DRS/A 1 filename1.htm DRS/A
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As confidentially submitted to the Securities and Exchange Commission on July 19, 2019

Registration No. 333-            

 

 

 

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM F-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

UCLOUDLINK GROUP INC.

(Exact name of Registrant as specified in its charter)

 

 

Not Applicable

(Translation of Registrant’s name into English)

 

 

 

Cayman Islands   4899   Not Applicable

(State or other jurisdiction of

incorporation or organization)

 

(Primary Standard Industrial

Classification Code Number)

 

(I.R.S. Employer

Identification Number)

Room 2118-2119, 21/F, One Pacific Centre

414 Kwun Tong Road, Kwun Tong

Kowloon, Hong Kong

+852 2180-6111

(Address, including zip code, and telephone number, including area code, of Registrant’s principal executive offices)

 

 

(Name, address, including zip code, and telephone number, including area code, of agent for service)

 

 

Copies to:

 

Z. Julie Gao, Esq.

Skadden, Arps, Slate, Meagher & Flom LLP

c/o 42/F, Edinburgh Tower, The Landmark

15 Queen’s Road Central

Hong Kong

+852 3740-4700

 

David T. Zhang, Esq.

Meng Ding, Esq.

Kirkland & Ellis International LLP

c/o 26/F, Gloucester Tower, The Landmark

15 Queen’s Road Central

Hong Kong

+852 3761-3300

 

 

Approximate date of commencement of proposed sale to the public:

as soon as practicable after the effective date of this registration statement.

 

 

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box.  ☐

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ☐

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ☐

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ☐

Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933.

Emerging growth company  ☒

If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards† provided pursuant to Section 7(a)(2)(B) of the Securities Act.  ☐

† The term “new or revised financial accounting standard” refers to any update issued by the Financial Accounting Standards Board to its Accounting Standards Codification after April 5, 2012.

 

 

CALCULATION OF REGISTRATION FEE

 

 

Title of each class of

securities to be registered

 

Proposed

maximum

aggregate

offering price(2)(3)

 

Amount of

registration fee

Class A Ordinary Shares, par value US$0.00005 per share(1)

  US$               US$            

 

 

(1)

American depositary shares issuable upon deposit of Class A ordinary shares registered hereby will be registered under a separate registration statement on Form F-6 (Registration No. 333-            ). Each American depositary share represents             Class A ordinary shares.

(2)

Includes Class A ordinary shares that are issuable upon the exercise of the underwriters’ over-allotment option. Also includes Class A ordinary shares initially offered and sold outside the United States that may be resold from time to time in the United States either as part of their distribution or within 40 days after the later of the effective date of this registration statement and the date the shares are first bona fide offered to the public. These Class A ordinary shares are not being registered for the purpose of sales outside the United States.

(3)

Estimated solely for the purpose of determining the amount of registration fee in accordance with Rule 457(o) under the Securities Act of 1933.

 

 

The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.

 

 

 

 


Table of Contents

The information in this preliminary prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell these securities and we are not soliciting offers to buy these securities in any jurisdiction where the offer or sale is not permitted.

 

PRELIMINARY PROSPECTUS (Subject to Completion)

Dated              , 2019.

American Depositary Shares

 

LOGO

UCLOUDLINK GROUP INC.

Representing              Class A Ordinary Shares

 

 

This is an initial public offering of shares of American depositary shares, or ADSs, of UCLOUDLINK GROUP INC. Each ADS represents              of our Class A ordinary shares, par value US$0.00005 per share.

We are offering              American depositary shares, or ADSs. We anticipate the initial public offering price per ADS will be between US$             and US$            .

We are an “emerging growth company” under applicable U.S. federal securities laws and are eligible for reduced public company reporting requirements.

 

 

Prior to this offering, there has been no public market for the ADSs or our ordinary shares. We intend to apply for the listing of the ADSs on [the New York Stock Exchange/Nasdaq Stock Market] under the symbol “UCL.”

Investing in the ADSs involves risks. See “Risk Factors” beginning on page 17 for factors you should consider before buying the ADSs.

 

 

PRICE US$             PER ADS

Neither the United States Securities and Exchange Commission nor any other regulatory body has approved or disapproved of these securities or passed upon the accuracy or adequacy of this prospectus. Any representation to the contrary is a criminal offense.

 

 

 

      

Per ADS

      

Total

 

Initial public offering price

       US$                      US$              

Underwriting discounts and commissions 1

       US$                      US$              

Proceeds, before expenses, to us

       US$                      US$              

The underwriters have an over-allotment option to purchase up to an additional              ADSs from us at the initial public offering price, less the underwriting discounts and commissions, within 30 days from the date of prospectus.

The underwriters expect to deliver the ADSs against payment in U.S. dollars to purchasers on or about              , 2019.

Upon the completion of this offering, our outstanding shares will consist of              Class A ordinary shares and              Class B ordinary shares. Mr. Chaohui Chen, our founder, director and chief executive officer, and Mr. Zhiping Peng, our founder and chairman of the board of directors, will beneficially own all of our then issued Class B ordinary shares and will be able to exercise             % of the total voting power of our issued and outstanding shares if the underwriters do not exercise their over-allotment option, or             % if the underwriters exercise their over-allotment option in full. Holders of Class A ordinary shares and Class B ordinary shares have the same rights except for voting and conversion rights. Each Class A ordinary share is entitled to one vote, and each Class B ordinary share is entitled to 15 votes and is convertible into one Class A ordinary share at any time by the holders thereof. Class A ordinary shares are not convertible into Class B ordinary shares under any circumstances.

 

 

 

MORGAN STANLEY   BNP PARIBAS   NOMURA
 

NEEDHAM

 

Prospectus dated             , 2019.

 

1

For a description of compensation payable to the underwriters, see “Underwriting.”


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TABLE OF CONTENTS

 

Business

     118  

Regulation

     147  

Management

     166  

Principal Shareholders

     174  

Related Party Transactions

     177  

Description of Share Capital

     178  

Description of American Depositary Shares

     189  

Shares Eligible for Future Sale

     199  

Taxation

     201  

Underwriting

     208  

Expenses Related to this Offering

     217  

Legal Matters

     218  

Experts

     219  

Where You Can Find Additional Information

     220  

Index to Consolidated Financial Statements

     F-1  
 

 

 

You should rely only on the information contained in this prospectus or in any related free writing prospectus. We have not authorized anyone to provide you with information different from that contained in this prospectus or in any related free writing prospectus. We are offering to sell, and seeking offers to buy the ADSs, only in jurisdictions where offers and sales are permitted. The information contained in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or any sale of the ADSs.

Neither we nor any of the underwriters has taken any action to permit a public offering of the ADSs outside the United States or to permit the possession or distribution of this prospectus or any filed free writing prospectus outside the United States. Persons outside the United States who come into possession of this prospectus or any filed free writing prospectus must inform themselves about and observe any restrictions relating to the offering of the ADSs and the distribution of the prospectus or any filed free writing prospectus outside the United States.

Until             , 2019 (the 25th day after the date of this prospectus), all dealers that buy, sell or trade ADSs, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the obligation of dealers to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.

 

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PROSPECTUS SUMMARY

The following summary is qualified in its entirety by, and should be read in conjunction with, the more detailed information and financial statements appearing elsewhere in this prospectus. In addition to this summary, we urge you to read the entire prospectus carefully, especially the risks of investing in the ADSs discussed under “Risk Factors,” before deciding whether to invest in the ADSs. This prospectus contains information from an industry report commissioned by us and prepared by Frost & Sullivan, an independent market research firm, to provide information regarding our industry and our market position.

Our Mission

Our mission is to enable people to use mobile data traffic freely anytime, anywhere like breathing the air. We aim to make the world more connected with maximized network utility through harnessing the power of mobile data traffic sharing.

Overview

We are the world’s first and leading mobile data traffic sharing marketplace, according to Frost & Sullivan. 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. As of March 31, 2019, we had aggregated mobile data traffic allowances from 269 mobile network operators (MNOs) in 140 countries and regions in our cloud SIM architecture. Total data consumed through our platform were approximately 9,000 and 28,000 terabytes in 2017 and 2018, respectively.

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. According to Frost & Sullivan, cloud SIM technology enabled solutions are superior to other SIM-based technology solutions, such as solutions based on embedded SIM (eSIM) and soft SIM, in terms of network availability, quality, connection and security. 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. As of April 30, 2019, we owned 33 patents relating to our cloud SIM technology.

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 superior seamless 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 140 countries and regions we cover. As a result, we have accumulated a large and active user base. In the first three months of 2019, our average daily active terminals reached approximately 137,900 and each of our active terminals on average used 900 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 the society.



 

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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.

 

   

uCloudlink 1.0. Our 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 the uCloudlink 1.0 model in 2014. We operate portable Wi-Fi services under our own Roamingman brand in China, Malaysia and Singapore 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, for them to offer global mobile data connectivity services directly to their users. Leveraging on these business partners’ local operation knowledge and established brand name in their regions, we are able to penetrate into different markets and regions more effectively, accelerating the adoption of our products and services on a global scale. Since 2018, we began to offer smartphones and smart devices enabled with mobile data connectivity services such as the GlocalMe World Phone series. According to Frost & Sullivan, the market size of international roaming service is US$23.3 billion in 2018 and is expected to reach US$34.8 billion in 2023. We are the largest portable Wi-Fi service provider for international roaming for Chinese outbound travelers with a 41.0% market share in 2018, according to Frost & Sullivan.

 

   

uCloudlink 2.0. Our uCloudlink 2.0 model aims to provide mobile data connectivity services to local users across different MNOs in a single country. We tested this service in 2018, and commercially launched the service in April 2019. We develop GlocalMe Inside implementation for smartphones and other smart hardware terminals, enabling them to obtain access to our cloud SIM architecture and use our globally distributed SIM card pool, and also offer GlocalMe World Phone series. We have partnered with a leading smartphone company in China to provide GlocalMe Inside implementation for certain models of its smartphones. Similarly, we have agreed with other smartphone brands including PT. Bangga Teknologi Indonesia, the owner of the handset brand Advan in Indonesia, and Cosmic Technologies, Inc., the owner of the handset brand Cherry Mobile in the Philippines, to launch GlocalMe Inside on some of their models. This enables smartphone users to use not only our global mobile data connectivity services but also local data traffic packages without a separate Wi-Fi router. According to Frost & Sullivan, the market size of local mobile data connectivity services is US$820 billion in 2018 and is expected to reach US$1,149 billion in 2023. As we are expanding GlocalMe Inside to more smartphone brands and models, we believe we will be able to grow our user base rapidly and capture more monetization opportunities in the market.

 

   

uCloudlink 3.0. We expect that we will launch our services following uCloudlink 3.0 model in the next two to three years. We anticipate that under our proposed uCloudlink 3.0 model, users may share and trade their unused data packages through our cloud SIM architecture, which will create a data traffic sharing marketplace. We have tested the data allowance sharing among users in trials, and are technologically ready to launch the uCloudlink 3.0 model. We believe that our successful uCloudlink 1.0 model and fast-growing uCloudlink 2.0 model will lead us to uCloudlink 3.0 model in the near future. Sharing among users will further enrich the sources of our distributed SIM card pool and optimize network usage, and make us a vibrant data traffic sharing marketplace.

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.



 

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We have grown rapidly in recent years. Our average daily active terminals increased by 73.0% from approximately 65,300 in 2017 to 113,000 in 2018. The average daily data usage per active terminal increased from 390 megabytes in 2017 to 700 megabytes in 2018. We generate revenues primarily from our mobile data connectivity services and hardware terminals that incorporate the services. Our revenues increased by 47.2% from US$85.8 million in 2017 to US$126.4 million in 2018. Our gross margin increased from 34.4% in 2017 to 36.5% in 2018. We had a net loss of US$19.3 million and US$26.6 million in 2017 and 2018, respectively. Our adjusted net loss, a non-GAAP measure defined as net loss excluding share-based compensation, was US$13.7 million and US$24.3 million in 2017 and 2018, respectively. Our adjusted EBITDA, another non-GAAP measure defined as net loss excluding share of loss in equity method investment, net of tax, interest expense, depreciation and amortization, and share-based compensation, was negative US$4.7 million and negative US$15.1 million in 2017 and 2018, respectively. See “Summary Consolidated Financial and Operating Data—Non-GAAP Financial Measures.” In 2017 and 2018, we generated 37.9% and 50.9%, respectively, of our revenues outside of China according to the location of the customers.

Our Market Opportunity

We believe that mobile data traffic has become of utility-like importance for economies and society today. Adoption of mobile technologies has increased significantly across industries and daily life situations in addition to simple internet browsing and basic communications, driven by factors such as massive build-out of 3G and 4G telecommunication infrastructure globally, increasingly affordable smartphone and smart-devices, increased adoption of high bandwidth data applications, and increasingly affordable mobile data plans. The mobile data connectivity service industry is a large and stable growing industry globally. According to Frost & Sullivan, the total revenue generated from this industry increased from US$549 billion in 2014 to US$854 billion in 2018, representing a CAGR of 11.7%, which is estimated to grow further at a CAGR of 7.2% to US$1,210 billion in 2023.

With our bold mission supported by our innovative cloud SIM technology and architecture, we believe we are able to capture the market opportunities in this massive industry in the long-term. An increasing number of global outbound travels and increasing adoption in mobile data usage across businesses and daily life create an increasing need of mobile data connectivity while traveling. However, this is not fully addressed by the global mobile data connectivity services provided by MNOs due to high prices. In the local mobile data connectivity service market, the significant difference in pricing across different local data packages and local MNOs and differences in network quality and utilization rates across different MNOs make a case for sharing between MNOs. A mature user-based sharing model is still absent from the telecommunication space and we believe there are great potential for this to be developed in the future. Our uCloudlink 1.0, 2.0, and 3.0 models address those market opportunities respectively.

Our Value Propositions

Our products and services deliver unique value propositions to mobile data users, handset and smart-hardware companies, MVNOs, MNOs and more broadly to the society.

To our users:

 

   

Global coverage. Users enjoy mobile data connectivity services in 140 countries and regions, freely switching among countries, network operators, and data plans.

 

   

Superior mobile connectivity experience. Our technology dynamically and intelligently selects the local mobile network available in our distributed SIM card pool with strong signal and fast speed at the location of the end-user. Users may enjoy seamless and unnoticeable transitions across different network operators.



 

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Locally competitive rate. By repackaging data allowances across different operators and tailoring them to meet a broad variety of user preferences, we are able to offer competitive rates to local and cross-border users comparable to those provided by local operators.

 

   

Personalized data package to maximize data package usage. Our users can customize data packages based on their own needs, which minimizes the data traffic wastage in their data plans and helps optimize network utilization for network operators.

To smartphone and smart-hardware companies:

 

   

Enhanced product differentiation to promote sales. Our GlocalMe Inside implementation, which can be pre-installed in smart mobile terminals, adds an additional major selling point to smartphones models, enhancing product differentiation and competitiveness and resulting in more sales.

 

   

New recurring revenue streams. Smartphone companies, who are typically reliant on one-off sales of hardware, can generate an additional, recurring and highly scalable data revenue stream via the revenue-sharing arrangements with us.

 

   

Stronger foothold in digital ecosystem. Acting as a catalyst for mobile data usage, GlocalMe Inside can be deployed on smartphones as well as other smart-hardware terminals, and serve as gateway for hardware vendors to participate in the digital ecosystem and capture more business opportunities.

To MVNOs and fixed network operators:

 

   

Flexible mobile network sourcing. By using our services, MVNOs can reduce their dependence on the arrangement with MNOs to use their network. We also purchase spare data capacity from MVNOs thereby increasing efficient usage of their networks.

 

   

Strengthened local and global data connectivity offering. Leveraging our global SIM card resources, MVNOs can offer their users competitively-priced international mobile data connectivity services and provide broader local coverage and better network performance, without being limited by that of the MNOs they have entered into contract with.

 

   

Enabling mobile data offering for fixed network operators. Cable operators or other fixed network operators can offer wireless services through our GlocalMe products without entering into an MVNO contract.

 

   

Offering full ownership of users. By offering GlocalMe products, MVNOs can foster more direct and interactive relationships with users.

To MNOs, especially tier-2 and 3 MNOs:

 

   

Improved network coverage and service quality. We improve a MNO’s network coverage by enabling their customers to access all the mobile networks globally supported by our platform. Our technology provides seamless and continuous access to data and enhances user experience, ultimately helping MNOs improve customer satisfaction and stickiness and save capital expenditure.

 

   

Maximized network utilization. Our platform can revolutionize the difficult process of network sharing among MNOs. We can also dynamically select networks of MNOs, by intelligently identifying the imbalance in terms of coverage and usage level between different networks, to better leverage their under-utilized network capacities and maximize the network utilization.

 

   

Simplified cooperation among MNOs. We enable MNOs to share their network without having to engage in costly and time-consuming one-on-one negotiations. In addition, MNOs may choose not to roll-out networks in economically unattractive areas where other operators already provide coverage.



 

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New user development model. Our platform decouples users from a single MNO under the traditional SIM-based model, and allows MNOs to acquire and develop users and sell data traffic allowances through users’ GlocalMe-ready smart devices, creating a new OTT(over the top)-like handset-based user development model.

 

   

Accelerated 5G implementation. As network operators start to roll-out 5G networks, mobile data traffic sharing between MNOs via our cloud SIM architecture can reduce capital spending and roaming agreements negotiation cost, ensure low network latency for end users and expand network coverage.

To society as a whole:

 

   

Radio frequency efficiency. Our cloud SIM technology enables MNOs to share their networks and resources, improving efficiency of spectrum usage.

 

   

Environmentally friendly and reduce waste. Our sharing model reduces duplicated construction of telecommunication infrastructure, which leads to less industrial waste.

 

   

Enhanced information sharing and digitalization. We facilitate better information sharing by allowing people to use mobile data traffic. By empowering smartphones and smart hardware with reliable mobile connectivity without limitation, we facilitate the creation of innovative mobile digital solutions.

Our Competitive Strengths

We believe the following strengths have contributed to our success:

 

   

the world’s first and leading mobile data traffic sharing marketplace;

 

   

innovative cloud SIM technology and architecture redefining mobile data connectivity experience;

 

   

strong strategic partnerships globally enabling deep and effective penetration into local markets;

 

   

efficient data procurement and utilization based on advanced technology and data analytic capabilities;

 

   

diversified and asset-light business model with strong growth and margin; and

 

   

experienced and visionary management team.

Our Strategies

As the world’s first and leading data traffic sharing marketplace, we have a set of user-centric strategies to grow our business and deliver the best mobile internet connectivity experience to users globally:

 

   

strengthen our market leadership in international mobile data connectivity services for cross-border travelers;

 

   

capture the massive opportunities in local mobile data markets worldwide;

 

   

expand GlocalMe Inside to become a leading provider and create a GlocalMe Inside connection based ecosystem;

 

   

support the global proliferation of Internet-of-thing (IoT) applications in the upcoming 5G era;

 

   

continue to innovate to pursue new monetization opportunities;

 

   

promote user engagement across our products to drive adoption and recurring usage; and

 

   

pursue strategic investment and acquisition opportunities.



 

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Our Challenges

We face risks and uncertainties in realizing our business objectives and executing our strategies, including those relating to:

 

   

our dependence on network operators for their wireless networks, infrastructures and data traffic;

 

   

our ability to continue to obtain data traffic at favorable rates;

 

   

extensive telecommunications regulations and changes in the regulatory environment;

 

   

intellectual property, including those relating to our ability to protect our intellectual property rights, defend intellectual property claims against us, and obtain licenses;

 

   

our limited operating history;

 

   

the substantial amount of share-based compensation expense upon the completion of this offering;

 

   

our business partnerships and strategic alliances;

 

   

our efforts to attract and retain users;

 

   

interruption or failure of our own information technology systems or those provided by third-party service providers we rely upon;

 

   

the current tensions in international economic relations that may negatively affect the cost of our operations, the growth of our business, and the size of our target market;

 

   

competition from other players in the international and local mobile data connectivity service industries and their adjacent industries; and

 

   

our expansions into new businesses.

Corporate History and Structure

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 HONGKONG UCLOUDLINK NETWORK TECHNOLOGY LIMITED, an entity through which we conduct our business operations in Hong Kong.

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 established the following subsidiaries to perform the following functions of our business:

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;



 

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primarily for technology research and development:

 

   

Shenzhen Ucloudlink Technology Limited in China in July 2015; and

primarily for hardware exportation:

 

   

Shenzhen uCloudlink Co., Ltd in 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 our VIEs in this prospectus. Our contractual arrangements with our VIEs and their shareholders allow us to (i) exercise effective control over our VIEs, (ii) receive substantially all of the economic benefits of our 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 our VIEs when and to the extent permitted by PRC law. For more details, including risks associated with the VIE structure, please see “—Agreements that provide us with effective control over our VIEs,” “—Agreements that allow us to receive economic benefits from our VIEs,” “—Agreements that provide us with the option to purchase the equity interests in and assets of our VIEs,” and “Risk Factors—Risks Related to Our Corporate Structure.”

As a result of our direct ownership in Beijing uCloudlink and the VIE contractual arrangements, we are regarded as the primary beneficiary of our VIEs, and we treat them and their subsidiaries as our consolidated affiliated entities under U.S. GAAP. We have consolidated the financial results of our VIEs and their respective subsidiaries with our consolidated financial statements in accordance with U.S. GAAP.



 

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The chart below summarizes our corporate structure and identifies our principal subsidiaries, our VIEs and their principal subsidiaries immediately upon the completion of this offering, assuming no exercise of the over-allotment option granted to the underwriters:

 

 

LOGO

 

Note:

(1)

Through contractual arrangements, one of our employees holds the equity interest in the entity on behalf of us, and we have consolidated its financial results in our consolidated financial statements in accordance with U.S. GAAP.

  (2)

Chaohui Chen our founder, director and chief executive officer, and Zhiping Peng, our founder and chairman of board of directors, each holds 50.17% and 49.67% of the equity interests in Beijing Technology, respectively. Both of them are beneficial owners of our company. Four other beneficial owners of our company, namely, Wen Gao, Zhongqi Kuang, Baixing Wang and Xingya Qiu, hold an aggregate of 0.16% of the equity interest in Beijing Technology. Mr. Wen Gao serves as our chief sales officer, and Mr. Zhongqi Kuang serves as our chief supply chain officer.



 

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Implications of Being an Emerging Growth Company

As a company with less than US$1.07 billion in revenue for our last fiscal year, we qualify as an “emerging growth company” pursuant to the Jumpstart Our Business Startups Act of 2012, as amended, or the JOBS Act. An emerging growth company may take advantage of specified reduced reporting and other requirements compared to those 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 in the assessment of the emerging growth company’s internal control over financial reporting. The JOBS Act also provides that an emerging growth company does not need to comply with any new or revised financial accounting standards until such date that a private company is otherwise required to comply with such new or revised accounting standards, and we do not plan to opt out of such exemptions afforded to an emerging growth company.

We will remain an emerging growth company until the earliest of (a) the last day of the fiscal year during which we have total annual gross revenues of at least US$1.07 billion; (b) the last day of our fiscal year following the fifth anniversary of the completion of this offering; (c) the date on which we have, during the preceding three-year period, issued more than US$1.0 billion in non-convertible debt; or (d) the date on which we are deemed to be a “large accelerated filer” under the Securities Exchange Act of 1934, as amended, or the Exchange Act, which would occur if the market value of the ADSs that are held by non-affiliates is at least US$700 million as of the last business day of our most recently completed second fiscal quarter. Once we cease to be an emerging growth company, we will not be entitled to the exemptions provided in the JOBS Act discussed above.

Corporate Information

Our principal executive offices are located at Room 2118-2119, 21/F, One Pacific Centre, 414 Kwun Tong Road, Kwun Tong, Kowloon, Hong Kong. Our telephone number is +852 2180-6111. Our registered office in the Cayman Islands is located at the office of Maricorp Services Ltd., P.O. Box 2075, George Town, Grand Cayman KY1-1105, Cayman Islands.

Investors should submit any inquiries to the address and telephone number of our principal executive offices. Our main website is www.ucloudlink.com. The information contained on our website is not a part of this prospectus. Our agent for service of process in the United States is             , located at             .

Conventions that Apply to this Prospectus

Unless otherwise indicated or the context otherwise requires, references in this prospectus to:

 

   

“ADRs” are to the American depositary receipts which may evidence the ADSs;

 

   

“ADSs” are to the American depositary shares, each of which represents             Class A ordinary shares;

 

   

“average daily active terminals” are to the average number of terminals connected to our platform per day during a certain period;

 

   

“average daily data usage per active terminal” are to the average volume of data consumed by each daily active terminal on our platform per day during a certain period;

 

   

“China” or the “PRC” are to the People’s Republic of China, excluding, for the purposes of this prospectus only, Hong Kong, Macau and Taiwan;

 

   

“Class A ordinary shares” are to our Class A ordinary shares, par value US$0.00005 per share;



 

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“Class B ordinary shares” are to our Class B ordinary shares, par value US$0.00005 per share;

 

   

“RMB” and “Renminbi” are to the legal currency of China;

 

   

“shares” or “ordinary shares” are to our ordinary shares, par value US$0.00005 per share, and upon and after the completion of this offering, are to our Class A and Class B ordinary shares, par value US$0.00005 per share;

 

   

“terminals” are to our portable Wi-Fi devices providing mobile data connectivity services, and smartphones and other smart hardware with our GlocalMe Inside app installed;

 

   

“uCloudlink,” “we,” “us,” “our company” and “our” are to UCLOUDLINK GROUP INC., our Cayman Islands holding company and its subsidiaries, its consolidated variable interest entities and the subsidiaries of the consolidated variable interest entities;

 

   

“US$,” “U.S. dollars,” “$,” and “dollars” are to the legal currency of the United States; and

 

   

“VIEs” are to our variable interest entities, which are Beijing uCloudlink New Technology Co., Ltd. and Shenzhen uCloudlink Network Technology Co., Ltd.

Unless the context indicates otherwise, all information in this prospectus assumes no exercise by the underwriters of their over-allotment option.



 

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THE OFFERING

 

Offering price

We expect that the initial public offering price will be between US$             and US$             per ADS.

 

ADSs offered by us

             ADSs (or              ADSs if the underwriters exercise their over-allotment option in full).

 

ADSs outstanding immediately after this offering

             ADSs (or              ADSs if the underwriters exercise their over-allotment option in full)

 

Ordinary shares outstanding immediately after this offering

             ordinary shares, comprised of              Class A ordinary shares and              Class B ordinary shares (or              ordinary shares if the underwriters exercise their over-allotment option in full, comprised of              Class A ordinary shares and              Class B ordinary shares). This number assumes the conversion, on a one-for-one basis, of all outstanding preferred shares into ordinary shares immediately upon the completion of this offering.

 

The ADSs

Each ADS represents              Class A ordinary shares, par value US$0.00005 per share.

 

  The depositary will hold Class A ordinary shares underlying your ADSs. You will have rights as provided in the deposit agreement among us, the depositary and holders and beneficial owners of ADSs from time to time.

 

  We do not expect to pay dividends in the foreseeable future. If, however, we declare dividends on our ordinary shares, the depositary will pay you the cash dividends and other distributions it receives on our ordinary shares after deducting its fees and expenses in accordance with the terms set forth in the deposit agreement.

 

  You may surrender your ADSs to the depositary in exchange for Class A ordinary shares. The depositary will charge you fees for any exchange.

 

  We may amend or terminate the deposit agreement without your consent. If you continue to hold your ADSs after an amendment to the deposit agreement, you agree to be bound by the deposit agreement as amended.

 

  To better understand the terms of the ADSs, you should carefully read the “Description of American Depositary Shares” section of this prospectus. You should also read the deposit agreement, which is filed as an exhibit to the registration statement that includes this prospectus.


 

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Ordinary shares

Our ordinary shares will be divided into Class A ordinary shares and Class B ordinary shares immediately prior to the completion of this offering. Holders of Class A ordinary shares and Class B ordinary shares will have the same rights except for voting and conversion rights. In respect of matters requiring a shareholder vote, each Class A ordinary share will be entitled to one vote, and each Class B ordinary share will be entitled to 15 votes. Each Class B ordinary share is convertible into one Class A ordinary share at any time by the holder thereof. 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. For a description of Class A ordinary shares and Class B ordinary shares, see “Description of Share Capital.”

 

Over-allotment option

We have granted the underwriters an option, exercisable within 30 days from the date of this prospectus, to purchase up to an aggregate of              additional ADSs.

 

Use of proceeds

We expect that we will receive net proceeds of approximately US$             million from this offering or approximately US$             million if the underwriters exercise their over-allotment option in full, assuming an initial public offering price of US$             per ADS, which is the midpoint of the estimated range of the initial public offering price, after deducting underwriting discounts and commissions and estimated offering expenses payable by us.

 

  We intend to use the net proceeds from this offering to invest in research and development and for general corporate purposes. See “Use of Proceeds” for more information.

 

Lock-up

[We, our directors, executive officers and all of our existing shareholders] have agreed with the underwriters, subject to certain exceptions, not to sell, transfer or otherwise dispose of any ADSs, ordinary shares or similar securities for a period of 180 days after the date of this prospectus. See “Shares Eligible for Future Sale” and “Underwriting” for more information.

 

[Directed Share Program

At our request, the underwriters have reserved for sale, at the initial public offering price, up to an aggregate of              ADSs offered in this offering to some of our directors, officers, employees, business associates and related other persons associated with us through a directed share program.]

 

Listing

We intend to apply to have the ADSs listed on the [New York Stock Exchange/Nasdaq Stock Market] under the symbol “UCL.” The ADSs and our ordinary shares will not be listed on any other stock exchange or traded on any automated quotation system.


 

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Payment and settlement

The underwriters expect to deliver the ADSs against payment therefor through the facilities of The Depository Trust Company on             , 2019.

 

Depositary

 


 

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SUMMARY CONSOLIDATED FINANCIAL AND OPERATING DATA

The following summary consolidated statements of comprehensive loss data for the years ended December 31, 2017 and 2018, summary consolidated balance sheets data as of December 31, 2017 and 2018 and summary consolidated statements of cash flow data for the years ended December 31, 2017 and 2018 have been derived from our audited consolidated financial statements included elsewhere in this prospectus. Our consolidated financial statements are prepared and presented in accordance with U.S. GAAP. Our historical results are not necessarily indicative of results expected for future periods. You should read this Summary Consolidated Financial and Operating Data section together with our consolidated financial statements and the related notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this prospectus.

 

    For the Year Ended December 31,  
    2017     2018  
    (US$ in thousands)  

Summary Consolidated Statements of Comprehensive Loss Data:

 

Revenues

    85,845       126,399  

—Data connectivity services

    65,081       82,543  

Data connectivity services from Roamingman

    48,746       52,792  

Other data connectivity services

    16,335       29,751  

—Sales of terminals

    16,073       25,595  

—Sales of data related products

    2,624       12,148  

—PaaS and SaaS services

    1,835       5,047  

—Others

    232       1,066  

Cost of revenues

    (56,313     (80,244
 

 

 

   

 

 

 

Gross profit

    29,532       46,155  

Research and development expenses

    (13,255     (20,401

Sales and marketing expenses

    (17,673     (29,658

General and administrative expenses(1)

    (16,186     (19,919

Other income, net

    1,447       658  
 

 

 

   

 

 

 

Loss from operations

    (16,135     (23,165

Interest income

    174       435  

Interest expense

    (3,299     (3,385
 

 

 

   

 

 

 

Loss before income tax

    (19,260     (26,115

Income tax expenses

           

Share of loss in equity method investment, net of tax

          (442
 

 

 

   

 

 

 

Net loss

    (19,260     (26,557

Accretion of Series A-2 ordinary shares and Series A Preferred Shares

    (3,121     (2,209

Allocation to Series A-2 ordinary shares

    1,431        
 

 

 

   

 

 

 

Net loss attributable to ordinary shareholders of the Company

    (20,950     (28,766

Net loss

    (19,260     (26,557

Other comprehensive income/(loss), net of tax

   

Foreign currency translation adjustment

    91       (537
 

 

 

   

 

 

 

Total comprehensive loss

    (19,169     (27,094
 

 

 

   

 

 

 

Net loss per share attributable to ordinary shareholders of the Company

   

Basic and diluted

    (0.17     (0.16

Net loss per ADS(2)

   

Basic and diluted

   
 

 

 

   

 

 

 

Weighted average number of ordinary shares used in computing net loss per share

   

Basic and diluted

    124,473,486       185,370,982  

Non-GAAP Financial Measures(3)

   

Adjusted net loss

    (13,680     (24,275

Adjusted EBITDA

    (4,683     (15,132

 

Notes:    (1)   Including share-based compensation of US$5.6 million and US$2.3 million in 2017 and 2018, respectively, which relate to restricted shares held by certain of our senior management. As of December 31, 2018, there was US$0.2 million of unrecognized share-based compensation expense related to the restricted shares, which will be recognized in 2019.


 

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(2)   Each ADS represents              ordinary shares.
(3)   See “—Non-GAAP Financial Measures.”

The following table presents our summary consolidated balance sheet data as of December 31, 2017 and 2018:

 

     As of December 31,  
     2017     2018  
     (US$ in thousands)  

Summary Consolidated Balance Sheets Data:

    

Cash and cash equivalents

     49,102       36,464  

Accounts receivable, net

     13,676       16,631  

Inventories

     4,986       12,020  

Prepayments and other current assets

     8,086       10,423  

Total assets

     89,325       80,505  

Accrued expenses and other liabilities

     15,849       18,755  

Accounts payables

     10,286       12,673  

Convertible bonds

     70,254        

Total liabilities

     99,699       43,469  

Total mezzanine equity

     18,228       20,437  

Ordinary shares (149,318,791 and 228,749,678 shares outstanding as of December 31, 2017 and 2018, respectively)

     7       11  

Total shareholders’ (deficit) equity

     (28,602     16,599  

Total liabilities, mezzanine equity and shareholders’ (deficit) equity

     89,325       80,505  

The following table presents our summary consolidated cash flow data for the years ended December 31, 2017 and 2018:

 

     For the Year Ended December 31,  
     2017     2018  
     (US$ in thousands)  

Summary Consolidated Cash Flow Data:

    

Net cash used in operating activities

     (7,218     (19,472

Net cash used in investing activities

     (4,956     (4,569

Net cash generated from financing activities

     59,433       4,421  

Increase/(decrease) in cash, cash equivalents and restricted cash

     47,259       (19,620

Effect of exchange rates on cash, cash equivalents and restricted cash

     420       (559

Cash, cash equivalents and restricted cash at beginning of year

     9,127       56,806  

Cash, cash equivalents and restricted cash at end of year

     56,806       36,627  

The following table presents certain of our operating data for the years ended December 31, 2017 and 2018:

 

     For the Year Ended December 31,  
     2017      2018  

Summary Operating Data:

     

Average daily active terminals (including GlocalMe Inside apps)

     65,300        113,000  

Average daily data usage per active terminal (in megabytes)

     390        700  

Non-GAAP Financial Measures

In evaluating our business, we consider and use two non-GAAP measures, adjusted net loss and adjusted EBITDA, as supplemental measures to review and assess our operating performance. The presentation of these



 

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non-GAAP financial measures is not intended to be considered in isolation or as a substitute for the financial information prepared and presented in accordance with U.S. GAAP. We define adjusted net loss as net loss excluding share-based compensation. We define adjusted EBITDA as net loss excluding share of loss in equity method investment, net of tax, interest expense, depreciation and amortization, and share-based compensation.

We believe that adjusted net loss and adjusted EBITDA help identify underlying trends in our business that could otherwise be distorted by the effect of certain expenses that we include in loss from operations and net loss. We believe that adjusted net loss and adjusted EBITDA provide useful information about our operating results, enhance the overall understanding of our past performance and future prospects and allow for greater visibility with respect to key metrics used by our management in its financial and operational decision-making.

The non-GAAP financial measures are not defined under U.S. GAAP and are not presented in accordance with U.S. GAAP. The non-GAAP financial measures have limitations as analytical tools. One of the key limitations of using adjusted net loss and adjusted EBITDA is that they do not reflect all items of income and expense that affect our operations. Share-based compensation has been and may continue to be incurred in our business and is not reflected in the presentation of adjusted net loss. Further, the non-GAAP financial measures may differ from the non-GAAP information used by other companies, including peer companies, and therefore their comparability may be limited.

We compensate for these limitations by reconciling the non-GAAP financial measure to the nearest U.S. GAAP performance measure, all of which should be considered when evaluating our performance. We encourage you to review our financial information in its entirety and not rely on a single financial measure.

The following table reconciles our adjusted net loss to the most directly comparable financial measure calculated and presented in accordance with U.S. GAAP, which is net loss, for the periods presented:

 

     For the Year Ended December 31,  
     2017     2018  
     (US$ in thousands)  

Reconciliation of Net Loss to Adjusted Net Loss:

    

Net loss

     (19,260     (26,557

Add:

    

Share-based compensation

     5,580       2,282  

Adjusted net loss

     (13,680     (24,275

The following table reconciles our adjusted EBITDA to the most directly comparable financial measure calculated and presented in accordance with U.S. GAAP, which is net loss, for the periods presented:

 

     For the Year Ended December 31,  
     2017     2018  
     (US$ in thousands)  

Reconciliation of Net Loss to Adjusted EBITDA:

    

Net loss

     (19,260     (26,557

Add:

    

Interest expense

     3,299       3,385  

Depreciation and amortization

     5,698       5,316  

EBITDA

     (10,263     (17,856

Add:

    

Share-based compensation

     5,580       2,282  

Share of loss in equity method investment, net of tax

           442  

Adjusted EBITDA

     (4,683     (15,132


 

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RISK FACTORS

An investment in our ADSs involves significant risks. You should consider carefully all of the information in this prospectus, 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.

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.

We do not own or operate a physical network, but rather utilize the global wireless communication networks of 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 more than 10% 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.

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

 

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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 subject to the governmental investigation and inquiries, initiating by the governmental authorities on their own or by responding the reports or complaints from our competitors, our users, from time to time. 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 China are subject to regulation by, and under the supervision of, the MIIT, the primary regulator of the telecommunications industry in 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 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.

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 “Regulation—PRC—Regulations Related to Mobile Data Traffic Service.” According to the PRC laws and regulations 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 the PRC, 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 MVOs 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 does 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 PRC is not mobile telecommunication resale service stipulated definitely under PRC laws and regulations. We recently received an Investigation Notice issued by Guangdong Communications Administration, or the GCA,

 

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the local branch of the MIIT, on March 25, 2019. According to the Investigation Notice, one of our VIEs, Shenzhen uCloudlink, has been reported to engage in the mobile telecommunication resale business without requisite approvals. The GCA conducted an investigation on us subsequently. We have been informed by the GCA that the investigation is completed, however, as of the date of this prospectus, 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 PRC regulations 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 a MVNO. To minimize such risk, we have invested in a MVNO in the PRC and we are expecting to cooperate with it in the future.

As a network service provider in the PRC, 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 the PRC 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 the date hereof, 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. 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. Therefore, we are able to verify the real identity information of our users through their phone numbers. This authentication method has been widely adopted by network service providers in the PRC. However, we cannot assure that our authentication method is sufficient to fulfill the real-name authentication obligation. We purchase machine to machine data SIM cards, or M2M Data SIM Cards to support our service in the PRC. In addition to the usage limitation set forth in the purchase agreements, PRC laws and regulations also have other restrictions, and further requires 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 users. As of the date of this prospectus, we have not received any notice issued by MVOs or MVNOs informing us that our use of M2M Data SIM Cards does not comply with the relevant regulations. However, since the interpretation and application of regulations and laws related to M2M Data SIM Cards in the PRC remain unclear, and there are uncertainties as to what the definition of resale and non-industry users, our usage of M2M Data SIM Cards may be deemed in violation of relevant regulations. In that case, 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 of Japan, or the Telecommunications Business Act, generally requires that those who plan to provide telecommunications services be registered as telecommunications business operators. However, as long as the scale of the telecommunications circuit facilities to be installed for the telecommunication services and the scope of service area to be covered do not exceed certain thresholds set forth in an ordinance of the Ministry of Internal Affairs and Communications of Japan, or fall within a certain category of radio facilities, submission of a notice to the Minister of Internal Affairs and Communications of Japan, rather than registration, is required.

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

 

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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 “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.

The overall legal framework of the European Union was modified by the new European Electronic Communications Code which took effect on December 20, 2018 (see Section 1.7.1.1.2 Significant events in 2018). The revised code includes four main directives deriving from the 2002 Telecoms Package 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) no. 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) no. 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;

 

   

expands, 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. A preparatory review, prior to the potential modification of the regulation of wholesale roaming prices is scheduled for 2019.

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.

 

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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 and 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.

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, it is often difficult to register, maintain and enforce intellectual property rights in China. Chinese statutes and regulations are subject to judicial interpretation and enforcement and may not be applied consistently due to the lack of clear guidance on statutory interpretation. 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. The lawsuit is currently in discovery stage. We filed another lawsuit against Shenzhen Skyroam Technology Co., Ltd. and Shenzhen Manlian Electronics Co., Ltd. in the Intermediate People’s Court of Shenzhen, claiming patent infringement. The lawsuit is currently awaiting court notice. See “Business—Legal Proceedings”

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.

 

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We are, and may in the future be, subject to intellectual property claims, which are costly to defend, could result in significant damage awards, 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. In April 2019, the court granted a summary judgment in favor of SIMO and another in favor of us. In May 2019, the jury delivered a verdict that the compensatory damages of SIMO for a four-month period from August 2018 to December 2018 were approximately US$2.2 million and found that our infringement was willful, in connection with which the plaintiff sought enhanced damages of 50% of the compensatory damages. Immediately after the jury verdict was delivered in May 2019, we adjusted our cloud SIM platform and implemented an alternative method that we believe does not infringe the relevant patent. We believe that this adjustment will not disrupt or negatively affect our products and services, user experience and business operations. We estimate that the maximum total amount of compensatory and enhanced damages in the most unfavorable outcome will be approximately US$6.6 million for the period from August 2018 to May 2019. Although we will appeal the trial judge’s judgement vigorously, there can be no assurance that we will prevail in any appeal. If our appeal is not successful, we will have to pay the damages awarded by the trial judge. We have incurred legal expenses relating to this litigation of approximately US$2.1 million in 2018 and US$1.8 million in the first three months of 2019. In August 2018, Shenzhen Sibowei’ersi Technology Co., Ltd. and Shenzhen Skyroam Technology Co., Ltd. jointly filed a complaint against our company in Guangzhou Intellectual Property Court in PRC alleging patent infringements. In the lawsuit, the plaintiffs alleged that we infringed one of their patent in the PRC, and require us to, among others, stop manufacturing and selling related terminals and pay damages up to RMB10.5 million. The first hearing of the lawsuit was held on May 13, 2019, the second hearing will be held on August 9, 2019 and no final verdict is concluded to date. If the court judgement is against us in any extent, our business or operation may be adversely affected. To make us a strong case, we filed an invalidity petition against their alleged patent in Patent Reexamination Board of National Intellectual Property Administration in PRC, on July 16, 2019, the Patent Reexamination Board issued a reexamination decision which invalidates their alleged patent in its entirety. See “Business—Legal Proceedings.”

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 have experienced rapid growth in recent periods. 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.

 

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We have not recognized any share-based compensation expense relating to employee options to date but will recognize a substantial amount of share-based compensation expense upon completion of this offering, which will have a material adverse impact on our results of operations.

In December 2018, our shareholders and board of directors approved the 2018 Stock Option Scheme, which we refer to as the 2018 Plan in this prospectus, to offer persons selected by our company an opportunity to acquire a proprietary interest in the success of our company, or to increase such interest by acquiring shares. The maximum aggregate number of ordinary shares that may be issued under the 2018 Plan is 40,147,720 shares. As of December 31, 2018, 12,187,420 share options were granted and outstanding. We are required to account for share options and restricted share units granted to our employees and directors in accordance with Codification of Accounting Standards, or ASC 718, “Compensation—Stock Compensation”. We are required to classify share options granted to our employees and directors as equity awards and recognize share-based compensation expense based on the grant-date fair value of such share options, with the share-based compensation expense recognized over the period in which the recipient is required to provide service in exchange for the equity award. Because the vesting of the share options granted by us is also conditional upon completion of this offering, we have not recognized share-based compensation expense relating to these share options granted by us yet.

As a result, upon the completion of this offering, we expect to begin to recognize a substantial amount of share-based compensation expense, which will have a significant impact on our results of operations. As the vesting of the share options will begin six months after the completion of this offering, this constitutes a performance condition that is not considered probable until the completion of this offering. Moreover, if additional share options or other equity incentives are 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 “Management—2018 Stock Option Scheme.”

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 such as Ctrip and Fliggy, airlines and other travel related companies, sells portable Wi-Fi terminals on online e-commerce platforms such as Amazon and T-mall, as well as on in-flight magazines with support from airlines, and work with local distribution partners to offer our data connectivity services in other countries. 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. We have partnered with a leading smartphone company in China to provide GlocalMe Inside implementation for certain models of its smartphones. Similarly, we have agreed with other smartphone brands including Advan in Indonesia and Cherry Mobile in the Philippines, to launch GlocalMe Inside on some of their models. Some local regulator 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 suffers 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.

 

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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.

Interruption or failure of our own information 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 information 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 information 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. 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.

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. The U.S. government has recently imposed, and has recently 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. On September 17, 2018, President Trump announced his decision to impose a 10% tariff on the third list of US$200 billion in imports from China to the U.S. effective September 24, 2018. The 10% tariff was scheduled to increase to 25% on January 1, 2019. However, the U.S.

 

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government has agreed to postpone this increase until the beginning of March of 2019 to allow the U.S. and Chinese government’s time to negotiate an agreement on tariffs. On May 8, 2019, the U.S. government announced to increase tariffs to 25%. These tariffs are in addition to two earlier rounds of tariffs implemented against Chinese products on June 6, 2018 and August 16, 2018 that amount to tariffs on US$50 billion of Chinese products imported into the U.S. On May 13, 2019, China responded by imposing tariffs on certain U.S. goods on a smaller scale, and proposed to impose additional tariffs on U.S. goods.

Amid these tensions, the U.S. government has imposed and may impose additional measures on entities in China, including sanctions. 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.

 

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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, such as GlocalMe Inside, 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.

For example, 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, since local mobile data traffic represents a much bigger market than international data roaming. We have partnered with a leading smartphone company in China to provide GlocalMe Inside implementation for certain models of its smartphones. Similarly, we have agreed with other smartphone brands including Advan in Indonesia and Cherry Mobile in the Philippines, to launch GlocalMe Inside on some of their models. 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 majority 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 2017 and 2018, we derived a majority 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

 

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travel, which in turn may adversely affect our operating results and financial condition. 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 to provide 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 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; and

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 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

 

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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 arrangements with, other companies with technologies that are complementary to our business and these acquisitions or arrangements could disrupt 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 October 2018, we made an equity investment in a privately-held company, Maya System, Inc., which provides cloud SIM related services in Japan, including sale of products and maintenance. 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

 

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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 at terms that would be acceptable to us and may not be able to close on 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 with 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

 

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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 prospectus, 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 this offering, we have been 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 prospectus, 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 “Management’s Discussion and Analysis of Financial Condition and Results of Operations—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.

Upon completion of this offering, we will become 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 beginning with our annual report for the fiscal year ending December 31, 2019. 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

 

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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, after we become 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 our 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 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.

We are subject to complex and evolving laws and regulations regarding privacy and data protection.

Many jurisdictions, including the United States, the European Union and China, continue to consider the need for greater regulation or reform to the existing regulatory framework for privacy and data protection. 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 requiring businesses to reasonably protect certain types of personal information they hold or to otherwise comply with certain specified data security requirements for personal information. Additionally, 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 for targeted advertising. In the European Union, or EU, the General Data Protection Regulation, or GDPR, which came into effect on May 25, 2018, increased our burden of regulatory compliance and requires us to change certain of our privacy and data security practices in order to achieve compliance. The GDPR implements more 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

 

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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 further 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. Under the GDPR, fines of up to €20 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 for non-compliance. Since the GDPR only came into effect recently, the potential risks associated with non-compliance therewith are uniquely difficult to predict.

In June 2017, the PRC Cyber Security Law promulgated by the Standing Committee of the National People’s Congress, or the SCNPC, took effect, which is formulated to maintain the network security, safeguard the cyberspace sovereignty, national security, and public interests, protect the lawful rights and interests of citizens, legal persons, and other organizations, and requires that a network operator take technical measures, and other necessary measures to safeguard the safe and stable operation of the networks, effectively respond to the network security incidents, prevent illegal and criminal activities, and maintain the integrity, confidentiality, and availability of network data. The PRC Cyber Security Law reaffirms the basic principles and requirements set forth in other existing laws and regulations on personal information protections and strengthens the obligations and requirements of internet service providers, which include but are not limited to: (i) keeping all user information collected strictly confidential and setting up a comprehensive user information protection system; (ii) abiding by the principles of legality, rationality and necessity in the collection and use of user information and disclosure of the rules, purposes, methods and scopes of collection and use of user information; and (iii) protecting users’ personal information from being leaked, tampered with, destroyed, or provided to third parties. Any violation of the provisions and requirements under the PRC Cyber Security Law and other related regulations and rules may result in administrative liabilities such as warnings, fines, confiscation of illegal gains, revocation of licenses, suspension of business, and shutting down of websites, or, in severe cases, criminal liabilities. In addition, National Internet Information Office published Measures for the Security Assessment of Personal Information and Important Data to be Transmitted Abroad, or the Draft Security Assessment Notice to seek for public comments on April 11, 2017. The Draft Security Assessment Notice emphasizes the security evaluation requirements, any company found to be non-compliant with the obligations under the Draft Security Assessment Notice may potentially be subject to fines, administrative and/or criminal liabilities. It is still uncertain when the Draft Security Assessment Notice would be signed into law and whether the final version would have any substantial changes from this draft. Although we do not transfer any users’ personal information outside the PRC currently, we may transfer such information outside the PRC in the future subject to the requests or orders of governmental authorizations outside the PRC. We may not be able to fulfill the obligations then we are subjected to, among other, the security assessment at acceptable cost, or at all.

In addition to the above, many jurisdictions 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 become compliant with applicable laws as they come into effect, it may require substantial expenditures on 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 would impose significant burdens and costs on our operations or may require us to alter our business practices. While we strive to protect our users’ privacy and data security and to comply with material data protection laws and regulations applicable to us, it is possible that our practices are, and will continue to be, inconsistent with certain regulatory requirements. Our international business expansion could be adversely affected if these laws and regulations are interpreted or implemented in a manner that is inconsistent with our current business practices or that requires changes to these practices. If these laws and

 

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regulations materially limit our ability to collect 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 will be impaired. 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.

We would be harmed by data loss or other security breaches.

Our business involves the receipt, storage, and transmission of our users’ confidential information, including sensitive personal information, confidential information about our employees and suppliers, and other sensitive information about our company. Unauthorized access to confidential information may be difficult 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 sensitive data 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

 

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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 a 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

 

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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. 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 our ADSs.

 

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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, 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, 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 “brushing” usually seen on e-commerce platforms, we may experience slower growth in a particular market, lose

 

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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 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 use third parties to perform shipping functions on our behalf. 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.

We face risks related to natural disasters, terrorist acts or acts of war, health epidemics or other public safety concerns or hostile events, which could significantly disrupt our operations.

Our business could be materially and adversely affected by natural disasters, terrorist acts or acts of war, health epidemics or other public safety concerns or hostile events. Natural disasters may give rise to server interruptions, breakdowns, system failures 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.

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 and anticipated cash flow from operations 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

 

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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.

We have incurred losses in the past.

We have incurred loss from operations of US$16.1 million and US$23.2 million, and net losses of US$19.3 million and US$26.6 million in 2017 and 2018, respectively. Our net cash used in operating activities was US$7.2 million and US$19.5 million in 2017 and 2018, respectively. These 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;

 

   

sales and marketing;

 

   

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 upon completion of this offering.

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 achieve or sustain profitability. If we fail to achieve, sustain or increase profitability, our business and operating results could be adversely affected.

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 1 to 3 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 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.

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

 

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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. In our opinion, based on the facts known at this time, the ultimate resolution of these ordinary course legal proceedings will not have a material adverse effect on our financial position or results of operations as a whole. However, 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.

Risks Related to Our Corporate Structure

If the PRC government finds that the agreements that establish the structure for operating certain of our operations in China do not comply with PRC regulations relating to the relevant industries, or if these regulations or the interpretation of existing regulations change in the future, we could be subject to severe penalties or be forced to relinquish our interests in those operations.

Foreign ownership of telecommunication businesses is subject to restrictions under current PRC laws and regulations. For example, foreign investors are generally not allowed to own more than 50% of the equity interests in a commercial internet content provider or other value-added telecommunication service provider (other than operating e-commerce) and the major foreign investor in a value-added telecommunication service provider in China must have experience in providing value-added telecommunications services overseas and maintain a good track record in accordance with the Guidance Catalog of Industries for Foreign Investment promulgated in 2007, as amended, the Special Administrative Measures for Access of Foreign Investment (Negative List) (2018), and other applicable laws and regulations.

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 China. To comply with PRC laws and regulations, we conduct such business activities through our VIEs in China. Beijing uCloudlink has entered into contractual arrangements with our 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 our VIEs when and to the extent permitted by PRC law. Because of these contractual arrangements, we are the primary beneficiary of our VIEs in China and hence consolidate their financial results with ours as our variable interest entities under U.S. GAAP. If the PRC government finds that our contractual arrangements do not comply with its restrictions on foreign investment in value-added telecommunication or other foreign-restricted services, or if the PRC government otherwise finds that we, our VIEs, or any of their subsidiaries are in violation of PRC laws or regulations or lack the necessary permits or licenses to operate our business, the relevant PRC regulatory authorities, including the Ministry of Industry and Information Technology, the State Administration for Market Regulation, and Ministry of Commerce, would have broad discretion in dealing with such violations or failures, including, without limitation:

 

   

revoking the business licenses and/or operating licenses of such entities;

 

   

discontinuing or placing restrictions or onerous conditions on our operation through any transactions between our PRC subsidiaries and VIEs;

 

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imposing fines, confiscating the income from our PRC subsidiaries or our VIEs, or imposing other requirements with which we or our VIEs may not be able to comply;

 

   

requiring us to restructure our ownership structure or operations, including terminating the contractual arrangements with our VIEs and deregistering the equity pledges of our VIEs, which in turn would affect our ability to consolidate, derive economic interests from, or exert effective control over our VIEs; or

 

   

restricting or prohibiting our use of the proceeds of our initial public offering to finance our business and operations in China.

Furthermore, it is uncertain whether any new PRC laws, rules or regulations relating to contractual arrangements will be adopted or if adopted, what they would provide. In particular, a new draft of Foreign Investment Law was submitted to the National People’s Congress for review and was approved on March 15, 2019, which will come into effect from January 1, 2020. The approved Foreign Investment Law does not touch upon the relevant concepts and regulatory regimes that were historically suggested for the regulation of VIE structures, and thus this regulatory topic remains unclear under the Foreign Investment Law. Since the Foreign Investment Law is new, there are substantial uncertainties exist with respect to its implementation and interpretation and it is also possible that variable interest entities will be deemed as foreign invested enterprises and be subject to restrictions in the future. Such restrictions may cause interruptions to our operations, products and services and may incur additional compliance cost, which may in turn materially and adversely affect our business, financial condition and results of operations.

Any of these events could cause significant 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. If occurrences of any of these events results in our inability to direct the activities of our VIEs in China that most significantly impact their economic performance, and/or our failure to receive the economic benefits from our VIEs, we may not be able to consolidate the financial results of our VIEs with ours in accordance with U.S. GAAP.

We rely on contractual arrangements with our VIEs and their shareholders for our business operations, which may not be as effective as direct ownership in providing operational control.

We have relied and expect to continue to rely on contractual arrangements with VIEs and their shareholders to operate part of our business in China. For a description of these contractual arrangements, see “Corporate History and Structure.” These contractual arrangements may not be as effective as direct ownership in providing us with control over our VIEs. For example, our VIEs and their shareholders could breach their contractual arrangements with us by, among other things, failing to conduct its operations in an acceptable manner or taking other actions that are detrimental to our interests.

If we had direct ownership of our VIEs in China, we would be able to exercise our rights as a shareholder to effect changes in the board of directors of our VIEs, which in turn could implement changes, subject to any applicable fiduciary obligations, at the management and operational level. However, under the current contractual arrangements, we rely on the performance by our VIEs and their shareholders of their obligations under the contracts to exercise control over our VIEs. The shareholders of our VIEs may not act in the best interests of our company or may not perform their obligations under these contracts. Such risks exist throughout the period in which we intend to operate certain portion of our business through the contractual arrangements with our VIEs. If any dispute relating to these contracts remains unresolved, we will have to enforce our rights under these contracts through the operations of PRC law and arbitration, litigation and other legal proceedings and therefore will be subject to uncertainties in the PRC legal system. Therefore, our contractual arrangements with our VIEs may not be as effective in ensuring our control over the relevant portion of our business operations as direct ownership would be.

 

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Any failure by our VIEs or their shareholders to perform their obligations under our contractual arrangements with them would have a material adverse effect on our business.

If our VIEs or their shareholders fail to perform their respective obligations under the contractual arrangements, we may have to incur substantial costs and expend additional resources to enforce such arrangements. We may also have to rely on legal remedies under PRC law, including seeking specific performance or injunctive relief, and claiming damages, which we cannot assure you will be effective under PRC law. For example, if the shareholders of our VIEs were to refuse to transfer their equity interests in our VIEs to us or our designee if we exercise the purchase option pursuant to these contractual arrangements, or if they were otherwise to act in bad faith toward us, then we may have to take legal actions to compel them to perform their contractual obligations.

All the agreements under our contractual arrangements are governed by PRC law and provide for the resolution of disputes through arbitration in China. Accordingly, these contracts would be interpreted in accordance with PRC law and any disputes would be resolved in accordance with PRC legal procedures. The legal system in the PRC is not as developed as in some other jurisdictions, such as the United States. As a result, uncertainties in the PRC legal system could limit our ability to enforce these contractual arrangements. Meanwhile, there are very few precedents and little formal guidance as to how contractual arrangements in the context of a consolidated affiliated entity should be interpreted or enforced under PRC law. There remain significant uncertainties regarding the ultimate outcome of such arbitration should legal action become necessary. In addition, under PRC law, rulings by arbitrators are final, parties cannot appeal the arbitration results in courts, and if the losing parties fail to carry out the arbitration awards within a prescribed time limit, the prevailing parties may only enforce the arbitration awards in PRC courts through arbitration award recognition proceedings, which would require additional expenses and delay. In the event we are unable to enforce these contractual arrangements, or if we suffer significant delay or other obstacles in the process of enforcing these contractual arrangements, we may not be able to exert effective control over our VIEs, and our ability to conduct our business may be negatively affected. See “Risks Related to Doing Business in China—Uncertainties with respect to the PRC legal system could adversely affect us.”

The shareholders of our VIEs may have potential conflicts of interest with us, which may materially and adversely affect our business and financial condition.

The shareholders of our VIEs may have potential conflicts of interest with us, and we cannot assure you that their interests will be aligned with ours. Chaohui Chen, Zhiping Peng and four other beneficial owners of our company, hold 50.17%, 49.67% and 0.16% of the equity interests in Beijing Technology, respectively. Mr. Chaohui Chen is our founder, director and the chief executive officer. Mr. Zhiping Peng is our founder and the chairman of our board of directors. Two other shareholders of Beijing Technology, Wen Gao and Zhongqi Kuang, also serve as our executive officers. The shareholders of our VIEs may breach, or cause our VIEs to breach, or refuse to renew, the existing contractual arrangements we have with them and our VIEs, which would have a material adverse effect on our ability to effectively control our VIEs and receive economic benefits from it. For example, the shareholders may be able to cause our agreements with our VIEs to be performed in a manner adverse to us by, among other things, failing to remit payments due under the contractual arrangements to us on a timely basis. We cannot assure you that when conflicts of interest arise, any or all of these shareholders will act in the best interests of our company or such conflicts will be resolved in our favor. Currently, we do not have any arrangements to address potential conflicts of interest between these shareholders and our company, except that we could exercise our purchase option under the exclusive option agreements with these shareholders to request them to transfer all of their equity interests in the VIEs to a PRC entity or individual designated by us, to the extent permitted by PRC law. For individuals who are also our directors and officers, we rely on them to abide by the laws of the Cayman Islands, which provide that directors and officers owe a fiduciary duty to the company that requires them to act in good faith and in what they believe to be the best interests of the company and not to use their position for personal gains. The shareholders of our VIEs have appointed Beijing uCloudlink as their attorney-in-fact to exercise their rights, including power, with respect to our VIEs. If we cannot resolve

 

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any conflict of interest or dispute between us and these shareholders, we would have to rely on legal proceedings, which could result in disruption of our business and subject us to substantial uncertainty as to the outcome of any such legal proceedings.

Contractual arrangements in relation to our VIEs may be subject to scrutiny by the PRC tax authorities and they may determine that we or our VIEs owe additional taxes, which could negatively affect our financial condition and the value of your investment.

Under applicable PRC laws and regulations, arrangements and transactions among related parties may be subject to audit or challenge by the PRC tax authorities within ten years after the taxable year when the transactions are conducted. We could face material adverse tax consequences if the PRC tax authorities determine that the VIE contractual arrangements were not entered into on an arm’s length basis in such a way as to result in an impermissible reduction in taxes under applicable PRC laws, rules and regulations, and adjust income of our VIEs in the form of a transfer pricing adjustment. A transfer pricing adjustment could, among other things, result in a reduction of expense deductions recorded by our VIEs for PRC tax purposes, which could in turn increase its tax liabilities without reducing Beijing uCloudlink’s tax expenses. In addition, the PRC tax authorities may impose late payment fees and other penalties on our VIEs for the adjusted but unpaid taxes according to the applicable regulations. Our financial position could be materially and adversely affected if our variable interest entities’ tax liabilities increase or if they are required to pay late payment fees and other penalties.

We may lose the ability to use and enjoy assets held by our VIEs that are material to the operation of certain portion of our business if the entity goes bankrupt or becomes subject to a dissolution or liquidation proceeding.

As part of our contractual arrangements with our VIEs, the entities hold certain assets that are material to the operation of certain portion of our business, including permits, domain names and most of our IP rights. If our VIEs go bankrupt and all or part of its assets become subject to liens or rights of third-party creditors, we may be unable to continue some or all of our business activities, which could materially and adversely affect our business, financial condition and results of operations. Under the contractual arrangements, our VIEs may not, in any manner, sell, transfer, mortgage or dispose of their assets or legal or beneficial interests in the business without our prior consent. If our VIEs undergo a voluntary or involuntary liquidation proceeding, the independent third party creditors may claim rights to some or all of these assets, thereby hindering our ability to operate our business, which could materially and adversely affect our business, financial condition and results of operations.

Uncertainties exist with respect to the interpretation and implementation of the newly enacted PRC Foreign Investment Law and how it may impact the viability of our current corporate structure, corporate governance and business operations.

On March 15, 2019, the National People’s Congress approved the Foreign Investment Law, which will come into effect on January 1, 2020 and replace the trio of existing laws regulating foreign investment in China, namely, the Sino-foreign Equity Joint Venture Enterprise Law, the Sino-foreign Cooperative Joint Venture Enterprise Law and the Wholly Foreign-invested Enterprise Law, together with their implementation rules and ancillary regulations. The Foreign Investment Law embodies an expected PRC regulatory trend to rationalize its foreign investment regulatory regime in line with prevailing international practice and the legislative efforts to unify the corporate legal requirements for both foreign and domestic investments. However, since it is relatively new, uncertainties still exist in relation to its interpretation and implementation. For instance, under the Foreign Investment Law, “foreign investment” refers to the investment activities directly or indirectly conducted by foreign individuals, enterprises or other entities in China. Though it does not explicitly classify contractual arrangements as a form of foreign investment, there is no assurance that foreign investment via contractual arrangement would not be interpreted as a type of indirect foreign investment activities under the definition in the

 

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future. In addition, the definition contains a catch-all provision which includes investments made by foreign investors through means stipulated in laws or administrative regulations or other methods prescribed by the State Council. Therefore, it still leaves leeway for future laws, administrative regulations or provisions promulgated by the Stale Council to provide for contractual arrangements as a form of foreign investment. In any of these cases, it will be uncertain whether our contractual arrangements will be deemed to be in violation of the market access requirements for foreign investment under the PRC laws and regulations. Furthermore, if future laws, administrative regulations or provisions prescribed by the State Council mandate further actions to be taken by companies with respect to existing contractual arrangements, we may face substantial uncertainties as to whether we can complete such actions in a timely manner, or at all. Failure to take timely and appropriate measures to cope with any of these or similar regulatory compliance challenges could materially and adversely affect our current corporate structure, corporate governance and business operations.

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. 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.

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.

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significantly enhanced the protections afforded to various forms of foreign investments in 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 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 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 PRC subsidiaries to fund any cash and financing requirements we may have, and any limitation on the ability of our PRC 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 PRC 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 PRC regulations permit our PRC subsidiaries to pay dividends to their respective shareholders only out of their accumulated profits, if any, determined in accordance with PRC accounting standards and regulations. In addition, each of our PRC subsidiaries and our 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 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 PRC 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 PRC 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 over recent months, including stricter vetting procedures for 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 PRC subsidiaries’ ability to provide offshore loans to us. The PRC government may continue to strengthen its capital controls and our PRC subsidiaries’ dividends and other distributions may be subjected to tighter scrutiny in the future. Any limitation on the ability of our PRC 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.

 

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Under the EIT Law and related regulations, dividends, interests, rent or royalties payable by a foreign invested enterprise, such as our PRC 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 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 China. Hong Kong has a tax arrangement with 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 PRC 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 PRC 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 PRC 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 PRC 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.

PRC regulation of loans to and direct investment in PRC entities by offshore holding companies and governmental control of currency conversion may delay or prevent us from using the proceeds of any financing outside China to make loans to or make additional capital contributions to our PRC subsidiaries and VIEs, which could materially and adversely affect our liquidity and our ability to fund and expand our business.

Any funds we transfer to our PRC 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 China. According to the relevant PRC regulations on foreign-invested enterprises, or FIEs, in China, capital contributions to our PRC subsidiaries are subject to filing with the Ministry of Commerce in its foreign investment comprehensive management information system and registration with other governmental authorities in China. In addition, (i) any foreign loan procured by our PRC subsidiaries and VIEs is required to be registered with SAFE or its local branches or filed with SAFE in its information system, and (ii) each of our PRC subsidiaries and VIEs may not procure loans which exceed the difference between its registered capital and its total investment amount as recorded in the foreign investment comprehensive management information system or, as an alternative, only procure loans subject to the Risk-Weighted Approach and the Net Asset Limits. See “Regulation—Regulations Related to Foreign Exchange.” Any medium or long term loan to be provided by us to our VIEs must also be approved by the National Development and Reform Commission, or the NDRC. We may not obtain these government approvals or complete such registrations on a timely basis, if at all, with respect to future capital contributions or foreign loans by us to our PRC subsidiaries and VIEs. If we fail to receive such approvals or complete such registration or filing, our ability to use the proceeds of any financing outside China to capitalize our PRC operations may be negatively affected, which could adversely affect our liquidity and our ability to fund and expand our business. There is, in effect, no statutory limit on the amount of capital contribution that we can make to our PRC subsidiaries. This is because there is no statutory limit on the amount of registered capital for our PRC subsidiaries, and we are allowed to make capital contributions to our PRC subsidiaries by subscribing for their initial registered capital and increased registered capital, provided that the PRC subsidiaries completes the relevant filing and registration procedures. With respect to loans to the PRC subsidiaries by us, (i) if the relevant PRC subsidiaries adopt the traditional foreign exchange administration mechanism, or the Current Foreign Debt mechanism, the outstanding amount of the loans shall not exceed the difference between the total investment and the registered capital of the PRC subsidiaries and there is, in effect, no statutory limit on the amount of loans that we can make to our PRC subsidiaries under this circumstance because we can increase the registered capital of our PRC subsidiaries by making capital contributions to them, subject to the completion of the required registrations, and the difference between the total investment and the registered capital will increase accordingly; and (ii) if the relevant PRC subsidiaries adopt the foreign exchange

 

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administration mechanism as provided in the PBOC Notice No. 9, or the Notice No. 9 Foreign Debt mechanism, the risk-weighted outstanding amount of the loans, which shall be calculated based on the formula provided in the PBOC Notice No. 9, shall not exceed 200% of the net assets of the relevant PRC subsidiary. According to the PBOC Notice No. 9, after a transition period of one year since the promulgation of the PBOC Notice No. 9, the PBOC and SAFE will determine the cross-border financing administration mechanism for the foreign-invested enterprises after evaluating the overall implementation of the PBOC Notice No. 9. As of the date hereof, neither PBOC nor SAFE has promulgated and made public any further rules, regulations, notices or circulars in this regard. It is uncertain which mechanism will be adopted by PBOC and SAFE in the future and what statutory limits will be imposed on us when providing loans to our PRC subsidiaries. Currently, our PRC subsidiaries have the flexibility to choose between the Current Foreign Debt mechanism and the Notice No. 9 Foreign Debt mechanism. However, if the Notice No. 9 Foreign Debt Mechanism, or a more stringent foreign debt mechanism becomes mandatory and our PRC subsidiaries are no longer able to choose the Current Foreign Debt mechanism, our ability to provide loans to our PRC subsidiaries or our VIEs may be significantly limited, which may adversely affect our business, financial condition and results of operations.

In 2008, SAFE promulgated the Circular on the Relevant Operating Issues Concerning the Improvement of the Administration of the Payment and Settlement of Foreign Currency Capital of Foreign-Invested Enterprises, or SAFE Circular 142. SAFE Circular 142 regulates the conversion by FIEs of foreign currency into Renminbi by restricting the usage of converted Renminbi. SAFE Circular 142 provides that any Renminbi capital converted from registered capitals in foreign currency of FIEs may only be used for purposes within the business scopes approved by PRC governmental authority and such Renminbi capital may not be used for equity investments within China unless otherwise permitted by the PRC law. In addition, SAFE strengthened its oversight of the flow and use of the Renminbi capital converted from registered capital in foreign currency of FIEs. The use of such Renminbi capital may not be changed without SAFE approval, and such Renminbi capital may not in any case be used to repay Renminbi loans if the proceeds of such loans have not been utilized. On April 8, 2015, SAFE promulgated the Circular on Reforming the Management Approach Regarding the Foreign Exchange Capital Settlement of Foreign-Invested Enterprises, or SAFE Circular 19. SAFE Circular 19 took effect as of June 1, 2015 and superseded SAFE Circular 142 on the same date. SAFE further promulgated Circular 16, effective on June 9, 2016, which, among other things, amend certain provisions of SAFE Circular 19. SAFE Circulars 19 and 16 launched a nationwide reform of the administration of the settlement of the foreign exchange capitals of FIEs and allows FIEs to settle their foreign exchange capital at their discretion, but continues to prohibit FIEs from using the Renminbi fund converted from their foreign exchange capitals for expenditure beyond their business scopes, and also prohibit FIEs from using such Renminbi fund to provide loans to persons other than affiliates unless otherwise permitted under its business scope. As a result, we are required to apply Renminbi funds converted from the net proceeds we received from any financing outside China within the business scopes of our PRC subsidiaries. SAFE Circular 19 and 16 may significantly limit our ability to transfer to and use in China the net proceeds from any such financing outside China, which may adversely affect our business, financial condition and results of operations.

Fluctuations in exchange rates could have a material adverse impact on our results of operations and the value of your investment.

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 China’s foreign exchange policies. On July 21, 2005, the PRC government changed its decade-old policy of pegging the value of the Renminbi to the U.S. dollar, and the Renminbi appreciated more than 20% against the U.S. dollar over the following three years. Between July 2008 and June 2010, this appreciation halted and the exchange rate between the Renminbi and the U.S. dollar remained within a narrow band. Since June 2010, the PRC government has allowed the Renminbi to appreciate slowly against the U.S. dollar again, and it has appreciated more than 10% since June 2010. On August 11, 2015, the People’s Bank of China announced plans to improve the central parity rate of the Renminbi against the U.S. dollar by authorizing market-makers to provide parity to the China Foreign Exchange Trading Center operated by the People’s Bank of China with reference to the interbank foreign

 

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exchange market closing rate of the previous day, the supply and demand for foreign currencies as well as changes in exchange rates of major international currencies. Effective from October 1, 2016, the International Monetary Fund added Renminbi to its Special Drawing Rights currency basket. Such change and additional future changes may increase volatility in the trading value of the Renminbi against foreign currencies. The PRC government may adopt further reforms of its exchange rate system, including making the Renminbi freely convertible in the future. Accordingly, 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.

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 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 PRC exchange control regulations that restrict our ability to convert Renminbi into foreign currency.

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 prospectus, some of the lessors of our properties leased by us in 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 PRC laws. 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 RMB 10,000 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 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 PRC subsidiary to fund any cash and financing requirements we may have. Under existing PRC foreign exchange regulations, 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

 

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exchange restrictions, without prior approval of SAFE, cash generated from the operations of our PRC subsidiary in 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 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 PRC subsidiary and consolidated affiliated entity to pay off their respective debt in a currency other than Renminbi owed to entities outside China, or to make other capital expenditure payments outside China in a currency other than Renminbi.

In light of the recent flood of capital outflows of 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 our ADSs.

The approval of the China Securities Regulatory Commission, or the CSRC, may be required in connection with this offering under a PRC regulation.

On August 8, 2006, six PRC regulatory agencies, including the China Securities Regulatory Commission, or the CSRC, promulgated the M&A Rules, which became effective on September 8, 2006 and was amended on June 22, 2009. This regulation, among other things, requires offshore special purpose vehicles, or SPVs, formed for the purpose of an overseas listing and controlled by PRC companies or individuals, to obtain the CSRC approval prior to listing their securities on an overseas stock exchange. The interpretation and application of the regulations remain unclear, and this offering may ultimately require approval from the CSRC. If CSRC approval is required, it is uncertain whether it would be possible for us to obtain the approval, and any failure to obtain or delay in obtaining CSRC approval for this offering would subject us to sanctions imposed by the CSRC and other PRC regulatory agencies. Our PRC legal counsel, Han Kun Law Offices, has advised us that, based on their understanding of the current PRC laws, the CSRC approval is not required under the M&A Rules in the context of this offering because (i) the CSRC currently has not issued any definitive rule or interpretation concerning whether offerings like ours under this prospectus are subject to this regulation; (ii) our wholly owned PRC subsidiaries were established by foreign direct investment, rather than through a merger or acquisition of a domestic company as defined under the M&A Rules; and (iii) no explicit provision in the M&A Rules classifies the contractual arrangements between us and the VIE as a type of acquisition transaction falling under the M&A Rules.

However, we have been advised by our PRC legal counsel that there are uncertainties regarding the interpretation and application of the PRC law, and there can be no assurance that the PRC government will ultimately take a view that is not contrary to the above opinion of our PRC legal counsel. If it is determined that the CSRC approval is required for this offering, we may face sanctions by the CSRC or other PRC regulatory agencies for failure to seek the CSRC approval for this offering. These sanctions may include fines and penalties on our operations in the PRC although, to our knowledge, no definitive rules or interpretations have been issued to determine or quantify such fines or penalties, delays or restrictions on the repatriation of the proceeds from this offering into the PRC, restrictions on or prohibition of the payments or remittance of dividends by our PRC subsidiaries, or other actions that may have a material adverse effect on our business and the trading price of the ADSs. The CSRC or other PRC regulatory agencies may also take actions requiring us, or making it advisable to us, to halt this offering before the settlement and delivery of the ADSs that we are offering. Consequently, if you engage in market trading or other activities in anticipation of and prior to the settlement and delivery of the ADSs we are offering, you would be doing so at the risk that the settlement and delivery may not occur. In addition, if

 

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the CSRC or other regulatory agencies later promulgate new rules or explanations requiring that we obtain their approvals 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.

The M&A Rules and certain other PRC 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 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 Ministry of Commerce be notified in advance of any change-of-control transaction in which a foreign investor takes control of a PRC domestic enterprise. 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 Ministry of Commerce, 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. 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 Ministry of Commerce 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.

PRC regulations relating to offshore investment activities by PRC residents and enterprises may increase our administrative burden and restrict our overseas and cross-border investment activities. If our PRC resident 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 PRC law.

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 PRC residents or entities 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 PRC residents or entities’ legally owned assets or equity interests in domestic enterprises or offshore assets or interests. In addition, such PRC 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 PRC 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 PRC residents or entities do not complete their registration with the local SAFE branches, our PRC 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 PRC subsidiaries. Moreover, failure to comply with the SAFE registration described above could result in liability under PRC laws for evasion of applicable foreign exchange restrictions.

We have notified all PRC residents or entities who directly or indirectly hold shares in our Cayman Islands holding company and who are known to us as being PRC residents to complete the foreign exchange registrations, among which, the foreign exchange registrations of several PRC 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 PRC residents or entities holding direct or indirect interest in our company,

 

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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 PRC residents or entities 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 PRC subsidiaries, could subject us to fines or legal sanctions, restrict our overseas or cross-border investment activities, limit our PRC 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, Ministry of Commerce promulgated the Measures for the Administration of Overseas Investment, and 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 PRC enterprises in the area and industry that is not sensitive is required to be filed with Ministry of Commerce 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 Ministry of Commerce or its local branches which processed the original filing. Regarding to the overseas reinvestments by the overseas enterprise, the PRC registered entities as the shareholder of such overseas enterprise, shall, upon completion of overseas legal formalities, report to the Ministry of Commerce. Certain of our enterprise shareholders that are PRC registered entities have completed the filing with Ministry of Commerce, and have not yet competed filing with the NDRC and the report and change formalities with Ministry of Commerce as of the date of this prospectus 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 PRC residents and PRC enterprises holding direct or indirect interest in our company, and even if we are aware of such shareholders or beneficial owners who are PRC residents or PRC enterprises, 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 PRC domestic company, 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 PRC regulations regarding the registration requirements for employee stock incentive plans may subject the PRC plan participants or us to fines and other legal or administrative sanctions.

Under the applicable regulations and SAFE rules, PRC citizens 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

 

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and complete certain other 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 PRC resident participates in any stock incentive plan of an overseas publicly-listed company, a qualified PRC 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 PRC 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 PRC collective foreign currency account opened and managed by the PRC agent before distribution to such participants. We and our PRC resident employees who have been granted stock options or other share-based incentives of our Company will be subject to the Stock Option Rules when our Company becomes an overseas listed company upon the completion of this offering. If we or our PRC resident participants fail to comply with these regulations, we and/or our PRC resident participants may be subject to fines and legal sanctions and may also limit our ability to contribute additional capital into our PRC subsidiaries and limit our PRC 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 PRC law. See “Regulation—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 China who exercise or transfer share options or are granted restricted shares will be subject to PRC individual income tax. Our PRC 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 “Regulation—Regulations Related to Foreign Exchange—Regulations on Stock Incentive Plans.”

If we are classified as a PRC resident enterprise for PRC income tax purposes, such classification could result in unfavorable tax consequences to us and our non-PRC noteholders, shareholders or ADS holders.

Under the PRC Enterprise Income Tax Law and its implementation rules, an enterprise established outside of the PRC with its “de facto management body” within the PRC is considered a “resident enterprise” and will be subject to PRC 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 SAT issued a circular, known as SAT Circular 82, which provides certain specific criteria for determining whether the “de facto management body” of a PRC-controlled enterprise that is incorporated offshore is located in China. Although this circular only applies to offshore enterprises controlled by PRC enterprises or PRC enterprise groups, not those controlled by PRC 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 PRC enterprise or a PRC enterprise group will be regarded as a PRC tax resident by virtue of having its “de facto management body” in China and will be subject to PRC 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 the PRC; (ii) decisions relating to the enterprise’s financial and human resource matters are made or are subject to approval by organizations or personnel in the PRC; (iii) the enterprise’s primary assets, accounting books and records, company seals, and board and shareholder resolutions, are located or maintained in the PRC; and (iv) at least 50% of voting board members or senior executives habitually reside in the PRC.

 

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We believe none of our entities outside of China is a PRC resident enterprise for PRC 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 PRC 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 our ADSs. In addition, non-resident enterprise noteholders and shareholders (including our ADS holders) may be subject to PRC 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 the PRC. Furthermore, if PRC tax authorities determine that we are a PRC resident enterprise for enterprise income tax purposes, interest or dividends paid to our non-PRC 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 PRC 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 PRC sources. These rates may be reduced by an applicable tax treaty, but it is unclear whether non-PRC shareholders of UCLOUDLINK GROUP INC. would be able to claim the benefits of any tax treaties between their country of tax residence and the PRC in the event that UCLOUDLINK GROUP INC. is treated as a PRC 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 PRC resident enterprises by their non-PRC 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-PRC Resident Enterprises, or Bulletin 7. Pursuant to Bulletin 7, an “indirect transfer” of PRC assets, including a transfer of equity interests in an unlisted non-PRC holding company of a PRC resident enterprise, by non-PRC resident enterprises may be re-characterized and treated as a direct transfer of the underlying PRC assets, if such arrangement does not have a reasonable commercial purpose and was established for the purpose of avoiding payment of PRC enterprise income tax. As a result, gains derived from such indirect transfer may be subject to PRC 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 PRC 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 nonresident 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-PRC 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.

Our auditor, like other independent registered public accounting firms operating in China, is not permitted to be subject to inspection by Public Company Accounting Oversight Board, and consequently investors may be deprived of the benefits of such inspection.

Our auditor, the independent registered public accounting firm that issued the audit report included in this prospectus, as an auditor of companies that are traded publicly in the United States and a firm registered with the Public Company Accounting Oversight Board (United States), or PCAOB, is subject to laws in the United States

 

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pursuant to which the PCAOB conducts regular inspections to assess its compliance with applicable professional standards. Our auditor is located in, and organized under the laws of, the PRC, which is a jurisdiction where the PCAOB has been unable to conduct inspections without the approval of the Chinese authorities. In May 2013, PCAOB announced that it had entered into a Memorandum of Understanding on Enforcement Cooperation with the CSRC and the PRC Ministry of Finance, which establishes a cooperative framework between the parties for the production and exchange of audit documents relevant to investigations undertaken by PCAOB, the CSRC or the PRC Ministry of Finance in the United States and the PRC, respectively. PCAOB continues to be in discussions with the China Securities Regulatory Commission, or CSRC, and the PRC Ministry of Finance to permit joint inspections in the PRC of audit firms that are registered with PCAOB and audit Chinese companies that trade on U.S. exchanges.

On December 7, 2018, the SEC and the PCAOB issued a joint statement highlighting continued challenges faced by the U.S. regulators in their oversight of financial statement audits of U.S.-listed companies with significant operations in China. However, it remains unclear what further actions, if any, the SEC and PCAOB will take to address the problem.

This lack of PCAOB inspections in China prevents the PCAOB from fully evaluating audits and quality control procedures of our independent registered public accounting firm. As a result, we and investors in our ordinary shares are deprived of the benefits of such PCAOB inspections. The inability of the PCAOB to conduct inspections of auditors in China makes 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 China that are subject to PCAOB inspections, which could cause investors and potential investors in our stock to lose confidence in our audit procedures and reported financial information and the quality of our financial statements.

Proceedings instituted by the SEC against the “big four” China-based accounting firms, including our independent registered public accounting firm, could result in financial statements being determined to not be in compliance with the requirements of the Securities Exchange Act of 1934, as amended, or the Exchange Act.

Starting in 2011 the “big four” China-based accounting firms, including our independent registered public accounting firm, were affected by a conflict between U.S. and Chinese law. Specifically, for certain U.S.-listed companies operating and audited in China, the SEC and the PCAOB sought to obtain from the Chinese firms access to their audit work papers and related documents. The firms were, however, advised and directed that under Chinese law, they could not respond directly to the U.S. regulators on those requests, and that requests by foreign regulators for access to such papers in China had to be channeled through the CSRC.

In late 2012, this impasse led the SEC to commence administrative proceedings under Rule 102(e) of its Rules of Practice and also under the Sarbanes-Oxley Act of 2002 against the Chinese accounting firms, including our independent registered public accounting firm. A first instance trial of the proceedings in July 2013 in the SEC’s internal administrative court resulted in an adverse judgment against the firms. The administrative law judge proposed penalties on the firms including a temporary suspension of their right to practice before the SEC, although that proposed penalty did not take effect pending review by the Commissioners of the SEC. On February 6, 2015, before a review by the Commissioner had taken place, the firms reached a settlement with the SEC. Under the settlement, the SEC accepted that future requests by the SEC for the production of documents will normally be made to the CSRC. The firms were to receive matching Section 106 requests, and were required to abide by a detailed set of procedures with respect to such requests, which in substance require them to facilitate production via the CSRC. If they failed to meet specified criteria, the SEC retained authority to impose a variety of additional remedial measures on the firms depending on the nature of the failure.

Under the terms of the settlement, the underlying proceeding against the four China-based accounting firms was deemed dismissed with prejudice four years after entry of the settlement. The four-year mark occurred on

 

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February 6, 2019. While we cannot predict if the SEC will further challenge the four China-based accounting firms’ compliance with U.S. law in connection with U.S. regulatory requests for audit work papers or if the results of such a challenge would result in the SEC imposing penalties such as suspensions. If additional remedial measures are imposed on the “big four” China-based accounting firms, including our independent registered public accounting firm, we could be unable to timely file future financial statements in compliance with the requirements of the Exchange Act.

In the event the “big four” China-based accounting firms become subject to additional legal challenges by the SEC or PCAOB, depending upon the final outcome, listed companies in the United States with major PRC operations may find it difficult or impossible to retain auditors in respect of their operations in the PRC, which could result in financial statements being determined to not be in compliance with the requirements of the Exchange Act, including possible delisting. Moreover, any negative news about any such future proceedings against these audit firms may cause investor uncertainty regarding China-based, U.S.-listed companies and the market price of our common stock may be adversely affected.

If our independent registered public accounting firm was denied, even temporarily, the ability to practice before the SEC and we were unable to timely find another registered public accounting firm to audit and issue an opinion on our financial statements, our financial statements could be determined not to be in compliance with the requirements of the Exchange Act. Such a determination could ultimately lead to the delisting of the ADSs from [the New York Stock Exchange/Nasdaq Stock Market] or deregistration from the SEC, or both, which would substantially reduce or effectively terminate the trading of the ADSs in the United States.

The enforcement of the PRC Labor Contract Law and other labor-related regulations in the PRC 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 PRC labor laws. 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 PRC subsidiaries have not made adequate contributions to employee benefit plans, or not withheld individual income tax adequately, as required by applicable PRC laws and regulations. In addition, certain of our PRC 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

 

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all. As of the date of this prospectus, we are not aware of any notice from regulatory authorities or any claim or request from these employees in this regard. 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.

Some of our PRC service stores 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 PRC laws, 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 April 30, 2019, we registered 14 branches in the PRC, 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 pick 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 Our ADSs and This Offering

There has been no public market for our shares or ADSs prior to this offering, and you may not be able to resell our ADSs at or above the price you paid, or at all.

Prior to this initial public offering, there has been no public market for our shares or ADSs. We will apply to list our ADSs on [New York Stock Exchange/Nasdaq Stock Market]. Our shares will not be listed on any exchange or quoted for trading on any over-the-counter trading system. If an active trading market for our ADSs does not develop after this offering, the market price and liquidity of our ADSs will be materially and adversely affected.

Negotiations with the underwriters will determine the initial public offering price for our ADSs which may bear no relationship to their market price after the initial public offering. We cannot assure you that an active trading market for our ADSs will develop or that the market price of our ADSs will not decline below the initial public offering price.

The trading price of our ADSs may be volatile, which could result in substantial losses to you.

The trading prices of our ADSs is likely 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

 

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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 PRC companies’ securities after their offerings may affect the attitudes of investors toward PRC companies listed in the United States, which consequently may impact the trading performance of our 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 PRC companies may also negatively affect the attitudes of investors towards PRC 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 our ADSs.

In addition to the above factors, the price and trading volume of our 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;

 

   

release or expiry of lock-up or other transfer restrictions on our issued and outstanding shares or ADSs;

 

   

sales or perceived potential sales of additional ordinary shares or ADSs; and

 

   

proceedings instituted recently by the SEC against five PRC-based accounting firms, including our independent registered public accounting firm.

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.

Immediately prior to the completion of this offering, we expect to create a dual-class share structure such that our ordinary shares will 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 will be entitled to one vote per share, while holders of Class B ordinary shares will be entitled to 15 votes per share based on our proposed dual-class share structure. We will sell Class A ordinary shares represented by our ADSs in this offering. 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.

 

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Immediately prior to the completion of this offering, our two founders, Mr. Chaohui Chen and Mr. Zhiping Peng, will beneficially own all of our issued Class B ordinary shares. These Class B ordinary shares will constitute approximately        % of our total issued and outstanding share capital immediately after the completion of this offering and        % of the aggregate voting power of our total issued and outstanding share capital immediately after the completion of this offering due to the disparate voting powers associated with our dual-class share structure, assuming the underwriters do not exercise their over-allotment option. See “Principal Shareholders.” 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. 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 our 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 our ADSs.

S&P Dow Jones and FTSE Russell have recently 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 our 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 our 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 our 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. They will continue to have a substantial control of us and collectively hold        % of total voting power immediately after this offering, assuming the underwriters do not exercise their over-allotment option. 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. For more information regarding our principal shareholders, see “Principal Shareholders.”

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 our ADSs, the market price for our ADSs and trading volume could decline.

The trading market for our ADSs will depend 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 our ADSs or publishes inaccurate or

 

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unfavorable research about our business, the market price for our 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 our ADSs to decline.

Because our initial public offering price is substantially higher than our net tangible book value per share, you will experience immediate and substantial dilution.

If you purchase ADSs in this offering, you will pay more for your ADSs than the amount paid by our existing shareholders for their ordinary shares on a per ADS basis. As a result, you will experience immediate and substantial dilution of US$             per ADS, representing the difference between the initial public offering price of US$             per ADS and our adjusted net tangible book value per ADS as of December 31, 2018, after giving effect to our sale of the ADSs offered in this offering. In addition, you may experience further dilution to the extent that our ordinary shares are issued upon the exercise of share options. See “Dilution” for a more complete description of how the value of your investment in the ADSs will be diluted upon completion of this offering.

Because we do not expect to pay dividends in the foreseeable future after this offering, you must rely on price appreciation of our ADSs for return on your investment.

We currently intend to retain most, if not all, of our available funds and any future earnings after this offering 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 our 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 our ADSs will likely depend entirely upon any future price appreciation of our ADSs. There is no guarantee that our ADSs will appreciate in value after this offering or even maintain the price at which you purchased the ADSs. You may not realize a return on your investment in our ADSs and you may even lose your entire investment in our ADSs.

Substantial future sales or perceived potential sales of our ADSs in the public market could cause the price of our ADSs to decline.

Sales of our ADSs in the public market after this offering, or the perception that these sales could occur, could cause the market price of our ADSs to decline. Upon completion of this offering, we will have              ordinary shares issued and outstanding including              Class A ordinary shares represented by ADSs, assuming the underwriters do not exercise their over-allotment option. All ADSs sold in this offering will be freely transferable without restriction or additional registration under the Securities Act. The remaining ordinary shares issued and outstanding after this offering and the ordinary shares will be available for sale, upon the expiration of the 180-day lock-up period beginning from the date of this prospectus, subject to volume and other restrictions as applicable under Rules 144 and 701 under the Securities Act. Any or all of these shares may be released prior to the expiration of the lock-up period at the discretion of the representatives of the underwriters of this offering. To the extent shares are released before the expiration of the lock-up period and sold into the market, the market price of our ADSs could decline.

 

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After completion of this offering, certain holders of our ordinary shares may cause us to register under the Securities Act the sale of their shares, subject to the 180-day lock-up period in connection with this offering. Registration of these shares under the Securities Act would result in ADSs representing these shares becoming freely tradable without restriction under the Securities Act immediately upon the effectiveness of the registration. Sales of these registered shares in the form of ADSs in the public market could cause the price of our ADSs to decline.

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 our 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. 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 your instructions. If we ask for your instructions, then upon receipt of your voting instructions, the depositary will try 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 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 post-offering memorandum and articles of association that will become effective prior to completion of this offering, 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. Except in limited circumstances, the depositary for our ADSs will give us a discretionary proxy to vote the underlying Class A ordinary shares represented by your ADSs if you do not vote at shareholders’ meetings, which could adversely affect your interests.

Under the deposit agreement for the ADSs, if you do not vote, the depositary will give us a discretionary proxy to vote the Class A ordinary shares underlying your ADSs at shareholders’ meetings unless:

 

   

we have instructed the depositary that we do not wish a discretionary proxy to be given;

 

   

we have informed the depositary that there is substantial opposition as to a matter to be voted on at the meeting;

 

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a matter to be voted on at the meeting would have a material adverse impact on shareholders; or

 

   

the voting at the meeting is to be made on a show of hands.

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 ordinary shares or other deposited securities, and we do not have any present plan to pay any cash dividends on our ordinary shares in the foreseeable future. To the extent that there is a distribution, the depositary of our ADSs has agreed to pay to you the cash dividends or other distributions it or the custodian receives on our 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 through the mail, or that the value of certain distributions may be less than the cost of mailing them. In these cases, the depositary may decide not to distribute such property to you.

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, during which time the depositary needs to maintain an exact number of ADS holders on its books for a specified period. 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. Substantially all of our assets are located in China and Hong Kong. All of our directors and executive officers are nationals or residents

 

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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 the PRC may render you unable to enforce a judgment against our assets or the assets of our directors and officers. For more information regarding the relevant laws of the Cayman Islands and China, see “Enforceability of Civil Liabilities.”

Your investment in our ADSs may be impacted if we are encouraged to issue CDRs in the future.

Currently the PRC central government is proposing new rules that would allow PRC technology companies listed outside China to list on the mainland stock market through the creation of Chinese Depositary Receipts, or CDRs. Once the CDR mechanism is in place, we might consider and be encouraged by the evolving PRC governmental policies to issue CDRs and allow investors to trade our CDRs on PRC stock exchanges. However, there are uncertainties as to whether a pursuit of CDRs in China would bring positive or negative impact on your investment in our 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.

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 Law 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 or to obtain copies of lists of shareholders of these companies. Our directors have discretion under our post-IPO articles of association that will become effective immediately prior to completion of this offering 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 Law of the Cayman Islands and the laws applicable to companies incorporated in the United States and their shareholders, see “Description of Share Capital—Differences in Corporate Law.”

We have not determined a specific use for a portion of the net proceeds from this 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 this offering, and our management will have considerable discretion in deciding how to apply these proceeds. You will not have the

 

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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 this 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.

The post-offering memorandum and articles of association that we plan to adopt and that will become effective immediately prior to the completion of this offering will contain 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.

We have adopted amended and restated memorandum and articles of association that will become effective immediately prior to the completion of this offering. Our new memorandum and articles of association contain 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 proposed 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 our 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 [New York Stock Exchange/Nasdaq Stock 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.

 

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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 [NYSE/Nasdaq Stock Market] corporate governance listing standards; these practices may afford less protection to shareholders than they would enjoy if we complied fully with the [New York Stock Exchange/Nasdaq Stock Market] corporate governance listing standards.

As a Cayman Islands company listed on the [New York Stock Exchange/Nasdaq Stock Market], we are subject to [New York Stock Exchange/Nasdaq Stock Market] corporate governance listing standards. However, the [New York Stock Exchange/Nasdaq Stock Market] 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 [New York Stock Exchange/Nasdaq] corporate governance listing standards. For example, neither the Companies Law of the Cayman Islands nor our post-offering memorandum and articles of association that will become effective immediately prior to the completion of this offering requires a majority of our directors to be independent and we could include non-independent directors as members of our compensation committee and nominating committee, and our independent directors would not necessarily hold regularly scheduled meetings at which only independent directors are present. Currently, we do not plan to rely on home country practice with respect to our corporate governance after we complete this offering. However, if we choose to follow home country practice in the future, our shareholders may be afforded less protection than they otherwise would under [New York Stock Exchange/Nasdaq] corporate governance 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 investors in our ADSs or ordinary shares to significant adverse United States income tax consequences.

We will be classified as a passive foreign investment company, or PFIC, for United States federal income tax purposes for any taxable year if either (a) 75% or more of our gross income for such year consists of certain types of “passive” income or (b) 50% or more of the value of our assets (determined on the basis of a quarterly average) during such year produce or are held for the production of passive income (the “asset test”). Although the law in this regard is unclear, we intend to treat our VIEs (including their respective subsidiaries, if any) as being owned by us for United States federal income tax purposes, not only because we exercise effective control over the operation of such entities but also because we are entitled to substantially all of their economic benefits, and, as a result, we consolidate their results of operations in our consolidated financial statements. Assuming that we are the owner of our VIEs (including their respective subsidiaries, if any) for United States federal income tax purposes, and based upon our current and expected income and assets, including goodwill and other unbooked intangibles not reflected on our balance sheet (taking into account the expected proceeds from this offering) and projections as to the market price of our ADSs following the offering, we do not presently expect to be a PFIC for the current taxable year or the foreseeable future.

While we do not expect to become a PFIC, because the value of our assets for purposes of the asset test may be determined by reference to the market price of our ADSs, fluctuations in the market price of our ADSs may cause us to become a PFIC for the current or subsequent taxable years. The determination of whether we will be or become a PFIC will also depend, in part, on the composition and classification of our income and assets. Because there are uncertainties in the application of the relevant rules, it is possible that the IRS may challenge our classification of certain income and assets as non-passive which may result in our being or becoming a PFIC in the current or subsequent years. In addition, the composition of our income and assets will also be affected by how, and how quickly, we use our liquid assets and the cash raised in this offering. 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 our VIEs for United States federal income tax purposes, our risk of being a PFIC may substantially increase. Because there are uncertainties in the application of the relevant rules and PFIC status is a factual determination made annually after the close of each taxable year, there can be no assurance that we will not be a PFIC for the current taxable year or any future taxable year.

 

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If we are a PFIC in any taxable year, a U.S. Holder (as defined in “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 our 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 our ADSs or ordinary shares. For more information see “TAXATION—United States Federal Income Tax Considerations—Passive Foreign Investment Company Considerations.”

We will incur increased costs and become subject to additional rules and regulations as a result of being a public company.

As a result of this offering, we will become a public company and expect to incur significant accounting, legal and other expenses that we did not incur as a private company. We estimate such additional expenses to be approximately US$2.5 million to US$4.0 million annually. The Sarbanes-Oxley Act, as well as rules subsequently implemented by the SEC and the [New York Stock Exchange/Nasdaq Stock Market], have detailed requirements concerning corporate governance practices of public companies, including Section 404 of the Sarbanes-Oxley Act relating to internal controls over financial reporting. We expect these rules and regulations applicable to public companies to increase our accounting, legal and financial compliance costs and to make certain corporate activities more time-consuming and costly. Our management will be required to devote substantial time and attention to our public company reporting obligations and other compliance matters. We are currently evaluating and monitoring developments with respect to these rules and regulations, and we cannot predict or estimate the amount of additional costs we may incur or the timing of such costs. Our reporting and other compliance obligations as a public company may place a strain on our management, operational and financial resources and systems for the foreseeable future.

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.

 

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This prospectus contains forward-looking statements that reflect our current expectations and views of future events. The forward looking statements are contained principally in the sections entitled “Prospectus Summary,” “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business.” Known and unknown risks, uncertainties and other factors, including those listed under “Risk Factors,” may cause our actual results, performance or achievements to be materially different from those expressed or implied by the forward-looking statements.

You can identify some of these forward-looking statements by words or phrases such as “may,” “will,” “expect,” “anticipate,” “aim,” “estimate,” “intend,” “plan,” “believe,” “is/are likely to,” “potential,” “continue” or other similar expressions. We have based these forward-looking statements largely on our current expectations and projections about future events that we believe may affect our financial condition, results of operations, business strategy and financial needs. These forward-looking statements include statements relating to:

 

   

our mission, goals and strategies;

 

   

our future business development, financial conditions and results of operations;

 

   

the expected growth of the mobile data connectivity service industry;

 

   

our expectations regarding demand for and market acceptance of our products and services;

 

   

our expectations regarding our relationships with our customers, suppliers and business partners;

 

   

competition in our industry;

 

   

our proposed use of proceeds; and

 

   

relevant government policies and regulations relating to our industry and our geographic markets.

These forward-looking statements involve various risks and uncertainties. Although we believe that our expectations expressed in these forward-looking statements are reasonable, our expectations may later be found to be incorrect. Our actual results could be materially different from our expectations. Important risks and factors that could cause our actual results to be materially different from our expectations are generally set forth in “Prospectus Summary—Our Challenges,” “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Business,” “Regulation” and other sections in this prospectus. You should read thoroughly this prospectus and the documents that we refer to with the understanding that our actual future results may be materially different from and worse than what we expect. We qualify all of our forward-looking statements by these cautionary statements.

This prospectus contains certain data and information that we obtained from various government and private publications. Statistical data in these publications also include projections based on a number of assumptions. The mobile data connectivity service industry may not grow at the rate projected by market data, or at all. Failure of this market to grow at the projected rate may have a material adverse effect on our business and the market price of the ADSs. In addition, the rapidly evolving nature of this industry results in significant uncertainties for any projections or estimates relating to the growth prospects or future condition of our market. Furthermore, if any one or more of the assumptions underlying the market data are later found to be incorrect, actual results may differ from the projections based on these assumptions. You should not place undue reliance on these forward-looking statements.

The forward-looking statements made in this prospectus relate only to events or information as of the date on which the statements are made in this prospectus. Except as required by law, we undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise, after the date on which the statements are made or to reflect the occurrence of unanticipated events. You should read this prospectus and the documents that we refer to in this prospectus and have filed as exhibits to the registration statement, of which this prospectus is a part, completely and with the understanding that our actual future results may be materially different from what we expect.

 

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USE OF PROCEEDS

We estimate that we will receive net proceeds from this offering of approximately US$            , or approximately US$            if the underwriters exercise their over-allotment option in full, after deducting underwriting discounts and commissions and the estimated offering expenses payable by us. These estimates are based upon an assumed initial public offering price of US$            per ADS, which is the midpoint of the price range shown on the front page of this prospectus. A US$1.00 increase (decrease) in the assumed initial public offering price of US$            per ADS would increase (decrease) the net proceeds to us from this offering by US$            , assuming the number of ADSs offered by us, as set forth on the front cover of this prospectus, remains the same and after deducting the estimated underwriting discounts and commissions and estimated expenses payable by us.

The primary purposes of this offering are to create a public market for our shares for the benefit of all shareholders, retain talented employees by providing them with equity incentives and obtain additional capital. We plan to use the net proceeds of this offering as follows:

 

   

approximately        % for research and development; and

 

   

the balance for general corporate purposes, which may include funding sales and marketing efforts, working capital needs and potential strategic investments and acquisitions, although we have not identified any specific investments or acquisition opportunities.

The foregoing represents our current intentions based upon our present plans and business conditions to use and allocate the net proceeds of this offering. Our management, however, will have significant flexibility and discretion to apply the net proceeds of this offering. If an unforeseen event occurs or business conditions change, we may use the proceeds of this offering differently than as described in this prospectus. See “Risk Factors—Risks Related to the ADSs and This Offering—We have not determined a specific use for a portion of the net proceeds from this offering and we may use these proceeds in ways with which you may not agree.”

Pending any use described above, we plan to invest the net proceeds in short-term, interest-bearing, debt instruments or demand deposits.

In using the proceeds of this offering, we are permitted under PRC laws and regulations as an offshore holding company to provide funding to our PRC subsidiaries only through loans or capital contributions and to our VIEs only through loans, subject to satisfaction of applicable government registration and approval requirements. We cannot assure you that we will be able to obtain these government registrations or approvals on a timely basis, or at all. See “Risk Factors—Risks Relating to Doing Business in China—PRC regulation of loans to and direct investment in PRC entities by offshore holding companies and governmental control of currency conversion may delay or prevent us from using the proceeds of any financing outside China to make loans to or make additional capital contributions to our PRC subsidiaries and VIEs, which could materially and adversely affect our liquidity and our ability to fund and expand our business.” Additionally, while there is no statutory limit on the amount of capital contribution that we can make to our PRC subsidiaries, loans provided to our PRC subsidiaries and our VIEs in the PRC are subject to certain statutory limits. With respect to our PRC subsidiaries, the maximum amount of the loans that they can acquire in aggregate from outside China as of December 31, 2018 is (i) approximately US$52.1 million according to the Total Investment and Registered Capital Balance, as defined in “Regulation—Regulations Related to Foreign Exchange—Loans by the Foreign Companies to their PRC Subsidiaries;” or (ii) approximately US$62.6 million under the Risk-Weighted Approach and the Net Asset Limits, as defined in “Regulation—Regulations Related to Foreign Exchange—Loans by the Foreign Companies to their PRC Subsidiaries.” With respect to our VIEs, the maximum amount of the loans that they can obtain in aggregate from outside China as of December 31, 2018 is approximately US$7.5 million according to the Risk-Weighted Approach and the Net Asset Limits. We are able to use all of the net proceeds from this offering to fund our PRC subsidiaries through capital contributions, which are not subject to any statutory limit on the amount under PRC laws and regulations. See “Regulation—Regulations Related to Foreign Exchange—Loans by the Foreign Companies to their PRC Subsidiaries.”

 

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DIVIDEND POLICY

Our board of directors has discretion on 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 board of directors. In either case, all dividends are subject to certain restrictions under Cayman Islands law, namely that our company may only pay dividends out of profits or share premium, and provided always that in no circumstances may a dividend be paid if this would result in our company being unable to pay its debts as they fall due in the ordinary course of business. Even if we decide to pay dividends, the form, frequency and amount will depend upon our future operations and earnings, capital requirements and surplus, general financial condition, contractual restrictions and other factors that the board of directors may deem relevant.

We do not have any present plan to pay any cash dividends on our ordinary shares in the foreseeable future after this offering. We currently intend to retain most, if not all, of our available funds and any future earnings to operate and expand our business.

We are a holding company incorporated in the Cayman Islands. We may rely on dividends from our subsidiaries an consolidated entities in Hong Kong or China for our cash requirements, including any payment of dividends to our shareholders. PRC regulations may restrict the ability of our PRC subsidiaries to pay dividends to us. See “Regulation—Regulations on Dividend Distribution.”

If we pay any dividends on our ordinary shares, we will pay those dividends which are payable in respect of the Class A ordinary shares underlying the ADSs to the depositary, as the registered holder of such Class A ordinary shares, and the depositary then will pay such amounts to the ADS holders in proportion to the Class A ordinary shares underlying the ADSs held by such ADS holders, subject to the terms of the deposit agreement, including the fees and expenses payable thereunder. See “Description of American Depositary Shares.” Cash dividends on our ordinary shares, if any, will be paid in U.S. dollars.

 

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CAPITALIZATION

The following table sets forth our capitalization as of December 31, 2018:

 

   

on an actual basis;

 

   

on a pro forma basis to reflect (i) the redesignation of 122,072,980 ordinary shares beneficially owned by Mr. Chaohui Chen and Mr. Zhiping Peng into Class B ordinary shares on a one-for-one basis immediately prior to the completion of this offering, (ii) the redesignation of all of the remaining ordinary shares into Class A ordinary shares on a one-for-one basis immediately prior to the completion of this offering, (iii) the automatic conversion and the redesignation of all of the remaining issued and outstanding preferred shares on a one-for-one basis into Class A ordinary shares immediately prior to the completion of this offering; and

 

   

on a pro forma as adjusted basis to reflect (i) the redesignation of 122,072,980 ordinary shares beneficially owned by Mr. Chaohui Chen and Mr. Zhiping Peng into Class B ordinary shares on a one-for-one basis immediately prior to the completion of this offering, (ii) the redesignation of all of the remaining ordinary shares into Class A ordinary shares on a one-for-one basis immediately prior to the completion of this offering, (iii) the automatic conversion and the redesignation of all of the remaining issued and outstanding preferred shares on a one-for-one basis into Class A ordinary shares immediately prior to the completion of this offering, and (iv) the sale of              Class A ordinary shares in the form of ADSs by us in this offering at an assumed initial public offering price of US$             per ADS, the mid-point of the estimated range of the initial public offering price shown on the front cover of this prospectus, after deducting the underwriting discounts and commissions and estimated offering expenses payable by us, assuming the underwriters do not exercise the over-allotment option.

 

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You should read this table together with our consolidated financial statements and the related notes included elsewhere in this prospectus and the information under “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

 

     As of December 31, 2018  
     Actual     Pro
Forma
    Pro
Forma As
Adjusted(1)
 
     (US$ in thousands, except for shares)  

Indebtedness:

      

Long term borrowing

     1,766       1,766                     

Mezzanine Equity:

      

Series A redeemable convertible preferred shares (US$0.00005 par value; 29,000,000 shares authorized, issued and outstanding on an actual basis; none outstanding on a pro forma or pro forma as adjusted basis)

     20,437          

Total mezzanine equity

     20,437          

Shareholders’ Equity:

      

Ordinary shares (US$0.00005 par value; 971,000,000 shares authorized, 232,451,900 shares issued and 228,749,678 shares outstanding on an actual basis)

     11          

Class A ordinary shares (US$0.00005 par value; No shares authorized, issued and outstanding; 135,676,698 shares authorized, shares issued and outstanding on a pro-forma basis)

           6    

Class B ordinary shares (US$0.00005 par value; No shares authorized, issued and outstanding; 122,072,980 shares authorized,              shares issued and outstanding on a pro-forma basis)

           6    

Additional paid-in capital(2)

     121,189       141,794    

Accumulated other comprehensive income(2)

     674       674    

Accumulated losses

     (105,275     (105,444  

Total shareholders’ equity(2)

     16,599       37,036    

Total capitalization(2)

     38,802       38,802    
  

 

 

   

 

 

   

 

 

 

 

Notes:    (1)   The pro forma as adjusted information discussed above is illustrative only. Our additional paid-in capital, total shareholders’ equity, and total capitalization following the completion of this offering are subject to adjustment based on the actual initial public offering price and other terms of this offering determined at pricing.
             (2)   A US$1.00 increase/(decrease) in the assumed initial public offering price of US$             per ADS, the mid-point of the estimated range of the initial public offering price shown on the cover page of this prospectus, would increase/(decrease) each of additional paid-in capital, total shareholders’ equity, and total capitalization by US$             million.

 

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DILUTION

If you invest in the ADSs, your interest will be diluted to the extent of the difference between the initial public offering price per ADS and our net tangible book value per ADS after this offering. Dilution results from the fact that the initial public offering price per ordinary share is substantially in excess of the book value per ordinary share attributable to the existing shareholders for our presently outstanding ordinary shares.

Our net tangible book value as of December 31, 2018 was approximately US$36.4 million, representing US$0.16 per ordinary share or US$             per ADS as of that date, or US$0.14 per ordinary share and US$             per ADS on a pro forma basis. Net tangible book value represents the amount of our total consolidated tangible assets, less the amount of our total consolidated liabilities. Pro forma net tangible book value per ordinary share is calculated after giving effect to the automatic conversion of all of our issued and outstanding convertible preference shares. Dilution is determined by subtracting pro forma net tangible book value per ordinary share, after giving effect to the additional proceeds we will receive from this offering, from the assumed initial public offering price of US$             per ordinary share, which is the midpoint of the estimated initial public offering price range set forth on the front cover of this prospectus adjusted to reflect the ADS-to-ordinary share ratio, and after deducting underwriting discounts and commissions and estimated offering expenses payable by us. Because the Class A ordinary shares and Class B ordinary shares have the same dividend and other rights, except for voting and conversion rights, the dilution is presented based on all issued and outstanding ordinary shares, including Class A ordinary shares and Class B ordinary shares.

Without taking into account any other changes in net tangible book value after December 31, 2018, other than to give effect to our sale of the ADSs offered in this offering at the assumed initial public offering price of US$             per ADS, which is the midpoint of the estimated initial public offering price range, after deduction of the underwriting discounts and commissions and estimated offering expenses payable by us, our pro forma as adjusted net tangible book value as of December 31, 2018 would have been US$            , or US$             per ordinary share and US$             per ADS. This represents an immediate increase in net tangible book value of US$             per ordinary share and US$             per ADS to the existing shareholders and an immediate dilution in net tangible book value of US$             per ordinary share and US$             per ADS to investors purchasing ADSs in this offering. The following table illustrates such dilution:

 

     Per
Ordinary
Share
     Per ADS  

Assumed initial public offering price

   US$                    US$                

Net tangible book value as of December 31, 2018

   US$        US$    

Pro forma net tangible book value after giving effect to the conversion of our preferred shares

   US$        US$    

Pro forma as adjusted net tangible book value after giving effect to the conversion of our preferred shares and this offering

   US$        US$    

Amount of dilution in net tangible book value to new investors in this offering

   US$        US$    

A US$1.00 increase (decrease) in the assumed initial public offering price of US$             per ADS would increase (decrease) our pro forma as adjusted net tangible book value after giving effect to this offering by US$            , the pro forma as adjusted net tangible book value per ordinary share and per ADS after giving effect to this offering by US$             per ordinary share and US$             per ADS and the dilution in pro forma as adjusted net tangible book value per ordinary share and per ADS to new investors in this offering by US$             per ordinary share and US$             per ADS, assuming no change to the number of ADSs offered by us as set forth on the front cover of this prospectus, and after deducting underwriting discounts and commissions and estimated offering expenses payable by us.

The following table summarizes, on a pro forma as adjusted basis as of December 31, 2018, the differences between existing shareholders and the new investors with respect to the number of ordinary shares (in the form of

 

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ADSs or shares) purchased from us, the total consideration paid and the average price per ordinary share and per ADS paid before deducting the underwriting discounts and commissions and estimated offering expenses payable by us. The total number of ordinary shares does not include ordinary shares underlying the ADSs issuable upon the exercise of the over-allotment option granted to the underwriters.

 

     Ordinary Shares
Purchased
     Total Consideration     Average
Price Per
Ordinary
Share
     Average
Price Per
ADS
 
     Number      Percent      Amount      Percent  

Existing shareholders

                                           US$                                 US$                    US$                

New investors

         US$                     US$        US$    
  

 

 

    

 

 

    

 

 

    

 

 

      

Total

         US$          100.0     
  

 

 

    

 

 

    

 

 

    

 

 

      

The pro forma as adjusted information discussed above is illustrative only. Our net tangible book value following the completion of this offering is subject to adjustment based on the actual initial public offering price of the ADSs and other terms of this offering determined at pricing.

The discussion and tables above assume no exercise of any share options outstanding as of the date of this prospectus. As of the date of this prospectus, there are 12,187,420 ordinary shares issuable upon exercise of outstanding share options with exercise prices ranging from of US$0.50 to US$0.81 per share. To the extent that any of these options are exercised, there will be further dilution to new investors.

 

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ENFORCEABILITY OF CIVIL LIABILITIES

We are incorporated under the laws of the Cayman Islands as an exempted company with limited liability. We are incorporated in the Cayman Islands to take advantage of certain benefits associated with being a Cayman Islands exempted company, such as:

 

   

political and economic stability;

 

   

an effective judicial system;

 

   

a favorable tax system;

 

   

the absence of exchange control or currency restrictions; and

 

   

the availability of professional and support services.

However, certain disadvantages accompany incorporation in the Cayman Islands. These disadvantages include but are not limited to:

 

   

the Cayman Islands has a less developed body of securities laws as compared to the United States and these securities laws provide significantly less protection to investors as compared to the United States; and

 

   

Cayman Islands companies may not have standing to sue before the federal courts of the United States.

Our constituent documents do not contain provisions requiring that disputes, including those arising under the securities laws of the United States, between us, our officers, directors and shareholders, be arbitrated.

Substantially all of our assets are located in China and Hong Kong. All of our directors and executive officers are nationals or residents of jurisdictions other than the United States and most of their assets are located outside the United States. As a result, it may be difficult for a shareholder to effect service of process within the United States upon these individuals, or to bring an action against us or these individuals in the United States, or to enforce against us or them judgments obtained in United States courts, including judgments predicated upon the civil liability provisions of the securities laws of the United States or any state in the United States.

We have appointed             , located at             , as our agent upon whom process may be served in any action brought against us under the securities laws of the United States.

Cayman Islands

Maples and Calder (Hong Kong) LLP, our counsel as to Cayman Islands law, has advised us that there is uncertainty as to whether the courts of the Cayman Islands would (i) recognize or enforce judgments of U.S. courts obtained against us or our directors or officers that are predicated upon the civil liability provisions of the federal securities laws of the United States or the securities laws of any state in the United States, or (ii) entertain original actions brought in the Cayman Islands against us or our directors or officers that are predicated upon the federal securities laws of the United States or the securities laws of any state in the United States.

Maples and Calder (Hong Kong) LLP has informed us that although there is no statutory enforcement in the Cayman Islands of judgments obtained in the federal or state courts of the United States (and the Cayman Islands are not a party to any treaties for the reciprocal enforcement or recognition of such judgments), the courts of the Cayman Islands will, at common law, recognize and enforce a foreign money judgment of a foreign court of competent jurisdiction without any re-examination of the merits of the underlying dispute based on the principle that a judgment of a competent foreign court imposes upon the judgment debtor an obligation to pay the liquidated sum for which such judgment has been given, provided such judgment (i) is final and conclusive, (ii) is not in respect of taxes, a fine or a penalty; and (iii) was not obtained in a manner and is not of a kind the

 

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enforcement of which is contrary to natural justice or the public policy of the Cayman Islands. However, the Cayman Islands courts are unlikely to enforce a judgment obtained from the U.S. courts under civil liability provisions of the U.S. federal securities law if such judgment is determined by the courts of the Cayman Islands to give rise to obligations to make payments that are penal or punitive in nature. A Cayman Islands court may stay enforcement proceedings if concurrent proceedings are being brought elsewhere.

PRC

Han Kun Law Offices, our counsel as to PRC law, has advised us that there is uncertainty as to whether the courts of China would:

 

   

recognize or enforce judgments of United States courts obtained against us or our directors or officers predicated upon the civil liability provisions of the securities laws of the United States or any state in the United States; or

 

   

entertain original actions brought in each respective jurisdiction against us or our directors or officers predicated upon the securities laws of the United States or any state in the United States.

Han Kun Law Offices has further advised us that the recognition and enforcement of foreign judgments are provided for under the PRC Civil Procedures Law. PRC courts may recognize and enforce foreign judgments in accordance with the requirements of the PRC Civil Procedures Law based either on treaties between China and the country where the judgment is made or on principles of reciprocity between jurisdictions. China does not have any treaties or other form of reciprocity with the United States or the Cayman Islands that provide for the reciprocal recognition and enforcement of foreign judgments. In addition, according to the PRC Civil Procedures Law, courts in the PRC will not enforce a foreign judgment against us or our directors and officers if they decide that the judgment violates the basic principles of PRC law or national sovereignty, security, or public interest. As a result, it is uncertain whether and on what basis a PRC court would enforce a judgment rendered by a court in the United States or in the Cayman Islands. Under the PRC Civil Procedures Law, foreign shareholders may originate actions based on PRC law against a company in China for disputes if they can establish sufficient nexus to the PRC for a PRC court to have jurisdiction, and meet other procedural requirements, including, among others, the plaintiff must have a direct interest in the case, and there must be a concrete claim, a factual basis and a cause for the suit. It will be, however, difficult for U.S. shareholders to originate actions against us in the PRC in accordance with PRC laws because we are incorporated under the laws of the Cayman Islands and it will be difficult for U.S. shareholders, by virtue only of holding the ADSs or ordinary shares, to establish a connection to the PRC for a PRC court to have jurisdiction as required under the PRC Civil Procedures Law.

Hong Kong

Guantao & Chow Solicitors and Notaries, our counsel with respect to Hong Kong law, has advised us that there is uncertainty as to whether the courts of Hong Kong would (1) recognize or enforce judgments of U.S. courts obtained against us or our directors or officers that are predicated upon the civil liability provisions of the federal securities laws of the United States or the securities laws of any state in the United States, or (2) entertain original actions brought in Hong Kong against us or our directors or officers that are predicated upon the federal securities laws of the United States or the securities laws of any state in the United States.

We have been further advised by Guantao & Chow Solicitors and Notaries that judgment of United States courts will not be directly enforced in Hong Kong. There are currently no treaties or other arrangements providing for reciprocal enforcement of foreign judgments between Hong Kong and the United States. However, subject to certain conditions, including but not limited to when the judgment is for a definite sum of money in a civil matter and not in respect of taxes, fines, penalties or similar charges, the judgment is final and conclusive and has not been stayed or satisfied in full, the judgement is from a competent court, the judgment was not obtained by fraud, misrepresentation or mistake nor obtained in proceedings which contravenes the rules of natural justice and the enforcement of the judgment is not contrary to public policy in Hong Kong, Hong Kong

 

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courts may accept such judgment obtained from a United States court as a debt due under the rules of common law. However, a separate legal action for debt must be commenced in Hong Kong in order to recover such debt from the judgment debtor.

 

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CORPORATE HISTORY AND STRUCTURE

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 HONGKONG UCLOUDLINK NETWORK TECHNOLOGY LIMITED, an entity through which we conduct our business operations in Hong Kong.

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 established the following subsidiaries to perform the following functions of our business:

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;

primarily for technology research and development:

 

   

Shenzhen Ucloudlink Technology Limited in China in July 2015; and

primarily for hardware exportation:

 

   

Shenzhen uCloudlink Co., Ltd in 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 our VIEs in this prospectus. Our contractual arrangements with our VIEs and their shareholders allow us to (i) exercise effective control over our VIEs, (ii) receive substantially all of the economic benefits of our 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 our VIEs when and to the extent permitted by PRC law. For more details, including risks associated with the VIE structure, please see “—Agreements that provide us with effective control over our VIEs,” “—Agreements that allow us to receive economic benefits from our VIEs,” “—Agreements that provide us with the option to purchase the equity interests in and assets of our VIEs,” and “Risk Factors—Risks Related to Our Corporate Structure.”

As a result of our direct ownership in Beijing uCloudlink and the VIE contractual arrangements, we are regarded as the primary beneficiary of our VIEs, and we treat them and their subsidiaries as our consolidated affiliated entities under U.S. GAAP. We have consolidated the financial results of our VIEs and their respective subsidiaries with our consolidated financial statements in accordance with U.S. GAAP.

 

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The chart below summarizes our corporate structure and identifies our principal subsidiaries, our VIEs and their principal subsidiaries immediately upon the completion of this offering, assuming no exercise of the over-allotment option granted to the underwriters:

 

LOGO

 

 

Note:

(1)

Through contractual arrangements, one of our employees holds the equity interest in the entity on behalf of us, and we have consolidated its financial results in our consolidated financial statements in accordance with U.S. GAAP.

  (2)

Chaohui Chen our founder, director and chief executive officer, and Zhiping Peng, our founder and chairman of board of directors, each holds 50.17% and 49.67% of the equity interests in Beijing Technology, respectively. Both of them are beneficial owners of our company. Four other beneficial owners of our company, namely, Wen Gao, Zhongqi Kuang, Baixing Wang and Xingya Qiu, hold an aggregate of 0.16% of the equity interest in Beijing Technology. Mr. Wen Gao serves as our chief sales officer, and Mr. Zhongqi Kuang serves as our chief supply chain officer.

 

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Contractual Arrangements with Our VIEs and Their Respective Shareholders

Agreements that provide us with effective control over our VIEs

Business Operation Agreements and Powers of Attorney. Pursuant to the Business Operation Agreement dated January 27, 2015, among Beijing uCloudlink, Shenzhen uCloudlink and Beijing Technology, which is the sole shareholder of Shenzhen uCloudlink, Shenzhen uCloudlink and Beijing Technology undertake that without Beijing uCloudlink’s prior written consent, Shenzhen uCloudlink shall not enter into any transactions that may have a material effect on Shenzhen uCloudlink’s assets, business, personnel, obligations, rights or business operations. Shenzhen uCloudlink and Beijing Technology agree that to the extent permitted by law, they will accept and unconditionally execute instructions from Beijing uCloudlink on business operations. Shenzhen uCloudlink and Beijing Technology also agree to elect directors nominated by Beijing uCloudlink and such directors shall nominate officers designated by Beijing uCloudlink. The business operation agreement will remain effective until the dissolution of Shenzhen uCloudlink and Beijing Technology correspondingly, the term of which will be extended if Beijing uCloudlink’s business term is extended or as required by Beijing uCloudlink.

On January 27, 2015, Beijing Technology 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, including, but not limited to, the power to participate in and vote at shareholder’s meetings, the power to nominate and appoint the directors, senior management, and other shareholders’ voting rights. The power of attorney will remain effective from the date of execution until the earlier of the liquidation of Shenzhen uCloudlink or the termination of the business operation agreement and can be extended upon request by Beijing uCloudlink.

On July 10, 2019, Beijing uCloudlink, Beijing Technology, and its shareholders entered into an amended business operation agreement, and all of the shareholders of Beijing Technology jointly executed a power of attorney, which contained terms substantially similar to the business operation agreement and power of attorney by and among Beijing uCloudlink, Shenzhen uCloudlink and Beijing Technology described above.

Equity Interest Pledge Agreements. Pursuant to equity interest pledge agreement dated January 27, 2015, among Beijing uCloudlink, Shenzhen uCloudlink and Beijing Technology, Beijing Technology has 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. In the event of a breach by Shenzhen uCloudlink or its shareholder of contractual obligations under these contractual arrangements, Beijing uCloudlink, as pledgee, will have the right to dispose of the pledged equity interests in Shenzhen uCloudlink and will have priority in receiving the proceeds from such disposal. Beijing Technology also covenants that, without the prior written consent of Beijing uCloudlink, it will not dispose of, create or allow any encumbrance on the pledged equity interests. The equity interest pledge agreement will remain effective until the pledgees fulfill all the obligations under relevant agreements and upon the written consent of pledger.

On July 10, 2019, Beijing uCloudlink, Beijing Technology, and its shareholders entered into an amended equity interest pledge agreement, which contained terms substantially similar to the equity interest pledge agreement by and among Beijing uCloudlink, Shenzhen uCloudlink and Beijing Technology described above.

As of the date of this prospectus, we have completed the registration of the equity interest pledge under the equity interest pledge agreement in relation to Shenzhen uCloudlink with the relevant office of State Administration of Market Regulation in accordance with the PRC Property Rights Law, and we are in the process of the registration of equity interest pledges under the equity agreements in relation to Beijing Technology.

 

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Agreements that allow us to receive economic benefits from our VIEs

Exclusive Technology Consulting and Services Agreements. Pursuant to the exclusive technology consulting and services agreement dated January 27, 2015, between Beijing uCloudlink and Shenzhen uCloudlink, Beijing uCloudlink has the exclusive right to provide Shenzhen uCloudlink with operational supports as well as consulting and technical services required by Shenzhen uCloudlink’s business. Without Beijing uCloudlink’s prior written consent, Shenzhen uCloudlink may not accept the same or similar technology consulting and services provided by any third party during the term of the agreement. Shenzhen uCloudlink agrees to pay Beijing uCloudlink service fees at an amount determined by Beijing uCloudlink based on the standard as indicated in the agreement, which should be paid within ten business days upon receipt of invoice from Beijing uCloudlink. Beijing uCloudlink has the exclusive ownership of all the intellectual property rights created as a result of the performance of the exclusive technology consulting and services agreement.

On July 10, 2019, Beijing uCloudlink and Beijing Technology entered into an amended exclusive technology consulting and services agreement, which contains terms substantially similar to the exclusive technology consulting and services agreement between Beijing uCloudlink and Shenzhen uCloudlink described above.

Agreements that provide us with the option to purchase the equity interests in and assets of our VIEs

Option Agreements. Pursuant to the option agreement dated January 27, 2015, among Beijing uCloudlink, Shenzhen uCloudlink and Beijing Technology, Beijing Technology has 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. Beijing uCloudlink or its designated person may exercise such options at the price of RMB1.00 or the lowest price permitted under applicable PRC law. Shenzhen uCloudlink and the shareholder of Shenzhen uCloudlink covenant that, without Beijing uCloudlink’s prior written consent, they will not, among other things, (i) create any pledge or encumbrance on their equity interests in Shenzhen uCloudlink, (ii) transfer or otherwise dispose of their equity interests in Shenzhen uCloudlink, (iii) change Shenzhen uCloudlink’s registered capital, (iv) amend Shenzhen uCloudlink’s articles of association, (v) dispose of Shenzhen uCloudlink’s material assets or enter into any material contract (except in the ordinary course of business or with Beijing uCloudlink’s prior written consent), (vi) pay any dividends to the shareholder of Shenzhen uCloudlink in any forms; or (vii) merge Shenzhen uCloudlink with any other entity or acquire equity interest or invest in any other entity.

On July 10, 2019, Beijing uCloudlink, Beijing Technology, and its shareholders entered into an amended option agreement, which contained terms substantially similar to the option agreement by and among Beijing uCloudlink, Shenzhen uCloudlink and Beijing Technology described above.

Spousal Consent Letters. The spouses of the shareholders of Beijing Technology, if applicable, have 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 will be disposed pursuant to the contractual agreements with Beijing uCloudlink. Each spouse agreed not to assert any rights over the equity interest in Beijing Technology held by the respective shareholder.

In the opinion of Han Kun Law Offices, our PRC legal counsel:

 

   

the ownership structures of our VIEs in China and Beijing uCloudlink, both currently and immediately after giving effect to this offering, are not in violation of applicable PRC laws and regulations currently in effect; and

 

   

the contractual arrangements between Beijing uCloudlink, our VIEs and their respective shareholders governed by PRC law are valid, binding and enforceable, and will not result in any violation of applicable PRC laws and regulations currently in effect.

However, our PRC legal counsel has also advised us that there are substantial uncertainties regarding the interpretation and application of current and future PRC laws, regulations and rules. Accordingly, the PRC

 

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regulatory authorities may take a view that is contrary to the opinion of our PRC legal counsel. It is uncertain whether any new PRC laws or regulations relating to variable interest entity structures will be adopted or if adopted, what they would provide. If we or any of our VIEs are found to be in violation of any existing or future PRC laws or regulations, 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 “Risk Factors—Risks Related to Our Corporate Structure—If the PRC government finds that the agreements that establish the structure for operating certain of our operations in China do not comply with PRC regulations relating to the relevant industries, or if these regulations or the interpretation of existing regulations change in the future, we could be subject to severe penalties or be forced to relinquish our interests in those operations.” and “Risk Factors—Risks Relating to Doing Business in China—Uncertainties exist with respect to the interpretation and implementation of the newly enacted PRC Foreign Investment Law and how it may impact the viability of our current corporate structure, corporate governance and business operations.”

 

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SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA

The following selected consolidated statements of comprehensive loss data for the years ended December 31, 2017 and 2018, selected consolidated balance sheets data as of December 31, 2017 and 2018 and selected consolidated statements of cash flow data for the years ended December 31, 2017 and 2018 have been derived from our audited consolidated financial statements included elsewhere in this prospectus. 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 Selected Consolidated Financial and Operating Data section together with our consolidated financial statements and the related notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this prospectus.

 

    For the Year Ended December 31,  
    2017     2018  
    (US$ in thousands)  

Selected Consolidated Statements of Comprehensive Loss Data:

 

Revenues

    85,845       126,399  

—Data connectivity services

    65,081       82,543  

Data connectivity services from Roamingman

    48,746       52,792  

Other data connectivity services

    16,335       29,751  

—Sales of terminals

    16,073       25,595  

—Sales of data related products

    2,624       12,148  

—PaaS and SaaS services

    1,835       5,047  

—Others

    232       1,066  

Cost of revenues

    (56,313     (80,244
 

 

 

   

 

 

 

Gross profit

    29,532       46,155  

Research and development expenses

    (13,255     (20,401

Sales and marketing expenses

    (17,673     (29,658

General and administrative expenses(1)

    (16,186     (19,919

Other income, net

    1,447       658  
 

 

 

   

 

 

 

Loss from operations

    (16,135     (23,165

Interest income

    174       435  

Interest expense

    (3,299     (3,385
 

 

 

   

 

 

 

Loss before income tax

    (19,260     (26,115

Income tax expenses

           

Share of loss in equity method investment, net of tax

          (442
 

 

 

   

 

 

 

Net loss

    (19,260     (26,557

Accretion of Series A-2 ordinary shares and Series A Preferred Shares

    (3,121     (2,209

Allocation to Series A-2 ordinary shares

    1,431        
 

 

 

   

 

 

 

Net loss attributable to ordinary shareholders of the Company

    (20,950     (28,766

Net loss

    (19,260     (26,557

Other comprehensive income/(loss), net of tax

   

Foreign currency translation adjustment

    91       (537
 

 

 

   

 

 

 

Total comprehensive loss

    (19,169     (27,094
 

 

 

   

 

 

 

Loss per share attributable to ordinary shareholders of the Company

   

Basic and diluted

    (0.17)       (0.16)  

Net loss per ADS(2)

   

Basic and diluted

   
 

 

 

   

 

 

 

Weighted average number of ordinary shares used in computing net loss per share

   

Basic and diluted

    124,473,486       185,370,982  

Non-GAAP Financial Measures(3)

   

Adjusted net loss

    (13,680     (24,275

Adjusted EBITDA

    (4,683     (15,132

 

Notes:

(1)

Including share-based compensation of US$5.6 million and US$2.3 million in 2017 and 2018, respectively, which relate to restricted shares held by certain of our senior management. As of December 31, 2018, there was US$0.2 million of unrecognized share-based compensation expense related to the restricted shares, which will be recognized in 2019.

  (2)

Each ADS represents             ordinary shares.

  (3)

See “Prospectus Summary—Summary Consolidated Financial and Operating Data—Non-GAAP Financial Measures.”

 

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The following table presents our selected consolidated balance sheet data as of December 31, 2017 and 2018:

 

                As of December 31,               
    2017     2018  
    (US$ in thousands)  

Selected Consolidated Balance Sheets Data:

   

Cash and cash equivalents

    49,102       36,464  

Accounts receivable, net

    13,676       16,631  

Inventories

    4,986       12,020  

Prepayments and other current assets

    8,086       10,423  

Total assets

    89,325       80,505  

Accrued expenses and other liabilities

    15,849       18,755  

Accounts payables

    10,286       12,673  

Convertible bonds

    70,254        

Total liabilities

    99,699       43,469  

Total mezzanine equity

    18,228       20,437  

Ordinary shares (149,318,791 and 228,749,678 shares outstanding as of December 31, 2017 and 2018, respectively)

    7       11  

Total shareholders’ (deficit) equity

    (28,602     16,599  

Total liabilities, mezzanine equity and shareholders’ (deficit) equity

    89,325       80,505  

The following table presents our selected consolidated cash flow data for the years ended December 31, 2017 and 2018:

 

    For the Year Ended December 31,  
    2017     2018  
    (US$ in thousands)  

Selected Consolidated Cash Flow Data:

   

Net cash used in operating activities

    (7,218     (19,472

Net cash used in investing activities

    (4,956     (4,569

Net cash generated from financing activities

    59,433       4,421  

Increase/(decrease) in cash, cash equivalents and restricted cash

    47,259       (19,620

Effect of exchange rates on cash, cash equivalents and restricted cash

    420       (559

Cash, cash equivalents and restricted cash at beginning of year

    9,127       56,806  

Cash, cash equivalents and restricted cash at end of year

    56,806       36,627  

The following table presents certain of our operating data for the years ended December 31, 2017 and 2018:

 

    For the Year Ended December 31,  
    2017     2018  

Selected Operating Data:

   

Average daily active terminals (including GlocalMe Inside apps)

    65,300       113,000  

Average daily data usage per active terminal (in megabytes)

    390       700  

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion and analysis of our financial condition and results of operations in conjunction with the section entitled “Selected Consolidated Financial Data” and our consolidated financial statements and the related notes included elsewhere in this prospectus. This discussion contains forward-looking statements that involve risks and uncertainties about our business and operations. Our actual results and the timing of selected events may differ materially from those anticipated in these forward-looking statements as a result of various factors, including those we describe under “Risk Factors” and elsewhere in this prospectus. See “Special Note Regarding Forward-Looking Statements.”

Overview

We are the world’s first and leading mobile data traffic sharing marketplace, according to Frost & Sullivan. 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. As of March 31, 2019, we had aggregated mobile data traffic allowances from 269 MNOs in 140 countries and regions in our cloud SIM architecture. Total data consumed through our platform were approximately 9,000 and 28,000 terabytes in 2017 and 2018, respectively.

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. Leveraging our cloud SIM technology and architecture, we provide mobile data connectivity services with reliable connection, high speed and competitive price, and allow users to enjoy a superior seamless 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 140 countries and regions we cover. As a result, we have accumulated a large and active user base.

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.

 

   

uCloudlink 1.0. Our uCloudlink 1.0 model, which started in 2014, focuses on cross-border travelers that need mobile data connectivity services across different countries. We offer portable Wi-Fi services under our own Roamingman brand in China, Malaysia and Singapore 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 for them 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.

 

   

uCloudlink 2.0. Our uCloudlink 2.0 model aims to provide mobile data connectivity services to local users across different MNOs in a single country. We develop GlocalMe Inside implementation for smartphones and other smart hardware terminals, enabling them to obtain access to our cloud SIM architecture and use our globally distributed SIM card pool. Our solution enables smartphone users or smart hardware terminals to use our mobile data connectivity services without a separate Wi-Fi router.

 

   

uCloudlink 3.0. We anticipate that under our proposed uCloudlink 3.0 model, users may share and trade their unused data packages through our cloud SIM architecture, which will create a data traffic sharing marketplace. We have tested the data allowance sharing among users in trials, and are technologically ready to launch the uCloudlink 3.0 model.

 

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We have grown rapidly in recent years. We generate revenues primarily from our mobile data connectivity services and hardware terminals that incorporate the services. Our revenues increased by 47.2% from US$85.8 million in 2017 to US$126.4 million in 2018. Our gross margin increased from 34.4% in 2017 to 36.5% in 2018. We had a net loss of US$19.3 million and US$26.6 million in 2017 and 2018, respectively. Our adjusted net loss, a non-GAAP measure defined as net loss excluding share-based compensation was US$13.7 million and US$24.3 million in 2017 and 2018, respectively. Our adjusted EBITDA, another non-GAAP measure defined as net loss excluding share of loss in equity method investment net of tax, interest expense, depreciation and amortization, and share-based compensation, was negative US$4.7 million and negative US$15.1 million in 2017 and 2018, respectively. See “Prospectus Summary—Summary Consolidated Financial and Operating Data—Non-GAAP Financial Measures.”

Key Factors Affecting Our Results of Operations

Our results of operations and financial condition are affected by the general factors driving global mobile data connectivity service industry, including, among others, overall economic growth of major economies, the increase in per capita disposable income, the expansion of urbanization, the growth in consumer spending and consumption upgrades, the penetration of mobile internet and increasing population of mobile internet users, the growth of cross-border travels, as well as competition and telecommunications regulations. Unfavorable changes in any of these general industry conditions could negatively affect demand for our products and services and materially and adversely affect our results of operations.

While our business is influenced by these general factors, our results of operations are more directly affected by company specific factors, including the following major factors:

 

   

innovative monetization models offering mobile data connectivity services;

 

   

our ability to increase our user base and usage of our mobile data connectivity services;

 

   

efficient data allowance procurement;

 

   

the mix of our product and service offerings;

 

   

our ability to improve our margins; and

 

   

further penetration into international markets.

Innovative monetization models offering mobile data connectivity services

We create and develop various monetization models as our company evolves. We started to conduct our business under uCloudlink 1.0 model in 2014, which focuses on cross-border travelers that need mobile data connectivity services across different countries. We offer Roamingman portable Wi-Fi services and directly sell smart terminals to provide global mobile data connectivity services. We also offer smart terminals and provide our cloud SIM architecture to business partners such as MVNOs and MNOs for them to offer global mobile data connectivity services directly to their users. We will continue to penetrate into other markets outside of China to further drive the growth of international mobile data connectivity services under uCloudlink 1.0 model.

While continuing to generate revenues from uCloudlink 1.0 model, we developed uCloudlink 2.0 model in 2018, which aims to provide mobile data connectivity services to local users across different MNOs in a single country. 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 of GlocalMe Inside-embedded terminals can enjoy reliable and high-speed data connectivity experience at competitive cost, and they have the flexibility to create and customize their own data packages based on their needs and budgets, which in turn enables us to acquire and develop users rapidly. We strive to collaborate with more business partners to increase the number of smartphone models and terminals with GlocalMe Inside implementation. Due to enormous local mobile data market opportunities, we expect that uCloudlink 2.0 model will drive the growth of our user base and revenues and contribute an increasingly larger portion of our total revenues.

 

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Our ability to increase our user base and usage of our mobile data connectivity services

Growth in our user base, as measured by the number of terminals with our mobile data connectivity services activated, and the usage of our mobile data connectivity services are key drivers of our revenue growth. Our total revenues increased by 47.2% from US$85.8 million in 2017 to US$126.4 million in 2018. Our revenues from data connectivity services, accounting for a substantial majority of our total revenues, increased by 26.8% from US$65.1 million in 2017 to US$82.5 million in 2018. Our average daily active terminals increased by 73.0% from approximately 65,300 in 2017 to 113,000 in 2018. The average daily data usage per active terminal increased by 79.5% from 390 megabytes in 2017 to 700 megabytes in 2018. We plan to continue to increase the number of terminals and data usage by entering into new markets through cooperating with successful local business partners, and by penetrating further into current markets by expanding service offerings, offering more bundling and promotional data packages, and conducting more active branding and marketing activities. We will continue to promote the adoption of GlocalMe Inside implementations by actively developing strategic partnerships with leading smartphone companies. As of the date of this prospectus, we have partnered with three smartphone companies globally for GlocalMe Inside implementation, resulting in approximately 350,000 third-party smartphones that can access our mobile data connectivity service, among which about 13,000 had our function activated. We will continue to promote GlocalMe Inside to make it a standard configuration for mobile terminals, which will drive the growth of our user base and usage of our mobile data connectivity services, and enable us to capture the massive opportunities in local mobile data markets. The growth of our user base and data usage will lead to the increased revenues from data connectivity services.

Efficient data allowance procurement

Efficient data procurement is a key factor for managing our cost of revenues. Our gross margins relating to data connectivity services was 37.6% in 2017 and 44.2% in 2018. Our costs incurred from data procurement accounted for 72.1% and 57.4% of our total cost of revenues in 2017 and 2018, respectively. Our data sources include MNOs and their sales channels, MVNOs, and other SIM-card trading companies, covering mobile data markets in 140 countries and regions. We use a mobile data demand prediction model to plan for data procurement, which looks at seasonality, regions and countries, network performance and other features to predict users’ data demand at a specific time in a geographic area. The prediction from modeling guides us on purchasing data SIM cards to cover the dynamic data demand, optimizing the data procurement efficiency. As we have accumulated a larger number of data allowance providers as our data sources, we possess increasingly stronger bargaining power during the negotiation due to competition among data allowance providers. Data allowance providers are more willing to offer us leftover data with lower price, attracted by our unique value propositions to them. As our user base grows, larger demand for data also drives up our bargaining power with data suppliers. The efficiency of data procurement will continuously impact our cost of revenues and overall business performance. We expect that our uCloudlink 2.0 model will allow us to maximize the usage of the data allowances procured and improve the efficiency of data connectivity service marginal unit cost, and that our uCloudlink 3.0 model that relies on user-shared data allowances has the potential to further decrease data connectivity service marginal unit cost.

The mix of our product and service offerings

Our gross margin is mainly affected by the mix of data connectivity services and sales of terminals. Our gross margin improved from 34.4% in 2017 to 36.5% in 2018. Our data connectivity services had a gross margin of 37.6% and 44.2% in 2017 and 2018, respectively, while our sales of terminals had a gross margin of 18.8% and 14.5% in the same periods, respectively. Our ability to increase our gross margin depends on our ability to expand data connectivity services by developing innovative monetization models. Our gross margin is also affected by the mix of international and local mobile data connectivity services that we provide. We actively develop strategic partnerships with leading smartphone companies to increase the number of GlocalMe Inside-enabled smartphones. When smartphone companies implement GlocalMe Inside as a feature in their smartphones, their users may take advantage of our global and local mobile data connectivity services without

 

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changing physical SIM cards or connecting to a separate Wi-Fi router. This expands our user base for our data connectivity business, and creates more revenues for smartphone companies through offering a portion of our data revenues to smartphone companies as commissions. The typical term of our agreements with smartphone companies is one year, under which the smartphone companies are responsible for pre-installing our GlocalMe app and sales and marketing of their smartphones, and we are responsible for the development, implementation and maintenance of cloud SIM technology and providing customer supports. We collect user payments when they purchase data packages through the pre-installed app and will pay the smartphone companies a pre-determined percentage of such payments we received as commissions. Although we do not directly sell any hardware in connection with GlocalMe Inside, we will enjoy increasing data revenue streams from the growing base of GlocalMe Inside handsets. As of the date of this prospectus, we have partnered with three smartphone companies globally for GlocalMe Inside implementation, resulting in approximately 350,000 third-party smartphones that can access our mobile data connectivity service, among which about 13,000 had our function activated. We will continue to promote GlocalMe Inside to make it a standard configuration for mobile terminals.

Our ability to improve our margins

Our ability to achieve profitability is dependent on our ability to further improve our operational efficiency and reduce the total operating expenses as a percentage of our revenues. We will continue to enhance our research and development efforts to enhance our cloud SIM technology and architecture, develop and upgrade our products and services, optimize our data traffic usage, and improve data procurement and operational efficiency. Our research and development expenses accounted for 29.0% and 29.4% of our total operating expenses in 2017 and 2018, respectively. Our cloud SIM architecture and platform have been designed and built to power our growth as we scale to meet demands from our expanding customer base. As our business grows, we expect to continue to leverage the scalability of our business model, improve the efficiency and utilization of our personnel, and thus enjoy higher operating leverage. In addition, our ability to improve operational efficiency depends on our ability to optimize sales and marketing efforts. Currently, we expand our customer base and increase the spending by existing customers through establishing our own brand recognition and exploring more business partners around the globe. We will also utilize the insights we gain from data analytics to guide our operational activities to improve our margins.

Further penetration into international markets

We have experienced significant growth in the sales of our services and products in international markets. As of March 31, 2019, our data connectivity services and hardware products were offered in 140 countries and regions, compared to 107 countries and regions as of December 31, 2017. Under current uCloudlink 1.0 model, our portable Wi-Fi terminals are available in Malaysia and Singapore through our own Roamingman brand, and in 38 countries through our business partners, as of March 31, 2019. Leveraging on the local operation knowledge and established brand names of our business partners, we are able to penetrate into different markets and regions more effectively, accelerating the adoption of our products and services on a global scale. We believe our global opportunity is significant, and we will continue to expand our data connectivity services in selected local markets by collaborating with local business partners under uCloudlink 2.0 model. We have partnered with smartphone companies for GlocalMe Inside implementation in China, Philippines and Indonesia. We are planning to deploy GlocalMe Inside in Europe. We believe that our expansion and penetration into selected local markets will not only drive our revenue growth but also diversify our revenue streams across geographic regions.

 

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Key Components of Results of Operations

Revenues

The following table sets forth the components of our revenues by amounts and percentages of our total revenues for the years presented:

 

     For the Year Ended December 31,  
     2017      2018  
     US$      %      US$      %  
     (in thousands, except for percentages)  

Revenues:

           

Data connectivity services

     65,081        75.8        82,543        65.3  

—Data connectivity services from Roamingman

     48,746        56.8        52,792        41.8  

—Other data connectivity services

     16,335        19.0        29,751        23.5  

Sales of terminals

     16,073        18.7        25,595        20.3  

Sales of data related products

     2,624        3.1        12,148        9.6  

PaaS and SaaS services

     1,835        2.1        5,047        4.0  

Others

     232        0.3        1,066        0.8  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total revenues

     85,845        100.0        126,399        100.0  
  

 

 

    

 

 

    

 

 

    

 

 

 

Data connectivity services. We generate data connectivity services revenues from (i) data service fees from providing portable Wi-Fi to users under our service model with Roamingman brand, (ii) data service fees from providing portable Wi-Fi and other smart terminals to our business partners for them to operate under their own brands, and (iii) retail sales of data packages. We charge users service fee for data connectivity services for Roamingman brand, typically on a daily basis. We sell our data connectivity services as part of the portable Wi-Fi and smart terminals to our business partners and charge the business partners data service fees. We also generate revenues from selling data packages that can be used with our GlocalMe portable Wi-Fi terminals and GlocalMe World Phones through online platforms.

In 2017 and 2018, we generated substantially all of our data connectivity services revenues from our international data connectivity services under uCloudlink 1.0 model. As we further expand our business through GlocalMe Inside implementation under uCloudlink 2.0 model, we expect that our data connectivity services revenues will increase in the foreseeable future.

Sales of terminals. We also generate revenues from selling hardware terminals, including GlocalMe portable Wi-Fi terminals, GlocalMe World Phone series and IoT modules, to enterprise and retail users and business partners.

Sales of data related products. We generate revenues from selling SIM cards with prepaid data packages that can be used outside of China, which effectively help us grow our user base and data usage among travellers and cross-sell our other products and services.

PaaS and SaaS services. Revenues from Platform-as-a-Service, or PaaS, or Software-as-a-Service, or SaaS, services mainly consist of fees generated from providing cloud SIM platform as a service to business partners and other ancillary platform services. We provide our cloud SIM platform as a service to business partners, enabling them to manage their data resources. Business partners using the platform are charged service fees for the use of the cloud SIM platform services. We expect that revenues from our PaaS/SaaS services will increase in the future, as an increasing number of business partners are hosting and managing an increasing number of SIM cards on our platform.

Others. We generate other revenues mainly by providing a number of value-added services and charging recurring service fees.

 

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In terms of revenue contribution in 2018, China, Japan, Hong Kong, Taiwan, North America, Southeast Asia and Europe are the top geographies according to the location of customers, which contributed 49%, 19%, 10%, 6%, 5%, 5% and 3% of our total revenues in 2018, respectively.

We expect our total revenues will continue to increase in the foreseeable future as we further expand our business.

Cost of revenues

The following table sets forth the components of our cost of revenues by amounts and percentages of cost of revenues for the years presented:

 

     For the Year Ended December 31,  
     2017      2018  
     US$     %      US$     %  
     (in thousands, except for percentages)  

Cost of revenues:

         

Data connectivity service cost

     (40,621     72.1        (46,074     57.4  

Cost of terminals

     (13,050     23.2        (21,882     27.3  

Cost of data related products

     (2,447     4.3        (12,114     15.1  

Others

     (195     0.4        (174     0.2  
  

 

 

   

 

 

    

 

 

   

 

 

 

Total cost of revenues

     (56,313     100.0        (80,244     100.0  
  

 

 

   

 

 

    

 

 

   

 

 

 

Cost of revenues. Cost of revenue consists primarily of data connectivity service costs, cost of inventory, logistics costs, depreciation and maintenance costs for equipment, product replacement costs, payment processing fees and other related incidental expenses that are directly attributable to our principal operations.

Data connectivity service cost. Data connectivity service cost consists primarily of expenditure on data procurement and depreciations of our GlocalMe portable Wi-Fi terminals mainly under the Roamingman brand.

Cost of terminals. Cost of terminals consists primarily of hardware procurement cost, outsourcing processing fees and shipping costs.

Cost of data related products. Cost of data related products consists primarily of procurement costs related to overseas SIM cards and associated data package.

Others. Other cost consists primarily of cost related to revenues of cloud SIM platform and SIM card pool, depreciation costs and value-added services such as advertisement.

We expect that our cost of revenues will increase in absolute amounts in the foreseeable future as we continue to expand our business.

Gross profit and gross margin

Our overall gross profits are US$29.5 million and US$46.2 million in 2017 and 2018, respectively, representing general gross margins of 34.4% and 36.5% in 2017 and 2018, respectively. Specifically, our gross profits on data connectivity services are US$24.5 million and US$36.5 million in 2017 and 2018, respectively, corresponding to 37.6% and 44.2% gross margins relating to data connectivity services in 2017 and 2018, respectively. Our gross profits on sale of terminals are US$3.0 million and US$3.7 million in 2017 and 2018, respectively, corresponding to 18.8% and 14.5% gross margins relating to sale of terminals in 2017 and 2018, respectively.

 

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We expect our gross profit to increase in absolute amounts in the foreseeable future, as we further grow our business and expand our local data services under uCloudlink 2.0 model. Our gross margin is mainly affected by the mix of data connectivity services, sales of terminals and PaaS and SaaS services, as data services tend to have higher margin than sales of terminals and we do not incur cost of revenue for PaaS and SaaS services. Our gross margin is also affected by the mix of international and local mobile data connectivity services we provide.

Operating expenses

The following table sets forth the principal components of our operating expenses by amounts and percentages of our total operating expenses for the years presented:

 

     For the Year Ended December 31,  
     2017     2018  
     US$     %     US$     %  
     (in thousands)  

Research and development expenses

     (13,255     29.0       (20,401     29.4  

Sales and marketing expenses

     (17,673     38.7       (29,658     42.8  

General and administrative expenses

     (16,186     35.4       (19,919     28.7  

Other income, net

     1,447       (3.1     658       (0.9
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     (45,667 )      100.0       (69,320 )      100.0  
  

 

 

   

 

 

   

 

 

   

 

 

 

Research and Development expenses. Research and development expenses consist primarily of salaries and benefits for research and development personnel, materials, mobile terminals testing and certification expenses, general expenses and depreciation expenses associated with research and development activities.

Sales and marketing expenses. Sales and marketing expenses consist primarily of online and offline advertising expenses, promotion expenses, staff costs, sales commissions and other related incidental expenses that are incurred to conduct the sales and marketing activities.

General and administrative expenses. General and administrative expenses consist primarily of salaries, bonuses and benefits for employees and share-based compensation and benefits for certain of our senior management not specifically dedicated to sales and marketing activities, depreciation of property and equipment, amortization of intangible assets, legal and professional services fees, rental and other general corporate related expenses.

Taxation

Cayman Islands

The Cayman Islands currently levies no taxes on individuals or corporations based upon profits, income, gains or appreciation and there is no taxation in the nature of inheritance tax or estate duty. There are no other taxes likely to be material to us levied by the government of the Cayman Islands except for stamp duties which may be applicable on instruments executed in, or brought within the jurisdiction of the Cayman Islands. In addition, the Cayman Islands does not impose withholding tax on dividend payments.

Hong Kong

Under the current Inland Revenue Ordinance (Chapter 112 of the Laws of Hong Kong), from the year of assessment 2018/2019 onwards, the subsidiaries in Hong Kong are subject to profits tax at the rate of 8.25% on assessable profits up to HK$2.0 million; and 16.5% on any part of assessable profits over HK$2.0 million. For

 

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the years of assessment 2016/2017 and 2017/2018 , our subsidiaries in Hong Kong were subject to 16.5% Hong Kong profit tax on their taxable income generated from operations in Hong Kong. Additionally, payments of dividends by our subsidiary incorporated in Hong Kong to the Company is not subject to any Hong Kong withholding tax.

PRC

Generally, our PRC subsidiaries, VIEs and their subsidiaries are subject to enterprise income tax on their taxable income in China at a statutory rate of 25%. The enterprise income tax is calculated based on the entity’s global income as determined under PRC tax laws and accounting standards.

Shenzhen Ucloudlink Technology Limited and Shenzhen uCloudlink qualified as national high and new technology enterprises, or HNTE, in 2017, which are entitled to preferential tax rate to 15%. Their HNTE status is set to expire on August 16, 2020. 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.

Dividends paid by our wholly foreign-owned subsidiary in China to our intermediary holding company in Hong Kong will be subject to a withholding tax rate of 10%, unless the relevant Hong Kong entity satisfies all the requirements under the Arrangement between China and the Hong Kong Special Administrative Region on the Avoidance of Double Taxation and Prevention of Fiscal Evasion with respect to Taxes on Income and Capital and receives approval from the relevant tax authority. If our Hong Kong subsidiary satisfies all the requirements under the tax arrangement and receives approval from the relevant tax authority, then the dividends paid to the Hong Kong subsidiary would be subject to withholding tax at the standard rate of 5%. The Measures for the Administration of Non-Resident Taxpayers’ Enjoyment of the Treatment under Tax Agreements, which was promulgated by the STA on August 27, 2015 and became effective on November 1, 2015, abolished the former approval requirement, but a Hong Kong entity is still required to file application package with the relevant tax authority, and settle the overdue taxes if the preferential 5% tax rate is denied based on the subsequent review of the application package by the relevant tax authority. See “Risk Factors—Risks Related to Doing Business in China—We may rely on dividends and other distributions on equity paid by our PRC subsidiaries to fund any cash and financing requirements we may have, and any limitation on the ability of our PRC 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.”

If our holding company in the Cayman Islands or any of our subsidiaries outside of China were deemed to be a “resident enterprise” under the PRC Enterprise Income Tax Law, it would be subject to enterprise income tax on its worldwide income at a rate of 25%. See “Risk Factors—Risks Related to Doing Business in China—If we are classified as a PRC resident enterprise for PRC income tax purposes, such classification could result in unfavorable tax consequences to us and our non-PRC noteholders, shareholders or ADS holders.”

 

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Results of Operations

The following table sets forth a summary of our consolidated results of operations for the years presented, both in absolute amount and as a percentage of our revenues for the periods presented. This information should be read together with our consolidated financial statements and related notes included elsewhere in this prospectus. The results of operations in any period are not necessarily indicative of our future trends.

 

     Year Ended December 31,  
     2017     2018  
     US$     %     US$     %  
     (in thousands, except for percentages)  

Revenues

     85,845       100.0       126,399       100.0  

—Data connectivity services

     65,081       75.8       82,543       65.3  

Data connectivity services from Roamingman

     48,746       56.8       52,792       41.8  

Other data connectivity services

     16,335       19.0       29,751       23.5  

—Sales of terminals

     16,073       18.7       25,595       20.3  

—Sales of data related products

     2,624       3.1       12,148       9.6  

—PaaS and SaaS services

     1,835       2.1       5,047       4.0  

—Others

     232       0.3       1,066       0.8  

Cost of revenues

     (56,313     (65.6     (80,244     (63.5
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     29,532       34.4       46,155       36.5  

Operating expenses:

        

Research and development expenses

     (13,255     (15.4     (20,401     (16.1

Sales and marketing expenses

     (17,673     (20.6     (29,658     (23.5

General and administrative expenses(1)

     (16,186     (18.9     (19,919     (15.8

Other income, net

     1,447       1.7       658       0.5  
  

 

 

   

 

 

   

 

 

   

 

 

 

Loss from operations

     (16,135     (18.8     (23,165     (18.3

Interest income

     174       0.2       435       0.3  

Interest expense

     (3,299     (3.8     (3,385     (2.7
  

 

 

   

 

 

   

 

 

   

 

 

 

Loss before income tax

     (19,260     (22.4     (26,115     (20.7

Income tax expenses

                        

Share of loss in equity method investment, net of tax

                 (442     (0.3
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

     (19,260     (22.4     (26,557     (21.0
  

 

 

   

 

 

   

 

 

   

 

 

 

 

Note:      (1)   Share-based compensation was US$5.6 million and US$2.3 million in 2017 and 2018, respectively, mainly including restricted shares held by certain of our senior management. As of December 31, 2018, there was US$0.2 million of unrecognized share-based compensation expense related to the restricted shares, which will be recognized in 2019.

Year ended December 31, 2018 compared to year ended December 31, 2017

Revenues

Our revenues increased by 47.2% from US$85.8 million in 2017 to US$126.4 million in 2018. This increase was primarily attributable to the significant growth of revenues from both data connectivity services and sales of terminals.

 

   

Our revenues from data connectivity services increased by 26.8% from US$65.1 million in 2017 to US$82.5 million in 2018. This increase was primarily attributable to the growth in the number of terminals with our mobile data connectivity services activated and the increased usage of our mobile data connectivity services. Our average daily active terminals increased by 73.0% from approximately 65,300 in 2017 to 113,000 in 2018, and the average daily data usage per active terminal increased by 79.5% from 390 megabytes in 2017 to 700 megabytes in 2018.

 

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Our revenues from sales of terminals increased by 59.2% from US$16.1 million in 2017 to US$25.6 million in 2018, mainly due to the launch of GlocalMe World Phone series and portable Wi-Fi terminals.

 

   

Our revenues from sales of data related products increased by 363.0% from US$2.6 million in 2017 to US$12.1 million in 2018, mainly due to the increased sales of SIM cards with embedded data package.

 

   

Our revenues from PaaS and SaaS services increased by 175.0% from US$1.8 million in 2017 to US$5.0 million in 2018. This increase was primarily attributable to the increasing reliance of our business partners on our cloud SIM platform because of the expansion of their business cooperation with us.

Cost of revenues

Our cost of revenues increased by 42.5% from US$56.3 million in 2017 to US$80.2 million in 2018. The increase was primarily due to the expansion of our products and services offerings.

 

   

Our data connectivity service cost increased by 13.4% from US$40.6 million in 2017 to US$46.1 million in 2018, primarily due to the 26.8% increase of revenue from data connectivity services.

 

   

Our cost of terminals increased by 67.7% from US$13.1 million in 2017 to US$21.9 million in 2018, primarily due to the rapid growth of revenue from sales of terminals.

 

   

Our cost of data related products increased by 395.1% from US$2.4 million in 2017 to US$12.1 million in 2018, primarily due to sales of SIM cards and associated data packages with the purpose of user acquisition.

Gross profit and margin

As a result of the foregoing, our total gross profit increased by 56.3% from US$29.5 million in 2017 to US$46.2 million in 2018. Our gross margin improved from 34.4% in 2017 to 36.5% in 2018, mainly due to the increases in gross margin of data connectivity services.

Operating expenses

Research and development expenses. Our research and development expenses increased by 53.9% from US$13.3 million in 2017 to US$20.4 million in 2018. The increase was primarily due to (i) an increase of US$5.5 million in payroll costs in connection with the expansion of our research and development team, and (ii) an increase of US$1.5 million in mobile terminals testing and certification expenses.

Sales and marketing expenses. Our sales and marketing expenses increased by 67.8% from US$17.7 million in 2017 to US$29.7 million in 2018. The increase was primarily due to (i) an increase of US$5.9 million in payroll costs from the expansion of our sales and marketing team, and (ii) an increase of US$3.9 million in our expenses associated with advertising and promotions as we continued to enhance our brand recognition.

General and administrative expenses. Our general and administrative expenses increased by 23.1% from US$16.2 million in 2017 to US$19.9 million in 2018. The increase was primarily due to (i) an increase of US$1.1 million in payroll costs in connection with the expansion of our administrative team, (ii) an increase of expenses incurred in connection with litigation and legal fees from nil in 2017 to US$2.4 million in 2018, and (iii) an increase of US$1.0 million in sample fees in relation to free trials of data connectivity services and portable Wi-Fi terminals offered to travel agents.

Loss from operations

As a result of the foregoing, we incurred loss from operations of US$23.2 million in 2018, compared to US$16.1 million in 2017.

 

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Interest expenses

We had interest expenses of US$3.3 million and US$3.4 million in 2017 and 2018, respectively, primarily attributable to the company’s loan, convertible bond, and finance lease.

Net loss

As a result of the foregoing, we incurred net loss of US$26.6 million in 2018, compared to US$19.3 million in 2017.

Liquidity and Capital Resources

The following table sets forth a summary of our cash flows for the periods presented:

 

     For the Year Ended
December 31,
 
     2017     2018  
     US$     US$  
     (in thousands)  

Net cash used in operating activities

     (7,218     (19,472

Net cash used in investing activities

     (4,956     (4,569

Net cash generated from financing activities

     59,433       4,421  
  

 

 

   

 

 

 

Increase/(decrease) in cash, cash equivalents and restricted cash

     47,259       (19,620

Effect of exchange rates on cash, cash equivalents and restricted cash

     420       (559

Cash, cash equivalents and restricted cash at beginning of year

     9,127       56,806  
  

 

 

   

 

 

 

Cash, cash equivalents and restricted cash at end of year

     56,806       36,627  
  

 

 

   

 

 

 

To date, we have financed our operating and investing activities through cash generated by historical equity and equity-linked financing activities and borrowings from financial institutions. In April and May 2017, we issued convertible bonds with face value of US$55 million and US$15 million, respectively, to our new investors. The bonds bear an interest at a rate of 8% per annum on the US$55 million basis and interest is paid every 6 months and shall be matured in three years from the date of issue at their face value of US$70 million or convertible into ordinary shares of our company at predetermined ratio by the holder before the maturity date of the bonds. All outstanding principal and accrued interest of convertible bonds were automatically converted to 35,004,220 ordinary shares on August 28, 2018, upon the occurrence of the event of automatic conversion, being our revenue having achieved over RMB500 million in the year ended December 31, 2017.

As of December 31, 2018, we have the following borrowings:

 

   

In February 2018, we obtained a one-year short-term bank borrowing of RMB4.0 million (US$0.6 million) from a commercial bank, bearing interest at a rate of 6.6% per annum. As of December 31, 2018, the outstanding balance of this loan was RMB2.7 million (US$0.4 million).

 

   

In March 2018, we obtained a one-year short-term bank borrowing of RMB8.0 million (US$1.2 million) from a commercial bank, bearing interest at a rate of 6.1% per annum. As of December 31, 2018, the outstanding balance of this loan was RMB4.9 million (US$0.7 million).

 

   

In November 2018, we entered into a two-year financing agreement with a third-party finance lease company amounting to RMB30.0 million (US$4.4 million), with equivalent amount of accounts receivable pledged by us as collateral. The interest rate is 9% per annum. As of December 31, 2018, the outstanding balance of this borrowing was RMB27.7 million (US$4.0 million).

As of December 31, 2017 and 2018, our cash and cash equivalents were US$49.1 million and US$36.5 million, respectively. Our cash and cash equivalents primarily consist of cash on hand, cash held at bank, and time deposits placed with banks.

 

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As of December 31, 2018, US$22.6 million of our cash and cash equivalents was held in U.S. dollars, US$10.5 million was held in Renminbi, US$1.0 million was held in Hong Kong dollars, and US$2.4 million was held in other currencies. As of December 31, 2018, 28.1% of our cash and cash equivalents were held in China, and 10.8% were held by our VIEs. Although we consolidate the results of our VIE and its subsidiary, we only have access to the assets or earnings of our VIE and their subsidiary through our contractual arrangements with our VIE and their shareholders. See “Corporate History and Structure—Contractual Arrangements with Our VIEs and Their Respective Shareholders.”

We believe that our current cash and cash equivalents and our anticipated cash flows from operations will be sufficient to meet our anticipated working capital requirements and capital expenditures for at least the next 12 months. As our data centers or server rooms are leased, the capital needs related to our operations are limited. Total capital expenditures only accounted for 4.0% of our total revenues in 2018, and we do not expect significant increase in capital needs related to property, plant and equipment. We believe that we are financially flexible enough to address future capital needs related to research and development and other key investments to expand and strengthen our operations. In addition to the proceeds from this offering, we believe that the increase of our operating cash flow and our low debt-to-equity ratio offer us additional flexibility to increase and diversify our capital resources in the long term. After this offering, we may decide to enhance our liquidity position or increase our cash reserve for future investments through additional capital and finance funding. The issuance and sale of additional equity would result in further dilution to our shareholders. The incurrence of indebtedness would result in increased fixed obligations and could result in operating covenants that would restrict our operations. We cannot assure you that financing will be available in amounts or on terms acceptable to us, if at all.

Our accounts receivable represent primarily accounts receivable from customers and business partners to whom we rendered services or sold products. As of December 31, 2017 and 2018, our accounts receivable, net of allowance for doubtful accounts, were US$13.7 million and US$16.6 million, respectively. The increase was primarily due to the increase of sales volume. Our accounts receivable turnover days increased from 41.4 days in 2017 to 43.8 days in 2018, which was primarily due to special credit term extension for some strategic business partners. Accounts receivable turnover days for a given period are equal to average balances of accounts receivable, net of allowance for doubtful accounts, at the beginning and the end of the period divided by revenues during the period and multiplied by the number of days during the period.

Our accounts payable represent primarily accounts payable to hardware suppliers and mobile data allowance providers. As of December 31, 2017 and 2018, our accounts payable were US$10.3 million and US$12.7 million, respectively. The increase was primarily due to the increase of data connectivity service cost of approximately US$5.5 million. Our accounts payable turnover days increased from 48.8 days in 2017 to 52.2 days in 2018, which was primarily due to our payment control measures. Accounts payable turnover days for a given period are equal to average accounts payable balances at the beginning and the end of the period divided by total cost of revenues during the period and multiplied by the number of days during the period.

In utilizing the proceeds we expect to receive from this offering, we may make additional capital contributions to our PRC subsidiaries, establish new PRC subsidiaries and make capital contributions to these new PRC subsidiaries, make loans to our PRC subsidiaries, or acquire offshore entities with operations in China in offshore transactions. However, most of these uses are subject to PRC regulations. See “Risk Factors—Risks Related to Doing Business in China—PRC regulation of loans to and direct investment in PRC entities by offshore holding companies and governmental control of currency conversion may delay or prevent us from using the proceeds of any financing outside China to make loans to or make additional capital contributions to our PRC subsidiaries and VIEs, which could materially and adversely affect our liquidity and our ability to fund and expand our business” and “Use of Proceeds.”

 

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Operating activities

Net cash used in operating activities in 2018 was US$19.5 million. The difference between net cash used in operating activities and net loss of US$26.6 million in the same year was primarily due to (i) the increase of US$3.6 million of accrued expenses, accounts payable and other liabilities, (ii) the US$5.2 million of depreciation of property and equipment, and (iii) the share-based compensation of US$2.3 million. The accrued expenses, accounts payable and other liabilities mainly include accounts payable to hardware suppliers and mobile data allowance providers, and accrued bonus and staff costs. Such difference is partially offset by the increase of US$7.8 million of inventories, the increase of US$3.1 million of accounts receivables and the increase of US$2.3 million of prepayments and other current assets, which mainly include prepayment to suppliers, deposits to sales counters and export tax receivable.

Net cash used in operating activities in 2017 was US$7.2 million. The difference between net cash used in operating activities and net loss of US$19.3 million in the same year was primarily due to (i) the increase of US$13.8 million of accrued expenses, accounts payable and other liabilities, (ii) the share-based compensation of US$5.6 million, and (iii) US$5.7 million of depreciation of property and equipment. Such difference is partially offset by the increase of US$8.0 million of accounts receivables, and the increase of US$3.8 million of inventories.

Investing activities

Net cash used in investing activities in 2018 was US$4.6 million, primarily due to purchase of property and equipment of US$4.5 million, which was partially offset by proceeds from disposal of property and equipment of US$1.0 million.

Net cash used in investing activities in 2017 was US$5.0 million, primarily due to purchase of property and equipment of US$6.7 million, which was partially offset by proceeds from disposal of short-term investment of US$1.3 million.

Financing activities

Net cash generated from financing activities in 2018 was US$4.4 million, primarily due to proceeds from bank borrowings of US$6.1 million and cash received from long-term borrowing of US$4.4 million, which was partially offset by repayments of bank borrowings of US$5.8 million.

Net cash generated from financing activities in 2017 was US$59.4 million, primarily due to proceeds from issuance of convertible bonds of US$70.0 million and proceeds from bank borrowings of US$6.5 million, which was partially offset by repurchase of series A-1 ordinary shares of US$8.3 million, and repayments of bank borrowings of US$8.2 million.

Capital expenditures

Our capital expenditures are primarily incurred for purchases of intangible assets, property and equipment. Our capital expenditures were US$6.7 million in 2017 and US$5.1 million in 2018. We intend to fund our future capital expenditures with our existing cash balance and proceeds from this offering. We will continue to make capital expenditures to meet the expected growth of our business.

 

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Contractual obligations

The following table sets forth our contractual obligations as of December 31, 2018:

 

     Payment due by December 31,  
     Total      2019      2020      2021      2022      2023 and
thereafter
 
     (US$ in thousands)  

Operating lease obligations(1)

     4,176        2,794        1,247        87        48         

Short term borrowings

     3,365        3,365                              

Long term borrowings

     1,766               1,766                       

Interest on borrowings

     435        232        203                       
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     9,742        6,391        3,216        87        48         
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

Note:

(1)   Operating lease obligations consist of the obligations under non-cancellable operating lease agreements covering various facilities.

Other than as shown above, we did not have any significant capital and other commitments, long-term obligations or guarantees as of December 31, 2018.

Off-Balance Sheet Commitments and Arrangements

We have not entered into any financial guarantees or other commitments to guarantee the payment obligations of any third parties. In addition, we have not entered into any derivative contracts that are indexed to our shares and classified as shareholder’s equity or that are not reflected in our consolidated financial statements. Furthermore, we do not have any retained or contingent interest in assets transferred to an unconsolidated entity that serves as credit, liquidity or market risk support to such entity. We do not have any variable interest in any unconsolidated entity that provides financing, liquidity, market risk or credit support to us or engages in leasing, hedging or product development services with us.

Critical Accounting Policies

We prepare our financial statements in conformity with U.S. GAAP, which requires us to make judgments, estimates and assumptions. We continually evaluate these estimates and assumptions based on the most recently available information, our own historical experiences and various other assumptions that we believe to be reasonable under the circumstances. Since the use of estimates is an integral component of the financial reporting process, actual results could differ from our expectations as a result of changes in our estimates. Some of our accounting policies require a higher degree of judgment than others in their application and require us to make significant accounting estimates.

The following descriptions of critical accounting policies, judgments and estimates should be read in conjunction with our consolidated financial statements and other disclosures included in this prospectus. The selection of critical accounting policies, the judgments and other uncertainties affecting application of those policies and the sensitivity of reported results to changes in conditions and assumptions are factors that should be considered when reviewing our financial statements. We believe the following accounting policies involve the most significant judgments and estimates used in the preparation of our financial statements.

Basis of Consolidation

A subsidiary is an entity in which (i) we directly or indirectly control more than 50% of the voting power; or (ii) we have the power to appoint or remove the majority of the members of the board of directors or to cast a majority of votes at the meeting of the board of directors or to govern the financial and operating policies of the investee pursuant to a statute or under an agreement among the shareholders or equity holders. A VIE is required to be consolidated by the primary beneficiary of the entity if the equity holders in the entity do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties.

 

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All transactions and balances among us, our subsidiaries, the VIEs and their subsidiaries have been eliminated upon consolidation.

Revenue recognition

Revenue is principally generated by the provision of data connectivity services, the sales of terminals and sales of data related products. Revenue represents the fair value of the consideration received or receivable for the sales of goods and the provision of services in the ordinary course of our business activities and is recorded net of value-added tax, or VAT. We recognize revenue in accordance with ASC 606 “Revenue from Contracts with Customers” for all years presented with full retrospective method.

We conduct our business through various contractual arrangements, including:

(i) Data connectivity services

We generate data connectivity services revenues from (i) data service fees from the use of portable Wi-Fi services under Roamingman brand, (ii) data service fees generated from sales of data to business partners, and (iii) retail sales of data packages.

For data connectivity services from the use of portable WiFi terminals, we determine that the arrangement involves the leasing of portable Wi-Fi terminals with data connectivity services embedded. We determine that we are the lessor in the arrangement which contains an equipment lease component and a service non-lease component. We further determine that lease component is an operating lease under ASC 840, and that the operating lease component and service component are delivered over the same time and pattern. Therefore, the lease income and service income are recognized as data connectivity services revenue evenly over the service period.

We evaluate and determine that we are the principal. For data connectivity services from the use of portable WiFi terminals and retail sales of data packages, we view users as our customers. For data connectivity services generated from sales of data to enterprises customers, we view enterprise customers as our customers. We report data connectivity services revenues on gross basis. Accordingly, the amounts paid for data packages by customers are recorded as revenues and the related commission fees paid to our agents (mainly travel agents and other online distributors) are recorded as cost of revenues. Where we are the principal, we control the data before the data connectivity service is provided to customers. Such control is evidenced by the inventory risk borne by us and our ability to direct the use of data, and is further supported by our responsibility to customers and discretion in establishing pricing.

Data packages offered to customers typically provide unlimited data usage during a fixed period of time (“contract period”), where revenue is recognized ratably on a straight-line basis over the contract period. We do not have further performance obligations to the customers after the contract period. We also offer data packages where users are charged service fee based on actual data usage, where revenue is recognized as the services are provided to customers.

In providing data connectivity services to our customers, we procure SIM cards and data plans from various suppliers. Those SIM cards are activated and hosted on our cloud SIM platform. Our cloud SIM platform manages terminal information and customer accounts and intelligently allocates the SIM cards and data plans and makes them available to customers who purchase our data connectivity services. Accordingly, we take inventory risk and obtains control of the SIM cards and data plans procured and direct the use of the data on its cloud SIM platform depending on customers’ demand. We account for the SIM cards and data plans procured as costs of revenue as data is being made available and consumed on its cloud SIM platform.

As our data connectivity services are provided without right of return and we do not provide any other credit and incentive to our customers, therefore, the provision of data connectivity services does not involve variable consideration.

 

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(ii) Sales of terminals and data related products

We generate revenues from selling tangible products, including GlocalMe portable Wi-Fi terminals and GlocalMe World Phone series, SIM cards, to enterprise and retail customers and business partners. Sales of terminals and data related products are recognized when control of promised goods is transferred to the customers, which generally occurs upon the acceptance of the goods by the customers.

For sales of Wi-Fi terminals, one gigabyte of free data connectivity service is normally included as a bundle package for the first time purchase of the terminals. There are two separate performance obligations in such bundle sales as the Wi-Fi terminals is a distinct good while the data connectivity service is a distinct service. We allocate the transaction price to each distinct performance obligation based on their relative standalone selling prices. We then recognize revenue for each of the distinct performance obligations identified in accordance with the applicable revenue recognition method relevant for that obligation. For revenue related to the Wi-Fi terminals, revenue is recognized when the control of the Wi-Fi terminals is transferred. For revenue related to the data connectivity service, revenue is recognized ratably on a straight line basis over the contract period.

(iii) PaaS or SaaS services

PaaS or SaaS mainly consist of fees generated from providing cloud SIM platform as a service to business partners and other ancillary platform services. We provide our cloud SIM platform as a service to business partners enabling them to manage their data resources. Business partners using the platform are charged service fees for the use of the cloud SIM platform services. We have continuous obligation to ensure the performance of the platform over the service period. Revenue is recognized ratably over the contract period as business partners simultaneously consume and receive benefits from the service.

(iv) Contract balance

Contract liabilities represent the cash collected upfront from the customers for purchase of data connectivity services or purchase of Wi-Fi terminals, while the underlying data connectivity services have not yet been rendered or the Wi-Fi terminals have not been delivered to the customers by us, which is included in the presentation of contract liabilities.

Due to the generally short-term duration of the relevant contracts, all performance obligations are satisfied within one year. Where transaction prices for data connectivity services and Wi-Fi terminals are received upfront from the customers, such receipts are recorded as contract liabilities and recognized as revenues over the contract period. For the years ended December 31, 2017 and 2018, revenue amounting to approximately US$2.9 million and US$2.5 million were included in the contract liabilities balance at the beginning of the respective period.

Income taxes

We account for income taxes using the liability method, under which deferred income taxes are recognized for future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred taxes of a change in tax rates is recognized as income or expense in the period that includes the enactment date. Valuation allowance is provided on deferred tax assets to the extent that it is more likely than not that the asset will not be realizable in the foreseeable future.

Deferred taxes are also recognized on the undistributed earnings of subsidiaries, which are presumed to be transferred to the parent company and are subject to withholding taxes, unless there is sufficient evidence to show that the subsidiary has invested or will invest the undistributed earnings indefinitely or that the earnings will be remitted in a tax-free liquidation.

 

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We adopt ASC 740 “income taxes” which prescribes a more likely than not threshold for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. It also provides guidance on derecognition of income tax assets and liabilities, classification of current and deferred income tax assets and liabilities, accounting for interest and penalties associated with tax positions, accounting for income taxes in interim periods and income tax disclosures.

Share-based compensation and fair value of ordinary shares

Share-based compensation expenses arise from share based awards, mainly including Restricted Shares held by certain senior management (namely, Mr. Chaohui Chen, Mr. Zhiping Peng and Mr. Wen Gao) and share options awarded to employees in accordance with ASC 718 Stock Compensation. We follow ASC 718 to determine whether share option or restricted shares should be classified and accounted for as a liability award or equity award. All grants of share-based awards to employees and directors classified as equity awards are recognized in the financial statements based on their grant date fair values which are calculated using an option pricing model. We classify the share-based awards granted to employees as equity award, and have elected to recognize compensation expense on share-based awards with service condition on a graded vesting basis over the requisite service period, which is generally the vesting period.

We entered into a share restriction agreement with certain senior management and their respective wholly owned companies, which directly hold our equity interest. Pursuant to the share restriction agreement, all of our ordinary shares, or Restricted Shares, held by certain senior management shall be subject to vesting conditions until the Restricted Shares become vested. The Restricted Shares were classified as equity awards under ASC 718 and are accounted for as share-based compensation based on the grant date fair value over the vesting period using graded vesting method.

For share options awarded to employees, we apply the binominal option pricing model in determining the fair value of options granted under ASC 718. We have elected to account for forfeitures when they occur.

On each measurement date, we review internal and external sources of information to assist in the estimation of various attributes to determine the fair value of the share-based awards we granted, including the fair value of the underlying shares, expected life and expected volatility. We are required to consider many factors and makes certain assumptions during this assessment. If any of the assumptions used to determine the fair value of the share-based awards change significantly in the future, share-based compensation expense may differ materially.

In determining the grant date fair value of our ordinary shares for purposes of (i) assessing whether there is a beneficial conversion feature in connection with our convertible bond issued in April 2017 and (ii) determining share-based compensation expenses in connection with share options granted under the 2018 Stock Option Scheme, we, with the assistance of an independent external valuer, evaluated the use of income approach / discounted cash flow, or DCF method.

DCF method of the income approach involves applying appropriate weighted average cost of capital, or WACC, to discount the future cash flows forecast, based on our best estimates as of the valuation date, to present value. The WACC was determined based on a consideration of the factors including risk-free rate, comparative industry risk, equity risk premium, company size and non-systematic risk factors.

In deriving the equity value of each class of shares, we applied the option pricing method, which treats different classes of shares as call options on the total equity value, with exercise prices based on the liquidation preference or redemption amount of the relevant classes of shares. Under this method, the ordinary share has value only if the fund available for distribution to shareholders exceeds the value of liquidation preference or redemption amounts at the time of a liquidity event, assuming the enterprise has funds available to pay for liquidation preference or redemption. Given the nature of the different classes of shares, the modelling of

 

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different classes of capital as call options on company’s enterprise value is analyzed and the values of different classes of shares were derived accordingly.

We also applied a discount for lack of marketability, which assumed that the put option is struck at the average price of the stock before the privately held shares can be sold, the cost of the put option was considered as a basis to determine such discount for lack of marketability.

The determination of the equity value requires complex and subjective judgments to be made regarding prospects of the industry and the products at the valuation date, our projected financial and operating results, our unique business risks and the liquidity of our shares.

We have therefore estimated, with assistance from an independent external valuer, the fair value of our ordinary shares at certain dates for the periods presented to determine the fair value of our ordinary shares as of the issuance date of our convertible notes and the grant date of share-based compensation awards related to share options under the 2018 Stock Option Scheme as one of the inputs into determining the fair value of the awards as of the grant date.

 

Date of Grant

   Fair value per
Ordinary
Share
     Discount for
Lack of
Marketability
  Discount
Rate
  Type of Valuation

April 21, 2017

   US$ 1.99      25.00%   18.35%   Contemporaneous

December 31, 2018

   US$ 3.64      13.63%   18.13%   Contemporaneous

The determined fair value of our ordinary shares increased from US$1.99 per share as of April 21, 2017 to US$3.64 per share as of December 31, 2018. We believe the increase in the fair value of our ordinary shares was primarily attributable to the following factors:

 

   

Our revenues grew significantly from US$85.8 million in 2017 to US$126.4 million in 2018, representing a 47.2% annual growth rate;

 

   

As we progressed towards an initial public offering, the lead time to an expected liquidity event decreased, resulting in a decrease of discount for lack of marketability from 25.00% as of April 21, 2017 to 13.63% as of December 31, 2018;

 

   

As a result of milestone events described above and the growth of our business, the discount rate decreased from 18.35% as of April 21, 2017 to 18.13% as of December 31, 2018; and

 

   

We adjusted our financial forecast to reflect the anticipated higher revenue growth rate and improved financial performance in the future due to the abovementioned developments.

Internal Control Over Financial Reporting

Prior to this offering, we have been 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 as of and for the years ended December 31, 2017 and 2018, 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.

 

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To remedy identified material weaknesses, we have implemented, and plan to continue to implement, several measures, including, among others:

 

   

hiring additional competent and qualified accounting and reporting personnel with appropriate knowledge and experience of U.S. GAAP and SEC financial reporting requirements;

 

   

establishing an ongoing program to provide sufficient and additional appropriate training to our accounting staff, especially trainings related to U.S. GAAP and SEC financial reporting requirements; and

 

   

formulating internal accounting and internal control guidance on U.S. GAAP and SEC financial reporting requirements.

However, we cannot assure you that all these measures will be sufficient to remediate our material weaknesses in a timely manner, or at all. See “Risk Factors—Risks Related to Our Business and Industry—In connection with the audits of our consolidated financial statements included in this prospectus, 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.”

As a company with less than US$1.07 billion in revenue for fiscal year of 2018, 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 in the assessment of the emerging growth company’s internal control over financial reporting.

Quantitative and Qualitative Disclosures about Market Risk

Foreign exchange risk

We transact business globally in multiple currencies. Our international revenue, as well as costs and expenses denominated in foreign currencies, expose us to the risk of fluctuations in foreign currency exchange rates against the U.S. dollar. We have foreign currency risks related to our revenue and operating expenses denominated in currencies other than the U.S. dollar, including Renminbi, the Hong Kong dollar, and Japanese Yen. Accordingly, changes in exchange rates in the future may negatively affect our future revenue and other operating results as expressed in U.S. dollars. Our foreign currency risk is partially mitigated as our revenue recognized in currencies other than the U.S. dollar is diversified across geographic regions and we incur expenses in the same currencies in these regions. We have not used any derivative financial instruments to hedge exposure to such risk.

In addition, our foreign exchange risk is further mitigated since Hong Kong dollars are pegged against U.S. dollars. To the extent we need to convert U.S. dollars into Hong Kong dollars for our operations, appreciation of Hong Kong dollar against the U.S. dollar would reduce the amount in Hong Kong dollars we receive from the conversion. Conversely, if we decide to convert Hong Kong dollars into U.S. dollars for the purpose of making payments for servicing our outstanding debt, or for other business purposes, appreciation of the U.S. dollar against the Hong Kong dollar would reduce the U.S. dollar amounts available to us.

The value of U.S. dollar against Renminbi may fluctuate and is affected by, among other things, changes in political and economic conditions and the foreign exchange policy adopted by the PRC government. The Renminbi is not freely convertible into foreign currencies. Remittances of foreign currencies into the PRC or remittances of Renminbi out of the PRC as well as exchange between Renminbi and foreign currencies require approval by foreign exchange administrative authorities and certain supporting documentation. The State Administration for Foreign Exchange, under the authority of the People’s Bank of China, controls the conversion

 

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of Renminbi into other currencies. To the extent that we need to convert U.S. dollars into Renminbi for our operations, appreciation of Renminbi against the U.S. dollar would reduce the Renminbi amount we receive from the conversion. Conversely, if we decide to convert Renminbi into U.S. dollars for the purpose of making payments for dividends on our ordinary shares or ADSs, servicing our outstanding debt, or for other business purposes, appreciation of the U.S. dollar against the Renminbi would reduce the U.S. dollar amounts available to us.

Interest rate risk

Our exposure to interest rate risk primarily relates to the interest income generated by excess cash, which is mostly held in interest-bearing bank deposits. Interest-earning instruments carry a degree of interest rate risk. We have not been exposed to material risks due to changes in interest rates, and we have not used any derivative financial instruments to manage our interest risk exposure.

After completion of this offering, we may invest the net proceeds we receive from the offering in interest-earning instruments. Investments in both fixed rate and floating rate interest earning instruments carry a degree of interest rate risk. Fixed rate securities may have their fair market value adversely impacted due to a rise in interest rates, while floating rate securities may produce less income than expected if interest rates fall.

Recently Issued Accounting Pronouncements

A list of recently issued accounting pronouncements that are relevant to us is included in note 3 to our consolidated financial statements included elsewhere in this prospectus.

 

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INDUSTRY

The following summary is qualified in its entirety by, and should be read in conjunction with, the more detailed information and financial statements appearing elsewhere in this prospectus. In addition to this summary, we urge you to read the entire prospectus carefully, especially the risks of investing in our ADSs discussed under “Risk Factors,” before deciding whether to invest in our ADSs. The information presented in this section have been derived from an industry report commissioned by us and prepared by Frost & Sullivan, an independent research firm, to provide information regarding our industry and our market position in China and globally. We refer to this report as the “Frost & Sullivan Report.”

Our Market Opportunity

Increasing adoption of mobile data services globally

We believe that mobile data traffic has become of utility-like importance for economies and society today. Adoption of mobile technologies has increased significantly across industries and daily life situations in addition to simple internet browsing and basic communications. Key areas include but not limited to shopping (e-commerce), healthcare (mobile examination and assessment), entertainment (digital content streaming), home applications (connected-home), education (integrated and interactive education content), manufacturing (smart machinery) and more. As a result, mobile data usage per user globally experienced tremendous growth, increasing from 0.6 GB/month in 2014 to 3.9 GB/month in 2018, representing a CAGR of 59.7%, which is estimated to grow further at a CAGR of 37.3% to 19.0 GB/month in 2023, according to Frost & Sullivan. In addition, as a result of enhanced telecommunication infrastructure and networks, as well as digitization, data demand from the machine-to-machine, or M2M, IoT industry also reached 4.1 exabytes in 2018, recording a CAGR of 78.9% since 2014, and Frost & Sullivan estimated that it would grow further at a CAGR of 46.6% to 27.8 exabytes by 2023. The total number of M2M IoT devices connected also increased from 245 million in 2014 to 750 million in 2018, representing a CAGR of 32.3%, and expected to grow further at a CAGR of 8.4% to 1,122 million in 2023. This massive increase of connected devices globally will require new connectivity solutions for users, hardware vendors and carriers as traditional SIM model will gradually become increasingly less practical. With our bold mission supported by our innovative cloud SIM technology and architecture, we believe we are able to capitalize on this massive industry opportunity.

Global monthly mobile data usage per user, 2014-2023E

 

 

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Source: Frost & Sullivan Report

Note: The usage include both local and international roaming data.

 

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Global data demand from M2M IoT Industry, 2014-2023E

 

 

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Source: Frost & Sullivan Report

The mobile data connectivity service industry is a large and stable growing industry globally. It consists primarily of international mobile data connectivity services and local mobile data connectivity services used by mobile data users and M2M IoT devices. According to Frost & Sullivan, the total revenue generated from the global mobile data connectivity service industry by mobile data users increased from US$549 billion in 2014 to US$854 billion in 2018, representing a CAGR of 11.7%, which is estimated to grow further at a CAGR of 7.2% to US$1,210 billion in 2023. This includes the local data connectivity market, the international roaming market as well as the global M2M IoT market.

 

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The respective market size and growth rate are shown in the diagram below.

Local mobile data connectivity, international data roaming, M2M IoT market size, 2014-2023E

 

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Source: Frost & Sullivan Report

Notes:

(1)   Local mobile data connectivity services refers to mobile data connectivity services provided by local service providers, such as mobile network operators, or MNOs, or other mobile data connectivity service providers to local mobile data users within a designated local geographical coverage area.
  (2)   International data roaming refers to mobile data connectivity services provided to mobile data users when they travel outside of their local network coverage area. Includes services provided by OTT MVNOs through technologies such as cloud SIM.
  (3)   IoT is a system of interrelated computing devices, mechanical and digital machines or objects with the ability to transfer data over the internet without requiring human-to-human or human-to-computer interaction.

Key drivers in increasing adoption of mobile data services globally include the following:

 

   

Massive build-out of 3G and 4G telecommunication infrastructure globally: the build-out of 3G and 4G mobile communication infrastructure has been a key driver for the ubiquitous adoption of mobile data connectivity services, with the global penetration rate of 3G and 4G increasing from 75% and 36% in 2014 to 89% and 73% in 2018, respectively.

 

   

Increasingly affordable smartphones and smart-devices: The number of smartphone brands has increased from 47 to 305 between 2008 and 2018, and as of December 31, 2018, more than 77% of shipments from these brands are targeting the mid to low-end smartphone segment, which lead to the adoption of smartphones across the globe, according to Frost & Sullivan. The increasing competition and fragmentation in the mid to low-end smartphone segment has driven smartphone companies to improve the functionality of their products. As a result, penetration rate of smartphones globally has increased from 34.6% in 2014 to 52.2% in 2018, with some of the key developing countries, such as China, Indonesia and Philippines increasing by 55%, 19% and 22%, respectively during the same time period, reaching 67%, 26% and 32%, respectively. In addition to smartphones, the increasing adoption of other forms of smart or IoT devices further stimulates the adoption of and demand for mobile data services.

 

   

Increased adoption of high bandwidth data applications: The advancement in mobile data transmission technologies and availability of smartphones have also enabled the proliferation of more bandwidth-

 

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intensive applications such as streaming of entertainment content and mobile online gaming, further increasing the adoption of mobile data services.

 

   

Increasingly affordable mobile data plans: Increased transmission bandwidths have driven average global mobile data prices to decrease from US$16.7/GB in 2014 to US$ 3.5/GB in 2018, representing a CAGR of (32.3%). Increasingly affordable data combined with a wide array of applications has resulted in increased mobile data traffic consumed per user for mobile data applications.

Global mobile data pricing trend, 2014-2023E

 

 

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Source: Frost & Sullivan Report

Massive Total Addressable Market (TAM) lies across all uCloudlink business models

uCloudlink 1.0 – Sharing between countries to provide mobile data connectivity services to global travelers

Increasing disposable income, accelerated globalization, and the proliferation of new business models in the travel industry such as online travel agencies and online home sharing platforms have contributed to an increasing number of global outbound travels, with total numbers of annual outbound trips increasing from 1.33 billion in 2014 to 1.68 billion in 2018, representing a CAGR of 5.9%, and that is expected to grow at a CAGR of 6.5% to 2.30 billion in 2023.

Global outbound travels, 2014-2023E

 

 

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Growth rates (2018-2023E CAGRs) of outbound trips by key markets

 

 

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Source: Frost & Sullivan Report

With the increasing adoption in mobile data usage across businesses and daily life especially in the upcoming 5G era and the increasing time travelers spend abroad, the importance for travelers to stay connected globally will increase. As a result, the number of global outbound travels where travellers were using mobile data connectivity services increased from 212 million in 2014 to 333 million in 2018, representing a CAGR of 12.0% and is expected to grow at a CAGR of 12.4%, to 596 million in 2023.

Number of travels with international data roaming activated, 2014-2023E, line chart of top: % activation rate, 2014-2023E

 

 

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Source: Frost & Sullivan Report

Note: Number of travels with international roaming activated is calculated by multiplying number of international travels per year.

MNOs are providing global mobile data connectivity services to address increasing needs by global travelers. International roaming rates have come down, but remain significantly more expensive than local rates, which ranged across 2.7-31.6 times across some of our key target markets according to Frost & Sullivan. This has led to a high proportion of outbound travels with mobile data connectivity services deactivated remaining at 80.2% of total number of travels, as of 2018. As mobile data connectivity technologies continue to develop to reduce the roaming rates, the demand for mobile data connectivity services from outbound travelers will continue to rise, creating a massive market for alternative providers of international data connectivity solutions.

The table below shows a pricing comparison between local data and international roaming data in selected representative global wireless markets, including developed high average revenue per user, or ARPU, countries

 

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such as the U.S., the U.K. and Japan, and developing countries with lower ARPU but a high population such as China, Indonesia and the Philippines, which we view as some of our key target markets.

 

US$/GB

   US      UK      China      Japan      Philippines      Indonesia  

Local Data

     10.7        5.0        1.6        8.3        4.0        1.2  

International Roaming Data

     28.6        36.0        37.7        34.0        31.3        37.9  

Difference (times)

     2.7        7.2        23.6        4.1        7.8        31.6  

 

Note: Local and international roaming rates are calculated based on representative MNOs’ data plans in 2018

Source: Frost & Sullivan Report

uCloudlink 2.0—Sharing between carriers to serve local mobile data users

The size of the local mobile data connectivity services is massive, with revenue from local data connectivity services increasing from US$526 billion in 2014 to US$820 billion in 2018, representing a CAGR of 11.8%, and approximately 33 times the size of the international roaming market. It is expected to grow further at a CAGR of 7.0% to US$1,149 billion in 2023. In addition, the M2M IoT market could be another major driver for the local data usage as we approach the 5G era, where the application of mobile technologies will be further amplified. However, similar to the rate discrepancy in the international roaming context, the significant difference in price per GB across different local data packages and local MNOs opens up a massive opportunity for alternative providers of local data. In some of our key target markets, the price per GB difference between different data plans can be more than nine times, and the price per GB difference between Tier 1 and Tier 2 MNOs can be more than 60% as shown in the comparisons below.

The table below shows a pricing comparison between different local data plans on average in some of our key target markets.

 

US$/GB

   US      UK      China      Japan      Philippines      Indonesia  

0-5GB

     23.3        13.1        3.4        17.5        6.8        1.5  

5GB-20GB

     5.1        3.1        1.3        10.0        3.2        0.8  

20GB+

     3.9        1.4        1.0        3.1        1.8        0.5  

 

Note: Average data plan across selected MNOs in May 2019.

The table below shows a pricing comparison between Tier 1 and Tier 2 MNOs in some of our key target markets.

 

US$/GB, except %

   US     UK     China     Japan     Philippines     Indonesia  

Tier 1

     12.4       5.5       1.8       10.6       4.2       1.3  

Tier 2

     9.1       3.8       1.1       8.2       3.9       1.0  

% Difference

     36     45     64     29     8     30

 

Source: Frost & Sullivan Report

 

Notes:

Data traffic pricing of Tier 1 and Tier 2 are based on the average data plan in 2018. Tier 1 MNOs refer to the MNOs with the largest numbers of subscribers in each country, unless the subscriber market share difference is less than 5%. Price of Tier 2 MNOs is calculated based on the average pricing of the following two key players in each country.

Differences in network quality across different MNOs within the home market remain a pain-point for mobile data users. As a result, MNOs are constantly making significant investments to improve their network quality to minimize customer churn. Given Tier 1 MNOs typically have the financial strength to improve coverage of their mobile networks also to areas that may not be as economically attractive, population coverage ratios are typically higher than those of Tier 2 MNOs, with the coverage ratio difference in some of our key

 

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target markets being as high as 8.3%. However, this incremental improvement in coverage rate is at the cost of significant capex incurred as compared to Tier 2 MNOs, as shown in the table below. Similarly, depending on the market share of an operator, the depth of the network, available spectrum and employed mobile technologies, the difference in utilization rates of networks across mobile operators can be as high as 30% within the same market.

Sharing between MNOs will allow them to increase their network utilization rate and simultaneously lower the network capex requirements, thereby increasing efficiencies in operations and capital deployment. Below is a network population coverage and network utilization comparison between different MNOs in some of our key target markets.

Network population coverage(1) comparison between Tier 1 and Tier 2 MNOs:

 

%

   US     UK     China     Japan     Philippines     Indonesia  

Tier 1

     98.6     98.5     100     100     90.3     85.0

Tier 2

     94.8     97.0     94.0     99.0     82.0     80.5

% Difference

     3.8     1.5     6.0     1.0     8.3     4.5

 

Note: (1) Defined as the percentage of total population covered by the respective mobile network.

Capex Comparison between Tier 1 and Tier 2 MNOs in some of our key target markets

 

In US$Bn

   US     UK     China     Japan     Philippines     Indonesia  

Tier 1

     10.0       0.80       12.3       5.7       0.58       0.84  

Tier 2

     7.6       0.63       5.0       4.0       0.49       0.47  

% Difference

     32     27     146     43     18     79

 

Notes:

Capex of Tier 1 and Tier 2 based on the average capex of 2013-2017. Tier 1 MNOs refer to the MNOs with the largest number of subscribers in each country, unless the subscriber market share difference is less than 5%. Capex of the Tier 2 MNOs is calculated based on the average of the following two key players in each country.

Network utilization of MNOs in some global key markets, as of 2017(1):

 

 

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Source: Frost & Sullivan Report

Notes: (1) Defined as the average capacity utilization rate during busy hours in the 5% of most loaded sectors in the network

 

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uCloudlink 3.0 – Sharing between all mobile data users

We plan to further expand our TAM by addressing the unmet needs of mobile data users by enabling user-based data traffic sharing under our 3.0 sharing model in the near future, where mobile data users may freely share and trade data traffic from their underutilized data packages via our mobile data traffic marketplace.

We have seen user-based sharing models across many other industries with significant value creation. According to Frost & Sullivan, five major sharing economy sectors including on-demand staffing, media streaming, shared mobility, hospitality, peer-to-peer and crowd-based funding had a combined market size of US$14 billion in 2014 and are expected to grow to US$258 billion by 2023, representing a CAGR of 38.2%. Meanwhile, the combined market size of the respective traditional operating models corresponding to those five sectors is expected to grow from US$240 billion to US$258 billion across the same time period, representing a CAGR of 0.8%. Various sharing economy models create new market opportunities and provide additional optionality to consumers, who are becoming more technology savvy, cautious about efficient use of resources, with a higher degree of customization and personal interaction needs, as well as change in live-style as a result of globalization. A mature user-based sharing model is still absent from the telecommunication space and we believe there are great potential for this to be developed in the future.

The diagram below shows the comparison between the market sizes of the five major sharing economy models against their traditional operating models, including on-demand staffing, media streaming, shared mobility, hospitality, peer-to-peer and crowd-based funding:

 

 

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Source: Frost & Sullivan Report

In the global mobile data connectivity service industry, the underutilization of assets is twofold. On the one hand, the physical networks owned and operated by MNO’s often are underutilized, leading to a sub-optimal return on invested capital for MNOs. On the other hand, given there is limited sharing of data traffic allowances amongst users, the mobile data utilization rate can be as low as 42.5%. Sharing these unused data traffic allowances through new business models such as uCloudlink’s 3.0 sharing model can result in significant resource utilization benefits for both mobile data users and MNOs.

Utilization rate of data plans across key markets:

 

US

   UK   China   Japan   Philippines   Indonesia

67.5%

   42.5%   69.3%   75.3%   80.2%   59.2%

 

Source: Frost & Sullivan Report

In summary, we estimated our total addressable market, or TAM, to be US$23.3 billion in 2018, consisting of the international data roaming market. As we have started to offer local data connectivity services such as

 

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GlocalMe Inside under the sharing model 2.0, we will be able to tap into the massive local data connectivity services market, which is expected to grow to US$1,210 billion by 2023.

 

 

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Source: Frost & Sullivan Report

Overview of the Global Mobile Data Connectivity Industry and Key Trends

Major mobile data connectivity service providers

Most mobile data connectivity service providers fall under one of three categories:

 

   

Mobile Network Operator (MNO): providers of wireless communication services that own or control all the elements necessary to deliver services to mobile data users including the radio spectrum allocation, physical wireless network infrastructure, back-haul network infrastructure, and billing and customer services. They typically provide both wholesale and retail offerings to individual consumers and businesses.

 

   

Mobile Virtual Network Operator (MVNO): mobile operators that usually do not have their own network infrastructure. Instead, MVNOs have commercial arrangements with MNOs to rent out capacity on the MNOs’ network to serve their own customers. MVNOs typically offer wireless communication services under their own brands and distribute their SIM cards through online or physical retail channels to their end customers.

 

   

Over The Top Mobile Virtual Network Operator (OTT MVNO): typically eSIM or soft SIM technology-based mobile data connectivity service providers that aggregate network capacity from multiple MNOs and MVNOs to redistribute that capacity through customized retail offerings under their own brands.

Our cloud SIM technology: We do not own or control any telecommunication infrastructure like MNOs, nor are we dependent on the network of a limited number of MNOs like the MVNOs. We host a pool of SIM cards in the cloud and enable mobile data users to consume mobile data traffic, and potentially enable mobile data users and data providers to share their data traffic through a simple buy-and-sell process via our mobile data traffic marketplace. Our users are able to switch to any network available in the SIM card pool dynamically based on their respective global locations, which is not typically available in services based on other OTT MVNO technologies. Our cloud SIM technology is also capable of supporting mobile data traffic sharing among mobile data users and is compatible with other technologies offered by MNOs, MVNOs and OTT MVNOs to enable data traffic sharing across all platforms.

 

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Importance of mobile data traffic sharing to increase in a 5G world with growing variety of applications

The importance of staying connected to and the applications of mobile technologies will be further amplified by the adoption of the 5G technology in the coming years. 5G is expected to offer unprecedented bandwidth, low latency, fast mobility, and high capacity compared to previous technologies, which will support a set of brand new applications on top of a better experience.

5G applications can be classified into three key categories:

 

   

Enhanced mobile broadband: enhanced indoor and outdoor broadband will facilitate applications such as enterprise collaboration and augmented and virtual reality. For example, given the data-intensive and interactive nature, high quality augmented and virtual reality experiences set high requirements for network speed and latency, as well as storage and computing capabilities in the cloud, which can only be satisfied by 5G.

 

   

Ultra-reliable low latency communications: such as smart grids, remote patient monitoring or telehealth, industrial automation and autonomous vehicle. For example, autonomous vehicle is one of the mission-critical applications, with extremely high requirements for seamless coverage. The low network latency and fast mobility features of 5G are the key enablers of autonomous driving.

 

   

Massive machine type communications: such as IoT, asset tracking, smart agriculture, smart cities, energy monitoring, smart homes, remote monitoring. For example, the future development of smart cities will be wireless, cloud-based and analytically rich, all setting higher requirements than current 4G networks can deliver.

 

 

LOGO

 

Source: Setting the Scene for 5G: Opportunities & Challenges, International Telecommunication Union, 2018

 

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However, the rollout of 5G technology will place significantly higher requirements on mobile network capabilities compared to 4G. The diagram below compares the network performance requirements of today’s 4G mobile network against 5G across eight different categories.

 

 

LOGO

 

Source: Frost & Sullivan Report

Significant incremental capex will be required for implementation of 5G. When telecommunication technology advances from one generation to another, for example from 3G to 4G or from 4G to 5G, there are significant incremental capex requirements related to spectrum and network equipment and infrastructure. As the telecommunications industry is approaching the 5G era, there will be significant pressure of capex requirement on MNOs in order to support the rollout of 5G network in the next 10 years. According to Frost & Sullivan, the capex requirement to support 5G technology in some of the key countries, such as China and the United States is expected to be at 122% and 34% more than that under 4G, adding tremendous financial burden on MNOs.

Below table showcase the difference between 4G and expected 5G investment in some of our key target markets:

 

(US$ billion)

   China     US     Japan     Korea  

4G Investment

     190       197       94       41  

Expected 5G Investment

     421       265       129       61  

Increase in Investment under 5G vs. 4G

     122     34     37     51

 

Source: Frost & Sullivan Report

In addition, in the context of international roaming, the traditional roaming arrangements will significantly negate the benefits of low latency and high speed 5G could bring. With the network upgrading form 4G and 5G, MNOs will have to conduct cost renegotiations of bilateral international roaming arrangements. Both points highlight the importance mobile data traffic sharing in the 5G era.

Growing importance of the sharing concept in the telecommunications industry

As the mobile communication service industry becomes more competitive globally, in order to cope with the additional capex burden that comes with the technology advancement, carriers have has begun sharing telecommunication infrastructure and other network resources.

The largest shared telecommunication infrastructure to date is the passive telecommunication infrastructure, primarily in the telecommunications tower market, where multiple MNOs co-locate their antenna equipment on a

 

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shared physical tower site. According to Frost & Sullivan, approximately 67.5% of all global telecommunication towers globally in 2018 were shared between multiple MNOs. Tower sharing has gained recognition not just from the industry players but also support from the government in order to increase the efficiency of network usage as well as provide an environment for more competitive pricing and continuous technology advancement to happen. As a result, the telecommunication tower sharing industry has grown to become a multi-billion industry with the world’s 20 listed tower companies adding to a market capitalization of US$202 billion business as of December 31, 2018. Sharing of passive infrastructure significantly lower MNOs’ network capex requirement and improve MNOs’ time to market given this type of sharing typically involve massive infrastructure projects, which consume a significant amount of time and capital to build, however it typically involve complex negotiations among MNOs.

In addition, MNOs will also share active infrastructure, for example, radio spectrum, radio access network (RAN) and more, that are typically electronic infrastructure. It also extends to operational and administrative systems, such as billing system, customer service platform. As a result, this type of sharing typically takes the partnerships between MNOs deeper, and involves more complex negotiations and more often seen by regulators as potential anti-competition move in the past. It also incur additional operating expenses for the MNOs given they will need to pay leasing fees for the active infrastructure shared by their MNOs partners.

Beyond sharing of passive and active telecommunication infrastructures, MNOs have started to open up their networks and services for sharing to further improve utilization of network resources. Currently, key strategies include:

 

   

MNOs Opening-up Network to MVNOs: MNOs monetize unused network resources through partnership with MVNOs. MVNOs will typically target niche user segments where the MNOs have less success, and thereby act as a magnet, to indirectly increase the number of customer on the MNOs’ network and create an additional revenue stream for the MNOs. This network sharing strategy is a relatively easy to implement, given the MVNOs only ride on the MNO networks and primarily focus on sales and marketing to satisfy the need of customers in niche segments, while the network infrastructure remain fully owned and operated by the MNOs. As a result, the number of mobile subscribers under MVNOs globally has increased from 174 million in 2014 to 233 million in 2018, representing a CAGR of 7.6%, and expected to reach 407 million subscribers by 2023, growing at an accelerated CAGR 11.8% between 2018 and 2023.

 

   

Direct network sharing among MNOs: The MNOs market has always been a complex web of agreements, partnerships and rivalries. Competition among local MNOs globally is typically intense with low level of sharing given MNOs consider network asset as a core competence and strategic asset, it typically involves a series of negotiation and complex agreements to realize networking sharing. Network sharing agreements have been seen to some extent in Europe through the establishment of joint venture companies between the MNOs to consolidate the network assets intended to be shared. Moreover, as roaming agreements will need to be renegotiated among MNOs as the mobile technology evolve from one generation to another (i.e. from 4G to 5G), it creates further demand for alternative solutions that minimizes the negotiation costs.

Sharing of telecommunication resources has not happened on the level of end-users

Unlike other industries such as transportation, entertainment or lodging, there is an absence of a user-based sharing model in the telecommunications industry. Network sharing between MNOs will be able to help address resources utilization, but it is complex to implement. Sharing among users could be an alternative solution.

Sharing across end-users in other industries has gradually become a norm and part of daily life situations. It unlocks the value of unused and underused assets, driving a shift from asset-heavy to asset-light businesses and enabling access over ownership. Some 83% of Americans are familiar with sharing services in 2018, and two-thirds of consumers worldwide are willing to share or rent out their personal assets. While different in nature across industries, sharing

 

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economy models allow efficiently mapping of the unbalance between supply and demand side requirements for certain resources via a sharing platform.

According to Frost & Sullivan, mobile data packages are still significantly underutilized in some of our key target markets. On average, mobile data users are only able to utilize 65.7% of their data plan across our key target markets, indicating there is a large pool of unused mobile data traffic available for sharing between the end-users.

Cloud SIM technology uniquely positioned to become a competitive option for data traffic sharing in the 5G era

Overview of cloud SIM technology

Subscriber Identity Modules, or SIM cards, have been playing the role of authenticating and pairing mobile devices with the mobile networks and subsequently allowing the mobile device users to access the networks. Switching from traditional SIM technology to cloud SIM technology, mobile device users’ options of network are no longer restricted by the ties between physical SIM cards and the respective MNO networks. Cloud SIM technology uncouples users from the exclusive relationship with the MNOs by residing a pool of SIM cards in the cloud. Users are thus able to switch to any network available in the SIM card pool dynamically and automatically based on their location. By utilizing local SIM cards via cloud SIM, mobile data users are able to enjoy mobile data connectivity service globally with local network quality and at local rates, while still able to retain access to their primary phone number from their home network supported by traditional SIM cards.

The cloud SIM technology is in many aspects superior to OTT MVNO technologies

Soft SIM, which is more exposed to hacking given that it does not reside in any kind of secure data storage. The functionalities are performed by a collection of software applications with generally unsecured data handling. Moreover, hardware companies and vendors have access to write SIM card profiles under soft SIM in addition to MNOs, which can negatively affect the adoption of the technology by MNOs.

Embedded SIM (eSIM), which still ties the mobile devices to specific MNOs and limits future dynamic and seamless switching across networks, which is required to achieve best coverage, competitive rate and the optimal user experience.

Below is a comprehensive comparison across the three major OTT MVNO SIM technologies:

 

       

Cloud SIM

     

SoftSIM

     

eSIM

Physical existence     Physical SIM card on servers Nothing on devices     Data and software on server Nothing on devices     Data and software on server Embedded chipset on devices

Convenience

   

✓  Enables compatible devices to use local data network without physically changing SIM cards and supports automatic switching among mobile networks

   

✓  Enables compatible devices to use local data network without physically changing SIM cards and supports automatic switching among mobile networks

   

×   Requires users to manually remove and switch network on their mobile devices

Flexibility

   

✓  Users are no longer limited to a particular MNO

   

✓  Users are no longer limited to a particular MNO

   

×   Only a small portion of smartphones support eSIM

 

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Cloud SIM

     

SoftSIM

     

eSIM

   

✓  MNOs become suppliers of data traffic

   

✓  MNOs become suppliers of data traffic

   

×   To promote eSIM technology, mobile device companies have to cooperate with MNOs or MVNOs to gain technology support. However, MNOs or MVNOs are typically reluctant to provide such support as they believe eSIM may undermine users’ loyalty to their brands

Security

   

✓  High security

   

×   Information can be copied; low security.

   

✓  High security

   

✓  Follows the existing telecommunication technology, and presents no significant security risk for MNOs

   

×   Requires SIM profile for data traffic to be stored locally on the smart devices as software, which cannot be fully controlled by MNOs and is subject to hacking

   

✓  Requires SIM profile for data traffic to be stored locally on the mobile devices. The SIM profile is remotely downloaded over-the-air into an embedded universal integrated circuit card, the secure element in the eSIM solution

Availabilities of SIM resources    

✓  Close to all MNOs

   

×   Few MNOs

   

×   Few MNOs

Coverage    

✓ Multiple MNOs’ networks

   

✓ Multiple MNOs’ networks

   

×  Based on dedicated MNOs’ network

Service Repackaging    

✓ Possible

   

×  Not possible

   

×  Not possible

Standard    

×  No standard

   

×  No standard

   

✓ GSMA standard

Personal sharing    

✓ Possible

   

×  Not possible

   

×  Not possible

Utilize under-utilized data    

✓ Possible

   

×  Not possible

   

×  Not possible

 

Source: Frost & Sullivan Report

As a result of the advantages of cloud SIM, cloud SIM could become the standard for data sharing. Moreover, cloud SIM technologies is the only mobile data solution that supports sharing among mobile data users, which we expect to serve as the basis for our sharing 3.0 model. Data sharing can reduce under-utilized data packages and improve the efficiency of mobile data networks. Cloud SIM technology is also compatible with SoftSIM and eSIM technologies.

 

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Competitive landscape of key global mobile data service providers

Below is a comparison across all key global mobile data service providers, including MNOs, MVNOs and OTT MVNOs

 

Player

 

Products & Services

     

SIM Technology

     

Service
coverage

     

Dynamic

network
selection for
users

     

Utilize
under-
utilized
data

     

Data
repackaging

     

Decouple
users from
physical
SIM cards

uCloudlink   Cloud SIM enabled mobile terminals     Cloud SIM     140 countries and regions     Yes     Yes     Yes     Yes
MNOs   Local or international roaming     Mostly physical SIM     Depends on the MNOs’ roaming agreement     No     No     No     No
MVNOs/ SIM reseller   Local and dependent on MNOs’ networks     Mostly physical SIM     Depends on their agreement with MNOs     No     No     No     No
OTT MVNOs   eSIM and Soft SIM enabled portable Wi-Fi and smart devices     Mostly eSIM and Soft SIM     Depends on agreements between eSIM and soft SIM providers and MNOs    

eSIM (only with MNO’s approval)

 

Soft SIM (Yes)

    No     No    

eSIM (No)

 

Soft SIM (Yes)

 

Source: Frost & Sullivan Report

uCloudlink’s cloud SIM technology enabled mobile terminals and services offer the following key advantages compared to other mobile data service providers:

 

   

Our ability to acquire data from a wide range of sources. Our Cloud SIM technology can in theory support SIM cards from almost all suppliers and connect to networks of almost all MNOs. Moreover, the technology is compatible with eSIM and soft SIM technologies, encompassing the SIM card source available to those technologies.

 

   

Our ability to support dynamic network selection for mobile data users: With dynamic network selection capability, we can connect our users with local mobile data network that has the optimal combination of network quality, speed and price. As a result, users only need to carry one uCloudlink cloud SIM technology-enabled mobile device while they are travelling in the 140 countries and regions covered by uCloudlink to stay connected. uCloudlink’s mobile data connectivity services can be accessed across all smartphones, and regardless of the home mobile network that the users contracted with.

 

   

Our ability to utilize under-utilized data: uCloudlink’s proprietary algorithms to analyze historical data usage patterns and predict future data traffic demand, and the insights gained enable uCloudlink to efficiently procure data traffic allowances. We can intelligently allocate data traffic in the SIM card pool to our cloud SIM technology-enabled terminals, further maximizing the utilization rate of each of our SIM cards.

 

   

Our ability to repackage data: With the ability to serve our users with data traffic from multiple mobile networks and to dynamically select SIM cards for our users, we are able to create a variety of data packages across 140 countries and regions that we cover, to enable users to choose the most optimal

 

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data traffic plan based on their actual needs. In addition, we are also technologically ready to support mobile data users to trade their unused data to further customize their data allowances and packages.

 

   

Our ability to decouple users from physical SIM cards: Cloud SIM technology enables mobile data users to be decoupled from SIM cards, providing mobile data users with additional mobile network optionality. User can purchase data packages through our GlocalMe Connect mobile application and enjoy mobile data connectivity services provided by the MNOs, which is not possible under the traditional SIM-based model.

Certain handset manufacturers have begun to embed mobile data connectivity services in their devices, but only in limited numbers and only through eSIM and soft SIM technologies, which suffer from certain disadvantages as discussed above.

Powered by such competitive advantages, uCloudlink became the largest portable Wi-Fi service providers in China with a market share of 41.0% in 2018, significantly above the second and third players, who only had 20.2% and 14.0% market share respectively, according to Frost & Sullivan.

Based on the foregoing, we expect the adoption for uCloudlink’s product and services will continue to grow.

Benefits of adopting cloud SIM to handset and smart device companies

Traditionally, handset and smart device companies have limited ways to monetize their products and primarily rely on handset sales, which does not provide a recurring revenue stream and required smartphone companies to constantly design and promote new handset and smart device models in order to satisfy users’ needs.

The implementation of cloud SIM can bring the following benefits to handset and smart device companies:

 

   

Enhanced product differentiation to promote sales. Embedded mobile data connectivity services, which can be pre-installed in handset and smart devices, adds an additional major selling point to the handset and smart devices, enhancing product differentiation and competitiveness and resulting in more sales with better data traffic.

 

   

New Recurring revenue streams. Smartphone companies, who are typically reliant on one-off sales of hardware, can generate an additional, recurring and highly scalable data revenue stream via the revenue-sharing arrangements with cloud SIM providers.

 

   

Stronger foothold in digital ecosystem. Acting as a catalyst for mobile data usage, cloud SIM technology can be deployed on handsets as well as other smart devices, and serve as gateway for hardware vendors to participate in the digital ecosystem and capture more business opportunities.

 

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BUSINESS

Our Mission

Our mission is to enable people to use mobile data traffic freely anytime, anywhere like breathing the air. We aim to make the world more connected with maximized network utility through harnessing the power of mobile data traffic sharing.

Overview

We are the world’s first and leading mobile data traffic sharing marketplace, according to Frost & Sullivan. 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. As of March 31, 2019, we had aggregated mobile data traffic allowances from 269 mobile network operators (MNOs) in 140 countries and regions in our cloud SIM architecture. Total data consumed through our platform were approximately 9,000 and 28,000 terabytes in 2017 and 2018, respectively.

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. According to Frost & Sullivan, cloud SIM technology enabled solutions are superior to other SIM-based technology solutions, such as solutions based on embedded SIM (eSIM) and soft SIM, in terms of network availability, quality, connection and security. 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. As of April 30, 2019, we owned 33 patents relating to our cloud SIM technology.

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 superior seamless 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 140 countries and regions we cover. As a result, we have accumulated a large and active user base. In the first three months of 2019, our average daily active terminals reached approximately 137,900 and each of our active terminals on average used 900 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 the society.

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.

 

   

uCloudlink 1.0. Our 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 the uCloudlink 1.0 model in 2014. We operate portable Wi-Fi services under our own Roamingman brand in China, Malaysia and Singapore 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, for them to offer global mobile data connectivity services directly to their users. Leveraging on these business partners’ local operation

 

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knowledge and established brand name in their regions, we are able to penetrate into different markets and regions more effectively, accelerating the adoption of our products and services on a global scale. Since 2018, we began to offer smartphones and smart devices enabled with mobile data connectivity services such as the GlocalMe World Phone series. According to Frost & Sullivan, the market size of international roaming service is US$23.3 billion in 2018 and is expected to reach US$34.8 billion in 2023. We are the largest portable Wi-Fi service provider for international roaming for Chinese outbound travelers with a 41.0% market share in 2018, according to Frost & Sullivan.

 

   

uCloudlink 2.0. Our uCloudlink 2.0 model aims to provide mobile data connectivity services to local users across different MNOs in a single country. We tested this service in 2018, and commercially launched the service in April 2019. We develop GlocalMe Inside implementation for smartphones and other smart hardware terminals, enabling them to obtain access to our cloud SIM architecture and use our globally distributed SIM card pool, and also offer GlocalMe World Phone series. We have partnered with a leading smartphone company in China to provide GlocalMe Inside implementation for certain models of its smartphones. Similarly, we have agreed with other smartphone brands including PT. Bangga Teknologi Indonesia, the owner of the handset brand Advan in Indonesia, and Cosmic Technologies, Inc., the owner of the handset brand Cherry Mobile in the Philippines, to launch GlocalMe Inside on some of their models. This enables smartphone users to use not only our global mobile data connectivity services but also local data traffic packages without a separate Wi-Fi router. According to Frost & Sullivan, the market size of local mobile data connectivity services is US$820 billion in 2018 and is expected to reach US$1,149 billion in 2023. As we are expanding GlocalMe Inside to more smartphone brands and models, we believe we will be able to grow our user base rapidly and capture more monetization opportunities in the market.

 

   

uCloudlink 3.0. We expect that we will launch our services following uCloudlink 3.0 model in the next two to three years. We anticipate that under our proposed uCloudlink 3.0 model, users may share and trade their unused data packages through our cloud SIM architecture, which will create a data traffic sharing marketplace. We have tested the data allowance sharing among users in trials, and are technologically ready to launch the uCloudlink 3.0 model. We believe that our successful uCloudlink 1.0 model and fast-growing uCloudlink 2.0 model will lead us to uCloudlink 3.0 model in the near future. Sharing among users will further enrich the sources of our distributed SIM card pool and optimize network usage, and make us a vibrant data traffic sharing marketplace.

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.

We have grown rapidly in recent years. Our average daily active terminals increased by 73.0% from approximately 65,300 in 2017 to 113,000 in 2018. The average daily data usage per active terminal increased from 390 megabytes in 2017 to 700 megabytes in 2018. We generate revenue primarily from our mobile data connectivity services and hardware terminals that incorporate the services. Our revenues increased by 47.2% from US$85.8 million in 2017 to US$126.4 million in 2018. Our gross margin increased from 34.4% in 2017 to 36.5% in 2018. We had a net loss of US$19.3 million and US$26.6 million in 2017 and 2018, respectively. Our adjusted net loss, a non-GAAP measure defined as net loss excluding share-based compensation, was US$13.7 million and US$24.3 million in 2017 and 2018, respectively. Our adjusted EBITDA, another non-GAAP measure defined as net loss excluding share of loss in equity method investment net of tax, interest expense, depreciation and amortization, and share-based compensation, was negative US$4.7 million and negative US$15.1 million in 2017 and 2018, respectively. See “Summary Consolidated Financial and Operating

 

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Data—Non-GAAP Financial Measures.” In 2017 and 2018, we generated 37.9% and 50.9%, respectively, of our revenues outside of China according to the location of the customers.

Our Value Propositions

Our products and services deliver unique value propositions to mobile data users, handset and smart-hardware companies, MVNOs, MNOs and more broadly to the society.

To our users:

 

   

Global coverage. Users enjoy mobile data connectivity services in 140 countries and regions, freely switching among countries, network operators, and data plans.

 

   

Superior mobile connectivity experience. Our technology dynamically and intelligently selects the local mobile network available in our distributed SIM card pool with strong signal and fast speed at the location of the end-user. Users may enjoy seamless and unnoticeable transitions across different network operators.

 

   

Locally competitive rate. By repackaging data allowances across different operators and tailoring them to meet a broad variety of user preferences we are able to offer competitive rates to local and cross-border users comparable to those provided by local operators.

 

   

Personalized data package to maximize data package usage. Our users can customize data packages based on their own needs, which minimizes the data traffic wastage in their data plans and helps optimize network utilization for network operators.

To smartphone and smart-hardware companies:

 

   

Enhanced product differentiation to promote sales. Our GlocalMe Inside implementation, which can be pre-installed in smart mobile terminals, adds an additional major selling point to smartphones models, enhancing product differentiation and competitiveness and resulting in more sales.

 

   

New recurring revenue streams. Smartphone companies, who are typically reliant on one-off sales of hardware, can generate an additional, recurring and highly scalable data revenue stream via the revenue-sharing arrangements with us.

 

   

Stronger foothold in digital ecosystem. Acting as a catalyst for mobile data usage, GlocalMe Inside can be deployed on smartphones as well as other smart-hardware terminals, and serve as gateway for hardware vendors to participate in the digital ecosystem and capture more business opportunities.

To MVNOs and fixed network operators:

 

   

Flexible mobile network sourcing. By using our services, MVNOs can reduce their dependence on the arrangement with MNOs to use their network. We also purchase spare data capacity from MVNOs thereby increasing efficient usage of their networks.

 

   

Strengthened local and global data connectivity offering. Leveraging our global SIM card resources, MVNOs can offer their users competitively-priced international mobile data connectivity services and provide broader local coverage and better network performance, without being limited by that of the MNOs they have entered into contract with.

 

   

Enabling mobile data offering for fixed network operators. Cable operators or other fixed network operators can offer wireless services through our GlocalMe products without entering into an MVNO contract.

 

   

Offering full ownership of users. By offering GlocalMe products, MVNOs can foster more direct and interactive relationships with users.

 

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To MNOs, especially tier-2 and 3 MNOs:

 

   

Improved network coverage and service quality. We improve a MNO’s network coverage by enabling their customers to access all the mobile networks globally supported by our platform. Our technology provides seamless and continuous access to data and enhances user experience, ultimately helping MNOs improve customer s