20-F: Cloopen Reduces Losses Amidst Flat Revenue, NYSE Delisting

Cloopen Group Holding Limited reported a significant reduction in net loss for 2024, alongside minimal revenue growth, as it navigates operational challenges and addresses past regulatory issues.

Summary

• Net loss decreased by 64.4% to RMB146.8 million (US$20.1 million) in 2024, down from RMB412.4 million in 2023.
• Revenues increased slightly by 0.4% to RMB573.6 million (US$78.6 million) in 2024, from RMB571.0 million in 2023.
• Operating loss decreased by 55.2% from RMB436.5 million in 2023 to RMB197.8 million (US$27.1 million) in 2024.
• Adjusted EBITDA was RMB225.4 million (US$30.9 million) in 2024, an improvement from RMB405.5 million in 2023.
• Gross profit increased by 3.0% to RMB210.8 million (US$28.9 million) in 2024, with the gross profit margin improving to 36.8% from 35.8% in 2023.
• The active customer base decreased to 7,529 enterprises in 2024 from 8,703 in 2023, including a reduction in large-enterprise customers from 121 to 114.
• The dollar-based net customer retention rate for recurring solutions decreased to 74.6% in 2024 from 85.8% in 2023.
• Operating expenses (R&D, S&M, G&A) saw significant reductions in 2024.
• The company reached a settlement with the SEC on February 6, 2024, regarding employee misconduct and transaction irregularities, without civil penalties due to self-reporting and remediation.
• Material weaknesses in internal control over financial reporting were identified as of December 31, 2024, with ongoing remedial measures.
• ADSs were delisted from the NYSE on October 25, 2023, and are now quoted on the OTC market under the symbol RAASY.
• The company believes it was a Passive Foreign Investment Company (PFIC) for the taxable year ended December 31, 2024, and may continue to be for future taxable years.

Sentiment

Score: 6

Explanation: While the company demonstrated significant progress in reducing net losses and operating expenses, and successfully resolved major legal and regulatory challenges, revenue growth remained flat, and both active customer count and dollar-based net customer retention rate declined. The identified material weaknesses in internal controls and the NYSE delisting introduce considerable uncertainty and risk. The overall trend in financial health is positive, but operational metrics and governance issues are concerning.

Positives

• Net loss significantly decreased by 64.4% to RMB146.8 million (US$20.1 million) in 2024, indicating improved financial efficiency.
• Operating loss improved by 55.2% to RMB197.8 million (US$27.1 million) in 2024, reflecting better operational management.
• Gross profit increased by 3.0% to RMB210.8 million (US$28.9 million), with the gross profit margin improving to 36.8% in 2024.
• Operating expenses, including R&D, selling and marketing, and general and administrative, were substantially reduced in 2024.
• Successfully settled with the SEC regarding past employee misconduct and transaction irregularities, avoiding civil penalties due to prompt self-reporting, cooperation, and remediation efforts.
• Net cash used in operating activities decreased significantly from RMB516.2 million in 2023 to RMB180.2 million (US$24.7 million) in 2024.
• Cash and restricted cash increased to RMB650.5 million (US$89.1 million) at year-end 2024 from RMB382.4 million in 2023.
• Introduction of the 'Chitu Big Model' and 'Copilot & Agent' recognized for their potential in the AI industry, highlighting innovation capabilities.

Negatives

• Overall revenue growth was minimal, increasing by only 0.4% in 2024, indicating stagnation in top-line expansion.
• The active customer base decreased by 13.6% from 8,703 in 2023 to 7,529 in 2024, suggesting challenges in customer acquisition and retention.
• The number of large-enterprise customers declined from 121 in 2023 to 114 in 2024.
• The dollar-based net customer retention rate for recurring solutions decreased to 74.6% in 2024 from 85.8% in 2023, primarily due to replacing certain SMS channel clients for pricing considerations and decreased demand from medium-sized cloud-based CC customers.
• CPaaS solutions revenue decreased by 3.1% in 2024, partly due to the termination of a jointly-operated platform.
• Cloud-based UC&C solutions revenue decreased by 1.3% in 2024 due to decreased customer demands.
• Material weaknesses in internal control over financial reporting were identified as of December 31, 2024, indicating ongoing control deficiencies and potential for misstatements.
• Delisting from the New York Stock Exchange (NYSE) on October 25, 2023, and subsequent trading on the less liquid OTC market, which may adversely affect liquidity and market price.
• Likely classification as a Passive Foreign Investment Company (PFIC) for U.S. federal income tax purposes for 2024 and future years, which can have adverse tax consequences for U.S. investors.

Risks

• Legal proceedings, investigations, and inquiries in connection with or arising from previously disclosed employee misconduct and transaction irregularities.
• Adverse publicity and potential concerns from customers and other business partners relating to or arising from the Independent Investigation and restatement of consolidated financial statements.
• Inability to implement and maintain an effective system of internal control over financial reporting to accurately report results of operations, meet reporting obligations, and prevent fraud.
• Failure to timely comply with SEC reporting obligations, which has already led to delisting and may affect future financing.
• Inability to attract new customers or retain existing ones, which could materially and adversely affect business, results of operations, and financial condition.
• Dependence on the continued development of solutions and the markets they target, with risks if cloud-based communications adoption slows.
• Limited operating history, making it difficult to forecast revenues and evaluate business and prospects.
• Inability to generate profits and positive cash flows, as the company has incurred significant net losses and negative operating cash flows since inception.
• Reliance on collaborations with China's major mobile network operators, with risks of termination or unfavorable terms.
• Failure to enhance or upgrade existing solutions and introduce new ones that are broadly accepted by the market in a timely and cost-effective manner.
• Incompatibility of solutions across devices, business systems, applications, and physical infrastructure not controlled by the company.
• Operating in a highly competitive market, with risks of failing to compete effectively.
• Failure to collect contract assets and accounts receivable from customers in a timely manner, affecting liquidity and cash flows.
• Inability to maintain and enhance brand image and generate positive publicity.
• Failure to optimize prices for solutions, impacting revenues and results of operations.
• Lengthy and unpredictable sales cycles for large enterprises, requiring considerable time and expense and potentially causing delays in revenue recognition.
• Risks associated with conducting business with state-owned enterprises in China, including compliance complexity and pricing pressures.
• Real or perceived errors, defects, failures, vulnerabilities, or bugs in solutions, which could diminish customer demand and subject the company to liability.
• Inability to integrate acquired businesses and technologies successfully or achieve the expected benefits of such acquisitions.
• Exposure to intellectual property rights claims and other litigation matters, which are expensive to support and could harm the business.
• Inability to protect or defend intellectual property rights.
• Failure to comply with laws and contractual obligations related to data privacy and protection and cybersecurity.
• Compliance with extensive and evolving laws and regulations in the PRC, including potential disallowance of the VIE structure.
• Adverse effects on brand image, business, and results of operations due to third-party misconduct and misuse of solutions.
• Limited insurance coverage, which could expose the company to significant costs and business disruption.
• Changes in China's economic, political, or social conditions or government policies.
• Chinese government's significant authority to intervene or influence operations and exert control over overseas offerings and foreign investment.
• Potential requirement for CSRC approval for future offshore offerings, with uncertainties regarding approval timing or rescission.
• Risk of ADSs being prohibited from trading over the counter in the United States under the HFCAA if audit work is not completely inspected by the PCAOB.
• Difficulties for overseas regulators to conduct investigations or collect evidence within China.
• Custodians or authorized users of controlling non-tangible assets (chops and seals) failing to fulfill responsibilities, or misappropriating or misusing these assets.
• Fluctuations in exchange rates, particularly between Renminbi and U.S. dollar.
• Governmental control of currency conversion limiting the ability to utilize revenues effectively and affecting investment value.
• Complex procedures for certain types of acquisitions of Chinese companies by foreign investors.
• PRC regulations relating to loans to and direct investment in PRC entities by offshore holding companies affecting funding abilities.
• Failure to comply with PRC regulations regarding registration requirements for employee stock ownership plans or share option plans.
• Classification as a PRC resident enterprise for PRC income tax purposes, resulting in unfavorable tax consequences.
• Uncertainties with respect to indirect transfer of equity interests in PRC resident enterprises by their non-PRC holding companies.
• Increases in labor costs in the PRC.
• Recent litigation and negative publicity surrounding China-based companies listed in the United States, potentially increasing regulatory scrutiny.
• A severe or prolonged downturn in the global economic recession and the slowdown in the Chinese economy.
• Tension in international trade and rising political tension, particularly between the United States and China.
• Failure by the VIE or its shareholders to perform their obligations under contractual arrangements.
• Actual or potential conflicts of interest of shareholders of the VIE with the company.
• Contractual arrangements may be subject to scrutiny by the PRC tax authorities, potentially leading to additional taxes.
• Uncertainties with respect to the interpretation and implementation of the newly enacted Foreign Investment Law and its impact on the corporate structure.
• Reliance on dividends paid by PRC subsidiaries to fund cash and financing requirements, with limitations on their ability to pay dividends.
• Status as a foreign private issuer and emerging growth company, which exempts the company from certain U.S. domestic public company provisions.
• Significant costs incurred as a public company, particularly after ceasing to qualify as an emerging growth company.
• Dual-class voting structure and concentration of ownership limiting the ability to influence corporate matters.
• Anti-takeover provisions in the memorandum and articles of association.
• Volatility of the trading price of the ADSs.
• The sale or availability for sale of substantial amounts of the ADSs could adversely affect their market price.
• Techniques employed by short sellers may drive down the market price of the ADSs.
• If securities or industry analysts do not publish research or reports about the business, or if they adversely change their recommendations, the market price and trading volume could decline.
• Reliance on price appreciation of the ADSs for return on investment due to no expected dividends in the foreseeable future.
• Difficulties in protecting interests and limited ability to protect rights through U.S. courts due to Cayman Islands incorporation and primary operations in emerging markets.
• Certain judgments obtained against the company by shareholders may not be enforceable.
• Limited voting rights of holders of ADSs by the terms of the deposit agreement.
• The depositary may give a discretionary proxy to vote Class A ordinary shares underlying ADSs if voting instructions are not given.
• The company and the depositary are entitled to amend the deposit agreement and change the rights of ADSs holders without prior consent.
• Potential dilution of holdings due to inability to participate in rights offerings.
• Limitations on transfer of ADSs.
• ADS holders may not be entitled to a jury trial with respect to claims arising under the deposit agreement.

Future Outlook

The company expects its dollar-based net customer retention rate to remain stable at a relatively high level, supported by a more established regulatory framework, China's economic recovery from the COVID-19 pandemic, and continuous optimization of existing solutions and development of new features. Operating expenses are anticipated to increase in absolute terms as the company scales. Management intends to continue investing in business operations, technological improvements (especially AI and video), marketing campaigns, and international expansion. The company plans to promote recurring revenue solutions to lower customer acquisition costs and improve profit margins, while also shifting focus towards higher-margin cloud-based CC and UC&C solutions. Strategic alliances and acquisitions will be selectively pursued. The company believes its existing cash and anticipated cash flows will be sufficient for the next 12 months, but acknowledges the potential need for additional capital for future growth or acquisitions. The company also believes it will likely continue to be treated as a PFIC for future taxable years.

Management Comments

• We believe that we are well-positioned to capitalize on this great opportunity in the emerging China market and continue to contribute to the growth of this market.
• We believe that we are well adapted to serve China's unique market dynamics, leveraging our deep-rooted experience in China's cloud-based communications industry and insights in the specific communications needs of domestic enterprises.
• We believe our capabilities in attracting and retaining these large-enterprise customers rest on our ability to develop and offer industry-specific features and functionalities that satisfy their disparate needs and complex internal deployment and integration requirements.
• We believe high customer satisfaction and close customer relationship can keep us posted of their honest feedback and evolving communications needs, which drives innovation and facilitates more targeted services to further increase customer loyalty.
• We are committed to continually innovating our technologies and solutions to stay ahead of our customers rapidly evolving communications needs.
• We believe our online and offline branding and customer acquisition efforts have contributed to our brand awareness and reputation and effectively fueled our business growth.
• Our management believes that the likelihood to lose the Company's current ownership structure or the contractual arrangements with the VIE is remote based on the current facts and circumstances.
• We believe that our existing cash and cash equivalents and anticipated cash flows from operating and financing activities will be sufficient to meet our anticipated working capital requirements, and capital expenditures in the ordinary course of business for the next 12 months.

Industry Context

China's cloud-based communications industry is in its early stages of development compared to more mature global markets, but is undergoing significant transformation driven by rapid advancements in cloud and AI technologies. Enterprises in China are increasingly adopting digital solutions to enhance communication efficiency. The industry remains highly fragmented, with many local players, presenting opportunities for consolidation. The regulatory landscape for privacy, cybersecurity, and data protection in China is continuously evolving, impacting industry participants. The online consumer finance sector, a customer segment for the company, is facing challenges and shrinking due to stringent and evolving regulations.

Comparison to Industry Standards

• China's cloud-based communications industry is still in the early stages of development relative to more mature markets globally, suggesting significant growth potential but also inherent market immaturity.
• The company considers its insurance coverage to be in line with that of other companies of similar size in the same industry in China, indicating standard risk mitigation practices within the local context.
• For estimating expected exercise multiples for share options, the company references academic research (Huddart and Lang, 1996) widely adopted by valuers, due to a lack of sufficient internal historical employee exercise data.

Management Changes

Corporate Governance

Legal Proceedings

• Settled securities class action lawsuits (Sonny St. John v. Cloopen Group Holding Limited et al. and Dong v. Cloopen Group Holding Limited et al.) on June 5, 2023, for US$12.0 million in cash, with final approval and dismissal on January 23, 2024.
• Reached a settlement with the SEC on February 6, 2024, regarding employee misconduct and transaction irregularities, consenting to a cease and desist order without civil penalties due to self-reporting, cooperation, and remediation.
• May continue to be a party to various legal or administrative proceedings arising in the ordinary course of business, including intellectual property infringement, breach of contract, and labor claims.

Related Party Transactions

• Recorded revenues of RMB0.2 million (US$22,000) from CPaaS services to Shenyang Yunrongxin Technology Co., Ltd. in 2024.
• Recorded revenues of RMB1,000 (US$140) from CPaaS services to Shenzhen City Yunjitong Technology Co., Ltd. in 2024.
• Purchased project development services from Shanghai Keshen Information Technology Co., Ltd. for RMB2.0 million (US$0.3 million) in 2024.
• Amounts due from Shanghai Keshen Information Technology Co., Ltd. were RMB2.6 million (US$355,000) as of December 31, 2024, representing prepayment for project development services.
• Amounts due from Shenyang Yunrongxin Technology Co., Ltd. were RMB0.4 million (US$53,000) as of December 31, 2024, as accounts receivable.
• Amounts due to Shanghai Keshen Information Technology Co., Ltd. were RMB62,000 (US$8,000) as of December 31, 2024, as deposits.
• Amounts due to Shenyang Yunrongxin Technology Co., Ltd. were RMB91,000 (US$12,000) as of December 31, 2024, for outsourcing services.
• Amounts due to Shenzhen City Yunjitong Technology Co., Ltd. were RMB1,000 (US$140) as of December 31, 2024, for outsourcing services.

Stakeholder Impact

• Shareholders: Delisting from NYSE to OTC market reduces liquidity and potentially market price. Dual-class structure limits influence. PFIC status may have adverse tax consequences for U.S. investors. Potential dilution from future capital raises.
• Employees: Compensation packages, share incentive plans, social insurance, and housing fund contributions are provided. Changes in R&D and S&M headcount and compensation levels may impact employee morale and retention.
• Customers: Decreased active customer base and large-enterprise customers, along with reduced dollar-based net customer retention rate, indicate challenges in customer satisfaction and growth. Potential for improved service quality through AI and video technology investments.
• Suppliers: Concentration risk with one supplier representing 19.6% of total purchases in 2024, indicating reliance on key vendors.
• Creditors: Improved net loss and cash position could reduce credit risk, but ongoing negative operating cash flow and internal control weaknesses remain concerns.

Next Steps

• Continue to improve internal control over financial reporting and remediate identified material weaknesses.
• Recruit more qualified accounting and financial reporting personnel and implement regular U.S. GAAP training programs.
• Enhance oversight and clarify reporting requirements for non-recurring and complex transactions.
• Enhance guidance and manuals on financial closing policies and procedures, especially for revenue recognition and accounts receivable monitoring.
• Initiate the construction of a project management system and launch modules for outsourced personnel work hour reporting and review by 2025.
• Continue to invest in business operations, technological improvements (especially AI and video), marketing campaigns, and international expansion.
• Promote solutions offered on a recurring basis to lower customer acquisition costs and improve profit margins.
• Shift focus towards offering solutions with higher profit margins (cloud-based CC and UC&C).
• Selectively pursue strategic alliances and acquisitions to strengthen competitiveness.
• Monitor and comply with evolving PRC laws and regulations, particularly regarding data security, cross-border data flow, and overseas listings.

Key Dates

Recommendation

While Cloopen Group Holding Limited demonstrated significant progress in reducing net losses and operating expenses, and successfully resolved major legal and regulatory challenges, several concerns warrant a 'Hold' recommendation. The flat revenue growth, declining active customer base, and reduced customer retention rate indicate ongoing operational challenges in a competitive market. Furthermore, the identified material weaknesses in internal control over financial reporting and the delisting from the NYSE to the less liquid OTC market introduce considerable uncertainty and risk for investors. The potential PFIC status for U.S. investors adds another layer of complexity. Investors should monitor the company's ability to address these operational and governance issues, and demonstrate sustainable customer and revenue growth before considering a 'Buy' recommendation.

Keywords

Cloud communications, CPaaS, Cloud-based Contact Center, Cloud-based UC&C, China, AI, Enterprise solutions, SEC filing, 20-F, Financial results, Cybersecurity, Data privacy, VIE structure, Delisting, OTC market, PFIC, Internal controls, Share-based compensation