Qudian Inc. [QD] Filings

20-F 1 d307603d20f.htm FORM 20-F Form 20-F

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM

20-F

(Mark One)

☐	REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR 12(g) OF THE SECURITIES EXCHANGE ACT OF 1934

☒	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2021

☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 193 4

☐	SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 193 4

Date of event requiring this shell company report

For the transition period from

Commission file number

001-38230

Qudian Inc.

(Exact name of Registrant as specified in its charter)

Cayman Islands

(Jurisdiction of incorporation or organization)

Tower A, AVIC Zijin Plaza

Siming District, Xiamen

Fujian Province 361000,

People’s Republic of China

(Address of principal executive offices)

Min Luo, Chairman and Chief Executive Officer

Telephone: telephone:

+86-592-5911580

Email: ir@qudian.com

At the address of the Company set forth above

(Name, Telephone,

E-mail

and/or Facsimile number and Address of Company Contact Person)

Securities registered or to be registered pursuant to Section 12(b) of the Act:



Title of each class	Trading Symbol(s)	Name of each exchange on which registered
American Depositary Shares, each representing one Class A ordinary share	QD	New York Stock Exchange
Class A Ordinary Shares, par value US$0.0001 per share*

*	Not for trading, but only in connection with the listing on the New York Stock Exchange of American depositary shares.

Securities registered or to be registered pursuant to Section 12(g)

None

(Title of Class)

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:

None

(Title of Class)


Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report.			190,243,651 Class A ordinary shares 63,491,172 Class B ordinary shares
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.			☐ Yes ☒ No

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.			☐ Yes ☒ No

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.			☒ Yes ☐ No

Indicate by check mark whether the registrant has submitted every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).			☒ Yes ☐ No


Large accelerated filer ☐		Accelerated filer ☒		Non-accelerated filer ☐		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 13(a) of the Exchange 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.

Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒

Indicate by check mark which basis of accounting the registration has used to prepare the financial statements included in this filing:


U.S. GAAP ☒		International Financial Reporting Standards as issued by the International Accounting Standards Board ☐		Other ☐


If “Other” has been checked in response to the previous question, indicate by check mark which consolidated financial statement item the registrant has elected to follow.		☐ Item 17 ☐ Item 18

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Securities Exchange Act of 1934).		☐ Yes ☒ No

(APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST FIVE YEARS)

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.		☐ Yes ☐ No

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CONVENTIONS THAT APPLY TO THIS ANNUAL REPORT ON FORM 20-F		1

FORWARD-LOOKING INFORMATION		3

Part I.		4

ITEM 1.	IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS	4

ITEM 2.	OFFER STATISTICS AND EXPECTED TIMETABLE	4

ITEM 3.	KEY INFORMATION	4

ITEM 4.	INFORMATION ON THE COMPANY	78

ITEM 4A.	UNRESOLVED STAFF COMMENTS	135

ITEM 5.	OPERATING AND FINANCIAL REVIEW AND PROSPECTS	135

ITEM 6.	DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES	163

ITEM 7.	MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS	174

ITEM 8.	FINANCIAL INFORMATION	174

ITEM 9.	THE OFFER AND LISTING	177

ITEM 10.	ADDITIONAL INFORMATION	177

ITEM 11.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	185

ITEM 12.	DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES	187

Part II.		189

ITEM 13.	DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES	189

ITEM 14.	MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS	189

ITEM 15.	CONTROLS AND PROCEDURES	189

ITEM 16A.	AUDIT COMMITTEE FINANCIAL EXPERT	190

ITEM 16B.	CODE OF ETHICS	190

ITEM 16C.	PRINCIPAL ACCOUNTANT FEES AND SERVICES	190

ITEM 16D.	EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES	191

ITEM 16E.	PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS	191

ITEM 16F.	CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT	191

ITEM 16G.	CORPORATE GOVERNANCE	191

ITEM 16H.	MINE SAFETY DISCLOSURE	192

ITEM 16I.	DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS	192

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Part III.		193

ITEM 17.	FINANCIAL STATEMENTS	193

ITEM 18.	FINANCIAL STATEMENTS	193

ITEM 19.	EXHIBITS	193

SIGNATURES		198

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS		F-1

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CONVENTIONS THAT APPLY TO THIS ANNUAL REPORT ON FORM

20-F

Except where the context otherwise requires, references in this annual report to:

•

“active borrowers” are to borrowers who have drawn down credit in the specified period;

•

“ADSs” are to our American depositary shares, each of which represents one Class A ordinary share, and “ADRs” are to the American depositary receipts that evidence our ADSs;

•

“amount of transactions” are to the aggregate principal amount of credit drawdowns that are provided to borrowers in the specified period, which are comprised of (i) credit drawdowns that are facilitated under the Group’s loan book business and (ii) credit drawdowns that are facilitated under the Group’s transaction services business;

•

“Ant Financial” are to Ant Small and Micro Financial Services Group Co., Ltd., a company organized under the laws of the PRC, and its affiliates;

•

“China” and the “PRC” are to the People’s Republic of China, excluding, for the purposes of this annual report only, Taiwan, the Hong Kong Special Administrative Region and the Macao Special Administrative Region;

•

“the Group” are to Qudian Inc., the Group VIEs and their respective subsidiaries;

•

“Group VIEs” are to Beijing Happy Time Technology Development Co., Ltd., or Beijing Happy Time, Xiamen Qudian Technology Co., Ltd., or Xiamen Qudian, Ganzhou Qudian Technology Co., Ltd, or Ganzhou Qudian, Xiamen Weipujia Technology Co., Ltd., or Xiamen Weipujia, Xiamen Qu Plus Plus Technology Development Co., Ltd., or Xiamen Qu Plus Plus;

•

“loan book business” are to the Group’s business of offering small credit products to consumers; the relevant transactions may be funded by the Group’s institutional funding partners or the Group’s own capital, and the Group undertakes credit risk for such transactions;

•

“M1+ delinquency coverage ratio” are to the balance of allowance for principal and financing service fee receivables at the end of a period, divided by the total balance of outstanding principal for

on-balance

sheet transactions for which any installment payment was more than 30 calendar days past due as of the end of such period;

•

“M1+ delinquency rate by vintage” are to the total outstanding principal balance of the transactions of a vintage for which any repayment is overdue for more than 30 days, divided by the total initial principal of the transactions facilitated in such vintage;

•

“number of transactions” are to the number of credit drawdowns facilitated by the Group to borrowers, which are comprised of (i) credit drawdowns that are facilitated under the Group’s loan book business and (ii) credit drawdowns that are facilitated under the Group’s transaction services business;

•

“off-balance

sheet transactions” are to credit drawdowns under the Group’s loan book business that are not recorded on the Group’s balance sheets; the Group bears credit risk for such transactions;

•

“on-balance

sheet transactions” are to credit drawdowns under the Group’s loan book business that are recorded on the Group’s balance sheets;

•

“outstanding borrowers” are to borrowers who have outstanding loans under either the loan book business or the transaction services business as of a specified date;

•

“provision ratio” are to the amount of provision for loan principal and financing service fee receivables incurred during a period as a percentage of the total amount of

on-balance

sheet transactions facilitated during such period;

•

“P2P platforms” are to financial information intermediaries that are engaged in lending information business and directly provide peers, which can be natural persons, legal persons or other organizations, with lending information services;

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•

“Qudian marketplace” are to the Group’s online marketplace where consumers purchased merchandise offered by third-party merchandise suppliers with the Group’s merchandise credit products;

•

“registered users” are to individuals who have registered with the Group in connection with the Group’s credit business;

•

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

•

“small credit products” are to cash or merchandise credit products that are less than RMB5,000 in amount;

•

“Subsidiary” are to an entity controlled by Qudian Inc. and consolidated with Qudian Inc.’s results of operations due to Qudian Inc.’s equity interest in such entity, instead of contractual arrangements; for avoidance of doubt, the Group VIEs are not subsidiaries of Qudian Inc.;

•

“transaction services business” are to the Group’s business of offering loan recommendation and referral services to third-party financial service providers; the Group assumes no credit risk for the transactions facilitated under the transaction services business; the Group ceased its transaction services business in the third quarter of 2021;

•

“transactions” are to borrowers’ credit drawdowns from the Group’s platform;

•

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

•

“vintage” are to the

on-balance

sheet transactions and

off-balance

sheet transactions facilitated under the loan book business during a specified time period; and

•

“we,” “us,” “our company” and “our” are to Qudian Inc. and/or its subsidiaries, as the context requires.

The translations from Renminbi to U.S. dollars and from U.S. dollars to Renminbi in this annual report were made at a rate of RMB6.3726 to US$1.00, the exchange rates set forth in the H. 10 statistical release of the Federal Reserve Board on December 30, 2021. We make no representation that the Renminbi or U.S. dollar amounts referred to in this annual report could have been or could be converted into U.S. dollars or Renminbi, as the case may be, at any particular rate or at all. On March 31, 2022, the noon buying rate for Renminbi was RMB6.3393 to US$1.00.

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FORWARD-LOOKING INFORMATION

This annual report on Form

20-F

contains statements of a forward-looking nature. All statements other than statements of historical facts are forward-looking statements. These forward-looking statements are made under the “safe harbor” provision under Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act, and as defined in the Private Securities Litigation Reform Act of 1995. These statements involve known and unknown risks, uncertainties and other factors that may cause the Group’s actual results, performance or achievements to be materially different from those expressed or implied by the forward-looking statements. In some cases, these forward-looking statements can be identified by words or phrases such as “may,” “will,” “expect,” “anticipate,” “aim,” “estimate,” “intend,” “plan,” “believe,” “potential,” “continue,” “is/are likely to” or other similar expressions. These forward-looking statements relate to, among others:

•

the Group’s goal and strategies;

•

the Group’s expansion plans;

•

the Group’s future business development, financial condition and results of operations;

•

the Group’s expectations regarding demand for, and market acceptance of, the Group’s products and services;

•

the Group’s expectations regarding keeping and strengthening its relationships with customers, business partners and other parties the Group collaborates with; and

•

general economic and business conditions.

We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect the Group’s financial condition, results of operations, business strategy and financial needs.

You should read these statements in conjunction with the risks disclosed in “Item 3.D. Key Information—Risk Factors” of this annual report and other risks outlined in our other filings with the Securities and Exchange Commission, or the SEC. Moreover, the Group operates in an emerging and evolving environment. New risks may emerge from time to time, and it is not possible for our management to predict all risks, nor can we assess the impact of such risks on the Group’s business or the extent to which any risk, or combination of risks, may cause actual results to differ materially from those contained in any forward-looking statements. The forward-looking statements made in this annual report relate only to events or information as of the date on which the statements are made in this annual report. Except as required by law, we undertake no obligation to update any forward-looking statements to reflect events or circumstances after the date on which the statements are made or to reflect the occurrence of unanticipated events. You should read this annual report and the documents that we have referred to in this annual report, completely and with the understanding that the Group’s actual future results may be materially different from what we expect.

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Part I.

ITEM 1.

IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS

Not Applicable.

ITEM 2.

OFFER STATISTICS AND EXPECTED TIMETABLE

Not Applicable.

ITEM 3.

KEY INFORMATION

Contractual Arrangements with the Group VIEs and Their Shareholders

Qudian Inc. is a Cayman Islands holding company, and the Group’s operations are primarily conducted by its subsidiaries in China and through contractual arrangements with the Group VIEs. Investors in our ADSs and Class A ordinary shares do not hold equity interest in the Group’s operating entities in China, but instead hold equity interest in Qudian Inc. As used in this annual report, “Qudian,” “we,” “us,” “our company” or “our” refers to Qudian Inc. and/or its subsidiaries, and “the Group” refers to Qudian Inc., the Group VIEs and their respective subsidiaries.

Under the PRC laws and regulations, the operations of Internet content providers in the PRC are subject to foreign investment restrictions and license requirements. Therefore, we operate such businesses in China through the Group VIEs. Currently, the Group VIEs are (i) Beijing Happy Time; (ii) Ganzhou Qudian; (iii) Xiamen Qudian; (iv) Xiamen Weipujia; and (v) Xiamen Qu Plus Plus. We have entered into a series of contractual arrangements with each of the Group VIEs and the respective shareholders of the Group VIEs, including (i) power of attorney agreements and equity interest pledge agreements, which provide us with effective control over the Group VIEs; (ii) exclusive business cooperation agreements, which allow us to receive substantially all of the economic benefits from the Group VIEs; and (iii) exclusive call option agreements, which provide us with exclusive options to purchase all or part of the equity interests in or all or part of the assets of or inject registered capital into the Group VIEs when and to the extent permitted by PRC law. As a result of these contractual arrangements, we are the primary beneficiary of the Group VIEs for accounting purposes. We have consolidated their financial results in the Group’s consolidated financial statements. However, we do not own any equity interest in the Group VIEs.

The contractual arrangements with the Group VIEs and the respective shareholders of the Group VIEs may not be as effective as direct ownership in providing us with control over the Group VIEs. If any of the Group VIEs or the respective shareholders of the Group VIEs fails to perform their obligations under the contractual arrangements, we may have to incur substantial costs and expend additional resources to enforce such arrangements. Furthermore, there are very few precedents and little formal guidance as to how contractual arrangements in the context of a variable interest entity should be interpreted or enforced under PRC law. If the PRC government deems that the contractual arrangements in relation to the Group VIEs do not comply with PRC regulatory restrictions on foreign investment in the relevant industries, or if these regulations or the interpretation of existing regulations change in the future, our ADSs may significantly decline in value or become worthless if we are unable to assert our contractual control rights over the assets of the Group VIEs. See “Item 3. Key Information—D. Risk Factors—Risks Related to Our Corporate Structure.”

Operations in China

The Group faces various legal and operational risks and uncertainties associated with being based in and having its operations primarily in China and the country’s complex and evolving laws and regulations. For example, the Group faces risks associated with regulatory approvals on offerings conducted overseas by and foreign investment in China-based issuers, the use of the Group VIEs, anti-monopoly regulatory actions, and oversight on cybersecurity and data privacy, which may impact the Group’s ability to conduct certain businesses, accept foreign investments, or list on a U.S. or other foreign exchange outside of China. In addition, the Chinese government may intervene or influence the Group’s operations at any time. These risks could result in a material adverse change in the Group’s operations and the value of our ADSs and Class A ordinary shares, significantly limit or completely hinder our ability

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to offer or continue to offer securities to investors, or cause the value of such securities to significantly decline or become worthless. See “Item 3. Key Information—D. Risks Factors—Risks Related to Doing Business in China.”

Furthermore, the Holding Foreign Companies Accountable Act, or the HFCA Act, may affect our ability to maintain our listing on the NYSE. Among other things, the HFCA Act states that if the SEC determines that we are an issuer that has filed audit reports issued by a registered public accounting firm that has not been subject to inspection for the PCAOB for three consecutive years beginning in 2021, the SEC shall prohibit our shares or ADSs from being traded on a national securities exchange or in the

over-the-counter

trading market in the United States. In the event of such determination by the SEC, the NYSE would delist our ADSs. As stated in its report dated December 16, 2021, the U.S. Public Company Accounting Oversight Board, or the PCAOB, has determined that it is unable to inspect or investigate completely registered public accounting firms headquartered in mainland China and Hong Kong. The PCAOB identified our auditor as one of the registered public accounting firms that the PCAOB is unable to inspect or investigate completely. See “Item 3. Key Information—D. Risks Factors—Risks Related to Doing Business in China—Our ADSs will be prohibited from trading in the United States under the Holding Foreign Companies Accountable Act, or the HFCA Act, in 2024 if the PCAOB is unable to inspect or fully investigate auditors located in China, or 2023 if proposed changes to the law are enacted. The delisting of our ADSs, or the threat of their being delisted, may materially and adversely affect the value of your investment.”

PRC Permissions and Approvals

The Group has received all material permissions that are, or may be, required for its operations in China, and no material permission has been denied from the Group by relevant authorities in China. See “Item 4. Information on the Company—B. Business Overview—Licenses and Permissions Requirements.” However, the Group is subject to risks relating to the regulatory environment in China. See “Item 3. Key Information—D. Risk Factors—Risks Related to Doing Business in China—There are uncertainties regarding the interpretation and enforcement of PRC laws, rules and regulations. In addition, rules and regulations in China can change quickly with little advance notice.”

Under the PRC laws, rules and regulations currently in effect, no prior permission or approval from PRC government authority is required for issuing our ADSs to foreign investors. However, there remain substantial uncertainties as to how the relevant PRC laws, rules and regulations will be interpreted or implemented, and we cannot assure you that the relevant PRC government authorities will reach the same conclusion. Furthermore, laws, rules and regulations in China may change frequently. We cannot rule out the possibility that relevant PRC governmental authorities may subsequently determine our initial public offering in the U.S. or any debt financing activities should be subject to any approval, filing or other regulatory procedures, and we cannot assure you that we can obtain the required approval or accomplish the required filing or other regulatory procedures in a timely manner, or at all. See “Item 3. Key Information—D. Risks Factors—Risks Related to Doing Business in China—Privacy concerns relating to the Group’s products and services and the use of user information could damage our reputation, deter current and potential users and customers from using the Group’s products,” “Item 3. Key Information—D. Risk Factors—Risks Related to Our Business and Industry—There are uncertainties regarding the interpretation and enforcement of PRC laws, rules and regulations. In addition, rules and regulations in China can change quickly with little advance notice” and “Item 3. Key Information—D. Risks Factors—Risks Related to Our Corporate Structure—Uncertainties exist with respect to the interpretation and implementation of the Foreign Investment Law and its implementing rules and how they may impact our business, financial condition and results of operations.”

Cash Transfers within Our Corporate Structure

Our subsidiaries and the Group VIEs conduct business transactions that include intercompany loans and other intercompany transactions related to operating activities, subject to satisfaction of applicable government registration and approval requirements. The cash flows occurred between our company, our subsidiaries and the Group VIEs are summarized below:

For the years ended December 31, 2019, 2020 and 2021, our company did not provide any capital contribution to our subsidiaries. For the years ended December 31, 2019, 2020 and 2021, the Group VIEs

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provided loans of RMB1,043 million, RMB1,543 million and RMB528 million (US$83 million), respectively, to our subsidiaries, and received repayments of RMB1,635 million, RMB1,051 million and RMB642 million (US$101 million), respectively. For the years ended December 31, 2019, 2020 and 2021, our subsidiaries provided loans of RMB914 million, RMB1,854 million and RMB410 million (US$64 million), respectively, to the Group VIEs, and received repayments of RMB213 million, RMB2,322 million and RMB489 million (US$77 million), respectively.

With respect to other intercompany transactions related to operating activities, our company received cash from our subsidiaries amounted to RMB571 million, RMB1,528 million and nil for the years ended December 31, 2019, 2020 and 2021, respectively, and paid cash to our subsidiaries amounted to RMB164 million, RMB553 million and RMB33 million (US$5 million) for the years ended December 31, 2019, 2020 and 2021, respectively. The Group VIEs received cash from our subsidiaries amounted to RMB664 million, RMB212 million and RMB308 million (US$48 million) for the years ended December 31, 2019, 2020 and 2021, respectively, and repaid cash to our subsidiaries amounted to RMB2,317 million, RMB335 million and RMB537 million (US$84 million) for the years ended December 31, 2019, 2020 and 2021, respectively. The Group VIEs received cash from our company amounted to nil, RMB 543 million and nil for the years ended December 31, 2019, 2020 and 2021, respectively, and repaid cash to our company amounted to nil, RMB365 million and RMB150 million (US$24 million) for the years ended December 31, 2019, 2020 and 2021, respectively.

We are subject to restrictions on currency exchange. In particular, the PRC government imposes controls on the convertibility of Renminbi into foreign currencies and, in certain cases, currency remittance out of the PRC. Since the Group receives substantially all of its revenues in Renminbi and cash flow will be denominated in Renminbi, any existing and future restrictions on currency exchange may limit the Group’s ability to utilize cash generated in Renminbi to fund the Group’s business activities outside of the PRC or pay dividends in foreign currencies to our shareholders, including holders of the ADSs, and may limit our ability to obtain foreign currency through debt or equity financing for our PRC subsidiaries and the affiliated consolidated entities. See “Item 3. Key Information—D. 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 restrict or prevent us from using the proceeds of our initial public offering to make loans to our PRC subsidiaries and Group VIEs, or to make additional capital contributions to our PRC subsidiaries.” In addition, there are certain limitations on the ability of our PRC subsidiaries and the Group VIEs to distribute earnings to our offshore holding companies and the U.S. investors. In particular, each of our PRC subsidiaries, the Group VIEs and their subsidiaries in the PRC are required to set aside at least 10% of its net income each year to fund certain statutory reserves until the cumulative amount of such reserves reaches 50% of its registered capital. These reserves, together with the registered capital, are not distributable as cash dividends. See “Item 3. Key Information—D. Risk Factors—Risks Related to Our Corporate Structure—We rely to a significant extent on dividends and other distributions on equity paid by our principal operating subsidiaries to fund offshore cash and financing requirements.”

If any of our subsidiaries incurs debt on its own behalf in the future, the instruments governing such debt may restrict its ability to pay dividends to us.

Since inception, we have not declared or paid any dividends on our shares. We do not have any present plan to declare or pay any dividends on our ordinary shares or ADSs in the foreseeable future. We intend to retain most, if not all, of our available funds and any future earnings to operate and expand our business. See “Item 8. Financial Information—A. Consolidated Statements and Other Financial Information—Dividend Policy.”

For certain Cayman Islands, PRC and United States federal income tax considerations of an investment in the ADSs and Class A ordinary shares, see “Item 10. Additional Information—E. Taxation.”

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A.	Selected Financial Data

The following selected consolidated statements of operations for the years ended December 31, 2019, 2020 and 2021 and selected consolidated balance sheets as of December 31, 2020 and 2021 have been derived from the Group’s audited consolidated financial statements included elsewhere in this annual report. The following selected consolidated statements of operations for the years ended December 31, 2017 and 2018 and selected consolidated balance sheets as of December 31, 2017, 2018 and 2019 have been derived from the Group’s audited consolidated financial statements not included in this annual report.

You should read the selected consolidated financial data in conjunction with the financial statements and the related notes included elsewhere in this annual report and “Item 5. Operating and Financial Review and Prospects.” The Group’s consolidated financial statements are prepared and presented in accordance with U.S. GAAP. The Group’s historical results do not necessarily indicate the Group’s results expected for any future periods.


	Year Ended December 31,
	2017			2018			2019			2020			2021
	RMB			RMB			RMB			RMB			RMB			US$
	(in thousands, except for share and per share data)
Condensed Consolidated Statement of Operations Data:
Revenues
Financing income		3,642,184			3,535,276			3,510,055			2,102,665			1,255,488			197,014
Sales commission fee		797,167			307,492			356,812			80,992			35,411			5,557
Sales income		26,083			2,174,789			431,946			610,793			100,668			15,797
Penalty fees		7,922			28,013			44,354			72,235			67,316			10,563
Guarantee income		—			—			—			826,198			3,935			617
Loan facilitation income and other related income		302,010			1,646,773			2,297,413			131,633			39,531			6,203
Transaction services fee and other related income		—			—			2,199,464			(136,542	)		151,694			23,804

Total revenues		4,775,366			7,692,343			8,840,044			3,687,974			1,654,043			259,555
Cost of revenues
Cost of goods sold		(23,895	)		(2,003,642	)		(366,015	)		(645,083	)		(78,533	)		(12,324	)
Cost of other revenues		(856,951	)		(731,786	)		(535,773	)		(217,271	)		(220,193	)		(34,553	)

Total cost of revenues		(880,846	)		(2,735,428	)		(901,788	)		(862,354	)		(298,726	)		(46,877	)
Operating expenses(1)
Sales and marketing		(431,749	)		(540,551	)		(280,616	)		(293,282	)		(127,376	)		(19,988	)
General and administrative		(183,674	)		(255,867	)		(286,059	)		(285,905	)		(443,276	)		(69,560	)
Research and development		(153,258	)		(199,560	)		(204,781	)		(170,691	)		(141,264	)		(22,167	)
Changes in guarantee liabilities and risk assurance liabilities		(150,152	)		(116,593	)		(1,143,427	)		87,894			201,602			31,636
Provision for receivables and other assets		(605,164	)		(1,178,723	)		(2,283,126	)		(1,641,362	)		151,817			23,823
Impairment loss from long-lived assets		—			—			—			—			(156,394	)		(24,542	)

Total operating expenses		(1,523,997	)		(2,291,294	)		(4,198,009	)		(2,303,346	)		(514,891	)		(80,798	)
Other operating income		50,703			23,748			108,508			343,324			82,273			12,912

Income from operations		2,421,226			2,689,369			3,848,755			865,598			922,699			144,792
Interest and investment income, net		24,887			47,060			24,292			708,251			129,456			20,314
Loss from equity method investments		(20,676	)		(11,319	)		(3,420	)		(370,039	)		(221,798	)		(34,805	)

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	Year Ended December 31,
	2017			2018			2019			2020			2021
	RMB			RMB			RMB			RMB			RMB			US$
	(in thousands, except for share and per share data)
Unrealized gain on derivative instruments		—			—			—			—			17,375			2,727
Foreign exchange gain/(loss), net		(7,177	)		(90,771	)		6,635			(107	)		(51	)		(8	)
Other income		2,108			15,231			24,583			26,358			5,213			818
Other expenses		(363	)		(522	)		(10,323	)		(9,263	)		(6,485	)		(1,018	)

Net income before income taxes		2,420,005			2,649,047			3,890,522			1,220,798			846,409			132,820
Income tax expenses		(255,546	)		(157,731	)		(626,234	)		(261,979	)		(260,482	)		(40,875	)

Net income		2,164,459			2,491,316			3,264,288			958,819			585,927			91,945
Less: net loss attributable to noncontrolling interests		—			—			—			—			(3,147	)		(494	)

Net Income attributable to Qudian Inc.’s shareholders		2,164,459			2,491,316			3,264,288			958,819			589,074			92,439

Earnings per share for Class A and Cass B ordinary shares
— Basic		17.13			7.82			11.72			3.78			2.32			0.36
Earnings per share for Class A and Class B ordinary shares
— Diluted		7.09			7.74			10.94			3.59			2.27			0.36
Earnings per ADS (1 Class A ordinary shares equals 1 ADSs)
— Basic		17.13			7.82			11.72			3.78			2.32			0.36
Earnings per ADS (1 Class A ordinary shares equals 1 ADSs)
— Diluted		7.09			7.74			10.94			3.59			2.27			0.36
Weighted average number of Class A and Class B ordinary shares outstanding
— Basic		126,390,196			318,685,836			278,531,382			253,658,448			253,438,807			253,438,807
Weighted average number of Class A and Class B ordinary shares outstanding
— Diluted		305,221,444			321,955,142			300,457,711			274,333,161			266,292,869			266,292,869
Other comprehensive (loss)/income:
Foreign currency translation adjustment		(77,947	)		33,089			31,893			(38,455	)		(7,577	)		(1,189	)

Total comprehensive income		2,086,512			2,524,405			3,296,181			920,364			578,350			90,756
Less: comprehensive loss attributable to noncontrolling interests		—			—			—			—			(3,147	)		(494	)
Total comprehensive income attributable to Qudian Inc.’s shareholders		2,086,512			2,524,405			3,296,181			920,364			581,497			91,250

(1)	Share-based compensation expenses are allocated in operating expenses as follows:

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	Year Ended December 31,
	2017		2018		2019		2020		2021
	RMB		RMB		RMB		RMB		RMB		US$
	(in thousands)
Sales and marketing		1,891		5,641		4,482		1,912		1,727		271
General and administrative		42,849		38,587		74,312		40,895		29,684		4,658
Research and development		19,316		13,753		8,505		2,827		3,934		617

Total share-based compensation expenses		64,056		57,981		87,299		45,634		35,345		5,546


	As of December 31,
	2017		2018		2019		2020		2021
	RMB		RMB		RMB		RMB		RMB		US$
	(in thousands)
Summary Consolidated Balance Sheets:
Cash and cash equivalents		6,832,306		2,501,188		2,860,938		1,537,558		2,065,495		324,121
Restricted cash and cash equivalent		2,252,646		339,827		1,257,649		135,404		177,925		27,920
Time deposits		—		—		231,132		—		—		—
Short-term amounts due from related parties (1)		551,215		2		—		—		—		—
Short-term investments		—		—		—		5,042,314		5,926,601		930,013
Short-term loan principal and financing service fee receivables, net		8,758,545		8,417,821		7,894,697		3,940,461		2,371,966		372,213
Short-term finance lease receivables, net		8,508		508,647		398,256		179,613		31,462		4,937
Short-term contract assets		—		903,436		2,741,914		92,813		27,965		4,388
Long-term loan principal and financing service fee receivables		—		665,653		424		—		—		—
Long-term finance lease receivables, net		17,900		649,243		239,697		28,771		399		63
Long-term contract assets		—		15,597		273,597		23,094		31		5
Total assets		19,380,416		16,253,375		18,361,604		13,398,032		14,091,125		2,211,205

Short-term borrowings and interest payables		7,979,415		3,860,441		1,049,570		—		—		—
Long-term borrowings and interest payables		510,024		413,400		—		102,415		145,312		22,803
Convertible senior notes		—		—		2,339,552		822,005		681,401		106,927

Total liabilities		9,840,049		5,432,762		6,437,552		1,488,188		1,567,586		245,988

Non-controlling interest		—		—		—		10,000		6,853		1,075

Total Qudian Inc. shareholders’ equity / (deficit)		9,540,367		10,820,613		11,924,052		11,899,844		12,516,686		1,964,141

Total shareholders’ equity / (deficit)		9,540,367		10,820,613		11,924,052		11,909,844		12,523,539		1,965,217

(1)	Includes RMB549.8 million deposited in the Group’s Alipay accounts as of December 31, 2017. Such amount is unrestricted as to withdrawal and use and readily available to the Group on demand.

Non-GAAP

Measure

Adjusted Net Income Attributable to Qudian Inc.’s Shareholders

We use adjusted net income attributable to Qudian Inc.’s shareholders, a

non-GAAP

financial measure, in evaluating the Group’s operating results and for financial and operational decision-making purposes. We believe

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that adjusted net income attributable to Qudian Inc.’s shareholders help identify underlying trends in the Group’s business by excluding the impact of (i) share-based compensation expenses, which are

non-cash

charges, and (ii) convertible senior notes buyback income, which is

non-cash

and

non-recurring.

We believe that such non-GAAP financial measure provides useful information about the Group’s operating results, enhance the overall understanding of the Group’s 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.


	For the year ended December 31,
	2017		2018		2019		2020		2021
	RMB		RMB		RMB		RMB		RMB		US$
	(in thousands)
Adjusted net income attributable to Qudian Inc.’s shareholders (1)		2,228,515		2,549,297		3,351,587		382,344		612,372		96,095

(1)	Defined as net income attributable to Qudian Inc.’s shareholders excluding share-based compensation expenses and convertible senior notes buyback income.

Adjusted net income attributable to Qudian Inc.’s shareholders is not defined under U.S. GAAP and are not presented in accordance with U.S. GAAP. This

non-GAAP

financial measure has limitations as analytical tools, and when assessing the Group’s operating performance, cash flows or the Group’s liquidity, investors should not consider them in isolation, or as a substitute for net income, cash flows provided by operating activities or other consolidated statements of operation and cash flow data prepared in accordance with U.S. GAAP.

The Group mitigates these limitations by reconciling the

non-GAAP

financial measure to the most comparable U.S. GAAP performance measure, all of which should be considered when evaluating the Group’s performance.

The following table reconciles the Group’s adjusted net income attributable to Qudian Inc.’s shareholders in the years presented to the most directly comparable financial measure calculated and presented in accordance with U.S. GAAP, which is net income attributable to Qudian Inc.’s shareholders:


	For the year ended December 31,
	2017		2018		2019		2020		2021
	RMB		RMB		RMB		RMB		RMB		US$
	(in thousands)
Net income attributable to Qudian Inc.’s shareholders		2,164,459		2,491,316		3,264,288		958,819		589,074		92,439
Add: share-based compensation expenses		64,056		57,981		87,299		45,634		35,345		5,546
Less: Convertible senior notes buyback income		—		—		—		622,109		12,047		1,890
Adjusted net income attributable to Qudian Inc.’s shareholders		2,228,515		2,549,297		3,351,587		382,344		612,372		96,095

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Financial Schedules Related to the Group VIEs

The tables set forth below the condensed consolidated schedule depicting the results of operations, the financial position and cash flows that disclose the financial information for Qudian Inc., or the Parent Company, the financial information for the subsidiaries of the Parent Company that are not the Group VIEs, the financial information for the Group VIEs, the eliminating adjustments between our Company and the Group VIEs and the consolidated results.

Condensed Consolidated Schedule of Results of Operation


	For the year ended December 31,
	2019												2020												2021
	Parent Company		Subsidiaries of Parent Company			Group VIEs		Elimination			Consolidated		Parent Company		Subsidiaries of Parent Company			Group VIEs		Elimination			Consolidated		Parent Company		Subsidiaries of Parent Company			Group VIEs		Elimination			Consolidated
	(RMB in thousands)												(RMB in thousands)												(RMB in thousands)
Revenues		—		2,809,433			8,049,577		(2,018,966	)		8,840,044		—		462,334			3,549,458		(323,818	)		3,687,974		—		551,534			1,600,712		(498,203	)		1,654,043
Income from subsidiaries and VIEs		3,374,438		—			—		(3,374,438	)		—		414,868		—			—		(414,868	)		—		639,520		—			—		(639,520	)		—
Net income/(loss)		3,264,288		(66,492	)		3,440,930		(3,374,438	)		3,264,288		958,819		(147,604	)		562,472		(414,868	)		958,819		589,074		(232,100	)		868,473		(639,520	)		585,927

Condensed Consolidated Schedule of Balance Sheets


	For the year ended December 31,
	2020											2021
	Parent Company		Subsidiaries of Parent Company		Group VIEs		Elimination			Consolidated		Parent Company		Subsidiaries of Parent Company		Group VIEs		Elimination			Consolidated
	(RMB in thousands)											(RMB in thousands)
Cash and cash equivalents		813,176		149,933		574,449		—			1,537,558		558,272		123,342		1,383,881		—			2,065,495
Restricted cash		—		128,879		6,525		—			135,404		—		158,332		19,593		—			177,925
Total current assets		2,557,157		2,354,790		11,044,967		(4,266,438	)		11,690,476		2,353,746		2,799,127		11,767,368		(4,702,152	)		12,218,089
Investments in subsidiaries		10,178,732		—		—		(10,178,732	)		—		10,850,691		—		—		(10,850,691	)		—
Total non-current assets		10,178,732		345,467		1,360,689		(10,177,332	)		1,707,556		10,850,691		105,027		1,744,115		(10,826,796	)		1,873,037
Total assets		12,735,889		2,700,257		12,405,656		(14,443,770	)		13,398,032		13,204,437		2,904,154		13,511,483		(15,528,948	)		14,091,126
Total current liabilities		14,041		3,211,596		1,541,885		(4,294,914	)		472,608		6,351		3,673,560		1,339,052		(4,525,446	)		493,517
Total non-current liabilities		822,005		881		184,761		7,933			1,015,580		681,401		—		592,668		(200,000	)		1,074,069
Total liabilities		836,046		3,212,477		1,726,646		(4,286,981	)		1,488,188		687,752		3,673,560		1,931,720		(4,725,446	)		1,567,586

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Condensed Consolidated Schedule of Cash Flows


	For the year ended December 31,
	2019															2020															2021
	Parent Company			Subsidiaries of Parent Company			Group VIEs			Elimination			Consolidated			Parent Company			Subsidiaries of Parent Company			Group VIEs			Elimination			Consolidated			Parent Company			Subsidiaries of Parent Company			Group VIEs			Elimination			Consolidated
	(RMB in thousands)															(RMB in thousands)															(RMB in thousands)
Cash flows generated from/(used in) operating activities		(5,822	)		2,671,753			4,362,960			(1,525,502	)		5,503,389			(223,271	)		(86,145	)		2,250,346			530,782			2,471,712			(11,537	)		1,003,060			747,408			(816,866	)		922,065
Cash flows (used in)/generated from investing activities		330,197			(785,183	)		(842,120	)		367,547			(929,559	)		1,497,131			(135,982	)		(2,252,530	)		(2,378,495	)		(3,269,876	)		(132,143	)		(927,961	)		645,957			167,567			(246,580	)
Cash flows generated from/(used in) financing activities		9,588			(1,684,664	)		(2,855,955	)		1,158,696			(3,372,335	)		(1,522,314	)		(734,396	)		(1,429,390	)		2,094,828			(1,591,272	)		(127,088	)		(108,221	)		(571,156	)		722,273			(84,192	)
Effect of exchange rate changes on cash, cash equivalents and restricted cash		100,138			(23,320	)		—			(741	)		76,077			84,221			106,134			571			(247,115	)		(56,189	)		15,864			35,984			291			(72,974	)		(20,835	)
Net increase/(decrease) in cash, cash equivalents and restricted cash		434,101			178,586			664,885			—			1,277,572			(164,233	)		(850,389	)		(1,431,003	)		—			(2,445,625	)		(254,904	)		2,862			822,500			—			570,458

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Exchange Rate Information

Substantially all of the Group’s operations are conducted in China and all of the Group’s revenues is denominated in Renminbi. This annual report contains translations of Renminbi amounts into U.S. dollars at specific rates solely for the convenience of the reader. Unless otherwise noted, all translations from Renminbi to U.S. dollars and from U.S. dollars to Renminbi in this annual report were made at a rate of RMB6.3726 to US$1.00, the exchange rate set forth in the H.10 statistical release of the Federal Reserve Board on December 30, 2021. We make no representation that the Renminbi or U.S. dollar amounts referred to in this annual report could have been or could be converted into U.S. dollars or Renminbi, as the case may be, at any particular rate or at all. The PRC government imposes control over its foreign currency reserves in part through direct regulation of the conversion of Renminbi into foreign exchange and through restrictions on foreign trade.

B.	Capitalization and Indebtedness

Not Applicable.

C.	Reasons for the Offer and Use of Proceeds

Not Applicable.

D.	Risk Factors

Summary of Risk Factors

Investing in our ADSs and Class A ordinary shares involves significant risks. You should carefully consider all of the information in this annual report before making an investment in our ADSs and Class A ordinary shares. Below please find a summary of the principal risks we face, organized under relevant headings.

Risks Related to Our Business and Industry

•

The Group has significantly downsized its credit business, and it may wind down the business in the future.

•

The Group has very limited experience in offering ready-to-cook meals, and the Group is likely to incur loss initially as a result of operating such business.

•

We intend to continue to explore new business opportunities, and such new businesses may not deliver the expected benefits.

•

Changes in food costs and availability could materially adversely affect the QD Food business.

•

Food safety and food-borne illness incidents or advertising or product mislabeling may materially adversely affect the QD Food business by exposing the Group to lawsuits, product recalls or regulatory enforcement actions, increasing the Group’s operating costs and reducing demand for its product offerings.

•

From time to time the Group may evaluate and potentially consummate strategic investments or acquisitions, which could require significant management attention, disrupt its business and materially and adversely affect its financial results.

•

The Group relies on its proprietary credit assessment model and risk management system in the determination of credit approval and credit limit assignment. If the Group’s proprietary credit assessment model and risk management system fail to perform effectively, such failure may materially and adversely impact the Group’s operating results.

•

If the Group is unable to effectively manage delinquency rates for transactions facilitated by it, its business and results of operations may be materially and adversely affected. Further, historical delinquency rates may not be indicative of future results.

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•

Increase in the delinquency rate of on-balance sheet transactions would increase the Group’s allowance for loan principal and financing service fee receivables and provision for loan principal and financing service fee receivables, which could have a material adverse effect on the Group’s business, results of operations and financial positions.

•

Increase in the amount of off-balance sheet transactions may lead to higher changes in guarantee liabilities and risk assurance liabilities and the Group’s business and results of operations may be materially and adversely affected.

Risks Related to Our Corporate Structure

•

If the PRC government deems that the contractual arrangements in relation to the Group VIEs do not comply with PRC regulatory restrictions on foreign investment in 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.

•

Our contractual arrangements with the Group VIEs may result in adverse tax consequences to the Group.

•

We rely on contractual arrangements with the Group VIEs and their shareholders to operate the our business, which may be less effective as direct ownership in providing operational control and otherwise have a material adverse effect as to our business.

•

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

•

Our corporate actions will be substantially controlled by our founder, chairman and chief executive officer, Mr. Min Luo, who will have the ability to control or exert significant influence over important corporate matters that require approval of shareholders, which may deprive you of an opportunity to receive a premium for your ADSs and materially reduce the value of your investment.

Risks Related to Doing Business in China

•

Changes in the political and economic policies of the PRC government may materially and adversely affect the Group’s business, financial condition and results of operations and may result in the Group’s inability to sustain its growth and expansion strategies.

•

There are uncertainties regarding the interpretation and enforcement of PRC laws, rules and regulations. In addition, rules and regulations in China can change quickly with little advance notice.

•

The audit report included in this annual report is prepared by an auditor who is not inspected by the U.S. Public Company Accounting Oversight Board and, as such, our investors are deprived of the benefits of such inspection.

•

Our ADSs will be prohibited from trading in the United States under the Holding Foreign Companies Accountable Act, or the HFCA Act, in 2024 if the PCAOB is unable to inspect or fully investigate auditors located in China, or 2023 if proposed changes to the law are enacted. The delisting of our ADSs, or the threat of their being delisted, may materially and adversely affect the value of your investment.

•

The opinions on supervision of illegal securities activities issued by the General Office of the Central Committee of the Communist Party of China and the General Office of the State Council may subject us to additional compliance requirements in the future.

•

The China Securities Regulatory Commission, or the CSRC, has released for public consultation the draft rules to exert more oversight and control over offerings that are conducted overseas and foreign investment in China-based issuers, which could significantly limit or completely hinder our ability to offer our securities to overseas investors and could cause the value of our ADSs to significantly decline.

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•

PRC regulations relating to investments in offshore companies by PRC residents may subject our

PRC-resident

beneficial owners or our PRC subsidiaries to liability or penalties, limit our ability to inject capital into our PRC subsidiaries or limit our PRC subsidiaries’ ability to increase their registered capital or distribute profits.

•

Any failure to comply with PRC regulations regarding our employee share incentive plans may subject the PRC plan participants or us to fines and other legal or administrative sanctions.

•

We rely to a significant extent on dividends and other distributions on equity paid by our principal operating subsidiaries to fund offshore cash and financing requirements.

Risks Related to Our Ordinary Shares and ADSs

•

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

•

If securities or industry analysts do not publish research or publish inaccurate or unfavorable research about our business, the market price for our ADSs and trading volume could decline.

•

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

Risks Related to Our Business and Industry

The Group has significantly downsized its credit business, and it may wind down the business in the future.

The Group historically derived substantially all of its revenue from its credit business. In light of the regulatory uncertainties in China’s online consumer finance market and to maintain its asset quality, the Group has implemented stringent credit standards for its credit business, which has led to a significant decrease in the amount of transactions facilitated in the first quarter of 2022. As a result, the Group expects its revenue to decline sequentially in the first quarter of 2022, compared with the fourth quarter of 2021. In addition, the Group expects further decreases in the total amount of transactions and related revenue in the second quarter of 2022. The Group will continue to evaluate conditions in the online consumer finance market and relevant regulatory developments. Based on this ongoing assessment, the Group may wind down its credit business, which could result in a further decrease to the Group’s revenue.

The Group has very limited experience in offering

ready-to-cook

meals, and the Group is likely to incur loss initially as a result of operating such business.

The Group launched its

ready-to-cook

meal business, or “QD Food,” in March 2022. The Group has very limited experience in most aspects of QD Food’s business operations, such as product design, supply chain management, fulfillment and user acquisition. QD Food’s prospects may be affected by a number of possible reasons that are beyond our control, including decreasing consumer spending, increasing competition, the emergence of alternative business models, decreasing demand for

ready-to-cook

meals, effects of the

COVID-19

pandemic, as well as changes in rules, regulations, government policies or general economic conditions. There can be no assurance that the Group will be able to successfully grow QD Food.

In particular, the

ramp-up

of QD Food may be adversely affected by the

COVID-19

pandemic. Since March 2022, major outbreaks of the Omicron variant of

COVID-19

have occurred in many parts of China. These outbreaks have resulted in widespread lockdowns, highway closures and other restrictive measures across China, which have caused severe hardships to countless consumers and businesses in China. The Group is unable to accurately predict the full impact of the Omicron outbreaks due to numerous uncertainties, including the geographic scope of the outbreaks, the duration of the outbreaks, as well as additional restrictive measures that may be taken by governmental authorities.

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In the near term, the Group expects to offer discounts and incur significant marketing expenses to expand QD Food’s user base. As a result, the Group is likely to incur losses initially as a result of this new venture. To support the growth of QD Food, the Group may also make significant capital expenditures to establish food preparation and fulfillment facilities. The Group’s ability to achieve profitability depends on its ability to enhance brand recognition, expand user base, maintain competitive pricing, and increase operational efficiency, which may be affected by numerous factors beyond our control. If the Group is unable to generate adequate revenue growth and manage its costs and expenses, the Group may not be able to achieve profitability or positive cash flow on a consistent basis, which may impact its business growth and adversely affect its financial condition and results of operations.

We intend to continue to explore new business opportunities, and such new businesses may not deliver the expected benefits.

Besides QD Food, the Group has been exploring other innovative consumer products and services to satisfy the fundamental and daily needs of Chinese consumers. If the Group experiences initial success with a new business, the Group may decide to invest significant amounts of capital to grow the business. We cannot assure you that the Group’s new business initiatives will be successful. For example, the Group is in the process of winding down its budget auto financing business and the Wanlimu

e-commerce

platform. The Group is also in the process of significantly downsizing its Wanlimu Kids Clubs business. The Group may make significant capital expenditures to develop new businesses, and our management’s attention may be diverted. The Group may also incur significant cost to comply with the laws and regulations that apply to such new businesses. Any failure of the Group’s efforts to pursue new business opportunities could have a material adverse effect on the Group’s business, prospects, financial condition and results of operations.

Changes in food costs and availability could materially adversely affect the QD Food business.

The success of the QD Food business depends in part on the Group’s ability to anticipate and react to changes in food and supply costs and availability. The QD Food business is susceptible to increases in food costs as a result of factors beyond the Group’s control, such as general economic conditions, inflation, market changes, increased competition, seasonal fluctuations, shortages or interruptions, weather conditions, global demand, food safety concerns, public health crises, such as pandemics and epidemics, generalized infectious diseases, changes in law or policy, declines in fertile or arable lands, product recalls and government regulations. For example, any prolonged negative impact of the

COVID-19

pandemic or inflationary periods on food and supply costs and availability could materially and adversely impact the QD Food business. In addition, deflation in food prices could reduce the attractiveness of the Group’s product offerings relative to competing products and thus impede the Group’s ability to maintain or increase overall sales, while food inflation, particularly periods of rapid inflation, could reduce the Group’s operating margins as there may be a lag between the time of the price increase and the time at which the Group is able to increase the price of its product offerings. The Group generally does not have long term supply contracts or guaranteed purchase commitments with its suppliers, and it does not hedge its commodity risks. As a result, we may not be able to anticipate, react to or mitigate against cost fluctuations which could materially adversely affect the QD Food business.

Any increase in the prices of the ingredients most critical to the Group’s recipes, or scarcity of such ingredients, such as vegetables, poultry, beef and pork, would adversely affect the Group’s operating results. Alternatively, in the event of cost increases or decrease of availability with respect to one or more of the Group’s key ingredients, the Group may choose to temporarily suspend including such ingredients in its recipes, rather than paying the increased cost for the ingredients. Any such changes to the Group’s available recipes could materially adversely affect its business, financial condition and operating results.

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Selling food for human consumption involves inherent legal and other risks, and there is increasing governmental scrutiny of and public awareness regarding food safety. Unexpected side effects, illness, injury or death related to allergens, food-borne illnesses or other food safety incidents (including food tampering or contamination) caused by products the Group sells, or involving suppliers that supply the Group with ingredients, condiments and other products, could result in the discontinuance of sales of these products or the Group’s relationships with such suppliers, or otherwise result in increased operating costs or harm to the Group’s reputation. Shipment of adulterated products, even if inadvertent, can result in criminal or civil liability. Such incidents could also expose the Group to government investigations and/or product liability or other lawsuits brought by consumers, as well as negative publicity. Any administrative penalties, judgment and/or negative publicity against the Group could have a material and adverse effect on the Group’s results of operations and financial condition.

The occurrence of food-borne illnesses or other food safety incidents could also adversely affect the price and availability of affected ingredients, resulting in higher costs, disruptions in supply and a reduction in the Group’s sales. Furthermore, any instances of food contamination, whether or not caused by the Group’s products, could subject the Group or its suppliers to a food recall. Food recalls could result in significant losses due to their costs, the destruction of product inventory, lost net revenues due to customer credits and refunds, lost future sales due to the unavailability of the product for a period of time and potential loss of existing customers and a potential negative impact on the Group’s ability to retain existing customers and attract new customers due to negative consumer experiences or as a result of an adverse impact on the Group’s brand and reputation.

In addition, food companies have been subject to targeted, large-scale tampering as well as to opportunistic, individual product tampering, and the Group could be a target for product tampering. Forms of tampering could include the introduction of foreign material, chemical contaminants and pathological organisms into consumer products as well as product substitution. If the Group does not adequately address the possibility, or any actual instance, of product tampering, it could face possible recall of its products and the imposition of civil or criminal sanctions, which could materially adversely affect its business, financial condition and operating results.

We may evaluate and consider strategic investments, combinations, acquisitions or alliances to better serve customers and enhance our competitive position. These transactions could be material to the Group’s financial condition and results of operations if consummated. There can be no assurance that these transactions will offer the expected benefits, and we may suffer significant investment losses as a result of such transactions.

We purchased 10,204,082 Class A ordinary shares issued by Secoo Holding Limited (NASDAQ: SECO), or Secoo, for an aggregate consideration of US$100 million in June 2020. Secoo is a large online integrated upscale products and services platform. As of March 31, 2022, we held approximately 28.9% of Secoo’s issued and outstanding shares, and we are its largest shareholder. The Group’s loss from equity method investments amounted to RMB370.0 million and RMB221.8 million (US$34.8 million) in 2020 and 2021, respectively, which was primarily related to its investment in Secoo. The Group may continue to recognize loss from such investment in the future, which could have a material and adverse effect on the Group’s financial condition and results of operations.

If we are able to identify an appropriate business opportunity, we may not be able to successfully consummate the transaction and, even if we do consummate such a transaction, we may be unable to obtain the

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benefits or avoid the difficulties and risks of such transaction, which may result in investment losses. Strategic investments or acquisitions will involve risks commonly encountered in business relationships, including:

•

difficulties in assimilating and integrating the operations, personnel, systems, data, technologies, products and services of the acquired business;

•

inability of the acquired technologies, products or businesses to achieve expected levels of revenue, profitability, productivity or other benefits including the failure to successfully further develop the acquired technology;

•

difficulties in retaining, training, motivating and integrating key personnel;

•

diversion of management’s time and resources from the Group’s normal daily operations and potential disruptions to the Group’s ongoing businesses;

•

difficulties in maintaining uniform standards, controls, procedures and policies within the combined organizations;

•

difficulties in retaining relationships with users, business partners, employees and other partners of the acquired business;

•

risks of entering markets in which the Group has limited or no prior experience;

•

regulatory risks, including remaining in good standing with existing regulatory bodies or receiving any necessary

pre-closing

or post-closing approvals, as well as being subject to new regulators with oversight over an acquired business;

•

assumption of contractual obligations that contain terms that are not beneficial to the Group, require the Group to license or waive intellectual property rights or increase the Group’s risk for liability;

•

liability for activities of the acquired business before the acquisition, including intellectual property infringement claims, violations of laws, commercial disputes, tax liabilities and other known and unknown liabilities; and

•

unexpected costs and unknown risks and liabilities associated with strategic investments or acquisitions.

We may not make any investments or acquisitions, or any future investments or acquisitions may not be successful, may not benefit the Group’s business strategy, may not generate sufficient revenues to offset the associated acquisition costs or may not otherwise result in the intended benefits.

From time to time we may also make financial investments, such as investments in equity securities of other companies, and there can be no assurance that we will be able to realize profits from such investments. We may also engage in corporate restructuring in order to facilitate capital raising and/or incubate new businesses. However, we may fail to obtain such intended benefits.

Credit limits for the Group’s borrowers are determined and approved based on risk assessment conducted by the Group’s proprietary credit assessment model and risk management system. Such model and system use big data-enabled technologies, such as artificial intelligence and machine learning, that take into account transactions that the Group has processed. While the Group relies on big data analytics to refine its model and system, there can be no assurance that its application of such technology will continue to deliver the expected benefits. As the Group has a limited operating history, it may not have accumulated sufficient credit analysis and data to optimize

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its model and system. Furthermore, the Group’s existing data and credit assessment model and risk management system might not be effective. If the Group’s system contains programming or other errors, if the Group’s model and system are ineffective or if the credit analysis and data the Group obtained are incorrect or outdated, the Group’s credit assessment abilities could be negatively affected, resulting in incorrect approvals or denials of credit applications or mispriced credit products. If the Group is unable to effectively and accurately assess the credit profiles of borrowers or price credit products appropriately, it may either be unable to offer attractive financing service fee and credit limits to borrowers, or be unable to maintain low delinquency rates of transactions facilitated by the Group. The Group’s risk and credit assessment may not be able to provide more predictive assessments of future borrower behavior and result in better evaluation of its borrower base when compared to its competitors. If the Group’s proprietary credit assessment model and risk management system fail to perform effectively, its business and results of operations may be materially and adversely affected.

The Group may not be able to maintain low delinquency rates for transactions facilitated by it, or such delinquency rates may be significantly affected by economic downturns or general economic conditions beyond the Group’s control and beyond the control of individual borrowers. For example, certain regulatory developments have reduced the availability of funding for consumer credit and driven up delinquency rates across the online consumer finance industry, including the Group’s loan portfolio. To better protect the Group and its institutional funding partners from these industry headwinds, the Group implemented significantly stricter standards for credit approvals. However, there can be no assurance that the Group will be able to effectively manage delinquency rates with such measures.

The Group experienced decreases in M1+ delinquency rate by vintage over time. M1+ delinquency rate by vintage for transactions in 2020 was 7.9% through March 31, 2021. M1+ delinquency rate by vintage for transactions in 2021 was less than 3.0% through March 31, 2022. Such decrease was primarily due to the Group’s deployment of a conservative and prudent strategy in its cash credit business. Major outbreaks of the Omicron variant of

COVID-19

have occurred in many parts of China since March 2022. These outbreaks have caused severe hardships to countless consumers in China and adversely affected their ability to repay their borrowings. As a result, the Group is likely to experience increases in delinquency rates in the near term.

Increase in the delinquency rate of

on-balance

sheet transactions would increase the Group’s allowance for loan principal and financing service fee receivables and provision for loan principal and financing service fee receivables, which could have a material adverse effect on the Group’s business, results of operations and financial positions.

The Group reserves any estimated loss for

on-balance

sheet transactions due to the borrowers’ default as allowance for loan principal and financing service fee receivables. When evaluating the loan principal receivables on a pooled basis, the Group applies a roll rate model based on historical loss rates, while also taking into consideration macroeconomic conditions in order to calculate the pooled allowance. Subsequent to January 1, 2020, the Group adjusts the allowance that is determined by the roll rate-based model for various qualitative factors that reflect current conditions and reasonable and supportable forecasts of future economic conditions, in accordance with Accounting Standards Update (“ASU”)

No. 2016-13,

Financial instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASC 326”). Accordingly, any increase in the delinquency rates of

on-balance

sheet transactions would increase the Group’s allowance for loan principal and financing service fee receivables, and the Group recognizes any increase in allowance for loan principal and financing service fee receivables as provision for loan principal and financing service fee receivables for the relevant period. Such increase could have a material adverse effect on the Group’s business, results of operations and financial positions. Furthermore, if the actual delinquency rates for

on-balance

sheet transactions were higher than predicted, the Group’s cash flow would be reduced and the Group’s allowance for

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loan principal and financing service fee receivables may not be able to cover the actual losses as expected, which could have a material adverse effect on the Group’s working capital, financial condition, results of operations and business operations. In 2019, 2020 and 2021,

on-balance

sheet transactions represented 37.4%, 99.5% and 99.1% of the total amount of transactions under the Group’s loan book business. In 2019, 2020 and 2021, provision for loan principal and financing service fee receivables and other assets was RMB2,283.1 million, RMB1,641.4 million and a reversal of RMB151.8 million (US$23.8 million), respectively; and the Group’s provision ratio during the same periods was 9.5%, 7.8% and a reversal of 1.3%, as a result of the decrease was primarily due to the decrease in

past-due

on-balance

sheet outstanding principal receivables. The Group’s

charge-off

ratio, which is defined as the amount of loan principal receivables the Group charged off during a period, divided by the total amount of

on-balance

sheet transactions during such period, in 2019,2020 and 2021 was 5.3%,11.6% and 2.6%, respectively.

As of December 31, 2019, 2020 and 2021, the Group’s M1+ delinquency coverage ratio, defined as the balance of allowance for loan principal and financing service fee receivables at the end of a period, divided by the total balance of outstanding principal for

on-balance

sheet transactions for which any installment payment was more than 30 calendar days past due as of the end of such period, was 1.5x, 2.4x and 1.8x, respectively. With respect to

on-balance

sheet transactions, principal for which any installment payment was more than 30 calendar days past due accounted for 11.1%, 7.5% and 5.9% of total

on-balance

sheet outstanding principal as of December 31, 2019, 2020 and 2021, respectively. As of December 31, 2019, 2020 and 2021, the Group’s loan principal and financing service fee receivables for

on-balance

sheet transactions for which any installment payment was more than 90 calendar days past due were approximately RMB630.0 million, RMB254.9 million and RMB91.0 million (US$14.3 million), respectively. As of December 31, 2019, 2020 and 2021, the Group’s allowance for loan principal and financing service fee receivables were approximately RMB1,528.9 million, RMB849.2 million and RMB267.0 million (US$41.9 million), respectively.

The Group does not accrue financing income on principal that is considered impaired or on credit drawdowns for which any installment payment is more than 90 calendar days past due. Financing income previously accrued but subsequently placed on nonaccrual status will be netted from the Group’s financing income for the current period. Therefore, an increase in delinquency rates of

on-balance

sheet transactions will lead to an increase in such adjustments of financing income.

Increase in the amount of

off-balance

sheet transactions may lead to higher changes in guarantee liabilities and risk assurance liabilities and the Group’s business and results of operations may be materially and adversely affected.

Under the Group’s loan book business, it has entered into

off-balance

sheet funding arrangements with certain institutional funding partners, which directly fund credit drawdowns by borrowers for credit products and receive guarantees from the Group. The Group also funded budget auto financing products under

off-balance

sheet arrangements historically. Borrowers directly repay principal and financing service fees to the relevant institutional funding partners, who will in turn deduct the principal and fees due to them from the repayments and remit the remainder to the Group as its loan facilitation fees. Revenues from loan facilitation services are recognized when the Group matches borrowers with funding partners and the funds are transferred to the borrowers. At the inception of each

off-balance

sheet transaction, the Group records the fair value of (i) guarantee liabilities, which represent the present value of the Group’s expected payout based on the estimated delinquency rate and the applicable discount rate for time value; or (ii) risk assurance liabilities, which considers the premium required by a third-party market participant to issue the same risk assurance in a standalone transaction, as applicable. The contingent loss rising from risk assurance liabilities is recognized when borrower default is probable, and the amount of loss is estimable. Subsequent to January 1, 2020, the contingent liability relating to the expected credit losses arising from the contingent aspect of the risk assurance liability is initially measured under current expected credit loss model, or CECL model, in accordance with ASC 326.

Accordingly, an increase in the expected delinquency rates of

off-balance

sheet transactions would result in an increase in the amount of guarantee liabilities and risk assurance liabilities, which are recognized as changes

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in guarantee liabilities and risk assurance liabilities. In 2019, 2020 and 2021,

off-balance

sheet transactions represented 62.6%, 0.5% and 0.9% of the total amount of transactions under the Group’s loan book business, respectively, and the Group recognized RMB1,143.4 million, a reverse of RMB87.9 million and a reverse of RMB201.6 million (US$31.6 million) of changes in guarantee liabilities and risk assurance liabilities during such periods, respectively. Furthermore, if the actual delinquency rates for

off-balance

sheet transactions were higher than expected, the Group’s guarantee liabilities and risk assurance liabilities may not be able to cover the actual losses as expected, which could have a material adverse impact on the Group’s working capital, financial condition, results of operations and business operations. The Group’s guarantee liabilities and risk assurance liabilities were RMB1,517.8 million and RMB31.4 million as of December 31, 2019 and 2020, respectively, and the Group paid the relevant institutional funding partners RMB2,084.1 million and RMB1,684.4 million in 2019 and 2020, respectively, as a result of borrowers’ default for

off-balance

sheet transactions. The Group’s guarantee liabilities and risk assurance liabilities were RMB0.9 million (US$0.1 million) as of December 31, 2021. Although the relevant amount under the Group’s

off-balance

sheet transactions decreased significantly as it primarily funded its credit products with its own capital in 2021, we cannot assure you that

off-balance

sheet transactions will not increase in the future.

The Group’s business depends on its ability to collect payment on and service the transactions the Group facilitates under the loan book business.

The Group has implemented payment and collection policies and practices designed to optimize regulatory compliant repayment, while also providing superior borrower experience. The Group’s collection process is divided into distinct stages based on the severity of delinquency, which dictates the level of collection steps taken. For example, automatic reminders through text, voice and instant messages are sent to a delinquent borrower as soon as the collections process commences. The Group’s collection team will also make phone calls to borrowers following the first missed payment and periodically thereafter. For amounts more than 90 calendar days past due, the Group may continue to contact the relevant borrowers by phone. During 2019, 2020 and 2021, the Group recovered RMB197.3 million, RMB310.7 million and RMB244.5 million (US$38.4 million), respectively, of principal and financing service fees of

on-balance

sheet transactions for which any installment payment is more than 90 calendar days past due.

Despite the Group’s servicing and collection efforts, we cannot assure you that the Group will be able to collect payments on the transactions it facilitates under the loan book business as expected. The Group’s failure to collect payment on the transactions will have a material adverse effect on its business operations and financial positions. In addition, we aim to control bad debts by utilizing and enhancing the Group’s credit assessment system rather than relying on collection efforts to maintain healthy credit performances. As such, the Group’s collection team may not possess adequate resources and manpower to collect payment on and service the transactions the Group facilitated. If the Group fails to adequately collect amounts owed, then payments of principals and financing service fees to the Group may be delayed or reduced and the Group’s results of operations will be adversely affected. If the amount of transactions facilitated by the Group under the loan book business increases in the future, it may devote additional resources into its collection efforts. However, there can be no assurance that the Group would be able to utilize such additional resources in a cost-efficient manner.

Moreover, the current regulatory regime for debt collection in the PRC remains unclear. Although we aim to ensure the Group’s collection efforts comply with the relevant laws and regulations in the PRC and the Group has established strict internal policies that its collections personnel do not engage in aggressive practices, we cannot assure you that such personnel will not engage in any misconduct as part of their collection efforts. Any such misconduct by the Group’s collection personnel or the perception that the Group’s collection practices are considered to be aggressive and not compliant with the relevant laws and regulations in the PRC may result in harm to the Group’s reputation and business, which could further reduce the Group’s ability to collect payments from borrowers, lead to a decrease in the willingness of prospective borrowers to apply for and utilize the Group’s credit or fines and penalties imposed by the relevant regulatory authorities, any of which may have a material adverse effect on the Group’s results of operations.

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The Group’s business may be adversely affected if it is unable to secure funding on terms acceptable to it, or at all.

The Group collaborates with institutional funding partners to fund certain credit drawdowns it facilitates. The Group’s current institutional funding partners include banks, trust companies, consumer finance companies, asset management companies and other institutions. For credit drawdowns currently funded by institutional funding partners, such credit drawdowns are typically either facilitated to borrowers directly from institutional funding partners or indirectly from institutional funding partners through trusts the Group established in collaboration with trust companies. Currently, the Group primarily fund its loan book business with its own capital. The total amount of transactions facilitated by the Group under the loan book business and the transaction services business in 2021 was RMB15,117.3 million (US$2,372.2 million), and RMB480.8 million (US$75.4 million) of such transactions was funded by the Group’s institutional funding partners. The Group’s funding arrangements has changed significantly since inception. The Group’s funding arrangements may continue to evolve. There can be no assurance that the Group’s cooperation with new institutional funding partners will meet its expectations or the expectations of borrowers.

The availability of funding from institutional funding partners depends on many factors, some of which are out of our control. Some of the Group’s institutional funding partners have limited operating history, and there can be no assurance that the Group will be able to rely on their funding in the future. The Group’s ability to cooperate with new institutional funding partners may be subject to regulatory or other limitations. In addition, regardless of the Group’s risk management efforts, credit facilitated by the Group may nevertheless be considered riskier and have a higher delinquency rate than loans provided by traditional financial institutions. In the event there is a sudden or unexpected shortage of funds from the Group’s institutional funding partners or if the Group’s institutional funding partners have determined not to continue to collaborate with the Group, the Group may not be able to maintain necessary levels of funding without incurring high costs of capital, or at all. Furthermore, the Group had historically relied on one institutional funding partner to fund a substantial portion of credit facilitated by the Group. While the Group has since managed to diversify its funding sources, there can be no assurance that the Group’s funding sources will remain or become increasingly diversified in the future. If the Group becomes dependent on a small number of institutional funding partners and any such institutional funding partner determines not to collaborate with the Group or limits the funding that is available, the Group’s business, financial condition, results of operations and cash flow may be materially and adversely affected. Since inception, the Group has from time to time experienced, and may continue to experience, constraints as to the availability of funds from the Group’s institutional funding partners. Such constraints have affected and may continue to affect user experience, including by limiting the Group’s ability to approve new credit applications or resulting in the Group having to curtail the amount that can be drawn down by borrowers under their existing credit limits. Any prolonged constraint as to the availability of funds from the Group’s institutional funding partners may also harm our reputation or result in negative perception of the credit products the Group offers, thereby decreasing the willingness of prospective or existing borrowers to seek credit products from the Group or to draw down on their existing credit. In addition, the Group may not be able to obtain timely payment of the relevant fees from the institutional funding partners and the Group’s relationship with them may suffer as a result.

The Group may be deemed as a lender or a provider of financial services by the PRC regulatory authorities.

The Group commenced its business in early 2014. The Group has established trusts in collaboration with trust companies starting in December 2016. Such trusts are funded by funds from institutional funding partners and the Group’s own capital. Since the trust companies administering such trusts have been licensed by financial regulatory authorities to lend, credit drawdowns funded under this arrangement are not private lending transactions within the meaning of the Provisions of the Supreme People’s Court the Provisions on Several Issues Concerning the Application of Law in the Trial of Private Lending Cases, or the Private Lending Judicial Interpretation, issued by the Supreme People’s Court of the PRC in 2015. The second revised version of the Private Lending Judicial Interpretation, or the Second Revised Private Lending Judicial Interpretation, has been issued in December 2020. In

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2021, the amount of transactions facilitated through trusts was RMB14,459.3 million (US$2,269.0 million), representing approximately 97.9% of the total amount of transactions facilitated under the loan book business during such period. The Group currently funds a majority of credit drawdowns initially disbursed by the Group through banks or trusts. The Group historically funded credit drawdowns through online small credit companies established by the Group.

The Group disbursed funds to borrowers without utilizing online small credit companies or trusts in the past, which may be considered to involve the use of the Group’s own capital in lending, as a result of which the Group may be deemed as a lender or a provider of financial services by the PRC regulatory authorities, and the Group may become subject to supervision and restrictions on lending under applicable laws and regulations. For example, the Measures for the Banning of Illegal Financial Institutions and Illegal Financial Business Operations, promulgated by the PRC State Council, or the State Council, in July 1998 and revised in 2011, prohibits financial business activity, including fund raising and facilitating loans to the public, to be conducted without the approval of the People’s Bank of China, or the PBOC. The General Rules on Loans issued by the PBOC in June 1996 provides that a financial institution shall conduct the business with the approval of the PBOC. Otherwise, it will be subject to a fine from one time to five times of the illegal revenues, and the PBOC has the authority to order such business to suspend its operations. Such existing PRC laws and regulations with respect to the supervision and restrictions on lending to the public were primarily aimed to regulate traditional banking and financial institutions at the time of their respective promulgations, and the regulatory environment in the PRC has evolved since then. With the rapid development and evolving nature of the consumer finance industry and other new forms of Internet finance business in China, there are uncertainties as to the interpretation of the laws and regulations mentioned above as well as whether such laws and regulations are applicable to the Group’s business. In the event that the Group is considered by the relevant authorities to be subject to such PRC laws and regulations, and the Group’s past business operations are deemed to be in violation of such laws and regulations, the Group may be exposed to certain administrative penalties, including the confiscation of illegal revenue and fines up to five times the amount of the illegal revenue as mentioned above. Furthermore, the Group’s financing service fees received from borrowers might be fully or partially deemed as interest, such fees may be subject to the restrictions on interest rate as specified in applicable rules on private lending. For example, under the Second Revised Private Lending Judicial Interpretation issued by the Supreme People’s Court in December 2020, such total annual percentage rates (inclusive of any default rate, default penalty and any other fee) exceeding four times that of China’s benchmark

one-year

loan prime rate, or LPR, as published on the 20th of each month will not be legally protected. Based on the LPR of 3.7% as published on April 20, 2022, such cap would be 14.8%. See “Item 4. Information on the Company—B. Business Overview—Regulations—Regulations related to Loans and Intermediation.”

In August 2015, the Legislative Affairs Office of the State Counsel of the PRC published a consultation paper seeking public comments on the Regulations on

Non-Deposit-Taking

Lending Organizations (Draft for Comment), or the Draft Regulations on

Non-Deposit-Taking

Lending, with a Note on the Draft Regulations on

Non-Deposit-Taking

Lending published by the PBOC, or the PBOC Note on the Draft Regulations on

Non-Deposit-Taking

Lending. According to the PBOC Note on the Draft Regulations on

Non-Deposit-Taking

Lending, rather than generally categorizing activities like lending to public without the approval of PBOC as illegal, PBOC recognizes that, with the continuous development of the financial industry, the credit market in the PRC has developed into multiple segments, in addition to the traditional lending by financial institutions, and

non-deposit-taking

lending organizations of various types have formed an important part of, and enriched the tiers of, the credit market of the PRC. The PBOC also states that the Draft Regulations on

Non-Deposit-Taking

Lending seeks to regulate small credit companies and other

non-deposit-taking

lending organizations that are not covered by the current regulatory framework in the PRC, which we believe may include companies such as the Group.

It is uncertain when or whether the Draft Regulations on

Non-Deposit

Lending-Taking will be officially promulgated and take effect and whether the promulgated version would be substantially revised. Therefore, substantial uncertainty remains regarding the final framework, scope and applicability of the Draft Regulations

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Non-Deposit

Lending-Taking to us. We cannot assure you that the Group’s past or existing practices would not be deemed to violate any existing or future laws, regulations and governmental policies. If the Draft Regulations on

Non-Deposit

Lending-Taking is enacted as proposed, the Group may have to obtain the requisite business permit and operate in accordance with relevant requirements provided therein.

The laws and regulations governing the online consumer finance industry in the PRC are still at a nascent stage and subject to further change and interpretation. If the Group’s business practices or the business practices of the Group’s institutional funding partners are deemed to violate any PRC laws or regulations, the Group’s business, financial condition, results of operations and prospects would be materially and adversely affected.

The PRC government has not adopted a clear regulatory framework governing the new and rapidly-evolving online consumer finance industry in which the Group operates, and the Group’s business may be subject to a variety of laws and regulations in the PRC that involve financial services, including consumer finance, small credit, and private lending. The application and interpretation of these laws and regulations are ambiguous, particularly in the new and rapidly-evolving online consumer finance industry in which the Group operates, and may be interpreted and applied inconsistently between the different government authorities. As of December 31, 2021, the Group had not been subject to any material fines or other penalties under any PRC laws or regulations as to the Group’s business operations. However, if the PRC government adopts a stringent regulatory framework for the online consumer finance industry in the future, and subject market participants such as the Group to specific requirements (including without limitation, capital requirements, reserve requirements and licensing requirements), the Group’s business, financial condition and prospects would be materially and adversely affected. The existing and future rules, laws and regulations can be costly to comply with and if the Group’s practice is deemed to violate any existing or future rules, laws and regulations, the Group may face injunctions, including orders to cease illegal activities, and may be exposed to other penalties as determined by the relevant government authorities as well.

In July 2015, the Guidelines on Promoting the Healthy Development of Internet Finance, or the Internet Finance Guidelines, were jointly released by ten PRC regulatory agencies. The Internet Finance Guidelines set out the regulatory framework and some basic principles on regulating the online consumer finance business in the PRC. The Internet Finance Guidelines specify that the China Banking Regulatory Commission, or the CBRC, will have primary regulatory responsibility for the online consumer finance businesses in China, which as currently used in the Internet Finance Guidelines is interpreted as businesses conducted via the Internet by consumer finance companies. Pursuant to the Pilot Measures for the Administration of Consumer Finance Companies released by the CBRC in November 2013, or the Pilot Consumer Finance Measures, consumer finance companies in the PRC refer to

non-banking

financial institutions as approved by the CBRC that do not engage in taking public deposits from individual lenders and provide individual borrowers with consumer loans pursuant to the principles that such loans be small amount in nature and widely dispersed to various borrowers. However, the Internet Finance Guidelines and the Pilot Consumer Finance Measures do not explicitly provide guidance or requirements on other forms of online consumer finance business conducted by participants other than the CBRC-approved consumer finance companies as defined in the Pilot Consumer Finance Measures, including, for example, the Group’s business. Therefore, it is currently uncertain whether the Group’s business practice is subject to the relevant rules regarding online consumer finance companies provided under the Internet Finance Guidelines and consumer finance companies provided under the Pilot Consumer Finance Measures. Given the evolving regulatory environment of the consumer finance industry, the Group cannot rule out the possibility that the CBRC or other government authorities will issue new regulatory requirements to institute a new licensing regime covering our industry. If such a license regime is introduced or new regulatory rules are promulgated, we cannot assure you that the Group would be able to obtain any new licenses or other regulatory approvals in a timely manner, or at all, which would materially and adversely affect the Group’s business and impede the Group’s ability to continue its operations.

According to two circulars promulgated in April 2016, namely the Circular of the General Office of the PRC State Council on Issuing the Implementing Proposals for the Special Rectification of Internet Financial Risks and the Circular on Issuing the Implementing Proposals for the Special Rectification of P2P online

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Financial Risks, two special task forces at the central-government level, namely the Office of the Leading Group for Specific Rectification against Online Finance Risks, or the Online Finance Risks Rectification Office, and the Office of the Leading Group for Specific Rectification against P2P Online Lending Risks, or the P2P Online Lending Rectification Office, were established to align the regulatory measures of the PBOC, the CBRC, and other relevant PRC government authorities that regulate the business operations of online finance companies and P2P platforms.

In addition, in August 2016, the CBRC, the Ministry of Industry and Information Technology, or the MIIT, the Ministry of Public Security of China and the Office for Cyberspace Affairs jointly promulgated the Interim Measures for Administration of the Business Activities of Online Lending Information Intermediary Institutions, or the Interim Online Lending Information Intermediary Measures, which set out certain rules to regulate the business activities of online lending information intermediary institutions. The Interim Online Lending Information Intermediary Measures define “online lending” as direct lending between peers, which can be natural persons, legal persons or other organizations, through Internet platforms, and “online lending information intermediary institutions” as financial information intermediaries that are engaged in lending information business and directly provide peers with lending information services, such as information collection and publication, credit rating, information interaction and loan facilitation between borrowers and lenders for them to form direct

peer-to-peer

lending relationships. The Interim Online Lending Information Intermediary Measures are only applicable to private lending transactions according to relevant interpretations by the China Banking Regulatory Commission. Loans funded by financial institutions which are licensed by financial regulatory authorities are not private lending transactions within the meaning of the Second Revised Private Lending Judicial Interpretation issued by the Supreme People’s Court of the PRC in December 2020. Therefore, facilitation of loans funded directly by such licensed financial institutions is not subject to the regulation set forth in the Interim Online Lending Information Intermediary Measures.

On December 8, 2017, the P2P Online Lending Rectification Office issued the Notice on the Rectification and Inspection Acceptance of Risk of Online Lending Intermediaries, or Circular 57, which provides further clarification on several matters in connection with the rectification of online lending information intermediaries. The Circular 57 requires that online lending intermediaries set up custody accounts with qualified banks that have passed certain testing and evaluation procedures run by the P2P Online Lending Rectification Office to hold customer funds. Pursuant to the Circular 57, online lending information intermediaries that have already established risk reserve funds shall not continue to set aside any of their funds as additional risk reserve and shall gradually reduce the balance of their existing risk reserve funds. Other than risk reserve funds, online lending information intermediaries shall actively seek alternative means of investor protection, such as third-party guarantee arrangements.

In particular, starting from the issuance of the Circular on the Classification and Disposal of Risks of Online Lending Institutions and Risk Prevention on December 19, 2018, or Circular 175, by the Online Finance Risks Rectification Office and the P2P Online Lending Rectification Office, a storm of regulatory measures have been taken by the PRC government centered on the enhancement of rectification of existing P2P platforms, with the goal of guiding such platforms to wind down and exit P2P business. The overarching objective of Circular 175 is for the PRC government agencies to effect orderly exits of

peer-to-peer

direct lending marketplaces without inducing systematic risks in the financial system or causing significant social turbulence. In accordance with Circular 175, P2P lending platforms which have demonstrated risk characteristics should exit the business or cease operation, and even the normal platforms must limit the scale of outstanding business and number of investors, which is sometimes referred as the “Business Dual Decrease,” and eventually seek to become licensed small credit companies, loan facilitation companies servicing banking institutions or companies channeling information for banking institutions. The regulatory actions under such stringent regulation on P2P lending platforms have decimated P2P lending platforms, including many well-known or listed companies such as Yidai, LuFax, and China Rapid Finance (NYSE: XRF). It is reported that in November 2019, the Online Finance Risks Rectification Office and the P2P Online Lending Rectification Office jointly issued the Guidance of Transformation of Online Lending Information Intermediaries to Small Credit Companies, or Guidance 83,

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which further signals the fundamental goal of the PRC government to end of P2P business. As of December 31, 2020, all P2P lending platforms have been exited or have completed their business transformation.

The Group does not engage in direct loan facilitation between peers. While the Group facilitates transactions that are directly funded by certain institutional funding partners, such companies are financial institutions licensed by financial regulatory authorities to lend. As such, the Group does not consider itself as an “online information intermediary institution” regulated under the Interim Online Lending Information Intermediary Measures. However, we cannot assure you that the CBRC, the P2P Online Lending Rectification Office or other PRC governmental agencies would not expand the applicability of the Interim Online Lending Information Intermediary Measures and/or otherwise regard the Group as an online lending information intermediary institution. As a provider of online credit products, the Group’s business shares certain similarities with those of P2P platforms. In March 2017, Beijing Happy Time received a rectification notice from the Beijing Branch of the Office of Leading Group for Special Rectification against Online Finance Risks, which was also the Office of the Leading Group for Special Rectification against P2P Online Lending Risks of Beijing or the Beijing Rectification Office, the regulator of the Internet finance and online lending industry in Beijing. The rectification notice required Beijing Happy Time to conduct certain improvements and corrections to its business operation to be in compliance with the Interim Online Lending Information Intermediary Measures and the Implementing Scheme of Special Rectification of Risks in the Internet Finance Sector. We do not believe the Group is subject to the Interim Online Lending Information Intermediary Measures, Circular 57 and Circular 157 and have discussed with the Beijing Rectification Office about the difference between the Group’s business and those of “online information intermediary institution” as defined in the Interim Online Lending Information Intermediary Measures and that certain correction requirements in the notice were not actually related to the Group’s business. Nevertheless, the Beijing Rectification Office still required the Group to comply with certain requirements under the Interim Online Lending Information Intermediary Measures regardless of whether the Group is a P2P platform due to the fact that the Group’s institutional funding partners used to include P2P platforms, which were identified as online lending information intermediary institutions in accordance with the Interim Online Lending Information Intermediary Measures and other PRC laws and regulations. As such, the Group was deemed to be participating in a certain part of the “online lending” process as defined in the Interim Online Lending Information Intermediary Measures. The Group has since carried out certain improvements and corrections as required by the Beijing Rectification Office and are maintaining an ongoing dialogue with the Beijing Rectification Office. As of the date of this annual report, the Group has not received final clearance from the Beijing Rectification Office that the Group’s rectification efforts were sufficient, and there can be no assurance that the Group will be able to receive such final clearance. We also cannot assure you that the Beijing Rectification Office will agree with our position that the Group is not an “online information intermediary institution.” In the event that the Group is deemed as an online lending information intermediary institution by the PRC regulatory authorities in the future, the Group may have to register with local financial regulatory authorities and apply for telecommunication business operation licenses if required by the competent authorities, and the Group’s current business practices may be considered to be in violation of the Interim Online Lending Information Intermediary Measures. Accordingly, the Group may face administrative orders to make rectification, receive administrative warnings or criticism notice, monetary penalties up to RMB30,000 and other penalties, and the Group’s business, results of operations and financial position could be materially and adversely affected.

The Group has cooperated with its institutional funding partners, whose compliance with PRC laws and regulations may affect the Group’s business. The Group’s collaboration with institutional funding partners have exposed the Group to and may continue to expose it to additional regulatory uncertainties faced by such institutional funding partners. In addition, the Group has ceased transferring credit drawdowns to P2P platforms in April 2017. Nonetheless, we cannot assure you that the business operations of the Group’s institutional funding partners currently are or will be in compliance with the relevant laws and regulations, and in the event that the Group’s institutional funding partners do not operate their businesses in accordance with the relevant laws and regulations or are engaged in illegal activities, they will be exposed to various regulatory risks and accordingly, the Group’s business, financial condition and prospects would be materially and adversely affected.

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In April 2017, the P2P Online Lending Rectification Office, the regulator for administration and supervision on the nationwide Internet finance and online lending, issued the Notice on the Conduction of Check and Rectification of Cash Loan Business Activities and a supplementary notice, or the Notice on Cash Loan. The Notice on Cash Loan requires the local counterparts of the P2P Online Lending Rectification Office to conduct a full-scale and comprehensive inspection of cash loan business conducted by online platforms and require such platforms to conduct necessary improvements and corrections within a designated period to comply with the relevant requirements under the Second Revised Private Lending Judicial Interpretation in December, 2020, the Measures for the Banning of Illegal Financial Institutions and Illegal Financial Business Operations, the Guiding Opinions on Small Credit Companies, the Interim Online Lending Information Intermediary Measures and the Implementing Scheme of Special Rectification of Risks in the Internet Finance Sector. The Notice on Cash Loan focuses on preventing malicious fraudulent activities, loans that are offered at extortionate interest rates and violence in the loan collection processes in the cash loan business operation of online platforms. The P2P Online Lending Rectification Office issued a list of cash loan business that are to be examined, which includes Laifenqi, one of the brands in which the Group uses to market its credit products. In light of the Notice on Cash Loan, the Group has taken measures, including

re-evaluating

and adjusting the amount of financing service fees it charges on all credit drawdowns in an effort to comply with applicable regulations. Due to the uncertainties with respect to the interpretation and application of the laws and regulations as stated in the Notice on Cash Loan, we cannot assure you the Group’s business practice will be deemed to be in full compliance with all such laws and regulations, and the Group may face injunctions, including orders to change the Group’s current business activities, and may be exposed to other penalties as determined by the relevant government authorities after such examination according to the Notice on Cash Loan. Furthermore, the Group may be required to conduct certain other improvements or corrections which could be costly, and the Group’s business, financial condition, results of operations and prospects would be materially and adversely affected.

The Online Finance Risks Rectification Office and P2P Online Lending Rectification Office jointly issued the Circular on Regulating and Rectifying Cash Loan Business on December 1, 2017, or Circular 141. Circular 141 sets out the principles and new requirements for the conduct of “cash loan” businesses by small loan companies, P2P platforms and banking financial institutions. Circular 141 does not clearly define “cash loans,” but it indicates that cash loans that are subject to regulation and rectification have certain features, such as the lack of (i) specific user cases (which, as we understand the term, refers to scenarios in which users purchase specific products or services on credit), (ii) specified uses of loan proceeds, (iii) defined customer base, or (iv) collateral.

The Circular 141 sets forth several general requirements with respect to “cash loan” business, including, among others: (i) no organizations or individuals may conduct the lending business without obtaining approvals for the lending business; (ii) the aggregate borrowing costs of borrowers charged by institutions in the forms of interest and various fees should be annualized and subject to the limit on interest rate of private lending set forth in the Private Lending Judicial Interpretations issued by the Supreme People’s Court; (iii) all relevant institutions shall follow the “know-your-customer” principle and prudently assess and determine the borrower’s eligibility, credit limit,

cooling-off

period and other relevant features; (iv) loans to any borrower without income sources are prohibited; (v) all relevant institutions shall enhance the internal risk control and prudently use “data-driven” risk management models; (vi) no lending institution or any third party entrusted thereby may collect debts by means of violence, intimidation, insult, defamation or harassment; and (vii) lending institutions shall strengthen the protection of customers’ information, and shall not steal or misuse customers’ private information in the name of “Big Data,” or illegally trade or disclose customers’ private information.

The Circular 141 also sets forth several requirements on banking financial institutions participating in “cash loan” business, including, among others,(i) such banking financial institutions shall not extend loans jointly with any third-party institution which has not obtained approvals for the lending business, or fund such institution for the purpose of extending loans in any form; (ii) with respect to the loan business conducted in cooperation with third-party institutions, such banking financial institutions shall not outsource the core business (including the credit assessment and risk control), and shall not accept any credit enhancement service whether or not in a disguised form (including the commitment to taking default risks) provided by any third-party institutions with no guarantee qualification and (iii) such banking financial institutions must require and ensure that the third-party

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institutions shall not collect any interests or fees from the borrowers. It remains uncertain how the regulatory authorities will interpret and enforce the requirements of Circular 141 under various circumstances. The Group has entered into arrangements with several banks which directly fund credit drawdowns to borrowers. The Group refers to such banks qualified credit applications from borrowers, including the Group’s assessment of their credit profiles and the Group’s suggested credit limits. They will then review the credit applications and approve credit for drawdown. Borrowers directly repay principal and financing service fees to the relevant institutional funding partners, who will in turn deduct the principal and fees due to them from the repayments and remit the remainder to the Group as the Group’s loan facilitation fees.

On October 9, 2019, the Supplementary Provisions on the Supervision and Administration of Financing Guarantee, or Financing Guarantee Provisions, is jointly issued by the China Banking and Insurance Regulatory Commission, the National Development and Reform Commission and other seven central governmental departments. Although financing guarantee, which means guarantor providing security for the secured party’s debt financing such as borrowings and issuance of bonds, has always been a licensed activity, the Financing Guarantee Provisions further tightens the supervision of such business. Specifically, it provides that institutions providing customer referral, credit rating or other services for loan lenders are barred from offering financing guarantee services in any manner unless after obtaining necessary approvals. The Group’s

off-balance

sheet transactions may be deemed to involve both customer referral and financing guarantee services. However, The Group does not directly or indirectly provide any financing guarantee to lenders without approvals. The Group’s outstanding loans, if involving guarantees, are either guaranteed by one of our wholly owned subsidiaries, Xiamen Xincheng Youda Financing Guarantee Ltd., or Xiamen Xincheng or covered by alternative arrangements with third-party companies with financing guarantee licenses. Xiamen Xincheng has obtained a license to provide financing guarantee service. We have provided guarantees for credit drawdowns through Xiamen Xincheng, which has a registered capital of RMB900 million. As of December 31, 2021, the net assets of Xiamen Xincheng was RMB934.3 million (US$146.6 million), and it was therefore permitted to incur guarantee liabilities and risk assurance liabilities up to RMB9,000.0 million (US$1,412.3 million). We have applied for regulatory approval for a reduction of Xiamen Xincheng’s registered capital to RMB100 million, and we have not received such approval as of the date of this annual report. Nonetheless, if the Group’s arrangement to provide guarantees through the alternative arrangements are deemed to be in violation of Circular 141 or Financing Guarantee Provisions, it could be subject to penalties and/or be required to change its business model. In addition, if the registered capital of Xiamen Xincheng or any other entity that through which the Group provides finance guarantee service decreases, the Group’s ability to provide such service may also be negatively affected. As a result, the Group’s business, financial condition, results of operations and prospects could be materially and adversely affected.

On July 23, 2019, the Supreme People’s Court of the PRC, the Supreme People’s Procuratorate of the PRC, the Ministry of Public Security and Ministry of Justice of the PRC jointly issued the Opinions on Several Issues Concerning Handling Illegal Lending Criminal Cases, or the Illegal Lending Opinions. According to the Illegal Lending Opinions, providing loans to unspecified public regularly (meaning more than ten borrowers in any given two years) without necessary governmental approvals will constitute illegal lending practices, of which the provision of loans of annual interest rate (including nominal interest and fees charged to borrowers in combination) higher than 36%, under serious or very serious circumstances, is criminally punishable (“Illegal High-interest Lending”). The Illegal Lending Opinions also provides specific definition of “serious” and “very serious” Illegal High-Lending. In comparison to previous administrative and judicial practices, the Illegal Lending Opinions criminalizes Illegal

High-interest

Lending practices at the first time. In addition, under the Illegal Lending Opinions, the collection of debts by means of violence is forbidden. Whoever gathers, instigates or hires others to forcibly collect debts by disturbing, pestering, beguiling, gathering a crowd to create momentum or otherwise, which does not constitute a crime independently, but the illegal lending has constituted the crime of illegal operation, shall be imposed a heavier punishment as the case may be in accordance with the provisions on the crime of illegal operation. In an effort to comply with potentially applicable laws and regulations, the Company adjusted the pricing of its credit products in April 2017 to ensure that the annualized fee charged on all credit drawdowns rates (including interest and fees combined) do not exceed 36%. The

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Company does not believe the regulatory change represented by the Illegal Lending Opinions will materially affect the Group’s business.

The Group focuses on complying with relevant laws, regulations and government policies applicable to the Group’s business practice in the PRC and have implemented various measures. The Group has established trusts in collaboration with trust companies starting in December 2016. In addition, the Group continuously seeks to work with additional institutional funding partners, including more traditional banking institutions. In April 2017, the Group ceased transferring credit drawdowns to P2P platforms and certain other institutional funding partners. However, due to the lack of clarity in the potential interpretation of the relevant rules and the fact that the rules, laws and regulations are expected to continue to evolve in this newly emerging industry in which the Group operates, we cannot assure you that the Group’s measures would effectively prevent it from violating any existing or future rules, laws and regulations. In addition, although the relevant regulations on P2P platforms do not directly apply to the Group, any regulatory restrictions may cause borrowers with lower credit qualities to seek for the Group’s service, which may have negative effect on the Group’s delinquency rates. Furthermore, such changes in regulations may also affect market sentiment and have a negative impact on the Group’s partnership with institutional funding partners.

As part of the Group’s efforts to obtain funding at competitive costs, the Group may from time to time explore alternative funding initiatives, including through standardized capital instruments. The current PRC regulatory framework does not impose many restrictions and obligations on us as the credit originator of any potential asset-backed securities offering. Pursuant to the relevant PRC laws and regulations, an institution, such as the Group’s online small credit companies, is entitled to establish an asset-backed securities scheme as a credit originator for such scheme on the condition that it has legitimate ownership to the underlying transferred assets that are able to generate independent and predictable cash flow in compliance with relevant laws and regulations. However, the initiators of any potential asset-backed securities scheme with whom the Group works with are required to be financial institutions and they are subject to a variety of laws and regulations in the PRC, such as Administrative Provisions on the Asset Securitization Business of Securities Companies and the Subsidiaries of Fund Management Companies and Measures for the Supervision and Administration of Pilot Projects of Credit Asset Securitization of Financial Institutions. Since the Group will not operate as an initiator of any asset-backed securities scheme, the Group will not be subject to these laws and regulations governing financial institutions as initiators. However, as the laws and regulations applicable to asset-backed securities are still developing, it remains uncertain as to the application and interpretation of such laws and regulations, particularly relating to the new and rapidly evolving online consumer finance industry in which the Group operates.

To the extent the Group issues asset-backed securities in the future, the Group does not plan to issue such securities to investors located in the United States or otherwise meeting the definition of “U.S. persons” as defined under Rule 902 under the Securities Act. As such, we do not believe that any such potential issuances will be subject to the requirements in Regulation AB under the Securities Act and the related rules. Nonetheless, if the Group issues asset-backed securities in the future that are required to be registered under the Securities Act, the Group may need to comply with Regulation AB and related rules, which may make the issuance of such asset-backed securities impracticable.

The Group’s financing service fees may decline in the future and any material decrease in such financing service fees could harm the Group’s business, financial condition and results of operations.

The Group generates a material portion of its total revenues from financing service fees. In 2021, financing income, which the Group recognizes for its

on-balance

sheet transactions, comprised 75.9% of the Group’s total revenues. In addition, the Group recognizes revenues from loan facilitation services when it matches borrowers with funding partners and the funds are transferred to the borrowers. Additionally, revenues from post-origination services are recognized evenly over the term of the loans as the services are performed. As such, the amount of financing service fees charged under such arrangements may affect the amount of loan facilitation fees that the Group collects. Any material decrease in the Group’s financing service fees would have a substantial impact on the

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Group’s margin. In the event that the amount of financing service fees the Group charges for credit drawdowns it facilitated decrease significantly in the future and the Group is not able to reduce its cost of capital for funds from institutional funding partners or to adopt any cost control initiatives, the Group’s business, financial condition and results of operations will be harmed. To compete effectively, the financing service fees the Group charges could be affected by a variety of factors, including the creditworthiness and ability to repay of the borrowers, the competitive landscape of our industry, the Group’s access to capital and regulatory requirements. The Group’s financing service fees may also be affected by a change over time in the mix of the types of products the Group offers and a change to the Group’s borrower engagement initiatives. The Group’s competitors may also offer more attractive fees, which may require the Group to reduce its financing service fees to compete effectively. Certain consumer financing solutions offered by traditional financial institutions may provide lower fees than the Group’s financing service fees. Although we do not believe such consumer financing solutions currently compete with the Group’s products or target the same unserved or underserved consumers in China, such traditional financial institutions may decide to do so in the future, which may have a material adverse effect as to the financing service fees that the Group will be able to charge. Furthermore, as the Group’s borrowers establish their credit profile over time, they may qualify for and seek out other consumer financing solutions with lower fees, including those offered by traditional financial institutions offline, and the Group may need to adjust its financing service fees to retain such borrowers. In addition, the Group’s financing service fees may be affected by many macroeconomic factors beyond the Group’s control, such as inflation, recession, the state of the credit markets, changes in market interest rates, global economic disruptions, unemployment and fiscal and monetary policies.

The Group’s financing service fees, to the extent they are fully or partially deemed as interest, may also be subject to the restrictions on interest rate as specified in applicable rules on private lending. Circular 141 provides that overall capital cost charged on a borrower, comprised of interests and fees, should be in compliance with the judicial interpretations by the Supreme People’s Court of the PRC regarding interest rates in private lending. According to the Private Lending Judicial Interpretations, if the annual interest rate of a private loan is higher than 36%, the excess will be void and will not be enforced by the courts.

In an effort to comply with potentially applicable laws and regulations, the Group adjusted the pricing of its credit products in April 2017 to ensure that the annualized fee rates charged on all credit drawdowns do not exceed 36%. See “—The laws and regulations governing the online consumer finance industry in the PRC are still at a nascent stage and subject to further change and interpretation. If the Group’s business practices or the business practices of the Group’s institutional funding partners are deemed to violate any PRC laws or regulations, the Group’s business, financial condition, results of operations and prospects would be materially and adversely affected.” In addition, as some of the Group’s institutional funding partners are prohibited from charging fees at annualized rates in excess of 24%, the Group cooperates with various insurance and asset management companies to charge additional fees from the relevant borrowers so that the overall fee rates applicable to such borrowers would still be within the limit of 36% on an annualized basis. If such arrangements were found by the regulatory authorities to be in violation of the applicable laws and regulations, the Group’s business, results of operations and financial condition could be materially and adversely affected.

Under the Second Revised Private Lending Judicial Interpretation issued by the Supreme People’s Court in December 2020, total annual percentage rates (inclusive of any default rate, default penalty and any other fee) for private lending exceeding four times that of China’s benchmark

one-year

loan prime rate, or LPR, as published on the 20th of each month will not be legally protected. Based on the LPR of 3.7% as published on April 20, 2022, such cap would be 14.8%. According to the Second Revised Private Lending Judicial Interpretation and Reply by Supreme People’s Court to Issues Concerning the Scope of Application of the New Judicial Interpretation on Private Lending, the interest rate cap is not applicable to the lending business of financial institutions and their branches that have been established with the approval of financial regulatory authorities. Rather, this new policy is generally interpreted as only being applicable to private lending, while the Group’s business almost entirely involves financial institutions. However, it is important to note that the Second Revised Private Lending Judicial Interpretation is newly promulgated, and the policy is subject to further clarifications by courts and regulatory authorities. If the same interest rate cap were

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applied to the Group’s business as required by relevant courts or regulatory authorities, the Group’s profitability may suffer a material adverse impact, and the Group could incur net losses.

In addition, the Circular 141 requires financial institutions to ensure that the loan facilitation operators they cooperate with do not collect interests or fees from borrowers. Although the Group no longer charges borrowers directly of any financing service fees, the Group does receive service fees from the Group’s institutional funding partners and third-party guarantee companies, which in turn charge fees from borrowers. We do not believe such practice is in violation of Circular 141. However, as the Circular 141 and other relevant regulations lack detailed guidance, the relevant authorities have broad discretion in the interpretation and implementation of such rules. We cannot rule out the possibility that the government authorities would still consider the Group’s business practices described above to be in violation of Circular 141. These regulations may be interpreted or enforced in ways that are different from our understanding and expectations. Moreover, the PRC government may seek to enhance the regulatory scrutiny of our industry and promulgate new laws and regulations in response to the growth of consumer finance. To the extent that any new laws and regulations or any interpretations of existing laws and regulations restrict the Group’s ability to continue its current operations, cause any aspects of the Group’s current operations to become

non-compliant,

or impose material compliance costs on it, the Group’s business and results of operations may be materially and adversely affected.

The Group may be deemed to operate financing guarantee business by the PRC regulatory authorities.

The State Council promulgated the Regulations on the Administration of Financing Guarantee Companies, or the Financing Guarantee Rules, on August 2, 2017 which became effective on October 1, 2017. Pursuant to the Financing Guarantee Rules, “financing guarantee” refers to the activities in which guarantors provide guarantee to the guaranteed parties as to loans, bonds or other types of debt financing, and “financing guarantee companies” refer to companies legally established and operating financing guarantee business. According to the Financing Guarantee Rules, the establishment of financing guarantee companies shall be subject to the approval by the competent government department, and unless otherwise stipulated by the state, no entity may operate financing guarantee business without such approval. If any entity violates these regulations and operates financing guarantee business without approval, the entity may be subject to penalties including ban or suspension of business, fines of RMB500,000 to RMB1,000,000, confiscation of illegal gains if any, and if the violation constitutes a criminal offense, criminal liability shall be imposed in accordance with the law.

On October 9, 2019, the Supplementary Provisions on the Supervision and Administration of Financing Guarantee Companies, or Financing Guarantee Provisions, is jointly issued by the China Banking and Insurance Regulatory Commission, the National Development and Reform Commission and other seven central governmental departments. Although financing guarantee has always been a licensed activity, the Financing Guarantee Provisions further tightens the supervision of such business. Specifically, it provides that institutions providing customer referral, credit rating or other services for loan lenders are barred from offering financing guarantee services in any manner unless after obtaining necessary approvals.

Under the Group’s loan bank business, the Group has entered into cooperative arrangements with certain banks in which they are identified as the lender under the agreements with borrowers and the borrowers are required to repay the principal and financing service fees directly to them. However, when borrowers under arrangements with banks fail to repay, the Group is obligated to repay the relevant bank the full overdue amount. In addition, pursuant to the Group’s agreement with a consumer finance company, the Group will make cash payments to the consumer finance company based on the overdue amount of loans that the Group has facilitated in which the consumer finance company originates. For 2021, such transactions, which are

off-balance

sheet transactions, represented 0.9% of the total amount of transactions under the Group’s loan book business. Historically, the Group also entered into arrangements with various institutional funding partners to fund

on-balance

sheet transactions, and the Group was also obligated to compensate such institutional funding partners for borrower default. For 2021, the Group funded all of the

on-balance

sheet transactions with its own capital. As such, transactions funded by institutional funding partners represented 0.9% of the total amount of transactions under the Group’s loan book business for year 2021.

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Due to the lack of further interpretations, the exact definition and scope of “operating financing guarantee business” under the Financing Guarantee Rules is unclear. It is uncertain whether the Group would be deemed to operate financing guarantee business because of the Group’s current arrangements with institutional funding partners. However, institutions providing customer referral, credit rating or other services for loan lenders are barred from offering financing guarantee services in any manner unless after obtaining necessary approvals in accordance with Financing Guarantee Provisions. Furthermore, pursuant to Circular 141, a bank participating in loan facilitation transactions may not accept credit enhancement service from a third party which has not obtained any license or approval to provide guarantees, including credit enhancement service in the form of a commitment to assume default risks. One of our wholly-owned subsidiaries, Xiamen Xincheng, obtained a license to provide financing guarantee service in March 2019. The Group provides guarantees for certain credit drawdowns through Xiamen Xincheng. Under the Financing Guarantee Rules, the outstanding guarantee liabilities and risk assurance liabilities of a financing guarantee company shall not exceed ten times of its net assets. Nonetheless, the Group may also provide guarantees through alternative arrangements, such as cooperation with third parties with financing guarantee licenses. If such alternative arrangements are deemed to be in violation of Circular 141, the Group could be subject to penalties and/or be required to change the Group’s business model. As a result, the Group’s business, financial condition, results of operations and prospects could be materially and adversely affected.

Injuries, accidents, food safety incidents or other harm suffered by students or employees of the Group’s premises that it operates may subject it to liabilities and damage our reputation.

The Group has significantly downsized the Wanlimu Kids Clubs business. Nonetheless, the business involves inherent risks associated with the safety and wellbeing of the Group’s students and other people visiting or working at the Group’s premises. The Group could face negligence claims for inadequate maintenance of the Group’s premises or lack of supervision of its teachers and other employees. In addition, any defects playground equipment in the Group’s premises or educational tools the Group uses in classrooms may cause harm to students. The Group therefore could be liable for accidents, injuries, food safety incidents or other harm to students or other people at the Group’s premises. Even if the Group is found not legally liable for such accidents or injuries, disputes on liabilities or general complaints by parents regarding food quality, students’ wellbeing or, from time to time, air quality and renovation fumes within the Group’s premises may create unfavorable publicity and our reputation may be damaged on such occasions. Additionally, although the Group maintains certain liability insurance, the insurance coverage may not be adequate to fully protect the Group from claims and liabilities, and reoccurrence of similar accidents may make it difficult for the Group to obtain liability insurance at reasonable prices in the future. Defending such claims may also cause the Group to incur substantial expenses and divert the time and attention of our management.

As the Group is winding down or downsizing certain businesses, it may incur significant write-downs or

write-offs,

and the Group’s results of operations, financial condition and liquidity may be materially and adversely affected.

The Group launched the Wanlimu

e-commerce

platform, which offers online luxury fashion products, in March 2020. The Group is in the process of winding down this business to focus on the Group’s other service offerings. The Group operated the Wanlimu

e-commerce

platform primarily on the basis of

just-in-time

ordering, whereby the Group purchased the relevant products from suppliers upon receiving customer orders. As of December 31, 2021, inventory relating to the platform amounted to RMB1.4 million (US$0.2 million). As the Group is winding down the Wanlimu

e-commerce

platform, it may be subject to a heightened risk of inventory obsolescence, a decline in inventory values, and inventory write-downs or write-offs. In addition, the Group may be required to lower sale prices in order to reduce inventory level, which may lead to lower gross margins. Any of the above may materially and adversely affect the Group’s results of operations and financial condition.

The Group launched Wanlimu Kids Clubs, an early childhood education business, in January 2021, and the Group is in the process of significantly downsizing such business. As a result, the Group may incur significant

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write-downs or write-offs of leasehold improvements and equipment relating to its Wanlimu Kids Clubs business, which may in turn have a material and adverse effect on the Group’s results of operations and financial condition.

The Group has limited experience managing its allowance for loan principal and financing service fee receivables. In addition, the Group’s allowance for loan principal and financing service fee receivables is determined based on both objective and subjective factors and may not be adequate to absorb loan losses if the Group fails to accurately forecast the expected loss.

The Group faces the risk that borrowers fail to repay their principals and financing service fees in full. Estimated credit loss relating to

on-balance

sheet transactions is recorded as allowance for loan principal and financing service fee receivables. If the Group experiences higher delinquency rates, such allowance would also increase. See “Item 5. Operating and Financial Review and Prospects—B. Liquidity and Capital Resources.” The Group has established an evaluation process designed to determine the adequacy of its allowance for loan principal and financing service fee receivables. While this evaluation process uses historical and other objective information, it is also dependent on the Group’s subjective assessment based upon its experience and judgment. In addition, since January 1, 2020 and our adoption of ASC 326, the Group’s evaluation process also take into account certain forward-looking factors that reflect current conditions and reasonable and supportable forecasts of future economic conditions. Actual losses are difficult to forecast, especially if such losses stem from factors beyond the Group’s historical experience. The Group has limited experience managing its allowance for loan principal and financing service fee receivables. Furthermore, the Group shifted its focus of target borrower base from college students to young consumers in general starting from November 2015, and it may not be able to accurately forecast delinquencies of its current target borrower base. Given these challenges, it is possible that the Group will underestimate or overestimate the allowance for loan principal and financing service fee receivables. In addition, the Group is not subject to periodic review by bank regulatory agencies of its allowance for loan principal and financing service fee receivables. As a result, if the Group underestimates the allowance for loan principal and financing service fee receivables, there can be no assurance that the Group’s allowance for loan principal and financing service fee receivables will be sufficient to absorb losses or prevent a material adverse effect on the Group’s business, financial condition and results of operations. Conversely, if the Group overestimates the allowance for loan principal and financing service fee receivables, the Group will record higher provision for loan principal and financing service fee receivables, which will adversely affect the Group’s results of operations.

The Group faces intense competition and, if the Group does not compete effectively, its results of operations could be harmed.

The online consumer finance industry in China is highly competitive and the Group competes with other consumer finance service providers, including online consumer finance service providers, as well as traditional financial institutions, such as banks and consumer finance companies. The Group’s competitors may operate different business models, have different cost structures or participate selectively in different market segments. They may ultimately prove more successful or more adaptable to consumer demand and new regulatory, technological and other developments. Some of the Group’s current and potential competitors have significantly more financial, technical, marketing and other resources than the Group does and may be able to devote greater resources to the development, promotion, sale and support of their offerings. The Group’s competitors may also have longer operating history, more extensive borrower bases or funding sources, greater brand recognition and brand loyalty and broader relationships with funding partners than the Group. Additionally, a current or potential competitor may acquire, or form a strategic alliance with, one or more of the Group’s competitors. The Group’s competitors may be better at developing new products, offering more attractive fees, responding more quickly to new technologies and undertaking more extensive and effective marketing campaigns. Furthermore, in light of the low barriers to entry in the online consumer finance industry, more players may enter this market and increase the level of competition. In response to competition, the Group may have to offer lower amount of financing service fees, which could materially and adversely affect the Group’s business and results of operations. If the Group is unable to compete with such companies and meet the need for innovation in its

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industry, the demand for the Group’s credit products could stagnate or substantially decline, which could harm the Group’s business and results of operations.

The markets in which the QD Food business competes are rapidly evolving and intensely competitive, and the Group faces an array of competitors from different industry sectors. The Group’s current and potential competitors include, among others, (1) other online food and meal delivery companies, (2) a wide array of food retailers, such as supermarkets and convenience stores,

(3) e-commerce

platforms and (4) casual dining and quick-service restaurants. The Group has very limited experience in most aspects of QD Food’s business operations, such as product design, supply chain management, fulfillment and user acquisition. If the QD Food business fails to compete effectively, the Group’s results of operations and financial condition would be materially and adversely affected.

The Group may be required to obtain additional value-added telecommunication business licenses.

PRC regulations impose sanctions for engaging in Internet information services of a commercial nature without having obtained an Internet content provider license, or the ICP license, and sanctions for engaging in the operation of online data processing and transaction processing without having obtained a value-added telecommunications services, or VATS, license for online data processing and transaction processing, or ODPTP license (ICP and ODPTP are both

sub-sets

of value-added telecommunication business). These sanctions include corrective orders and warnings from the PRC communication administration authority, fines and confiscation of illegal gains and, in the case of significant infringements, the websites and mobile apps may be ordered to cease operation. Nevertheless, the interpretation of such regulations and PRC regulatory authorities’ enforcement of such regulations in the context of online consumer finance industry remains uncertain, it is unclear whether online consumer finance service provider like the Group are required to obtain ICP license or ODPTP license, or any other kind of value-added telecommunication business licenses. As of December 31, 2021, Qufenqi (Beijing) Information Technology Co., Ltd., or Qufenqi Beijing, Xiamen Qudian Culture and Technology Co., Ltd., or Xiamen Qudian Culture and Technology, Xiamen Qudian, Xiamen Qu Plus Plus, Xiamen Wanlimu Technology Co., Ltd., and Xiamen Wanlimu Growth Technologies Co., Ltd., or Xiamen Wanlimu Growth, had obtained ICP licenses, and Xiamen Qudian had obtained an ODPTP license and a Service provider license. Given the evolving regulatory environment of the consumer finance industry and value-added telecommunication business, we cannot rule out the possibility that the PRC communication administration authority or other government authorities will explicitly require any of the Group VIEs or subsidiaries of the Group VIEs to obtain ICP licenses, ODPTP licenses or other value-added telecommunication business licenses, or issue new regulatory requirements to institute a new licensing regime for our industry. If such value-added telecommunication business licenses are clearly required in the future, or a new license regime is introduced or new regulatory rules are promulgated, we cannot assure you that the Group would be able to obtain any required license or other regulatory approvals in a timely manner, or at all, which would subject the Group to the sanctions described above or other sanctions as stipulated in the new regulatory rules, and materially and adversely affect the Group’s business and impede its ability to continue its operations.

PRC regulation of loans to, and direct investment in, PRC entities by offshore holding companies and governmental control of currency conversion may restrict or prevent us from making loans to our PRC subsidiaries and the Group VIEs, or to make additional capital contributions to our PRC subsidiaries.

We, as an offshore holding company, are permitted under PRC laws and regulations to provide funding to our PRC subsidiaries, which are treated as foreign-invested enterprises under PRC laws, through loans or capital contributions. However, loans by us to our PRC subsidiaries to finance their activities cannot exceed statutory limits and must be registered with the local counterpart of State Administration of Foreign Exchange, or the SAFE, and capital contributions to our PRC subsidiaries are subject to the requirement of making necessary filings in the Foreign Investment Comprehensive Management Information System, and registration with other governmental authorities in China.

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SAFE promulgated the Notice of the State Administration of Foreign Exchange on Reforming the Administration of Foreign Exchange Settlement of Capital of Foreign-invested Enterprises, or Circular 19, effective on June 1, 2015, in replacement of 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, the Notice from the State Administration of Foreign Exchange on Relevant Issues Concerning Strengthening the Administration of Foreign Exchange Businesses, or Circular 59, and the Circular on Further Clarification and Regulation of the Issues Concerning the Administration of Certain Capital Account Foreign Exchange Businesses, or Circular 45. According to Circular 19, the flow and use of the RMB capital converted from foreign currency-denominated registered capital of a foreign-invested company is regulated such that RMB capital may not be used for the issuance of RMB entrusted loans, the repayment of inter-enterprise loans or the repayment of banks loans that have been transferred to a third party. Although Circular 19 allows RMB capital converted from foreign currency-denominated registered capital of a foreign-invested enterprise to be used for equity investments within the PRC, it also reiterates the principle that RMB converted from the foreign currency-denominated capital of a foreign-invested company may not be directly or indirectly used for purposes beyond its business scope. Thus, it is unclear whether SAFE will permit such capital to be used for equity investments in the PRC in actual practice. SAFE promulgated the Notice of the State Administration of Foreign Exchange on Reforming and Standardizing the Foreign Exchange Settlement Management Policy of Capital Account, or Circular 16, effective on June 9, 2016, which reiterates some of the rules set forth in Circular 19, but changes the prohibition against using RMB capital converted from foreign currency-denominated registered capital of a foreign-invested company to issue RMB entrusted loans to a prohibition against using such capital to issue loans to

non-associated

enterprises. Violations of SAFE Circular 19 and Circular 16 could result in administrative penalties. Circular 19 and Circular 16 may significantly limit our ability to transfer any foreign currency we hold to our PRC subsidiaries, which may adversely affect our liquidity and our ability to fund and expand our business in the PRC.

Due to the restrictions imposed on loans in foreign currencies extended to any PRC domestic companies, we are not likely to make such loans to any of the Group VIEs and their subsidiaries, each a PRC domestic company. Meanwhile, we are not likely to finance the activities of the Group VIEs and their subsidiaries by means of capital contributions given the restrictions on foreign investment in the businesses that are currently conducted by the Group VIEs and their subsidiaries.

In light of the various requirements imposed by PRC regulations on loans to, and direct investment in, PRC entities by offshore holding companies, we cannot assure you that we will be able to complete the necessary government registrations or obtain the necessary government approvals on a timely basis, if at all, with respect to future loans to our PRC subsidiaries or any consolidated variable interest entity or future capital contributions by us to our PRC subsidiaries. As a result, uncertainties exist as to our ability to provide prompt financial support to our PRC subsidiaries or the Group VIEs and their subsidiaries when needed. If we fail to complete such registrations or obtain such approvals, our ability to use foreign currency and to capitalize or otherwise fund our PRC operations may be negatively affected, which could materially and adversely affect our liquidity and our ability to fund and expand our business.

We may need additional capital to pursue business objectives and respond to business opportunities, challenges or unforeseen circumstances, and financing may not be available on terms acceptable to us, or at all.