Qudian Inc.
Annual Report 2017

Plain-text annual report

Morningstar® Document Research℠ FORM 20-FQudian Inc. - QDFiled: April 09, 2018 (period: December 31, 2017)Annual and transition report of foreign private issuers under sections 13 or 15(d)The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The userassumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot belimited or excluded by applicable law. Past financial performance is no guarantee of future results.Table of Contents UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWASHINGTON, D.C. 20549 FORM 20-F (Mark One)☐REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR 12(g) OF THE SECURITIES EXCHANGE ACT OF 1934OR ☒ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the fiscal year ended December 31, 2017OR ☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934OR ☐SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934Date of event requiring this shell company report For the transition period from to Commission file number 001-38230 Qudian Inc.(Exact name of Registrant as specified in its charter) Cayman Islands(Jurisdiction of incorporation or organization)15/F Lvge Industrial Building1 Datun, Chaoyang DistrictBeijing 100012People’s Republic of China(Address of principal executive offices)Carl Yeung, Chief Financial OfficerTelephone: telephone: +86-10-59485220Email: ir@qudian.comAt 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 Name of each exchange on which registeredAmerican Depositary Shares, each representing one Class A ordinary share New York Stock ExchangeOrdinary Shares, par value nominal or US$0.0001 per share* New York Stock Exchange *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: NoneNone(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. 325,838,455 Shares Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. ☐ Yes ☒ NoIf 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 of1934. ☐ Yes ☒ NoIndicate 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 12months (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 ☐ NoIndicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and postedpursuant 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 and post suchfiles). ☒ Yes ☐ NoIndicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,”and “emerging growth company” in Rule 12b-2 of the Exchange Act. 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 withany 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 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 18If 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 tothe distribution of securities under a plan confirmed by a court. ☐ Yes ☐ No *Not for trading, but only in connection with the listing on the New York Stock Exchange of the American Depositary Shares Source: Qudian Inc., 20-F, April 09, 2018Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Table of ContentsTable of Contents Page CONVENTIONS THAT APPLY TO THIS ANNUAL REPORT ON FORM 20-F ii FORWARD-LOOKING INFORMATION iv PART I. 1 ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS 1 ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE 1 ITEM 3. KEY INFORMATION 1 ITEM 4. INFORMATION ON THE COMPANY 60 ITEM 4A. UNRESOLVED STAFF COMMENTS 108 ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS 108 ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES 139 ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS 151 ITEM 8. FINANCIAL INFORMATION 153 ITEM 9. THE OFFER AND LISTING 154 ITEM 10. ADDITIONAL INFORMATION 155 ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 163 ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES 164 PART II. 166 ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES 166 ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS 166 ITEM 15. CONTROLS AND PROCEDURES 166 ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT 167 ITEM 16B. CODE OF ETHICS 167 ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES 168 ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES 168 ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS 168 ITEM 16F. CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT 169 ITEM 16G. CORPORATE GOVERNANCE 169 ITEM 16H. MINE SAFETY DISCLOSURE 169 PART III. 170 ITEM 17. FINANCIAL STATEMENTS 170 ITEM 18. FINANCIAL STATEMENTS 170 ITEM 19. EXHIBITS 170 SIGNATURES 177 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS F-1 iSource: Qudian Inc., 20-F, April 09, 2018Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Table of ContentsCONVENTIONS THAT APPLY TO THIS ANNUAL REPORT ON FORM 20-FExcept 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 Americandepositary receipts that evidence our ADSs; • “Allowance ratio” are to the amount of allowance for loan principal and financing service fee receivables incurred as of a date as apercentage of the total amount of loan principal and financing service fee receivables as of such date; • “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 funded by us, including those that are subsequently transferred to our institutionalpartners, and (ii) credit drawdowns that are funded directly by our institutional partners, which are off-balance sheet; • “Ant Financial” are to Ant Small and Micro Financial Services Group Co., Ltd., a company organized under the laws of the PRC, and itsaffiliates; API (Hong Kong) Investment Limited, which is wholly owned by Ant Financial, is one of our principal shareholders; • “average MAU” are to the average number of monthly active users during a specified period; monthly active users comprise (i) users whouse our Laifenqi mobile app or the Alipay consumer interface to access our Laifenqi interface at least once during a specified month and(ii) users who use our Qudian mobile app or the Alipay consumer interface to access our Qudian interface at least once during a specifiedmonth; an individual who uses both our mobile app and the Alipay consumer interface to access only one of our Laifenqi or Qudianinterfaces during a specified month is counted as one monthly active user; an individual who accesses both of our Laifenqi and Qudianinterfaces during a specified month is counted as two monthly active users; a monthly active user may not have borrowed on our platform; • “China” and the “PRC” are to the People’s Republic of China, excluding, for the purposes of this annual report only, Taiwan, the HongKong Special Administrative Region and the Macao Special Administrative Region; • “M1+ Delinquency Coverage Ratio” are to the balance of allowance for principal and financing service fee receivables at the end of aperiod, divided by the total balance of outstanding principal for on-balance sheet transactions for which any installment payment was morethan 30 calendar days past due as of the end of such period; • “M1+ Delinquency Rate by Vintage” are to the total balance of outstanding principal of a vintage for which any installment payment isover 30 calendar days past due as of a particular date (adjusted to reflect total amount of recovered past due payments for principal, beforecharge-offs), divided by the total initial principal in such vintage; • “new borrowers” are to borrowers who drew down credit for the first time using credit products offered by us; new borrowers who have madeat least two drawdowns in the relevant period are also counted as repeat borrowers; • “number of transactions” are to the number of credit drawdowns facilitated by us to borrowers, which are comprised of (i) credit drawdownsthat are funded by us, including those that are subsequently transferred to our institutional partners, and (ii) credit drawdowns that arefunded directly by our institutional partners, which are off-balance sheet; • “off-balance sheet transactions” are to credit drawdowns that are not recorded on our balance sheets; • “on-balance sheet transactions” are to credit drawdowns that are recorded on our balance sheets; • “outstanding principal” are to the aggregate principal amount of credit drawdowns that have not been repaid as of the specified date, whichare comprised of (i) credit drawdowns that are funded by us, iiSource: Qudian Inc., 20-F, April 09, 2018Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Table of Contents including those that are subsequently transferred to our institutional partners, and (ii) credit drawdowns that are funded directly by ourinstitutional partners, which are off-balance sheet; • “principal turnover ratio” are to the amount of on-balance sheet transactions facilitated during a period divided by outstanding principal ofon-balance sheet transactions at the period end; • “Provision Ratio” are to the amount of provision for principal and financing service fee receivables incurred during a period as apercentage 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; • “registered users” are to individuals who have registered with us; • “repeat borrowers” are to active borrowers in the specified period who have made at least two drawdowns since such borrowers’ registrationwith us until the end of the specified period; • “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; • “transactions” are to borrowers’ credit drawdowns from our platform; • “US$,” “U.S. dollars,” or “dollars” are to the legal currency of the United States; • “vintage” are to transactions we facilitated during a specified time period; and • “we,” “us,” “our company” and “our” are to Qudian Inc., its subsidiaries, its consolidated VIEs and/or their respective subsidiaries, as thecontext 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 RMB6.5063 toUS$1.00, the exchange rates set forth in the H.10 statistical release of the Federal Reserve Board on December 29, 2017. We make no representationthat 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 thecase may be, at any particular rate or at all. On March 30, 2018, the noon buying rate for Renminbi was RMB6.2726 to US$1.00.Unless otherwise indicated, data as to our operations and credit performance in this annual report relate to our cash credit and merchandise creditproducts. We launched budget auto financing products in November 2017, and the amount of auto finance leases facilitated in 2017 was immaterial. iiiSource: Qudian Inc., 20-F, April 09, 2018Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Table of ContentsFORWARD-LOOKING INFORMATIONThis annual report on Form 20-F contains statements of a forward-looking nature. All statements other than statements of historical facts areforward-looking statements. These forward-looking statements are made under the “safe harbor” provision under Section 21E of the SecuritiesExchange Act of 1934, as amended, or the Exchange Act, and as defined in the Private Securities Litigation Reform Act of 1995. These statementsinvolve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materiallydifferent from those expressed or implied by the forward-looking statements. In some cases, these forward-looking statements can be identified bywords or phrases such as “may,” “will,” “expect,” “anticipate,” “aim,” “estimate,” “intend,” “plan,” “believe,” “potential,” “continue,” “is/are likelyto” or other similar expressions. These forward-looking statements relate to, among others: • our goal and strategies; • our expansion plans; • our future business development, financial condition and results of operations; • our expectations regarding demand for, and market acceptance of, our credit products; • our expectations regarding keeping and strengthening our relationships with borrowers, institutional funding partners, merchandisesuppliers and other parties we collaborate 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 thatwe believe may affect our 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 andother risks outlined in our other filings with the Securities and Exchange Commission, or the SEC. Moreover, we operate in an emerging and evolvingenvironment. 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 ofsuch risks on our business or the extent to which any risk, or combination of risks, may cause actual results to differ materially from those contained inany forward-looking statements. The forward-looking statements made in this annual report relate only to events or information as of the date on whichthe statements are made in this annual report. Except as required by law, we undertake no obligation to update any forward-looking statements toreflect events or circumstances after the date on which the statements are made or to reflect the occurrence of unanticipated events. You should readthis annual report and the documents that we have referred to in this annual report, completely and with the understanding that our actual future resultsmay be materially different from what we expect. ivSource: Qudian Inc., 20-F, April 09, 2018Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Table of ContentsPART I. ITEM 1.IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERSNot Applicable. ITEM 2.OFFER STATISTICS AND EXPECTED TIMETABLENot Applicable. ITEM 3.KEY INFORMATION A.Selected Financial DataThe following selected consolidated statements of operations for the years ended December 31, 2015, 2016 and 2017 and selected consolidatedbalance sheets as of December 31, 2016 and 2017 have been derived from our audited consolidated financial statements included elsewhere in thisannual report. The following selected consolidated statements of operations in the period from April 9 to December 31, 2014 and selected consolidatedbalance sheets as of December 31, 2015 have been derived from our 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 inthis annual report and “Item 5. Operating and Financial Review and Prospects.” Our consolidated financial statements are prepared and presented inaccordance with U.S. GAAP. Our historical results do not necessarily indicate our results expected for any future periods. Period fromApril 9, 2014(inception)throughDecember 31,2014 Year Ended December 31 2014 2015 2016 2017 RMB RMB RMB RMB US$ (in thousands, except for share and per share data) Condensed Consolidated Statement of Operations Data: Revenues Financing income 21,094 153,554 1,271,456 3,642,184 559,793 Sales commission fee 2,926 62,182 126,693 797,167 122,522 Revenue from sales-type lease — — — 26,083 4,009 Penalty fees 114 19,271 22,943 7,922 1,218 Loan facilitation income and others — — 21,754 302,010 46,418 Total revenues 24,133 235,007 1,442,846 4,775,366 733,960 Operating cost and expenses(1) Cost of revenues (9,014) (148,417) (267,862) (880,846) (135,384) Sales and marketing (46,368) (192,603) (182,458) (431,749) (66,359) General and administrative (3,503) (42,426) (108,786) (183,674) (28,230) Research and development (4,360) (37,530) (52,275) (153,258) (23,555) Loss on guarantee liabilities — — (861) (150,152) (23,078) Provision for loan principal, financing service fee receivablesand other receivables (1,667) (45,111) (132,176) (605,164) (93,012) 1Source: Qudian Inc., 20-F, April 09, 2018Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Table of Contents Period fromApril 9, 2014(inception)throughDecember 31,2014 Year Ended December 31 2014 2015 2016 2017 RMB RMB RMB RMB US$ (in thousands, except for share and per share data) Total operating cost and expenses (64,911) (466,086) (744,418) (2,404,843) (369,618) Other operating income — — 14,646 50,703 7,794 (Loss)/income from operations (40,778) (231,078) 713,074 2,421,226 372,136 Interest and investment income, net 8 2,889 1,857 4,211 647 Foreign exchange gain/(loss), net — 752 (9,651) (7,177) (1,103) Other income 0 779 47 2,108 324 Other expenses (5) (6,505) (1,834) (363) (56) Net (loss)/income before income taxes (40,775) (233,164) 703,493 2,420,005 371,948 Income tax expenses — — (126,840) (255,546) (39,277) Net (loss)/income (40,775) (233,164) 576,653 2,164,459 332,671 Net Income attributable to Qudian Inc.’s shareholders (40,775) (233,164) 576,653 2,164,459 332,671 Earnings/(loss) per share for Class A and Class B ordinaryshares — Basic (0.51) (2.94) 7.27 17.12 2.63 Earnings/(loss) per share for Class A and Class B ordinaryshares — Diluted (0.51) (2.94) 1.90 7.09 1.09 Earnings per ADS (1 Class A ordinary share equals 1 ADSs) — Basic 17.12 2.63 Earnings per ADS (1 Class A ordinary share equals 1 ADSs) — Diluted 7.09 1.09 Weighted average number of Class A and Class B ordinaryshares outstanding — Basic 79,305,191 79,305,191 79,305,191 126,410,744 126,410,744 Weighted average number of Class A and Class B ordinaryshares outstanding — Diluted 79,305,191 79,305,191 303,778,745 305,241,992 305,241,992 Other comprehensive loss: Foreign currency translation adjustment — — — (77,947) (11,980) Total comprehensive (loss)/income (40,775) (233,164) 576,653 2,086,512 320,691 Total comprehensive (loss)/income attributable to QudianInc.’s shareholders (40,775) (233,164) 576,653 2,086,512 320,691 2Source: Qudian Inc., 20-F, April 09, 2018Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Table of Contents (1)Share-based compensation expenses are allocated in operating cost and expenses as follows: Period fromApril 9, 2014(inception)throughDecember 31,2014 For the year ended December 31, 2014 2015 2016 2017 RMB RMB RMB RMB US$ (in thousands) Sales and marketing 952 23,691 690 1,891 291 General and administrative 742 11,425 18,986 42,849 6,586 Research and development 1,024 20,492 2,457 19,316 2,969 Total share based compensation expenses 2,717 55,607 22,134 64,056 9,845 As of December 31, 2015 2016 2017 RMB RMB RMB US$ (in thousands) Summary Consolidated Balance Sheets: Cash and cash equivalents 210,114 785,770 6,832,306 1,050,106 Restricted cash — — 2,252,646 346,225 Short-term amounts due from related parties(1) 34,930 585,906 551,215 84,720 Short-term loan principal and financing service fee receivables, net 2,060,768 4,826,791 8,758,545 1,346,164 Long-term loan principal and financing service fee receivables 177,582 87,822 — — Total assets 2,675,596 7,117,599 19,380,416 2,978,715 Short-term borrowings and interest payables 1,562,883 4,183,231 7,979,415 1,226,414 Long-term borrowings and interest payables 89,358 76,052 510,024 78,389 Total liabilities 3,306,965 4,604,010 9,840,049 1,512,388 Total mezzanine equity 5,943,978 5,943,978 — — Total shareholders’ equity / (deficit) (6,575,347) (3,430,389) 9,540,367 1,466,328 (1)Includes RMB33.8 million, RMB404.6 million and RMB549.8 million (US$84.5 million) deposited in our Alipay accounts as of December 31,2015, 2016 and 2017, respectively. Such amount is unrestricted as to withdrawal and use and readily available to us on demand.Exchange Rate InformationSubstantially all of our operations are conducted in China and all of our revenues is denominated in Renminbi. This annual report containstranslations of Renminbi amounts into U.S. dollars at specific rates solely for the convenience of the reader. Unless otherwise noted, all translationsfrom Renminbi to U.S. dollars and from U.S. dollars to Renminbi in this annual report were made at a rate of RMB6.5063 to US$1.00, the exchange rateset forth in the H.10 statistical release of the Federal Reserve Board on December 29, 2017. We make no representation that the Renminbi or U.S. dollaramounts 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 rateor at all. The PRC government imposes control over its foreign currency reserves in part through direct regulation of the conversion of Renminbi intoforeign exchange and through restrictions on foreign trade. On March 30, 2018, the noon buying rate for Renminbi was RMB6.2726 to US$1.00.The following table sets forth information concerning exchange rates between the RMB and the U.S. dollar for the periods presented. These ratesare provided solely for your convenience and are not necessarily the 3Source: Qudian Inc., 20-F, April 09, 2018Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Table of Contentsexchange rates that we used in this annual report or will use in the preparation of our periodic reports or any other information to be provided to you. Exchange Rate (Renminbi per US Dollar)(1) Period PeriodEnd Average(2) Low High (RMB per US$1.00) 2013 6.0537 6.1412 6.2438 6.0537 2014 6.2046 6.1704 6.2591 6.0402 2015 6.4778 6.2869 6.4896 6.1870 2016 6.9430 6.6549 6.9430 6.4480 2017 6.5063 6.7349 6.8900 6.5063 September 6.6533 6.5690 6.6591 6.4773 October 6.6328 6.6254 6.6533 6.5712 November 6.6090 6.6200 6.6385 6.5967 December 6.5063 6.5931 6.6210 6.5063 2018 January 6.2841 6.4232 6.5263 6.2841 February 6.3280 6.3182 6.3471 6.2649 March 6.2726 6.3174 6.3565 6.2685 (1)The source of the exchange rate is the H.10 statistical release of the Federal Reserve Board.(2)Annual averages are calculated using the average of the rates on the last business day of each month during the relevant year. Monthly averagesare calculated using the average of the daily rates during the relevant month. B.Capitalization and IndebtednessNot Applicable. C.Reasons for the Offer and Use of ProceedsNot Applicable. D.Risk FactorsRisks Related to Our Business and IndustryWe have a limited operating history in a new and evolving market, which makes it difficult to evaluate our future prospects.The online consumer finance market in the PRC is new and may not develop as expected. The regulatory framework for this market is alsoevolving and may remain uncertain for the foreseeable future. See “— The laws and regulations governing the online consumer finance industry in thePRC are still at a nascent stage and subject to further change and interpretation. If our business practices or the business practices of our institutionalfunding partners are deemed to violate any PRC laws or regulations, our business, financial condition, results of operations and prospects would bematerially and adversely affected.” Prospective borrowers may not be familiar with this market and may have difficulty distinguishing our creditproducts from those of our competitors, both online and offline. Convincing prospective borrowers of the value of our credit products is critical toincreasing the amount of transactions to borrowers and to the success of our business.We launched our business in 2014 and have a limited operating history. We have limited experience in most aspects of our business operation,such as credit product offerings, data-driven credit assessment and the development of long-term relationships with borrowers, institutional fundingpartners and merchandise suppliers. 4Source: Qudian Inc., 20-F, April 09, 2018Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Table of ContentsIn addition, we have limited experience in serving our current target borrower base. In November 2015, we shifted our focus from college students toyoung consumers in general, a more diverse customer base for whom traditional credit data is often unavailable. We have limited experience in onlineborrower engagement, as we only started to engage prospective borrowers through the Alipay consumer interface in November 2015. We currently offertwo principal types of online credit products in China, which are cash credit products and merchandise credit products. We evaluate and approveprospective borrowers’ credit applications submitted online, and we currently rely on institutional funding partners and trusts established incollaboration with trust companies to fund such credit drawdowns. We also have limited experience in providing auto financing products, as welaunched Dabai Auto in November 2017. As our business develops or in response to competition, we may continue to introduce new credit products,make adjustments to our existing credit products and our proprietary credit assessment model, or make adjustments to our business operation ingeneral. For example, we may implement more stringent borrower qualifications to reduce the delinquency rates of transactions facilitated by us, whichmay negatively affect the growth of our business. We will also seek to expand the base of prospective borrowers that we serve, which may result inhigher delinquency rates of transactions facilitated by us. In addition, we rely on our institutional funding partners to fund the credit that we facilitate.Our ability to continuously attract low-cost funding sources is also critical to our business. Any significant change to our business model not achievingexpected results may have a material and adverse impact on our financial condition and results of operations. It is therefore difficult to effectivelyassess our future prospects.You should consider our business and prospects in light of the risks and challenges we encounter or may encounter given the rapidly-evolvingmarket in which we operate and our limited operating history. These risks and challenges include our ability to, among other things: • offer personalized and competitive credit products; • increase the utilization of our credit products by existing borrowers as well as new borrowers; • maintain and enhance our relationship and business collaboration with Ant Financial; • offer attractive financing service fees while driving the growth and profitability of our business; • maintain low delinquency rates of transactions facilitated by us; • develop sufficient, diversified, cost-efficient and reputable institutional funding sources; • maintain and enhance our relationships with our other business partners, including merchandise suppliers and data providers; • broaden our prospective borrower base to include those outside of the Alipay consumer interface; • navigate a complex and evolving regulatory environment; • improve our operational efficiency; • attract, retain and motivate talented employees to support our business growth; • enhance our technology infrastructure to support the growth of our business and maintain the security of our system and the confidentialityof the information provided and utilized across our system; • navigate economic condition and fluctuation; and • defend ourselves against legal and regulatory actions, such as actions involving intellectual property or privacy claims.If we are unable to maintain or increase the amount of transactions or if we are unable to retain existing borrowers or attract new borrowers, ourbusiness and results of operations will be adversely affected.The amount of transactions that we have facilitated to borrowers has grown rapidly since inception. To maintain and increase the amount oftransactions facilitated to borrowers, we must continue to increase the 5Source: Qudian Inc., 20-F, April 09, 2018Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Table of Contentsamount of transactions facilitated to existing borrowers and attract additional prospective borrowers, which may be affected by several factors,including our brand recognition and reputation, the financing service fees charged, installment plans offered, our efficiency in engaging prospectiveborrowers, our ability to convert registered users to borrowers, utilization of the credit we approve, the effectiveness of our credit assessment model andrisk management system, our ability to secure sufficient and cost-efficient funding, borrower experience, the PRC regulatory environment governingour industry and the macroeconomic environment. In connection with the introduction of new products or in response to general economic conditions,we may also impose more stringent borrower qualifications to ensure the quality of the transactions we facilitate, which may negatively affect thegrowth of transactions facilitated to borrowers. Furthermore, we have engaged a portion of our active borrowers through different channels on theAlipay consumer interface since 2016. If channels on the Alipay consumer interface become less effective, if we are unable to continue to use suchchannels, or if the cost of borrower engagement from such channels become less efficient, and we are unable to attract borrowers through new channels,we may not be able to engage new borrowers in a cost-efficient manner or convert prospective borrowers into active borrowers, and may even loseexisting borrowers to our competitors. If we are unable to attract quality borrowers or if borrowers do not continue to utilize our credit products, wemight be unable to increase the amount of transactions facilitated to borrowers and our total revenues as expected, and our business and results ofoperations may be adversely affected.Ant Financial provides services to us as to various aspects of our operations and if such services provided by Ant Financial are limited, restricted,curtailed or less effective or more expensive in any way or become unavailable to us or the borrowers for any reason, our business may be materiallyand adversely affected.We have established a strategic partnership with Ant Financial, one of our principal shareholders, and have in-depth cooperation in multipleareas of our business. This strategic partnership has contributed to the significant growth of our total revenues and improvement of our profitability inthe past and we believe that it will continue to contribute to the growth of our total revenues. However, although we have entered into a series ofagreements relating to our ongoing business cooperation and service arrangements with Ant Financial, we cannot assure you that we will continue toreceive the same level of services from Ant Financial on the same or more favorable terms and conditions, or renew such agreements at all, uponexpiration of their respective agreement terms. Furthermore, certain of these agreements provide either party the right to terminate with 30 days’ priornotice. If our agreements with Ant Financial were terminated prior to expiration, our business, results of operations and financial condition will bematerially and adversely affected.We have engaged a portion of our active borrowers through different channels on the Alipay consumer interface since 2016, although fromDecember 2017 onward, we have encouraged our repeat borrowers to directly engage us through our mobile applications. If channels on the Alipayconsumer interface were to change or become ineffective, costly or unavailable, our business, future prospects and results of operations may bematerially and adversely affected. For example, we promote our products and launch campaigns through the public service window on the Alipayconsumer interface, a borrower engagement channel which is free of charge and generally available to third parties. If such channel becomesunavailable in the future, or if we engage more borrowers through channels that charge us fees, our borrower engagement fees could increasesignificantly. In addition, we historically engaged a substantial portion of our users through Alipay’s dedicated channel for online consumer creditproducts. Such arrangement was terminated in February 2017. Although we subsequently entered into agreements to engage users through Alipay’sother channels, such change to borrower engagement channels, along with reduced borrowing activities during the Chinese New Year holiday, mayhave contributed to a decrease in the number of new borrowers in the first quarter of 2017 as compared to the fourth quarter of 2016. Furthermore, thefee rates for borrower engagement may change over time. For example, we engage Alipay users through Alipay’s dedicated channel for online third-party service providers. Pursuant to the amended and restated agreement for such arrangement, which we entered into in August 2017, we pay a feeconsistent with fees that Alipay would charge other similar third-party service providers on this channel as determined by Alipay from time to time. If itbecomes more costly for us to engage borrowers through this channel, our future prospects and results of operations may be materially and adverselyaffected. Our collaboration with Ant Financial may also 6Source: Qudian Inc., 20-F, April 09, 2018Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Table of Contentsaffect the terms of transactions that we facilitate through Alipay’s consumer interface, including the financing service fees we charge. Effective fromNovember 30, 2017, annualized fee rates (covering all interest, fees and charges) for all leads generated from the Alipay consumer interface have beensubject to a cap of 24% set by Alipay. Since then, we have implemented measures to promote the usage of our mobile applications and hence themajority of transaction orders are now being placed on our own mobile applications directly. Orders directly placed on our mobile applications are notsubject to such 24% fee cap. The maximum annualized fee rates for such transactions are instead set at 36%, in accordance with current PRC laws andregulations on relevant lending activities. There can be no assurance that we would be able to swiftly adapt to any other policy changes on the Alipayconsumer interface in the future, and our ability to utilize such interface may be negatively affected as a result.In March 2017, we entered into an agreement with a subsidiary of Ant Financial which operates the Jiebei consumer credit business and began toengage borrowers through the Jiebei platform. Pursuant to the relevant agreement, we pay certain fees to Ant Financial based on a percentage offinancing service fees we receive from borrowers. We may enter into other similar arrangements with Ant Financial in the future. While we believe sucharrangements enable us to further expand our borrower base, they may have a negative impact on our margin.In addition, we cannot assure you that Zhima Credit will continue to provide us, even with the authorization of the relevant users, credit analysisinformation of prospective borrowers, including Zhima Credit Scores (which serves as one of the many inputs for our credit assessment model) on termsthat are acceptable to us, or at all. The denial of access to such credit analysis may materially and adversely impact our ability to assess thecreditworthiness of prospective borrowers in the future. Any deterioration in our risk assessment capabilities may adversely affect the quality oftransactions that we facilitate and we may experience higher delinquency rates. Moreover, certain analyses and results that were the products of ourcollaboration with Zhima Credit are maintained by Zhima Credit. Any significant disruption in the systems of Zhima Credit in which such analysesand results are maintained could impede our risk assessment capabilities, which may materially and adversely affect our business operations.If any of the foregoing occurs, our ability to engage a large number of quality borrowers may be significantly weakened, which will materiallyand adversely affect both our credit performance and operational efficiency. In addition, we engage in other collaborations with Ant Financial, such asthe joint venture QuCampus formed with Ant Financial, and are in ongoing discussions with Ant Financial to explore other collaborationopportunities. If there are any adverse developments as to our existing and future collaborations with Ant Financial, including those as to QuCampus,our ability to engage borrowers through different channels on the Alipay consumer interface will be harmed and our ability to receive credit analysisinformation from Zhima Credit may also be adversely impacted. For example, Alipay has the contractual right to adjust or terminate our access toAlipay’s dedicated channel for online third-party service providers at any time based on Alipay’s campus life business strategy and QuCampus meetingthe relevant performance targets as set forth by Alipay. In addition, Alipay may not renew the relevant agreement upon the expiration of its one-yearterm in August 2018. If our access to such channel is restricted or terminated, our ability to engage new borrowers could be materially and adverselyaffected.We also benefit from Alipay’s strong brand recognition and wide adoption in China. If Alipay loses its market position, the effectiveness of ourcooperation with Ant Financial may be materially and adversely affected. In addition, any negative publicity associated with Ant Financial and itsaffiliates and services provided by Ant Financial and its affiliates, including Alipay and Zhima Credit, or any negative development in respect of theirmarket position or compliance with legal or regulatory requirements in China, may have an adverse impact on the effectiveness of our cooperation withAnt Financial as well as our business, results of operations, brands, reputation and prospects. 7Source: Qudian Inc., 20-F, April 09, 2018Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Table of ContentsWe may compete with the consumer credit business of Ant Financial.Ant Financial operates consumer credit businesses, such as Ant Credit Pay, or Huabei, and Ant Cash Now, or Jiebei. Similar to a credit card,Huabei allows its users to purchase goods and services on credit and charges them no interest if full repayments are made before the first due dates.Jiebei offers cash credit products of various amounts, including those that are significantly larger than amounts offered under our credit products. Assuch, Ant Financial’s consumer credit businesses may target similar potential borrowers as ours and compete with us directly. There has not been anymaterial impact of such competition on our strategic partnership with Ant Financial, and we are in ongoing discussions with Ant Financial to exploreother collaboration opportunities. In March 2017, we entered into an agreement with a subsidiary of Ant Financial which operates the Jiebei consumercredit business and began to engage borrowers through the Jiebei platform. However, there can be no assurance that potential competition with AntFinancial’s consumer credit business will not harm our strategic partnership with Ant Financial or that we will continue to be able to enter intoadditional collaboration with Ant Financial. We cannot rule out the possibility that the various services currently provided by Ant Financial to us willbe limited, restricted, curtailed or less effective or more expensive in any way or become unavailable. Such changes could materially and adverselyaffect borrower engagement, availability of credit analysis information and other aspects of our business. We may also compete with other companiesthat collaborate with Ant Financial, and such companies may enjoy similar or greater collaboration with Ant Financial than we do, or may have greaterfinancial, technical, marketing and other resources than we do. Competition with such parties may also adversely affect our business.We rely on our proprietary credit assessment model and risk management system in the determination of credit approval and credit limit assignment.If our proprietary credit assessment model and risk management system fail to perform effectively, such failure may materially and adversely impactour operating results.Credit limits for our borrowers are determined and approved based on risk assessment conducted by our proprietary credit assessment model andrisk management system. Such model and system use big data-enabled technologies, such as artificial intelligence and machine learning, that takesinto account transactions that we have processed as well as credit analysis and data from multiple external sources. While we rely on big data analyticsto refine our model and system, there can be no assurance that our application of such technology will continue to deliver the expected benefits. Inaddition, as we have a limited operating history, we may not have accumulated sufficient credit analysis and data to optimize our model and system.Even if we have sufficient credit analysis and data and our credit assessment model and risk management system has been tailored for prospectiveborrowers on the Alipay consumer interface for our current operation, such data and credit assessment model and risk management system might not beeffective as we continue to increase the amount of transactions, expand the borrower base and broaden our borrower engagement efforts throughdifferent channels in the future. If our system contains programming or other errors, if our model and system is ineffective or if the credit analysis anddata we obtained are incorrect or outdated, our credit assessment abilities could be negatively affected, resulting in incorrect approvals or denials ofcredit applications or mispriced credit products. If we are unable to effectively and accurately assess the credit profiles of borrowers or price creditproducts appropriately, we may either be unable to offer attractive financing service fee and credit limits to borrowers, or be unable to maintain lowdelinquency rates of transactions facilitated by us. Our risk and credit assessment may not be able to provide more predictive assessments of futureborrower behavior and result in better evaluation of our borrower base when compared to our competitors. If our proprietary credit assessment modeland risk management system fail to perform effectively, our business and results of operations may be materially and adversely affected.If we are unable to maintain low delinquency rates for transactions facilitated by us, our business and results of operations may be materially andadversely affected. Further, historical delinquency rates may not be indicative of future results.We may not be able to maintain low delinquency rates for transactions facilitated by us, or such delinquency rates may be significantly affectedby economic downturns or general economic conditions beyond our control 8Source: Qudian Inc., 20-F, April 09, 2018Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Table of Contentsand beyond the control of individual borrowers. We shifted our focus of target borrower base from college students to young consumers in generalstarting from November 2015, and we may not be able to accurately assess the credit profiles of our current target borrower base. Increase in creditutilization by borrowers from existing levels, including increase in the use of our credit products from users that were approved for credit but have notpreviously drawn down on their credit, may also potentially have a material adverse effect as to the delinquency rates for transactions facilitated by us.Introduction of new credit products or the wider utilization by borrowers of certain of our existing credit products that has longer durations, includingmerchandise credit products, may also have a material adverse impact as to the delinquency rates for transactions facilitated by us. Furthermore,although certain credit facilitated by us are funded directly or indirectly by institutional funding partners or transferred to institutional fundingpartners, if borrowers default on their payment obligations, we are generally obligated to repay our institutional funding partners all or a percentage ofloan principals and fees payable in respect of such credit drawdowns. As of December 31, 2017, outstanding principal of on-balance sheet transactionswas RMB9,150.0 million (US$1,406.3 million), of which RMB6,152.8 million (US$945.7 million) represented credit drawdowns that were funded byinstitutional funding partners, which were recorded as short-term and long-term borrowings and interest payables or amounts due to related parties onour balance sheets. As of December 31, 2017, outstanding principal of off-balance sheet transactions, which represent credit drawdowns directly fundedby institutional funding partners, was RMB2,035.9 million (US$312.9 million). As such, if we were to experience a significant increase in delinquencyrate, we may not have sufficient capital resources to pay defaulted principals and fees to our institutional funding partners, and if this were to occur, ourresults of operations, financial position and liquidity will be materially and adversely affected. Furthermore, we broaden our prospective borrower basefrom time to time as we enhance our credit assessment model to include those with different credit profiles than borrowers that we currently providecredit to as well as prospective borrowers that we have not reached out to previously. For example, in July 2017, we began to increase the approval ratefor applicants who seek to draw down small amounts for one-week durations and selectively approve credit to applicants who were turned down in thepast. We expect to experience higher delinquency rates for new borrower groups as we test and refine our credit assessment model. As a result of suchchanges, we may be unable to maintain low delinquency rates for transactions facilitated by us in the future.In addition, we reserve any estimated loss for on-balance sheet transactions due to the borrowers’ default as allowance for loan principal andfinancing service fee receivables. When evaluating the loan principal receivables on a pooled basis, we apply a roll rate model based on historical lossrates, while also taking into consideration macroeconomic conditions in order to calculate the pooled allowance. Accordingly, any increase in thedelinquency rates of on-balance sheet transactions would increase our allowance for loan principal and financing service fee receivables and couldhave a material adverse effect on our business, results of operations and financial positions. Furthermore, if the actual delinquency rates for on-balancesheet transactions were higher than predicted, our cash flow would be reduced and our allowance for loan principal and financing service feereceivables may not be able to cover the actual losses as expected, which could have a material adverse effect on our working capital, financialcondition, results of operations and business operations. As of December 31, 2015, 2016 and 2017, our M1+ Delinquency Coverage Ratio, defined asthe balance of allowance for loan principal and financing service fee receivables at the end of a period, divided by the total balance of outstandingprincipal 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 1.6x, 1.6x and 1.3x, respectively. With respect to on-balance sheet transactions, principal for which any installment payment was more than 30calendar days past due accounted for 0.92%, 1.29% and 4.42% of total outstanding principal as of December 31, 2015 and 2016 and 2017,respectively. As of December 31, 2015, 2016 and 2017, our loan principal and financing service fee receivables for on-balance sheet transactions forwhich any installment payment was more than 90 calendar days past due were approximately RMB11.6 million, RMB29.8 million andRMB181.2 million (US$27.8 million), respectively. As of December 31, 2015, 2016 and 2017, our allowance for loan principal and financing servicefee receivables were approximately RMB34.2 million, RMB105.1 million and RMB519.3 million (US$79.8 million), respectively.We do not accrue financing income on principal that is considered impaired or on credit drawdowns for which any installment payment is morethan 90 calendar days past due. Financing income previously accrued but 9Source: Qudian Inc., 20-F, April 09, 2018Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Table of Contentssubsequently placed on nonaccrual status will be netted from our financing income for the current period. Therefore, an increase in delinquency ratesof on-balance sheet transactions will lead to an increase in such adjustments of financing income.We have entered into off-balance sheet funding arrangements with certain institutional funding partners, which directly fund credit drawdownsby borrowers. Borrowers directly repay principal and financing service fees to the relevant institutional funding partners, who will in turn deduct theprincipal and fees due to them from the repayments and remit the remainder to us as our loan facilitation fees. At the inception of each off-balance sheettransaction, we record the fair value of guarantee liabilities, which represent the present value of our expected payout based on the estimateddelinquency rate and the applicable discount rate for time value. The loan facilitation fees payable to us, net of guarantee liabilities which wereallocated from the consideration in connection with such transaction, are recognized as loan facilitation income and others. Accordingly, an increase inthe expected delinquency rates of off-balance sheet transactions would result in an increase in the fair value of guarantee liabilities, which arerecognized as loss on guarantee liabilities and could have a material adverse impact on our results of operations. Furthermore, if the actual delinquencyrates for off-balance sheet transactions were higher than expected, our guarantee liabilities may not be able to cover the actual losses as expected,which could have a material adverse impact on our working capital, financial condition, results of operations and business operations. Our guaranteeliabilities were RMB47.0 million (US$7.2 million) as of December 31, 2017, and we paid the relevant institutional funding partnersRMB124.8 million (US$19.2 million) as a result of borrowers’ defaults for off-balance sheet transactions in 2017.Our business depends on our ability to collect payment on and service the transactions we facilitate.We have implemented payment and collection policies and practices designed to optimize regulatory compliant repayment, while also providingsuperior borrower experience. Our collection process is divided into distinct stages based on the severity of delinquency, which dictates the level ofcollection steps taken. For example, automatic reminders through text, voice and instant messages are sent to a delinquent borrower as soon as thecollections process commences. Our collection team will also make phone calls to borrowers following the first missed payment and periodicallythereafter. Our collection team also disclose such delinquency to Zhima Credit if a payment is more than 20 calendar days past due. For amounts morethan 90 calendar days past due, we continue to contact the relevant borrowers by phone. For larger amounts past due, we may also conduct in-personvisits. During 2015, 2016 and 2017, we recovered RMB0.9 million, RMB7.4 million and RMB22.4 million (US$3.4 million), respectively, of principaland financing service fees of on-balance sheet transactions for which any installment payment is more than 90 calendar days past due.Despite our servicing and collection efforts, we cannot assure you that we will be able to collect payments on the transactions we facilitate asexpected. If borrowers default on their payment obligations, we are generally obligated to repay our institutional funding partners all or a percentage ofloan principals and fees payable in respect of credit funded by them. Therefore, our failure to collect payment on the transactions will have a materialadverse effect on our business operations and financial positions. In addition, we aim to control bad debts by utilizing and enhancing our creditassessment system rather than relying on collection efforts to maintain healthy credit performances. As such, our collection team may not possessadequate resources and manpower to collect payment on and service the transactions we facilitated. If we fail to adequately collect amounts owed, thenpayments of principals and financing service fees to us may be delayed or reduced and our results of operations will be adversely affected. As theamount of transactions facilitated by us increases in the future, we may devote additional resources into our collection efforts. However, there can be noassurance that we 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 our collection efforts complywith the relevant laws and regulations in the PRC and we have established strict internal policies that our collections personnel do not engage inaggressive practices, we cannot assure you that such personnel will not engage in any misconduct as part of their collection efforts. Any suchmisconduct by 10Source: Qudian Inc., 20-F, April 09, 2018Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Table of Contentsour collection personnel or the perception that our collection practices are considered to be aggressive and not compliant with the relevant laws andregulations in the PRC may result in harm to our reputation and business, which could further reduce our ability to collect payments from borrowers,lead to a decrease in the willingness of prospective borrowers to apply for and utilize our credit or fines and penalties imposed by the relevantregulatory authorities, any of which may have a material adverse effect on our results of operations.Our business may be adversely affected if we are unable to secure funding on terms acceptable to us, or at all.We collaborate with institutional funding partners to fund certain credit drawdowns we facilitate. Our current institutional funding partnersinclude banks and other institutions. For credit drawdowns currently funded by institutional funding partners, such credit drawdowns are typicallyeither facilitated to borrowers directly from institutional funding partners or indirectly from institutional funding partners through trusts we establishedin collaboration with trust companies. Our amount of transactions has increased from approximately RMB578.2 million in 2014 toRMB88,943.7 million (US$13,670.4 million) in 2017. 64.9% of our amount of transactions in 2017 was funded by our institutional funding partners.As the demand for credit facilitated by us have significantly increased since inception, our funding arrangements have also changed significantly. Forexample, we historically transferred a significant amount of credit drawdowns to P2P platforms. In 2016, the amount of credit drawdowns transferred toP2P platforms was RMB8,099.5 million, representing 63.7% of the total amount of transactions funded by institutional funding partners during suchyear. We have ceased transferring credit drawdowns to P2P platforms in April 2017. We expect that our funding arrangements will continue to evolveas we explore additional or new sources of funding as well as new risk sharing or transfer mechanisms. There can be no assurance that our cooperationwith new institutional funding partners will meet our 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 ourinstitutional funding partners have limited operating history, and there can be no assurance that we will be able to rely on their funding in the future.Our ability to cooperate with new institutional funding partners may be subject to regulatory or other limitations. In addition, regardless of our riskmanagement efforts, credit facilitated by us may availability of funding from institutional funding partners depends on many factors, some of which areout of our control. Some of our institutional funding partners have limited operating history, and there can be no assurance that we will be able to relyon their funding in the future. Our ability to cooperate with new institutional funding partners may be subject to regulatory nevertheless be consideredriskier and may have a higher delinquency rate than loans made by borrowers with more established credit histories by traditional financialinstitutions. In the event there is a sudden or unexpected shortage of funds from our institutional funding partners or if our institutional fundingpartners have determined not to continue to collaborate with us, we may not be able to maintain necessary levels of funding without incurring highcosts of capital, or at all. Furthermore, we had historically relied on one institutional funding partner to fund a substantial portion of credit facilitatedby us. While we have since managed to diversify our funding sources, there can be no assurance that our funding sources will remain or becomeincreasingly diversified in the future. If we become dependent on a small number of institutional funding partners and any such institutional fundingpartner determines not to collaborate with us or limits the funding that is available, our business, financial condition, results of operations and cashflow may be materially and adversely affected. Since inception, we have from time to time experienced, and may continue to experience, constraints asto the availability of funds from our institutional funding partners. Such constraints have affected and may continue to affect user experience,including by limiting our ability to approve new credit applications or resulting in us having to curtail the amount that can be drawn down byborrowers under their existing credit limits. Such limitations have in turn restrained, and may continue to restrain, the growth of our business. Anyprolonged constraint as to the availability of funds from our institutional funding partners may also harm our reputation or result in negativeperception of the credit products we offer, thereby decreasing the willingness of prospective or existing borrowers to seek credit products from us or todraw down on their existing credit. 11Source: Qudian Inc., 20-F, April 09, 2018Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Table of ContentsOur online small credit companies and trusts may not be able to provide sufficient amount to fund the growth of our business. In addition, theregulatory regime and practice with respect to online small credit companies are evolving and subject to uncertainty.We established two online small credit companies, Fuzhou Microcredit and Ganzhou Microcredit, in 2016. Each online small credit company isauthorized to provide credit drawdowns up to three times of its respective net capital pursuant to the relevant laws and regulations. The authorizedamounts are currently insufficient to meet our funding needs for on-balance sheet transactions. We may not be able to obtain the regulatory approvalsto increase the authorized amounts or to establish additional online small credit companies. To complement our online small credit companies, we alsofund credit drawdowns through trusts established in collaboration with trust companies. The amount of funds that our online small credit companiesand these trusts are able to provide may be insufficient to meet the growth in the amount of transactions drawdowns we facilitate. The funding of creditdrawdowns by us without utilizing online small credit companies or trusts may render us to be deemed as a lender or a provider of financial services bythe PRC regulatory authorities, and we may become subject to supervision and restrictions on lending under applicable laws and regulations.Government authorities have issued certain rules, laws and regulations to regulate the organization and business activities of online small creditcompanies. However, due to the lack of the detailed rules on interpretation and implementation of such rules, laws and regulations and the fact that therules, laws and regulations are expected to continue to evolve with respect to the online small credit companies, there are uncertainties as to how suchrules, laws and regulations will be interpreted and implemented and whether there will be new rules, laws or regulations issued which would set furtherrequirements and restrictions on online small credit companies. We cannot assure you that our existing practice of the online small credit companieswill be deemed to be in full compliance with all rules, laws and regulations that are applicable, or may become applicable to us in the future. Forexample, on November 9, 2016, Fuzhou Microcredit received a rectification notice from the Finance Office of Fuzhou Municipal Government, thecompetent regulator for administration and supervision on the small credit business of Fuzhou Microcredit, which requires Fuzhou Microcredit toconduct certain improvements and corrections in accordance with the Measures of Jiangxi Province for Supervision on Online Small Credit Companies(Pilot Scheme), as promulgated by the Jiangxi Provincial Finance Office on September 5, 2016. The rectification notice mainly focused on FuzhouMicrocredit’s lack of a separate operating system and internal control system from those of Beijing Happy Time and required Fuzhou Microcredit toestablish its own operating system and internal control system. We have carried out such improvements and corrections as required and have submittedto the Finance Office of Fuzhou Municipal Government the rectification report. We have not received any further notification from the regulator.Since December 2017, our two online small credit companies have been subject to inspections by the local regulatory authorities as part of abroader regulatory effort to promote compliance by online small credit companies in China. If our online small credit companies were found to be inviolation of applicable laws or regulations, we could be ordered to rectify such violation or even cease the operations of our online small creditcompanies. We have not received any notification from regulatory authorities as to the outcomes of such inspections. In light of the inspections, wehave voluntarily and temporarily ceased funding credit drawdowns through our online small credit companies since December 2017, and we havefacilitated credit drawdowns through other funding arrangements. If we were ordered to cease the operations of our online small credit companies, therecan be no assurance that we would not experience any disruption in our business as a result.We may be deemed as a lender or a provider of financial services by the PRC regulatory authorities.We commenced our business in early 2014. We have established two online small credit companies in May 2016 and December 2016,respectively, and we have established trusts in collaboration with trust companies starting in December 2016. The maximum amount of credit that eachof our online small credit companies is authorized to lend is limited and associated with its respective capital level pursuant to the requirements of thecompetent local authorities, and the authorized amounts are currently insufficient to meet our funding needs for on-balance sheet transactions. We maynot be able to obtain the regulatory approvals to increase the authorized amounts or to establish additional online small credit companies. Tocomplement our online small credit companies, we also fund credit drawdowns through trusts. Such trusts are funded by funds from institutional 12Source: Qudian Inc., 20-F, April 09, 2018Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Table of Contentsfunding partners and our own capital. Since the trust companies administering such trusts have been licensed by financial regulatory authorities tolend, credit drawdowns funded under this arrangement are not private lending transactions within the meaning of the Private Lending JudicialInterpretation issued by the Supreme People’s Court of the PRC in August 2015. In 2017, RMB16,970.3 million (US$2,608.3 million) of creditdrawdowns initially funded by us were funded through our online small credit companies, representing approximately 19.1% of the total amount oftransactions facilitated during such period. In 2017, the amount of transactions facilitated through trusts was RMB38,808.6 million (US$5,964.8million), representing approximately 43.6% of the total amount of transactions facilitated during such period. We currently fund all credit drawdownsinitially disbursed by us through online small credit companies or trusts.We disbursed funds to borrowers without utilizing online small credit companies or trusts in the past, which may be considered to involve the useof our own capital in lending, as a result of which we may be deemed as a lender or a provider of financial services by the PRC regulatory authorities,and we may become subject to supervision and restrictions on lending under applicable laws and regulations. For example, the Measures for theBanning of Illegal Financial Institutions and Illegal Financial Business Operations, promulgated by the PRC State Council, or the State Council, inJuly 1998 and revised in 2011, prohibits financial business activity, including fund raising and facilitating loans to the public, to be conductedwithout 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 afinancial 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 theillegal revenues, and the PBOC has the authority to order such business to suspend its operations. Such existing PRC laws and regulations with respectto the supervision and restrictions on lending to the public were primarily aimed to regulate traditional banking and financial institutions at the time oftheir respective promulgations, and the regulatory environment in the PRC has evolved since then. With the rapid development and evolving nature ofthe consumer finance industry and other new forms of Internet finance business in China, there are uncertainties as to the interpretation of the laws andregulations mentioned above as well as whether such laws and regulations are applicable to our business. In the event that we are considered by therelevant authorities to be subject to such PRC laws and regulations, and our past business operations are deemed to be in violation of such laws andregulations, we may be exposed to certain administrative penalties, including the confiscation of illegal revenue and fines up to five times the amountof the illegal revenue as mentioned above. Furthermore, our financing service fees received from borrowers might be fully or partially deemed asinterest, such fees may be subject to the restrictions on interest rate as specified in applicable rules on private lending. For example, in accordance withthe Provisions on Several Issues Concerning Laws Applicable to Trials of Private Lending Cases issued by the Supreme People’s Court of the PRC onAugust 6, 2015, or the Private Lending Judicial Interpretations, which came into effect on September 1, 2015, if the annual interest rate of a privateloan is higher than 36%, the excess will be void and will not be enforced by the courts. See “Item 4. Information on the Company — B. BusinessOverview — 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 theRegulations on Non-Deposit-Taking Lending Organizations (Draft for Comment), or the Draft Regulations on Non-Deposit-Taking Lending, with aNote on the Draft Regulations on Non-Deposit-Taking Lending published by the PBOC, or the PBOC Note on the Draft Regulations onNon-Deposit-Taking Lending. According to the PBOC Note on the Draft Regulations on Non-Deposit-Taking Lending, rather than generallycategorizing activities like lending to public without the approval of PBOC as illegal, PBOC recognizes that, with the continuous development of thefinancial 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 othernon-deposit-taking lending organizations that are not covered by the current regulatory framework in the PRC, which we believe may includecompanies such as ours.It is uncertain when or whether the Draft Regulations on Non-Deposit Lending-Taking will be officially promulgated and take effect and whetherthe promulgated version would be substantially revised. Therefore, 13Source: Qudian Inc., 20-F, April 09, 2018Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Table of Contentssubstantial uncertainty remains regarding the final framework, scope and applicability to us of the Draft Regulations on Non-Deposit Lending-Takingto us. We cannot assure you that our past or existing practices would not be deemed to violate any existing or future laws, regulations andgovernmental policies. If the Draft Regulations on Non-Deposit Lending-Taking is enacted as proposed, we may have to obtain the requisite businesspermit 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 andinterpretation. If our business practices or the business practices of our institutional funding partners are deemed to violate any PRC laws orregulations, our 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 inwhich we operate, and our business may be subject to a variety of laws and regulations in the PRC that involve financial services, including consumerfinance, small credit, and private lending. The application and interpretation of these laws and regulations are ambiguous, particularly in the new andrapidly-evolving online consumer finance industry in which we operate, and may be interpreted and applied inconsistently between the differentgovernment authorities. As of December 31, 2017, we have not been subject to any material fines or other penalties under any PRC laws or regulationsas to our business operations. However, if the PRC government adopts a stringent regulatory framework for the online consumer finance industry in thefuture, and subject market participants such as our company to specific requirements (including without limitation, capital requirements, reserverequirements and licensing requirements), our business, financial condition and prospects would be materially and adversely affected. The existing andfuture rules, laws and regulations can be costly to comply with and if our practice is deemed to violate any existing or future rules, laws andregulations, we may face injunctions, including orders to cease illegal activities, and may be exposed to other penalties as determined by the relevantgovernment authorities as well.In July 2015, the Guidelines on Promoting the Healthy Development of Internet Finance, or the Internet Finance Guidelines, were jointlyreleased by ten PRC regulatory agencies. The Internet Finance Guidelines set out the regulatory framework and some basic principles on regulating theonline 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 FinanceGuidelines is interpreted as businesses conducted via the Internet by consumer finance companies. Pursuant to the Pilot Measures for theAdministration of Consumer Finance Companies released by the CBRC in November 2013, or the Pilot Consumer Finance Measures, consumer financecompanies in the PRC refer to non-banking financial institutions as approved by the CBRC that do not engage in taking public deposits fromindividual lenders and provide individual borrowers with consumer loans pursuant to the principles that such loans be small amount in nature andwidely dispersed to various borrowers. However, the Internet Finance Guidelines and the Pilot Consumer Finance Measures do not explicitly provideguidance or requirements on other forms of online consumer finance business conducted by participants other than the CBRC-approved consumerfinance companies as defined in the Pilot Consumer Finance Measures, including, for example, our business. Therefore, it is currently uncertainwhether our business practice is subject to the relevant rules regarding online consumer finance companies provided under the Internet FinanceGuidelines and consumer finance companies provided under the Pilot Consumer Finance Measures. Given the evolving regulatory environment of theconsumer finance industry, we cannot rule out the possibility that the CBRC or other government authorities will issue new regulatory requirements toinstitute a new licensing regime covering our industry. If such a license regime is introduced or new regulatory rules are promulgated, we cannot assureyou that we would be able to obtain any new licenses or other regulatory approvals in a timely manner, or at all, which would materially and adverselyaffect our business and impede our ability to continue our operations.In addition, in August 2016, the CBRC, the Ministry of Industry and Information Technology, or the MIIT, the Ministry of Public Security ofChina and the Office for Cyberspace Affairs jointly promulgated the Interim Measures for Administration of the Business Activities of Online LendingInformation Intermediary Institutions, 14Source: Qudian Inc., 20-F, April 09, 2018Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Table of Contentsor the Interim Online Lending Information Intermediary Measures, which set out certain rules to regulate the business activities of online lendinginformation intermediary institutions. The Interim Online Lending Information Intermediary Measures define “online lending” as direct lendingbetween peers, which can be natural persons, legal persons or other organizations, through Internet platforms, and “online lending informationintermediary institutions” as financial information intermediaries that are engaged in lending information business and directly provide peers withlending information services, such as information collection and publication, credit rating, information interaction and loan facilitation betweenborrowers and lenders for them to form direct peer-to-peer lending relationships. The Interim Online Lending Information Intermediary Measures areonly applicable to private lending transactions according to relevant interpretations by the China Banking Regulatory Commission. Loans funded byfinancial institutions which are licensed by financial regulatory authorities are not private lending transactions within the meaning of the PrivateLending Judicial Interpretation issued by the Supreme People’s Court of the PRC in August 2015. Therefore, facilitation of loans funded directly bysuch licensed financial institutions is not subject to the regulation set forth in the Interim Online Lending Information Intermediary Measures.We do not engage in direct loan facilitation between peers. While we facilitate transactions that are directly funded by certain institutionalfunding partners, such companies are financial institutions licensed by financial regulatory authorities to lend. As such, we do not consider ourselvesas an “online information intermediary institution” regulated under the Interim Online Lending Information Intermediary Measures. However, wecannot assure you that the CBRC or other PRC governmental agencies would not expand the applicability of the Interim Online Lending InformationIntermediary Measures and/or otherwise regard us as an online lending information intermediary institution. As a provider of online credit products,our business share certain similarities with those of P2P platforms. In March 2017, Beijing Happy Time received a rectification notice from the BeijingBranch of the Office of Leading Group on Special Rectification of Risks in the Internet Finance Sector, which was also the Office of Leading Group onSpecial Rectification of Risks in the Online Lending of Beijing, or the Beijing Rectification Office, the regulator of the Internet finance and onlinelending industry in Beijing. The rectification notice required Beijing Happy Time to conduct certain improvements and corrections to its businessoperation to be in compliance with the Interim Online Lending Information Intermediary Measures and the Implementing Scheme of SpecialRectification of Risks in the Internet Finance Sector. We do not believe we are subject to the Interim Online Lending Information IntermediaryMeasures and have discussed with the Beijing Rectification Office about the difference between our business and those of “online informationintermediary institution” as defined in the Interim Online Lending Information Intermediary Measures and that certain correction requirements in thenotice were not actually related to our business. Nevertheless, the Beijing Rectification Office still required us to comply with certain requirementsunder the Interim Online Lending Information Intermediary Measures regardless of whether we are a P2P platform due to the fact that some of ourinstitutional funding partners are P2P platforms, which are identified as online lending information intermediary institutions in accordance with theInterim Online Lending Information Intermediary Measures and other PRC laws and regulations. As such, we were deemed to be participating in acertain part of the “online lending” process as defined in the Interim Online Lending Information Intermediary Measures. We have since carried outcertain improvements and corrections as required by the Beijing Rectification Office and are maintaining an ongoing dialogue with the BeijingRectification Office. As of the date of this annual report, we have not received final clearance from the Beijing Rectification Office that ourrectification efforts were sufficient, and there can be no assurance that we will be able to receive such final clearance. We also cannot assure you thatthe Beijing Rectification Office will agree with our position that we are not an “online information intermediary institution.” In the event that we aredeemed as an online lending information intermediary institution by the PRC regulatory authorities in the future, we may have to register with localfinancial regulatory authorities and apply for telecommunication business operation licenses if required by the competent authorities, and our currentbusiness practices may be considered to be in violation of the Interim Online Lending Information Intermediary Measures. Accordingly, we may faceadministrative orders to make rectification, receive administrative warnings or criticism notice, monetary penalties up to RMB30,000 and otherpenalties, and our business, results of operations and financial position could be materially and adversely affected. 15Source: Qudian Inc., 20-F, April 09, 2018Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Table of ContentsWe have cooperated with our institutional funding partners, whose compliance with PRC laws and regulations may affect our business. Ourcollaboration with institutional funding partners have exposed us to and may continue to expose us to additional regulatory uncertainties faced bysuch institutional funding partners. In addition, we have ceased transferring credit drawdowns to P2P platforms in April 2017. Nonetheless, we cannotassure you that the business operations of our institutional funding partners currently are or will be in compliance with the relevant laws andregulations, and in the event that our institutional funding partners do not operate their businesses in accordance with the relevant laws andregulations, they will be exposed to various regulatory risks and accordingly, our business, financial condition and prospects would be materially andadversely affected.In April 2017, the Office of Leading Group on Special Rectification of Risks in the Online Lending, the regulator for administration andsupervision on the nationwide Internet finance and online lending, or the National Rectification Office, issued an Notice on the Conduction of Checkand Rectification of Cash Loan Business Activities and a supplementary notice, or the Notice on Cash Loan. The Notice on Cash Loan requires thelocal counterparts of the National Rectification Office to conduct a full-scale and comprehensive inspection of cash loan business conducted by onlineplatforms and require such platforms to conduct necessary improvements and corrections within a designated period to comply with the relevantrequirements under the Private Lending Judicial Interpretation issued by the Supreme People’s Court of the PRC in August 2015, the Measures for theBanning of Illegal Financial Institutions and Illegal Financial Business Operations, the Guiding Opinions on Small Credit Companies, the InterimOnline Lending Information Intermediary Measures and the Implementing Scheme of Special Rectification of Risks in the Internet Finance Sector. TheNotice on Cash Loan focuses on preventing malicious fraudulent activities, loans that are offered at extortionate interest rates and violence in the loancollection processes in the cash loan business operation of online platforms. The National Rectification Office issued a list of cash loan business thatare to be examined, which includes Laifenqi, one of the brands in which we use to market our credit products. In light of the Notice on Cash Loan, wehave taken measures, including re-evaluating and adjusting the amount of financing service fees we charge on all credit drawdowns in an effort tocomply with applicable regulations. Due to the uncertainties with respect to the interpretation and application of the laws and regulations as stated inthe Notice on Cash Loan, we cannot assure you our business practice will be deemed to be in full compliance with all such laws and regulations, andwe may face injunctions, including orders to change our current business activities, and may be exposed to other penalties as determined by therelevant government authorities after such examination according to the Notice on Cash Loan. Furthermore, we may be required to conduct certainother improvements or corrections which could be costly, and our business, financial condition, results of operations and prospects would be materiallyand adversely affected.The Office of the Leading Group for Specific Rectification against Online Finance Risks and the Office of the Leading Group for SpecificRectification against P2P Online Lending Risks jointly issued the Circular on Regulating and Rectifying Cash Loan Business on December 1, 2017, orCircular 141. Among other things, Circular 141 provides restrictions on banks’ collaboration with third parties in cash loan business. Pursuant toCircular 141, a bank may not outsource its core business functions, such as credit assessment and risk management, to third parties. Circular 141 alsoprohibits a bank participating in loan facilitation transactions from accepting credit enhancement services from a third party which has not obtainedany license or approval to provide guarantees, including credit enhancement service in the form of a commitment to assume default risks. As Circular141 is relatively new, it remains uncertain how the regulatory authorities will interpret and enforce the requirements. We have entered intoarrangements with several banks which directly fund credit drawdowns to borrowers. We refer to such banks qualified credit applications fromborrowers, including our assessment of their credit profiles and our suggested credit limits. They will then review the credit applications and approvecredit for drawdown. When a borrower defaults, we are obligated to repay the full overdue amount to the relevant bank. If our arrangement with banksis deemed to be in violation of Circular 141, we could be subject to penalties and/or be required to significantly change our business model.We focus on complying with relevant laws, regulations and government policies applicable to our business practice in the PRC and haveimplemented various measures. We established two online small credit companies, Fuzhou Microcredit and Ganzhou Microcredit, in 2016. Eachonline small credit company is authorized to 16Source: Qudian Inc., 20-F, April 09, 2018Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Table of Contentsprovide credit drawdowns up to three times of its respective net capital pursuant to the relevant laws and regulations. We have established trusts incollaboration with trust companies starting in December 2016. In addition, we continuously seek to work with additional institutional fundingpartners, including more traditional banking institutions, in light of the regulatory uncertainties faced by certain of our institutional funding partners,such as P2P platforms. In April 2017, we 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 tocontinue to evolve in this newly emerging industry in which we operate, we cannot assure you that our measures would effectively prevent us fromviolating any existing or future rules, laws and regulations. See “Our online small credit companies and trusts may not be able to provide sufficientamount to fund the growth of our business. In addition, the regulatory regime and practice with respect to online small credit companies are evolvingand subject to uncertainty.”As part of our efforts to obtain funding at competitive costs, we may from time to time explore alternative funding initiatives to support our rapidbusiness growth, including through standardized capital instruments such as the issuance of asset-backed securities and other debt and equityofferings. The current PRC regulatory framework does not impose many restrictions and obligations on us as the credit originator of any potentialasset-backed securities offering. Pursuant to the relevant PRC laws and regulations, an institution, such as our online small credit companies, is entitledto establish an asset-backed securities scheme as a credit originator for such scheme on the condition that it has legitimate ownership to the underlyingtransferred assets that are able to generate independent and predictable cash flow in compliance with relevant laws and regulations. However, theinitiators of any potential asset-backed securities scheme with whom we work with are required to be financial institutions and they are subject to avariety of laws and regulations in the PRC, such as Administrative Provisions on the Asset Securitization Business of Securities Companies and theSubsidiaries of Fund Management Companies and Measures for the Supervision and Administration of Pilot Projects of Credit Asset Securitization ofFinancial Institutions. Since we will not operate as an initiator of any asset-backed securities scheme, we will not be subject to these laws andregulations governing financial institutions as initiators. However, as the laws and regulations applicable to asset-backed securities are stilldeveloping, it remains uncertain as to the application and interpretation of such laws and regulations, particularly relating to the new and rapidlyevolving online consumer finance industry in which we operate.To the extent we issue asset-backed securities in the future, we do not plan to issue such securities to investors located in the United States orotherwise meeting the definition of “U.S. persons” as defined under Rule 902 under the Securities Act. As such, we do not believe that any suchpotential issuances will be subject to the requirements in Regulation AB under the Securities Act and the related rules. Nonetheless, if we issue asset-backed securities in the future that are required to be registered under the Securities Act, we may need to comply with Regulation AB and related rules,which may make the issuance of such asset-backed securities impracticable.The financing service fees we charge borrowers may decline in the future and any material decrease in such financing service fees could harm ourbusiness, financial condition and results of operations.We generate a substantial majority of our total revenues from financing service fees we charge borrowers. In 2017, financing income, which werecognize for our on-balance sheet transactions, comprised 76.3% of our total revenues. In addition, we recognize loan facilitation income and othersfor our off-balance sheet transactions, as the relevant institutional funding partners deduct the principal and fees due to them from the repayments andremit the remainder to us as our loan facilitation fees. As such, the amount of financing service fees charged under such arrangements may affect theamount of loan facilitation fees that we collect. Any material decrease in our financing service fees would have a substantial impact on our margin. Inthe event that the amount of financing service fees we charge for credit drawdowns we facilitated decrease significantly in the future and we are notable to reduce our cost of capital for funds from institutional funding partners or to adopt any cost control initiatives, our business, financial conditionand results of operations will be harmed. To compete effectively, the financing service fees we charge borrowers could be affected by a variety offactors, including the creditworthiness and ability to repay of the borrowers, the competitive landscape of our industry, 17Source: Qudian Inc., 20-F, April 09, 2018Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Table of Contentsour access to capital and regulatory requirements. Our financing service fees may also be affected by a change over time in the mix of the types ofproducts we offer and a change to our borrower engagement initiatives. Our competitors may also offer more attractive fees, which may require us toreduce our financing service fees to compete effectively. Certain consumer financing solutions offered by traditional financial institutions may providelower fees than our financing service fees. Although we do not believe such consumer financing solutions currently compete with our products ortarget the same unserved or underserved consumers in China, such traditional financial institutions may decide to do so in the future, which may have amaterial adverse effect as to the financing service fees that we will be able to charge. Furthermore, as our borrowers establish their credit profile overtime, they may qualify for and seek out other consumer financing solutions with lower fees, including those offered by traditional financial institutionsoffline, and we may need to adjust our financing service fees to retain such borrowers.In addition, our financing service fees are sensitive to many macroeconomic factors beyond our control, such as inflation, recession, the state ofthe credit markets, changes in market interest rates, global economic disruptions, unemployment and fiscal and monetary policies. Our financingservice 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 applicablerules on private lending. Circular 141 provides that overall capital cost charged on a borrower, comprised of interests and fees, should be in compliancewith the judicial interpretations by the Supreme People’s Court of the PRC regarding interest rates in private lending. According to the Private LendingJudicial 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.The annualized fee rates charged by us on a significant number of transactions facilitated were in excess of 36% historically. Among the number oftransactions we facilitated in 2016, 59.5% of their annualized fee rates exceeded 36%. Had all such credit drawdowns reduced their annualized fee ratesto 36%, our revenue would have been reduced by approximately RMB307 million, representing 21% of our total revenues in 2016.In an effort to comply with potentially applicable laws and regulations, we adjusted the pricing of our credit products in April 2017 to ensure thatthe annualized fee rates charged on all credit drawdowns do not exceed 36%. As financing service fees historically accounted for a substantial majorityof our revenue, any material reduction in the amount of financing service fees we charge borrowers could have a material adverse effect on ourbusiness, results of operations and financial condition. See “The laws and regulations governing the online consumer finance industry in the PRC arestill at a nascent stage and subject to further change and interpretation. If our business practices or the business practices of our institutional fundingpartners are deemed to violate any PRC laws or regulations, our business, financial condition, results of operations and prospects would be materiallyand adversely affected.”We 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, onAugust 2, 2017 which became effective on October 1, 2017. Pursuant to the Financing Guarantee Rules, “financing guarantee” refers to the activities inwhich 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 offinancing 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 guaranteebusiness 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.We have entered into cooperative arrangements with banks in which they are identified as the lender under the agreements with borrowers andthe borrowers are required to repay the principal and financing service fees 18Source: Qudian Inc., 20-F, April 09, 2018Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Table of Contentsdirectly to them. However, when borrowers under arrangements with banks fail to repay, we are obligated to repay the relevant bank the full overdueamount. In addition, pursuant to our agreement with the consumer finance company, we will make cash payments to the consumer finance companybased on the delinquency rate on the portfolio of loans that we have facilitated in which the consumer finance company originates pursuant to apre-agreed formula. For year 2017, such transactions, which are off-balance sheet transactions, represented 11.8% of the total amount of transactionsfacilitated. We have also entered into arrangements with various institutional funding partners to fund on-balance sheet transactions, and we are alsoobligated to compensate such institutional funding partners for borrower defaults. For year 2017, such on-balance sheet transactions represented 53.1%of the total amount of transactions facilitated. As such, transactions funded by institutional funding partners represented 64.9% of the total amount oftransactions facilitated for year 2017.Due to the lack of further interpretations, the exact definition and scope of “operating financing guarantee business” under the FinancingGuarantee Rules is unclear. It is uncertain whether we would be deemed to operate financing guarantee business because of our current arrangementswith institutional funding partners. Furthermore, pursuant to Circular 141, a bank participating in loan facilitation transactions may not accept creditenhancement service from a third party which has not obtained any license or approval to provide guarantees, including credit enhancement service inthe form of a commitment to assume default risks. If the relevant regulatory authorities determine that such prohibition is applicable to our arrangementwith banks, we may be required to either cease providing guarantees as described above or obtain approval or license for financing guarantee business.If we were unable to satisfy either requirement, we may no longer be able to collaborate with the relevant banks, or become subject to penalties, and ourbusiness, financial condition, results of operations and prospects could be materially and adversely affected.We may not be able to successfully operate our budget auto financing business.We launched Dabai Auto, our budget auto financing products, in November 2017. We offer such products in the form of sales-type finance leases.We purchase cars on our inventory and lease them to creditworthy car buyers. Each car buyer is required to make a down payment and pay installmentsthroughout the term of the lease. The legal title of the car is transferred to the car buyer upon full repayment. Risks and uncertainties associated withour budget auto financing business include, among other things: • our ability to engage prospective car buyer in a cost-effective way; • our ability to offer competitive auto financing products and deliver convenient user experience; • our ability to accurately assess credit risk of prospective car buyers; • decline of residual value of leased cars before repossession; • our ability to collect repayments and/or repossess leased cars from delinquent car buyers; and • changes in the regulatory environment for auto financing products.If we were unable to successfully operate our budget auto financing business, our business, results of operations and financial condition will bematerially and adversely affected.We have limited experience managing our allowance for loan principal and financing service fee receivables. In addition, our allowance for loanprincipal and financing service fee receivables is determined based on both objective and subjective factors and may not be adequate to absorb loanlosses if we fail to accurately forecast the expected loss.We face the risk that borrowers fail to repay their principals and financing service fees in full. Although we transfer certain credit drawdownsfacilitated by us to our institutional funding partners, if borrowers default on their payment obligations for such credit drawdowns, we are generallyobligated to repay our institutional funding partners all loan principals and fees payable in respect of credit drawdowns funded by them. Estimated 19Source: Qudian Inc., 20-F, April 09, 2018Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Table of Contentsloss as a result of the borrower’s default is recorded as allowance for loan principal and financing service fee receivables. If we experience higherdelinquency rates, such allowance would also increase. See “Item 5. Operating and Financial Review and Prospects — B. Liquidity and CapitalResources.” We have established an evaluation process designed to determine the adequacy of our allowance for loan principal and financing servicefee receivables. While this evaluation process uses historical and other objective information, it is also dependent on our subjective assessment basedupon our experience and judgment. Actual losses are difficult to forecast, especially if such losses stem from factors beyond our historical experience.We have limited experience managing our allowance for loan principal and financing service fee receivables, especially given the fact that we onlycommenced our business in early 2014. Furthermore, we shifted our focus of target borrower base from college students to young consumers in generalstarting from November 2015, and we may not be able to accurately forecast delinquencies of our current target borrower base. Given these challenges,it is possible that we will underestimate or overestimate the allowance for loan principal and financing service fee receivables. In addition, we are notsubject to periodic review by bank regulatory agencies of our allowance for loan principal and financing service fee receivables. As a result, if weunderestimate the allowance for loan principal and financing service fee receivables, there can be no assurance that our allowance for loan principaland financing service fee receivables will be sufficient to absorb losses or prevent a material adverse effect on our business, financial condition andresults of operations. Conversely, if we overestimate the allowance for loan principal and financing service fee receivables, we will record higherprovision for loan principal and financing service fee receivables, which will adversely affect our results of operations.We face intense competition and, if we do not compete effectively, our results of operations could be harmed.The online consumer finance industry in China is highly competitive and we compete with other consumer finance service providers, includingonline consumer finance service providers, such as JD Finance, WeBank, Huabei and Jiebei, as well as traditional financial institutions, such as banksand consumer finance companies. In particular, we and Jiebei both engage borrowers through the Alipay consumer interface and may compete forborrower engagement. We also compete with other providers of budget auto financing products, such as Youxin and Yixin, offline auto retailers suchas 4S dealers as well as online auto retail platforms. Our competitors may operate different business models, have different cost structures or participateselectively 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 our current and potential competitors have significantly more financial, technical, marketing and otherresources than we do and may be able to devote greater resources to the development, promotion, sale and support of their offerings. Our competitorsmay also have longer operating history, more extensive borrower bases or funding sources, greater brand recognition and brand loyalty and broaderrelationships with funding partners or merchandise suppliers than us. Additionally, a current or potential competitor may acquire, or form a strategicalliance with, one or more of our competitors. Our competitors may be better at developing new products, offering more attractive fees, respondingmore quickly to new technologies and undertaking more extensive and effective marketing campaigns. Furthermore, in light of the low barriers to entryin the online consumer finance industry, more players may enter this market and increase the level of competition. We anticipate that more establishedInternet, technology and financial services companies that possess large, existing user bases, substantial financial resources and establisheddistribution channels may also enter the market in the future. In response to competition and in order to grow or maintain the amount of transactionsfacilitated to borrowers, we may have to offer lower amount of financing service fees, which could materially and adversely affect our business andresults of operations. If we are unable to compete with such companies and meet the need for innovation in our industry, the demand for our creditproducts could stagnate or substantially decline, which could harm our business and results of operations.With respect to institutional funding partners, we compete with other investment products and asset classes, such as equities, bonds, investmenttrust products, insurance products, bank savings accounts and real estate. If a substantial number of our institutional funding partners choose otherinvestment alternatives, our business, financial condition and results of operations could be materially and adversely affected. 20Source: Qudian Inc., 20-F, April 09, 2018Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Table of ContentsWe 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 Internetcontent provider license, or the ICP license, and sanctions for engaging in the operation of online data processing and transaction processing withouthaving obtained a 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 consumerfinance industry remains uncertain, it is unclear whether online consumer finance service provider like us are required to obtain ICP license or ODPTPlicense, or any other kind of value-added telecommunication business licenses. Beijing Happy Time and Qufenqi Beijing both have obtained ICPlicenses. We have not obtained any ODPTP license to date. 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 governmentauthorities will explicitly require any of our consolidated VIEs or subsidiaries of our consolidated VIEs to obtain ICP licenses, ODPTP licenses or othervalue-added telecommunication business licenses, or issue new regulatory requirements to institute a new licensing regime for our industry. If suchvalue-added telecommunication business licenses are clearly required in the future, or a new license regime is introduced or new regulatory rules arepromulgated, we cannot assure you that we would be able to obtain any required license or other regulatory approvals in a timely manner, or at all,which would subject us to the sanctions described above or other sanctions as stipulated in the new regulatory rules, and materially and adverselyaffect our business and impede our ability to continue our operations.The scale of our budget auto financing business may be limited by the total net assets of our finance lease subsidiary.In September 2013, the Ministry of Commerce, or the MOFCOM, promulgated the Measures for Supervision and Administration of FinanceLease Enterprises, pursuant to which the risk assets of a finance lease enterprise may not exceed ten times of its total net assets. According to theMeasures for the Administration of Foreign Funded Lease Industry, promulgated by the MOFCOM in 2005 and amended by the MOFCOM in 2015,the term “risk assets” refers to a company’s total assets, net of cash, bank deposits, Chinese treasury bonds and lease assets held in custody. ShanghaiAutohome funds finance leases for car buyers on our platform, and its risk assets consist of finance lease receivables relating to the finance leases itfunds.We currently provide budget auto financing products in the form of finance leases through our subsidiary Xiamen Qudian Financial Lease Ltd.,or Xiamen Financial Lease. We may continue to expand the amount of finance leases provided by Xiamen Financial Lease, which would increase theamount of finance lease receivables of such subsidiary. When the amount of finance lease receivables exceeds ten times of Xiamen Financial Lease’stotal net assets, we may be required to increase the total net assets of Xiamen Financial Lease by means of, among others, increasing the paid-up capitalcontribution. However, we cannot assure you that we will be able to make such capital contribution timely, or at all. Our inability to make such capitalcontribution on a timely basis could have an adverse impact on our business.PRC regulation of loans to, and direct investment in, PRC entities by offshore holding companies and governmental control of currency conversionmay restrict or prevent us from using the proceeds of our initial public offering to make loans to our PRC subsidiaries and our consolidated VIEs, orto make additional capital contributions to our PRC subsidiaries.In utilizing the proceeds of our initial public offering, we, as an offshore holding company, are permitted under PRC laws and regulations toprovide 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 21Source: Qudian Inc., 20-F, April 09, 2018Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Table of Contentssubsidiaries to finance their activities cannot exceed statutory limits and must be registered with the local counterpart of SAFE and capitalcontributions to our PRC subsidiaries are subject to the requirement of making necessary filings in the Foreign Investment ComprehensiveManagement Information System, and registration with other governmental authorities in China.SAFE promulgated the Notice of the State Administration of Foreign Exchange on Reforming the Administration of Foreign ExchangeSettlement of Capital of Foreign-invested Enterprises, or Circular 19, effective on June 1, 2015, in replacement of the Circular on the RelevantOperating Issues Concerning the Improvement of the Administration of the Payment and Settlement of Foreign Currency Capital of Foreign-InvestedEnterprises, or SAFE Circular 142, the Notice from the State Administration of Foreign Exchange on Relevant Issues Concerning Strengthening theAdministration of Foreign Exchange Businesses, or Circular 59, and the Circular on Further Clarification and Regulation of the Issues Concerning theAdministration of Certain Capital Account Foreign Exchange Businesses, or Circular 45. According to Circular 19, the flow and use of the RMBcapital converted from foreign currency-denominated registered capital of a foreign-invested company is regulated such that RMB capital may not beused for the issuance of RMB entrusted loans, the repayment of inter-enterprise loans or the repayment of banks loans that have been transferred to athird party. Although Circular 19 allows RMB capital converted from foreign currency-denominated registered capital of a foreign-invested enterpriseto be used for equity investments within the PRC, it also reiterates the principle that RMB converted from the foreign currency-denominated capital ofa foreign-invested company may not be directly or indirectly used for purposes beyond its business scope. Thus, it is unclear whether SAFE will permitsuch capital to be used for equity investments in the PRC in actual practice. SAFE promulgated the Notice of the State Administration of ForeignExchange on Reforming and Standardizing the Foreign Exchange Settlement Management Policy of Capital Account, or Circular 16, effective onJune 9, 2016, which reiterates some of the rules set forth in Circular 19, but changes the prohibition against using RMB capital converted from foreigncurrency-denominated registered capital of a foreign-invested company to issue RMB entrusted loans to a prohibition against using such capital toissue loans to non-associated enterprises. Violations of SAFE Circular 19 and Circular 16 could result in administrative penalties. Circular 19 andCircular 16 may significantly limit our ability to transfer any foreign currency we hold, including the net proceeds from our initial public offering, toour 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 toany of our consolidated VIEs and their subsidiaries, each a PRC domestic company. Meanwhile, we are not likely to finance the activities of ourconsolidated VIEs and their subsidiaries by means of capital contributions given the restrictions on foreign investment in the businesses that arecurrently conducted by our consolidated 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 holdingcompanies, we cannot assure you that we will be able to complete the necessary government registrations or obtain the necessary governmentapprovals on a timely basis, if at all, with respect to future loans to our PRC subsidiaries or any consolidated variable interest entity or future capitalcontributions by us to our PRC subsidiaries. As a result, uncertainties exist as to our ability to provide prompt financial support to our PRC subsidiariesor consolidated VIEs and their subsidiaries when needed. If we fail to complete such registrations or obtain such approvals, our ability to use foreigncurrency, including the proceeds we received from our initial public offering, and to capitalize or otherwise fund our PRC operations may benegatively affected, which could materially and adversely affect our liquidity and our ability to fund and expand our business. 22Source: Qudian Inc., 20-F, April 09, 2018Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Table of ContentsWe may need additional capital to pursue business objectives and respond to business opportunities, challenges or unforeseen circumstances, andfinancing may not be available on terms acceptable to us, or at all.Since inception, we have issued equity securities to support the growth of our business. As we intend to continue to make investments to supportthe growth of our business, we may require additional capital to pursue our business objectives and respond to business opportunities, challenges orunforeseen circumstances, including developing new products and services, further enhancing our risk management capabilities, increasing ourmarketing expenditures to improve brand awareness and diversify our borrower engagement channels by collaborating with other leading Internetcompanies, enhancing our operating infrastructure and acquiring complementary businesses and technologies. Accordingly, we may need to engage inequity or debt financings to secure additional funds. However, additional funds may not be available when we need them, on terms that are acceptableto us, or at all. Repayment of the debts may divert a substantial portion of cash flow to pay principal and interest on such debt, which would reduce thefunds available for expenses, capital expenditures, acquisitions and other general corporate purposes; and we may suffer default and foreclosure on ourassets if our operating cash flow is insufficient to repay debt obligations, which could in turn result in acceleration of obligations to repay theindebtedness and limit our sources of financing.Volatility in the credit markets may also have an adverse effect on our ability to obtain debt financing. If we raise additional funds throughfurther issuances of equity or convertible debt securities, our existing stockholders could suffer significant dilution, and any new equity securities weissue could have rights, preferences and privileges superior to those of holders of our Class A ordinary shares. If we are unable to obtain adequatefinancing or financing on terms satisfactory to us when we require it, our ability to continue to pursue our business objectives and to respond tobusiness opportunities, challenges or unforeseen circumstances could be significantly limited, and our business, operating results, financial conditionand prospects could be adversely affected.We incurred net losses in the past and may incur net losses in the future.We had net losses of RMB40.8 million and RMB233.2 million in the period from April 9 to December 31, 2014 and in 2015, respectively. Wehad accumulated deficits of RMB5,984.8 million and RMB6,633.7 million as of December 31, 2014 and December 31, 2015, respectively. Althoughwe had net income of RMB576.7 million in 2016 and RMB2,164.5 million (US$332.7 million) in 2017, we cannot assure you that we will be able tocontinue to generate net income in the future. We anticipate that our operating cost and expenses will increase in the foreseeable future as we continueto grow our business, attract borrowers, institutional funding partners and merchandise suppliers and further enhance and develop our credit products,enhance our risk management capabilities and increase brand recognition. These efforts may prove more costly than we currently anticipate, and wemay not succeed in increasing our revenue sufficiently to offset these higher expenses. There are other factors that could negatively affect our financialcondition. For example, the delinquency rates of the transactions facilitated may be higher than expected, which may lead to lower than expectedrevenue, additional expenses and higher provision for loan principal and financing service fee receivables. Furthermore, we have adopted shareincentive plans in the past and may adopt new share incentive plans in the future, which have caused, and will result in, significant share-basedcompensation expenses to us. We generate a substantial majority of our total revenues from financing service fees we charge borrowers. Any materialdecrease in our financing service fees would have a substantial impact on our margin. As a result of the foregoing and other factors, our net incomemargins may decline or we may incur additional net losses in the future and may not be able to maintain profitability on a quarterly or annual basis. 23Source: Qudian Inc., 20-F, April 09, 2018Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Table of ContentsIf our credit products do not achieve sufficient market acceptance or if we are unable to manage the growth of our credit products, our financialcondition, results of operations and competitive position will be materially and adversely affected.We currently offer cash credit products, merchandise credit products and budget auto financing products. Historically, we had explored andoffered other types of credit products to users in China which were discontinued due to limited demand in the market. While we intend to eventuallybroaden the scope of products that we offer, there can be no assurance that we will be successful. New products must achieve high levels of marketacceptance in order for us to balance the default risks associated with such products and to recoup our investment in developing and bringing them tomarket. Our existing or new products could fail to attain sufficient market acceptance for many reasons, including: • our failure to predict market demand accurately and supply attractive and increasingly personalized credit products at appropriate pricingand amount that meet this demand in a timely fashion; • borrowers may not like, find useful or agree with any changes made to our credit products; • our existing credit products may cease to be popular among current borrowers or prove to be less attractive to prospective borrowers; • our failure to offer attractive merchandise on our marketplace that can be purchased by borrowers through merchandise credit products atcompetitive amount of financing service fees to meet consumer needs and preferences; • our failure to assess risk associated with new products and to properly price new and existing products; • negative publicity about our credit products or our websites or mobile apps’ performance or effectiveness; • views taken by regulatory authorities that the launch of new credit products and changes to our existing credit products do not complywith PRC laws, rules or regulations applicable to us; and • the introduction or anticipated introduction of competing offerings by competitors.If our existing and new products do not achieve adequate acceptance in the market, our competitive position, results of operations and financialcondition could be harmed.Furthermore, the introduction of new credit products or the increased utilization of certain credit products over other products may result inmaterial adverse change to our results of operations. For example, borrowers may increase their preference and utilization of our merchandise creditproducts, which are typically larger in amount with longer terms, over our cash credit products. As small credit products enjoy favorable riskcharacteristics compared to larger credit products, an increase in the utilization of merchandise credit products over cash credit products by borrowersmay result in an increase in delinquency rate for the transactions facilitated by us. Credit products with longer durations may also lead to reducedfrequency of transactions by borrowers, which may have a material adverse effect as to the volume and comprehensiveness of the data we collect andanalyze and our risk management capabilities.Credit analysis and other information that we receive from other parties concerning a prospective borrower may be inaccurate or may notaccurately reflect such prospective borrower’s creditworthiness, which may compromise the accuracy of our credit assessment.For the purpose of credit assessment and pricing, we obtain prospective borrower’s credit analysis and other information from them as well as,with their authorization, from external parties, and assess applicants’ creditworthiness based on such information. Such external party’s creditassessment system may still be at a development stage and therefore have limitations in measuring borrowers’ creditworthiness. We have experiencedinstances where credit analysis information provided by an external party was not fully predictive of 24Source: Qudian Inc., 20-F, April 09, 2018Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Table of Contentsactual delinquency rates. Therefore, we do not rely on inputs from one or only a few external parties. Instead, we use inputs from many external parties,including Zhima Credit Score, for our credit assessment model to enhance our risk management capabilities. As the credit assessment methodologies ofexternal parties are not disclosed to us, we may not have adequate knowledge of the assumptions behind their credit analysis, which could cause ourmodel to produce inaccurate results. In addition, if there is an adverse change in the economic condition, credit analysis information provided byexternal parties may not be a reliable reference to assess an applicant’s creditworthiness, which may compromise our risk management capabilities. As aresult, our assessment of a borrower’s credit profile may not reflect that particular borrower’s actual creditworthiness because assessment may be basedon outdated, incomplete or inaccurate information. In addition, the completeness and reliability of information on borrower’s credit risk available inthe PRC is relatively limited. The PBOC has developed and put into use a national personal and corporate credit information database which remainsrelatively underdeveloped. The information available to us and external parties from whom we obtain information for our credit assessment model islimited. We also currently do not have a comprehensive way to determine whether prospective borrowers have obtained loans through other consumerfinance platforms, creating the risk whereby a borrower may utilize our credit products in order to pay off loans from other sources. Additionally, weallow a borrower to make multiple drawdowns under his or her credit, and such borrower may use proceeds from one drawdown to repay a separatecredit drawdown facilitated by us. There is also a risk that, following our obtaining a borrower’s information, the borrower may have: • become delinquent in the payment of an outstanding obligation; • defaulted on a pre-existing debt obligation; • taken on additional debt; or • sustained other adverse financial events.Such inaccurate or incomplete borrower credit analysis and other information could compromise the accuracy of our credit assessment andadversely affect the effectiveness of our control over our delinquency rates. We may not be able to recoup funds underlying transactions made inconnection with inaccurate or incomplete borrower credit information, in which case our results of operations will be harmed.Any harm to our brands or reputation or any damage to the reputation of the online consumer finance industry may materially and adverselyaffect our business and results of operations.Enhancing the recognition and reputation of our brands is critical to our business and competitiveness, since this initiative affects our ability toattract and better serve borrowers and institutional funding partners as well as merchandise suppliers. Factors that are vital to this objective include ourability to: • maintain the effectiveness, quality and reliability of our systems; • provide borrowers with a superior experience; • engage a large number of quality borrowers with low delinquency rate; • enhance and improve our credit assessment model and risk management system; • enhance the quality of our funding sources; • effectively manage and resolve borrower complaints; and • effectively protect personal information and privacy of borrowers.Any malicious or otherwise negative allegation made by the media or other parties about the foregoing or other aspects of our company,including our management, business, compliance with law, financial condition, prospects or our historical business operations on campuses, whetherwith merit or not, could severely hurt our reputation and harm our business and results of operations. In addition, certain factors that may adverselyaffect 25Source: Qudian Inc., 20-F, April 09, 2018Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Table of Contentsour reputation are beyond our control. Negative publicity about parties that we collaborate with in the operation of our business, such as Ant Financialor institutional funding partners, including negative publicity about any failure by them to adequately protect the information of their users, to complywith applicable laws and regulations or to otherwise meet required quality and service standards, could also harm our reputation or result in negativeperception of the products we offer. Furthermore, any negative development in the online consumer finance industry, such as bankruptcies or failuresof other consumer finance service providers, and especially a large number of such bankruptcies or failures, or negative perception of the industry as awhole, such as that arises from any failure of other consumer finance platforms to detect or prevent money laundering or other illegal activities, even iffactually incorrect or based on isolated incidents, could compromise our image, undermine the trust and credibility we have established and impose anegative impact on our ability to attract new borrowers and to collaborate with and retain institutional funding partners. Negative developments in ourindustry, such as widespread borrower defaults, fraudulent behavior and/or the closure of other online consumer finance service providers, may alsolead to tightened regulatory scrutiny of the sector and limit the scope of permissible business activities that may be conducted. If any of the foregoingtakes place, our business and results of operations could be materially and adversely affected.We are subject to risks associated with other parties with which we collaborate. If such other parties fail to perform or provide reliable orsatisfactory services, our business, financial condition and results of operations may be materially and adversely affected.We collaborate with certain other parties in providing our credit products to borrowers. Such other parties include Ant Financial, institutionalfunding partners, other institutions from which we obtain information for our credit assessment model and risk management system, our cloudcomputing service provider and merchandise suppliers. These parties may not be able to provide accurate data analyses, sufficiently or timely fundcredit that we facilitate or provide satisfactory merchandise and services to us and/or borrowers on commercially acceptable terms or at all. Any failureby these parties to continue with good business operations, comply with applicable laws and regulations or any negative publicity on these partiescould damage our reputation, expose us to significant penalties and decrease our total revenues and profitability. Also, if we fail to retain existing orattract new quality parties to collaborate with, our ability to retain existing borrowers, engage prospective borrowers may be severely limited, whichmay have a material and adverse effect on our business, financial condition and results of operations. In addition, certain of these other parties that wecollaborate with have access to our user data to a limited extent in order to provide their services. If these other parties engage in activities that arenegligent, illegal or otherwise harmful to the trustworthiness and security of our products or system, including the leak or negligent use of data, or usersare otherwise dissatisfied with their service quality, we could suffer reputational harm, even if these activities are not related to, attributable to orcaused by us.Fraudulent activity could negatively impact our results of operations, brand and reputation and cause the use of our credit products and services todecrease.We are subject to the risk of fraudulent activity associated with borrowers and parties handling user information. Our resources, technologies andfraud detection tools may be insufficient to accurately detect and prevent fraud. For example, we currently do not have a comprehensive way todetermine whether prospective borrowers have obtained loans through other consumer finance platforms, creating the risk whereby a borrower mayborrow money through us in order to pay off loans from other sources. Even if we identify a fraudulent borrower and reject his or her credit application,such borrower may re-apply by using fraudulent information. We may fail to identify such behavior, despite our measures to verify personalidentification information provided by borrowers. Furthermore, we may not be able to recoup funds underlying transactions made in connection withfraudulent activities. A significant increase in fraudulent activities could negatively impact our brands and reputation, discourage institutional fundingpartners from collaborating with us, reduce the amount of transactions facilitated to borrowers and lead us to take additional steps to reduce fraud risk,which could increase our costs. High profile fraudulent activity could even lead to regulatory intervention, and may divert our management’s attentionand cause us to incur additional expenses and costs. Although we have not experienced 26Source: Qudian Inc., 20-F, April 09, 2018Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Table of Contentsany material business or reputational harm as a result of fraudulent activities in the past, we cannot rule out the possibility that fraudulent activitiesmay materially and adversely affect our business, financial condition and results of operations in the future.We rely on institutional funding partners to fund credit drawdowns to borrowers, which may constitute provision of intermediary service, and ouragreements with these institutional funding partners and borrowers may be deemed as intermediation contracts under the PRC Contract Law.Under the PRC Contract Law, if an intermediary conceals any material fact intentionally or provides false information in connection with theconclusion of the proposed contract, which results in harm to the client’s interests, the intermediary may not claim for service fees and is liable for thedamages caused. See “Item 4. Information on the Company — B. Business Overview — Regulations — Regulations related to Loans andIntermediation.” Therefore, if we fail to provide material information to institutional funding partners, or if we fail to identify false informationreceived from borrowers or others and in turn provide such information to institutional funding partners, and in either case if we are also found to be atfault, due to failure or deemed failure to exercise proper care, such as to conduct adequate information verification or supervision of our employees, orto accurately detect and prevent fraud due to ineffectiveness of our fraud detection tools, we could be held liable for damages caused to institutionalfunding partners as an intermediary pursuant to the PRC Contract Law. In addition, if we fail to complete our obligations under the agreements withinstitutional funding partners and borrowers, we could also be held liable for damages caused to borrowers or institutional funding partners pursuant tothe PRC Contract Law. On the other hand, we do not assume any liability solely on the basis of failure to correctly assign a credit limit to a particularborrower in the process of facilitating transactions, as long as we do not conceal any material fact intentionally or provide false information, and arenot found to be at fault otherwise. However, due to the lack of detailed regulations and guidance in the area of online consumer finance platforms andthe possibility that the PRC government authority may promulgate new laws and regulations regulating online consumer finance platforms in thefuture, there are substantial uncertainties regarding the interpretation and application of current or future PRC laws and regulations for the onlineconsumer finance industry, and there can be no assurance that the PRC government authority will ultimately take a view that is consistent with ours.Fluctuations in interest rates could negatively affect the amount of transactions facilitated by us and cost of capital for funds provided to borrowers.All credit facilitated by us have fixed financing service fees. If prevailing market interest rates rise, our cost of capital for funds will increase,which may force us to increase the financing service fees we charge. If our borrowers decide not to utilize our credit products because of such anincrease in financing service fees, our ability to retain existing borrowers, attract or engage prospective borrowers as well as our competitive positionmay be severely limited. We cannot assure you that we will be able to effectively manage such interest risk at all times or pass on any increase ininterest rate to our borrowers. If we are unable to effectively manage such an increase, our business, profitability, results of operations and financialcondition could be materially and adversely affected. If prevailing market interest rates decrease and we fail to adjust the amount of financing servicefees we charge accordingly, prospective borrowers may take advantage of the lower funding cost offered by other parties. As a result, any fluctuation inthe interest rate environment may discourage borrowers from making credit applications from us or utilize their approved credit, which may adverselyaffect our business.If we are unable to provide a high quality borrower experience, our business and reputation may be materially and adversely affected.The success of our business largely depends on our ability to provide high quality borrower experience, which in turn depends on a variety offactors. These factors include our ability to continue to offer credit products at competitive amount of financing service fees and adequate credit limits,reliable and user-friendly website interface and mobile apps for borrowers to browse, apply for credit, and purchase merchandise, and further 27Source: Qudian Inc., 20-F, April 09, 2018Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Table of Contentsimprove our online credit approval process, source merchandise sold on our marketplace to respond to borrower’s demands and preferences. Ifborrowers are not satisfied with our credit products, the merchandise sold on our marketplace or our services, or our system is severely interrupted orotherwise fail to meet the borrowers’ requests, our reputation and borrower loyalty could be adversely affected.Our quarterly results may fluctuate significantly and may not fully reflect the underlying performance of our business.Our quarterly results of operations, including the levels of our total revenues, operating cost and expenses, net (loss)/income and other keymetrics, may vary significantly in the future due to a variety of factors, some of which are outside of our control, and period-to-period comparisons ofour operating results may not be meaningful, especially given our limited operating history. Accordingly, the results for any one quarter are notnecessarily an indication of future performance. Fluctuations in quarterly results may adversely affect the price of our ADSs. Factors that may causefluctuations in our quarterly financial results include: • our ability to attract new borrowers and maintain relationships with existing borrowers; • the amount of transactions; • the mix of products we offer; • delinquency rates of transactions we facilitate; • the amount and timing of operating cost and expenses related to acquiring borrowers and the maintenance and expansion of our business,operations and infrastructure; • our ability to establish relationship with additional institutional funding partners and maintain relationships with existing institutionalfunding partners; • our ability to secure funding for credit we facilitate on reasonable terms; • our emphasis on borrower experience instead of near-term growth; • the timing of expenses related to the development or acquisition of technologies or businesses; • proper and sufficient allowance and charge-off policies and implementation; • network outages or security breaches; • general economic, industry and market conditions; and • changes in applicable laws and regulations.In addition, we experience seasonality in our business, reflecting a combination of seasonality patterns of the retail market and our promotionalactivities. In recent years, many online and offline retailers in China hold promotions on November 11 and December 12 of each year, which drivessignificant increase in retail sales. Higher retail sales during the shopping seasons may generate greater demand for our credit products. As a result, wetypically record higher total revenues during the fourth quarter of each year compared to other quarters. On the other hand, our total revenues for thefirst quarter tend to be lower due to the Chinese New Year holiday that generally reduces borrowing activities. In addition, we hold promotionalcampaigns on March 21 (our anniversary), November 11 and December 12 by offering lower amount of financing service fees, which may also increasethe number of borrowers who utilize our credit products and thus increase our total revenues for the relevant periods. On the other hand, lowerfinancing service fee amount may decrease our margin for the relevant periods. Due to our limited operating history, the seasonal trends that we haveexperienced in the past may not apply to, or be indicative of, our future operating results. 28Source: Qudian Inc., 20-F, April 09, 2018Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Table of ContentsUncertainties relating to the growth of the retail industry in China in general, and the online retail industry in particular, could adversely affectrevenues from our cash and merchandise credit products and our business prospects.We generate our revenue from the provision of both cash and merchandise credit products which we believe are mainly used for day-to-daydiscretionary consumption purposes. As a result, our cash and merchandise credit products businesses are affected by the development of the retailindustry, and in particular the online retail industry, in China. The long-term viability and prospects of various online retail business models in Chinaremain relatively untested. As such, demand for our credit products and our future results of operations will depend on numerous factors affecting thedevelopment of the online retail industry in China, which may be beyond our control. These factors include: • the growth of Internet, broadband, personal computer and mobile penetration and usage in China, and the rate of any such growth; • the trust and confidence level of online retail and mobile commerce consumers, including our users, in China, as well as changes inborrower demographics and consumer tastes and preferences; • the selection, price and popularity of merchandise that we and our competitors offer online; • whether alternative retail channels or business models that better address the needs of consumers emerge in China; and • the development of fulfillment, payment and other ancillary services associated with retail and mobile commerce purchases.A decline in the popularity of online shopping in general, especially through the use of credit products, or any failure by us to adapt ourmarketplace and improve the online shopping experience of our users in response to trends and user requirements, may adversely affect our results ofoperations and business prospects.Our success and future growth depend significantly on our successful marketing efforts, and if we are unable to promote and maintain our brands inan effective and cost-efficient way, our business and financial results may be harmed.We believe that developing and maintaining awareness of our brands effectively is critical to attracting new and retaining existing borrowers.Successful promotion of our brands and our ability to attract quality borrowers depend largely on the effectiveness of our marketing efforts and thesuccess of the channels we use to promote our brands and credit products. Our efforts to build our brands may cause us to incur significant expenses.These efforts may not result in increased revenue in the immediate future or at all and, even if they do, any increases in revenue may not offset theexpenses incurred. If we fail to successfully promote and maintain our brands while incurring substantial expenses, our results of operations andfinancial condition would be adversely affected, which may impair our ability to grow our business.Our business and internal systems rely on software that is highly technical, and if it contains undetected errors, our business could be adverselyaffected.Our business and internal systems rely on software that is highly technical and complex. In addition, our business and internal systems depend onthe ability of such software to store, retrieve, process and manage large amounts of data. The software on which we rely has contained, and may now orin the future contain, undetected errors or bugs. Some errors may only be discovered after the code has been released for external or internal use. Errorsor other design defects within the software on which we rely may result in a negative experience for users, delay introductions of new features orenhancements, result in errors or compromise our ability to protect user data or our intellectual property, or affect the accuracy of our operating data.Any errors, bugs or defects discovered in the software on which we rely could result in harm to our reputation, loss of users, liability for damages, any ofwhich could adversely affect our business, financial condition and results of operations. 29Source: Qudian Inc., 20-F, April 09, 2018Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Table of ContentsAny significant disruption in our information technology systems, including events beyond our control, could prevent us from offering our products,thereby reduce the attractiveness of our products and result in a loss of borrowers or institutional funding partners.In the event of a system outage and physical data loss, our ability to provide credit products would be materially and adversely affected. Thesatisfactory performance, reliability and availability of our technology and our underlying network infrastructure are critical to our operations, userservice, reputation and our ability to attract new and retain existing borrowers and institutional funding partners. Our information technology systemsinfrastructure is currently deployed and our data is currently maintained on customized cloud computing services in China. Our operations depend onthe service provider’s ability to protect its and our systems in its facilities against damage or interruption from natural disasters, power ortelecommunications failures, air quality issues, environmental conditions, computer viruses or attempts to harm our systems, criminal acts and similarevents. Since the launch of our business, we had experienced one system outage during the holiday seasons in China due to competition for availablecloud computing services provided by our service provider and we cannot assure you that such incidents will not occur in the future. Moreover, if ourarrangement with this service provider is terminated or if there is a lapse of service or damage to their facilities, we could experience interruptions inour service as well as delays and additional expense in arranging new credit for borrowers.Any interruptions or delays in our service, whether as a result of third-party error, our error, natural disasters or security breaches, whetheraccidental or willful, could harm our relationships with borrowers and institutional funding partners and our reputation. Additionally, in the event ofdamage or interruption, our insurance policies may not adequately compensate us for any losses that we may incur. We also may not have sufficientcapacity to recover all data and services in the event of an outage. These factors could prevent us from processing credit applications and otherbusiness operations, damage our brands and reputation, divert our employees’ attention, reduce our revenue, subject us to liability and cause borrowersand institutional funding partners to abandon our credit products, any of which could adversely affect our business, financial condition and results ofoperations.Misconduct and errors by our employees and parties we collaborate with could harm our business and reputation.We are exposed to many types of operational risks, including the risk of misconduct and errors by our employees and parties that we collaboratewith. Our business depends on our employees and/or business partners to interact with users, process large numbers of transactions, deliver merchandisepurchased by borrowers, providing user and after-sale product services and support the collection process, all of which involve the use and disclosureof personal information. We could be materially and adversely affected if transactions were redirected, misappropriated or otherwise improperlyexecuted, if personal information was disclosed to unintended recipients or if an operational breakdown or failure in the processing of transactionsoccurred, whether as a result of human error, purposeful sabotage or fraudulent manipulation of our operations or systems. It is not always possible toidentify and deter misconduct or errors by employees or business partners, and the precautions we take to detect and prevent this activity may not beeffective in controlling unknown or unmanaged risks or losses. If any of our employees or business partners take, convert or misuse funds, documentsor data or fail to follow our rules and procedures when interacting with users, we could be liable for damages and subject to regulatory actions andpenalties. There have been media reports alleging that former employees of our company have misappropriated and sold borrower data. We are notaware of any former employee who has been identified by law enforcement authorities to have engaged in such misconduct, and we do not believesuch allegations have had a material impact on our business. However, future allegations of employee misconduct, whether perceived or actual, couldmaterially and adversely affect our reputation and business. We could also be perceived to have facilitated or participated in the illegalmisappropriation of funds, documents or data, or the failure to follow our rules and procedures, and therefore be subject to civil or criminal liability.Any of these occurrences could result in our diminished ability to operate our business, potential liability to users, inability to attract users,reputational damage, regulatory intervention and financial harm, which could negatively impact our business, financial condition and results ofoperations. 30Source: Qudian Inc., 20-F, April 09, 2018Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Table of ContentsIf we are unable to protect the confidential information of our users and adapt to the relevant regulatory framework as to protection of suchinformation, our business and operations may be adversely affected.We collect, store and process certain personal and other sensitive data from our users, which makes us an attractive target and potentiallyvulnerable to cyber-attacks, computer viruses, physical or electronic break-ins or similar disruptions. While we have taken steps to protect theconfidential information that we have access to, our security measures could be breached. Because techniques used to sabotage or obtain unauthorizedaccess to systems change frequently and generally are not recognized until they are launched against a target, we may be unable to anticipate thesetechniques or to implement adequate preventative measures. Any accidental or willful security breaches or other unauthorized access to our systemcould cause confidential user information to be stolen and used for criminal purposes. Security breaches or unauthorized access to confidentialinformation could also expose us to liability related to the loss of the information, time-consuming and expensive litigation and negative publicity. Ifsecurity measures are breached because of third-party action, employee error, malfeasance or otherwise, or if design flaws in our technologyinfrastructure are exposed and exploited, our relationships with users could be severely damaged, we could incur significant liability and our businessand operations could be adversely affected.In addition, PRC government authorities have enacted a series of laws and regulations in regard of the protection of personal information, underwhich internet service providers and other network operators are required to comply with the principles of legality, justification and necessity, toclearly indicate the purposes, methods and scope of any information collection and usage, and to obtain the consent of users, as well as to establishuser information protection system with appropriate remedial measures. We have obtained the consents from our users to use their personal informationwithin the scope of authorization and we have taken technical measures to ensure the security of such personal information and prevent the personalinformation from being divulged, damaged or lost. However, there is uncertainty as to the interpretation and application of such laws which may beinterpreted and applied in a manner inconsistent with our current policies and practices or require changes to the features of our system. We cannotassure you that our existing user information protection system and technical measures will be considered sufficient under applicable laws andregulations. If we are unable to address any information protection concerns, or to comply with the then applicable laws and regulations, we may incuradditional costs and liability and our reputation, business and operations might be adversely affected.If we fail to maintain proper and effective internal controls, our ability to produce accurate financial statements on a timely basis could be impaired.We are subject to the reporting requirements of the Exchange Act, the Sarbanes-Oxley Act and the rules and regulations of the NYSE. TheSarbanes-Oxley Act requires, among other things, that we maintain effective disclosure controls and procedures and internal controls over financialreporting. Commencing with our fiscal year ending December 31, 2018, we must perform system and process evaluation and testing of our internalcontrols over financial reporting to allow management to report on the effectiveness of our internal controls over financial reporting in our Form 20-Ffiling for that year, as required by Section 404 of the Sarbanes-Oxley Act. In addition, once we cease to be an “emerging growth company” as the termis defined in the JOBS Act, our independent registered public accounting firm must attest to and report on the effectiveness of our internal control overfinancial reporting. Our management may conclude that our internal control over financial reporting is not effective. Moreover, even if ourmanagement concludes that our internal control over financial reporting is effective, our independent registered public accounting firm, afterconducting its own independent testing, may issue a report that is qualified if it is not satisfied with our internal controls or the level at which ourcontrols are documented, designed, operated or reviewed, or if it interprets the relevant requirements differently from us. This will require that we incursubstantial additional professional fees and internal costs to expand our accounting and finance functions and that we expend significant managementefforts. Prior to our initial public offering, we were a private company with limited accounting personnel and other resources with which to address ourinternal controls and procedures, and we were never required to test our internal controls within a specified period, and, as a result, we may experiencedifficulty in meeting these reporting requirements in a timely manner. Our 31Source: Qudian Inc., 20-F, April 09, 2018Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Table of Contentsmanagement has not completed an assessment of the effectiveness of our internal control over financial reporting and our independent registeredpublic accounting firm has not conducted an audit of our internal control over financial reporting.In addition, our internal control over financial reporting will not prevent or detect all errors and all fraud. A control system, no matter how welldesigned and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. Because of the inherentlimitations in all control systems, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur orthat all control issues and instances of fraud will be detected.If we are not able to comply with the requirements of Section 404 of the Sarbanes-Oxley Act in a timely manner, or if we are unable to maintainproper and effective internal controls, we may not be able to produce timely and accurate financial statements. If that were to happen, the market priceof our ADSs could decline and we could be subject to sanctions or investigations by the NYSE, SEC or other regulatory authorities.We may not be able to prevent others from unauthorized use of our intellectual property, which could harm our business and competitive position.We regard our trademarks, domain names, copyrights, know-how, proprietary technologies and similar intellectual property as critical to oursuccess, and we rely on trademark and trade secret law and confidentiality, invention assignment and non-compete agreements with our employees andothers to protect our proprietary rights. See “Item 4. Information on the Company — B. Business Overview — Regulation — Regulations Related toIntellectual Property Rights.” However, we cannot assure you that any of our intellectual property rights would not be challenged, invalidated orcircumvented, or such intellectual property will be sufficient to provide us with competitive advantages. In addition, other parties may misappropriateour intellectual property rights, which would cause us to suffer economic or reputational damages. Because of the rapid pace of technological change,nor can we assure you that all of our proprietary technologies and similar intellectual property will be patented in a timely or cost-effective manner, orat all. Furthermore, parts of our business rely on technologies developed or licensed by other parties, or co-developed with other parties, and we maynot be able to obtain or continue to obtain licenses and technologies from these other parties on reasonable terms, or at all.It is often difficult to register, maintain and enforce intellectual property rights in China. Statutory laws and regulations are subject to judicialinterpretation and enforcement and may not be applied consistently due to the lack of clear guidance on statutory interpretation. Confidentiality,invention assignment and non-compete agreements may be breached by counterparties, and there may not be adequate remedies available to us for anysuch breach. Accordingly, we may not be able to effectively protect our intellectual property rights or to enforce our contractual rights in China.Preventing any unauthorized use of our intellectual property is difficult and costly and the steps we take may be inadequate to prevent themisappropriation of our intellectual property. In the event that we resort to litigation to enforce our intellectual property rights, such litigation couldresult in substantial costs and a diversion of our managerial and financial resources. We can provide no assurance that we will prevail in such litigation.In addition, our trade secrets may be leaked or otherwise become available to, or be independently discovered by, our competitors. To the extent thatour employees or consultants use intellectual property owned by others in their work for us, disputes may arise as to the rights in related know-how andinventions. Any failure in protecting or enforcing our intellectual property rights could have a material adverse effect on our business, financialcondition and results of operations.We may be subject to intellectual property infringement claims, which may be expensive to defend and may disrupt our business and operations.We cannot be certain that our operations or any aspects of our business do not or will not infringe upon or otherwise violate trademarks,copyrights, know-how, proprietary technologies or other intellectual property rights held by other parties. We may be from time to time in the futuresubject to legal proceedings and claims 32Source: Qudian Inc., 20-F, April 09, 2018Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Table of Contentsrelating to the intellectual property rights of others. In addition, there may be other parties’ trademarks, copyrights, know-how, proprietarytechnologies or other intellectual property rights that are infringed by our credit products or other aspects of our business without our awareness.Holders of such intellectual property rights may seek to enforce such intellectual property rights against us in China, the United States or otherjurisdictions. If any infringement claims are brought against us, we may be forced to divert management’s time and other resources from our businessand operations to defend against these claims, regardless of their merits.Additionally, the application and interpretation of China’s intellectual property right laws and the procedures and standards for grantingtrademarks, copyrights, know-how, proprietary technologies or other intellectual property rights in China are still evolving and are uncertain, and wecannot assure you that PRC courts or regulatory authorities would agree with our analysis. If we were found to have violated the intellectual propertyrights of others, we may be subject to liability for our infringement activities or may be prohibited from using such intellectual property, and we mayincur licensing fees or be forced to develop alternatives of our own. As a result, our business and results of operations may be materially and adverselyaffected.We may incur liability for merchandise sold on our marketplace that are without or have yet to receive proper authorization, infringe on otherparties’ intellectual property rights, or fail to comply with related permits or filing requirements.We currently collaborate with more than 330 merchandise suppliers, including leading brands and their authorized distributors for ourmerchandise credit product business. Although we have adopted measures to verify the authenticity and authorization of merchandise offered on ourmarketplace and avoid potential infringement of any rights of other parties in the course of sourcing these merchandise, we may not always besuccessful. In the event that counterfeit, unauthorized or infringing merchandise is sold on our mobile apps or infringing content is posted on ourwebsites, we could face claims that we should be held liable. We had in the past received a few claims alleging that merchandise sold on ourmarketplace infringed on other parties’ rights and had worked with the relevant merchandise suppliers for product return and exchange of suchmerchandise. Although these claims have been immaterial to our business, results of operations and financial condition, if any material claim occurs inthe future, irrespective of the validity of such claims, we may incur significant costs and efforts in either defending against or settling such claims. Ifthere is a successful claim against us, we might be required to pay substantial damages or refrain from further sale of the relevant merchandise. Potentialliability under PRC law if we negligently participated or assisted in infringement activities associated with counterfeit goods includes injunctions tocease infringing activities, rectification, compensation, administrative penalties and even criminal liability. Moreover, such claims or administrativepenalties could result in negative publicity and our reputation could be severely damaged. Any of these events could have a material and adverseeffect on our business, results of operations or financial condition.We may be required to segregate our own assets from those assets of the institutional funding partners and borrowers.Pursuant to the Internet Finance Guidelines and the Implementing Scheme of Special Rectification of Risks in the Internet Finance Sectoradopted in April 2016, online finance institutions are required to segregate assets of the institutional funding partners and borrowers in a custodianbank from their own assets. However, there is uncertainty as to the implementation of such regulations, and the scope of online finance institutionswhich are subject to such assets segregation liabilities remains unclear. In addition, commercial banks in the PRC currently only provide custodianservices to online lending information intermediary institutions as defined under the Interim Online Lending Information Intermediary Measures. Wedo not consider ourselves as an online lending information intermediary institution as defined under the Interim Online Lending InformationIntermediary Measures, and we currently do not engage commercial banks in the PRC to provide such custodian services to us. We use our best effortsto separate our own assets from those assets of the institutional funding partners to whom we transfer credit drawdowns by setting up separate bankaccounts to monitor the assets of such institutional funding partners. However, since such bank accounts are still under our names and all the assets aretherefore 33Source: Qudian Inc., 20-F, April 09, 2018Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Table of Contentsconsidered be owned by us from a PRC legal perspective, if any person enforces a judgment against our assets, the assets of the institutional fundingpartners and borrowers will be enforced against as well. In addition, if we are deemed as an online lending information intermediary institution by theapplicable regulatory authorities under the Interim Online Lending Information Intermediary Measures in the future, we may be subject to regulatorymeasures, such as warnings, fines and other measures permitted under the law, for our current practices.Any failure by us, institutional funding partners or payment processors to comply with applicable anti-money laundering and anti-terroristfinancing laws and regulations could damage our reputation, expose us to significant penalties, and decrease our revenues and profitability.We have implemented various policies and procedures in compliance with all applicable anti-money laundering and anti-terrorist financing lawsand regulations, including internal controls and “know-your-customer” procedures, for preventing money laundering and terrorist financing. Inaddition, we rely on our institutional funding partners and payment processors, in particular online payment companies that handle the transfer offunds from institutional funding partners to us and the borrowers, to have their own appropriate anti-money laundering policies and procedures.Certain of our institutional funding partners and online payment companies are subject to anti-money laundering obligations under applicable anti-money laundering laws and regulations and are regulated in that respect by the PBOC. We have adopted commercially reasonable procedures formonitoring our institutional funding partners and payment processors.We have not been subject to fines or other penalties, or suffered business or other reputational harm, as a result of actual or alleged moneylaundering or terrorist financing activities in the past. However, our policies and procedures may not be completely effective in preventing otherparties from using us, any of our institutional funding partners, or payment processors as a conduit for money laundering (including illegal cashoperations) or terrorist financing without our knowledge. If we were to be associated with money laundering (including illegal cash operations) orterrorist financing, our reputation could suffer and we could become subject to regulatory fines, sanctions, or legal enforcement, including being addedto any “blacklists” that would prohibit certain parties from engaging in transactions with us, all of which could have a material adverse effect on ourfinancial condition and results of operations. Even if we, our institutional funding partners and payment processors comply with the applicable anti-money laundering laws and regulations, we, institutional funding partners and payment processors may not be able to fully eliminate moneylaundering and other illegal or improper activities in light of the complexity and the secrecy of these activities. Any negative perception of theindustry, such as that arises from any failure of other online consumer finance service providers to detect or prevent money laundering activities, evenif factually incorrect or based on isolated incidents, could compromise our image, undermine the trust and credibility we have established, andnegatively impact our financial condition and results of operation.The Internet Finance Guidelines purport, among other things, to require internet finance service providers to comply with certain anti-moneylaundering requirements, including the establishment of a customer identification program, the monitoring and reporting of suspicious transactions,the preservation of customer information and transaction records, and the provision of assistance to the public security department and judicialauthority in investigations and proceedings in relation to anti-money laundering matters. The PBOC will formulate implementing rules to furtherspecify the anti-money laundering obligations of Internet finance service providers. We cannot assure you that the anti-money laundering policies andprocedures we have adopted will be deemed to be in compliance with applicable anti-money laundering implementing rules if and when adopted.From time to time we may evaluate and potentially consummate strategic investments or acquisitions, which could require significant managementattention, disrupt our business and adversely affect our financial results.We may evaluate and consider strategic investments, combinations, acquisitions or alliances to further increase the value of our credit productsand better serve borrowers and enhance our competitive position. For 34Source: Qudian Inc., 20-F, April 09, 2018Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Table of Contentsexample, to further enhance user engagement efforts, in October 2016 we formed a joint venture with Ant Financial. The joint venture provides servicescovering various aspects of the daily life of college students, including those related to academia, social connection, networking and other campus liferelated services.These transactions could be material to our financial condition and results of operations if consummated. If we are able to identify an appropriatebusiness opportunity, we may not be able to successfully consummate the transaction and, even if we do consummate such a transaction, we may beunable to obtain the 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 acquiredbusiness; • inability of the acquired technologies, products or businesses to achieve expected levels of revenue, profitability, productivity or otherbenefits 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 our normal daily operations and potential disruptions to our ongoing businesses; • difficulties in maintaining uniform standards, controls, procedures and policies within the combined organizations; • difficulties in retaining relationships with borrowers, institutional funding partners, merchandise suppliers, employees and other partners ofthe acquired business; • risks of entering markets in which we have 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 us, require us to license or waive intellectual propertyrights or increase our risk for liability; • liability for activities of the acquired business before the acquisition, including intellectual property infringement claims, violations oflaws, 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 our businessstrategy, may not generate sufficient revenues to offset the associated acquisition costs or may not otherwise result in the intended benefits.Our business depends on the continued efforts of our senior management. If one or more of our key executives were unable or unwilling to continuein their present positions, our business may be severely disrupted.Our business operations depend on the continued services of our senior management, particularly the executive officers named in this annualreport. In particular, Mr. Min Luo, our founder, chairman and chief executive officer, is critical to the management of our business and operations andthe development of our 35Source: Qudian Inc., 20-F, April 09, 2018Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Table of Contentsstrategic direction. While we have provided different incentives to our management, we cannot assure you that we can continue to retain their services.If one or more of our key executives were unable or unwilling to continue in their present positions, we may not be able to replace them easily or at all,our future growth may be constrained, our business may be severely disrupted and our financial condition and results of operations may be materiallyand adversely affected, and we may incur additional expenses to recruit, train and retain qualified personnel. In addition, although we have enteredinto confidentiality and non-competition agreements with our management, there is no assurance that any member of our management team will notjoin our competitors or form a competing business. If any dispute arises between our current or former officers and us, we may have to incur substantialcosts and expenses in order to enforce such agreements in China or we may be unable to enforce them at all.Competition for employees is intense, and we may not be able to attract and retain the qualified and skilled employees needed to support ourbusiness.We believe our success depends on the efforts and talent of our employees, including technology and product development, risk management,operation management and finance personnel. Our future success depends on our continued ability to attract, develop, motivate and retain qualifiedand skilled employees. Competition for highly skilled technical, risk management, operation management and financial personnel is extremelyintense. We may not be able to hire and retain these personnel at compensation levels consistent with our existing compensation and salary structure.Some of the companies with which we compete for experienced employees have greater resources than we have and may be able to offer more attractiveterms of employment.In addition, we invest significant time and expenses in training our employees, which increases their value to competitors who may seek torecruit them. If we fail to retain our employees, we could incur significant expenses in hiring and training their replacements, and the quality of ourservices and our ability to serve borrowers and investors could diminish, resulting in a material adverse effect to our business.We have identified a material weakness in our internal controls as of December 31, 2017, and if we fail to maintain an effective system of internalcontrols, our ability to accurately and timely report our financial results or prevent fraud may be adversely affected, and investor confidence and themarket price of the ADSs may be adversely affected.Prior to our initial public offering, we have been a private company with limited accounting personnel and other resources with which to addressour internal controls. In the course of auditing our consolidated financial statements, we and our independent registered public accounting firmidentified a material weakness in our internal controls. A material weakness is a deficiency, or combination of deficiencies, in internal controls, suchthat there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on atimely basis. The material weakness related to our lack of sufficient number of financial reporting personnel with appropriate level of knowledge andexperience in application of U.S. GAAP and SEC rules and regulations commensurate with our reporting requirements. Although we have begun toimplement measures to address the material weakness, implementation of those measures may not fully remediate the material weakness in a timelymanner. In the future we may determine that we have additional material weaknesses, or our independent registered public accounting firm maydisagree with our management assessment of the effectiveness of our internal controls.If we fail to establish and maintain adequate internal controls, we could suffer material misstatements in our financial statements and fail to meetour reporting obligations, which would likely cause investors to lose confidence in our reported financial information. This could limit our access tocapital markets, adversely affect our results of operations and lead to a decline in the trading price of the ADSs. Additionally, ineffective internalcontrols could expose us to increased risk of fraud or misuse of corporate assets and subject us to potential delisting from the stock exchange on whichwe list or to other regulatory investigations and civil or criminal sanctions. We could also be required to restate our historical financial statements. 36Source: Qudian Inc., 20-F, April 09, 2018Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Table of ContentsIncreases in labor costs in the PRC may adversely affect our business and results of operations.The economy in China has experienced increases in inflation and labor costs in recent years. As a result, average wages in the PRC are expectedto continue to increase. In addition, we are required by PRC laws and regulations to pay various statutory employee benefits, including pension,housing fund, medical insurance, work-related injury insurance, unemployment insurance and maternity insurance to designated government agenciesfor the benefit of our employees. The relevant government agencies may examine whether an employer has made adequate payments to the statutoryemployee benefits, and those employers who fail to make adequate payments may be subject to late payment fees, fines and/or other penalties. Weexpect that our labor costs, including wages and employee benefits, will continue to increase. Unless we are able to control our labor costs or pass onthese increased labor costs, our financial condition and results of operations may be adversely affected.We may be subject to claims under consumer protection laws, including health and safety claims and product liability claims, if property or peopleare harmed by the merchandise and services offered on our marketplace.Our marketplace allows consumers to buy merchandise from third-party merchandise suppliers, and some of such merchandise may be defectivelydesigned or manufactured. Operators of online marketplaces in the PRC are subject to certain provisions of consumer protection laws even where theoperator is not the supplier of the product or service purchased by the consumer. As a result, sales of defective merchandise could expose us to productliability claims relating to personal injury or property damage or other actions. In addition, if we do not take appropriate remedial action againstmerchandise suppliers for actions they engage in that we know, or should have known, would infringe upon the rights and interests of consumers, wemay be held jointly liable with the merchandise suppliers for such infringement. Moreover, applicable consumer protection laws in China provide thattrading platforms will be held liable for failing to meet any undertakings that the platforms make to consumers with regard to merchandise listed ontheir websites or mobile apps. Furthermore, we are required to report to the State Administration of Industry and Commerce, or the SAIC, or its localbranches any violation of applicable laws, regulations or SAIC rules by merchandise suppliers or service providers, such as sales of goods withoutproper license or authorization, and to take appropriate remedial measures, including ceasing to provide services to the relevant merchandise suppliers.We may also be held jointly liable with merchandise suppliers who do not possess the proper licenses or authorizations to sell goods or sell goods thatdo not meet product standards. In addition, we may face activist litigation in China by plaintiffs claiming damages based on consumer protection laws,which may result in increased costs in defending such suits and damages should we not prevail, which could materially and adversely affect ourreputation and brands and our results of operations. We do not maintain product liability insurance for merchandise offered on our marketplace, andour rights of indemnity from our merchandise suppliers may not adequately cover us for any liability we may incur. Even unsuccessful claims couldresult in the expenditure of funds and management time and resources and could materially reduce our net income and profitability.Under our standard form agreements, we require merchandise suppliers to indemnify us for any losses we suffer or any costs that we incur due toany merchandise offered by these merchandise suppliers. However, not all of our agreements with merchandise suppliers include such terms, and forthose agreements that include such terms, we may not be able to successfully enforce our contractual rights and may need to initiate costly and lengthylegal proceedings in China to protect our rights.If we cannot maintain our corporate culture as we grow, we could lose the innovation, collaboration and focus that contribute to the success of ourbusiness.We believe that a critical component of our success is our corporate culture, which we believe cultivates efficiency, fosters innovation,encourages teamwork and embraces changes and development. As we develop the infrastructure of a public company and continue to grow, we mayfind it difficult to maintain these valuable aspects of our corporate culture. Any failure to preserve our culture could negatively impact our futuresuccess, including our ability to attract and retain employees, encourage innovation and teamwork and effectively focus on and pursue our corporateobjectives. 37Source: Qudian Inc., 20-F, April 09, 2018Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Table of ContentsWe do not have any business insurance coverage.Insurance companies in China currently do not offer as extensive an array of insurance products as insurance companies in more developedeconomies. Currently, we do not have any business liability or disruption insurance to cover our operations. We have determined that the costs ofinsuring for these risks and the difficulties associated with acquiring such insurance on commercially reasonable terms make it impractical for us tohave such insurance. Any uninsured business disruptions may result in our incurring substantial costs and the diversion of resources, which could havean adverse effect on our results of operations and financial condition.A severe or prolonged downturn in the Chinese or global economy could materially and adversely affect our business and financial condition.Any prolonged slowdown in the Chinese or global economy may have a negative impact on our business, results of operations and financialcondition. In particular, general economic factors and conditions in China or worldwide, including the general interest rate environment andunemployment rates, may affect borrowers’ willingness to seek credit and institutional funding partners’ ability and desire to fund credit drawdownsfacilitated by us. Economic conditions in China are sensitive to global economic conditions. The global financial markets have experiencedsignificant disruptions since 2008 and the United States, Europe and other economies have experienced periods of recession. The recovery from thelows of 2008 and 2009 has been uneven and there are new challenges, including the escalation of the European sovereign debt crisis from 2011 andthe slowdown of China’s economic growth since 2012, which may continue. There is considerable uncertainty over the long-term effects of theexpansionary monetary and fiscal policies adopted by the central banks and financial authorities of some of the world’s leading economies, includingthe United States and China. There have also been concerns over unrest in North Korea, Ukraine, the Middle East and Africa, which have resulted involatility in financial and other markets. There have also been concerns over the expected withdrawal of the United Kingdom from the European Unionas well as the outcome of the United States presidential election in November 2016. There have also been concerns about the economic effect of thetensions in the relationship between China and surrounding Asian countries. If present Chinese and global economic uncertainties persist, we mayhave difficulty in obtaining funding sources to fund the credit utilized by borrowers. Adverse economic conditions could also reduce the number ofquality borrowers seeking credit from us, as well as their ability to make payments. Should any of these situations occur, the amount of transactionsfacilitated to borrowers and our revenue will decline, and our business and financial condition will be negatively impacted. Additionally, continuedturbulence in the international markets may adversely affect our ability to access the capital markets to meet liquidity needs.Borrower growth and activity on mobile devices depends upon effective use of mobile operating system, networks and standards, which we do notcontrol.Our credit products are offered through mobile apps. As new mobile devices and platforms are released, it is difficult to predict the problems wemay encounter in developing applications for these new devices and platforms, and we may need to devote significant resources to the development,support and maintenance of such applications. In addition, our future growth and our results of operations could suffer if we experience difficulties inthe future in integrating our credit products into mobile devices or if problems arise with our relationships with providers of mobile operating systemsor mobile app stores, or if we face increased costs to distribute or have users utilize our credit products on mobile devices. We are further dependent onthe interoperability of providing our credit products on popular mobile operating systems that we do not control, such as iOS and Android, and anychanges in such systems that degrade the accessibility of our credit products or give preferential treatment to competing products could adverselyaffect the usability of our credit products on mobile devices. In the event that it is more difficult for our users to access and utilize our credit productson their mobile devices, or if our users choose not to access or utilize our credit products on their mobile devices or to use mobile operating systemsthat do not offer access to our credit products, our user growth could be harmed and our business, financial condition and operating results may beadversely affected. 38Source: Qudian Inc., 20-F, April 09, 2018Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Table of ContentsOur operations depend on the performance of the Internet infrastructure and fixed telecommunications networks in China.Almost all access to the Internet in China is maintained through state-owned telecommunication operators under the administrative control andregulatory supervision of the MIIT. Our systems infrastructure is currently deployed and our data is currently maintained on customized cloudcomputing services. Our cloud computing service provider may rely on a limited number of telecommunication service providers to provide it withdata communications capacity through local telecommunications lines and Internet data centers to host its servers. Such service provider may havelimited access to alternative networks or services in the event of disruptions, failures or other problems with China’s Internet infrastructure or the fixedtelecommunications networks provided by telecommunication service providers. With the expansion of our business, we may be required to upgradeour technology and infrastructure to keep up with increasing traffic. We cannot assure you that our cloud computing service provider and theunderlying Internet infrastructure and the fixed telecommunications networks in China will be able to support the demands associated with thecontinued growth in Internet usage.In addition, we have no control over the costs of the services provided by telecommunication service providers which in turn, may affect ourcosts of utilizing customized cloud computing services. If the prices we pay for customized cloud computing services rise significantly, our results ofoperations may be adversely affected. Furthermore, if Internet access fees or other charges to Internet users increase, our user traffic may decline and ourbusiness may be harmed.We face risks related to natural disasters, health epidemics and other outbreaks, which could significantly disrupt our operations.We are vulnerable to natural disasters and other calamities. Fire, floods, typhoons, earthquakes, power loss, telecommunications failures,break-ins, war, riots, terrorist attacks or similar events may give rise to server interruptions, breakdowns, system failures or Internet failures, which couldcause the loss or corruption of data or malfunctions of software or hardware as well as adversely affect our ability to provide our credit products.Our business could also be adversely affected by the effects of Ebola virus disease, H1N1 flu, H7N9 flu, avian flu, Severe Acute RespiratorySyndrome, or SARS, or other epidemics. Our business operations could be disrupted if any of our employees is suspected of having Ebola virus disease,H1N1 flu, H7N9 flu, avian flu, SARS or other epidemic, since it could require our employees to be quarantined and/or our offices to be disinfected. Inaddition, our results of operations could be adversely affected to the extent that any of these epidemics harms the Chinese economy in general.Risks Related to Our Corporate StructureIf the PRC government deems that the contractual arrangements in relation to our consolidated VIEs do not comply with PRC regulatoryrestrictions 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.The PRC government regulates telecommunications-related businesses through strict business licensing requirements and other governmentregulations. These laws and regulations also include limitations on foreign ownership of PRC companies that engage in telecommunications-relatedbusinesses. Specifically, foreign investors are not allowed to own more than a 50% equity interest in any PRC company engaging in value-addedtelecommunications businesses, with certain exceptions relating to online retail and mobile commerce which does not apply to us. The primary foreigninvestor must also have experience and a good track record in providing value-added telecommunications services, or VATS, overseas.Because we are an exempted company incorporated in the Cayman Islands, we are classified as a foreign enterprise under PRC laws andregulations, and our wholly-owned PRC subsidiary, Ganzhou Qufenqi, is a 39Source: Qudian Inc., 20-F, April 09, 2018Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Table of Contentsforeign-invested enterprise, or an FIE. To comply with PRC laws and regulations, we conduct our business in China through our consolidated VIEs andtheir affiliates. Ganzhou Qufenqi has entered into a series of contractual arrangements with our consolidated VIEs and their shareholders. In addition,pursuant to the resolutions of all shareholders of Qudian Inc. and the resolutions of the board of directors of Qudian Inc., the board of directors ofQudian Inc. or any officer authorized by such board shall cause Ganzhou Qufenqi to exercise Ganzhou Qufenqi’s rights under the power of attorneyagreements entered into among Ganzhou Qufenqi, Beijing Happy Time and the nominee shareholders of Beijing Happy Time and Ganzhou Qufenqi’srights under the exclusive call option agreement between Ganzhou Qufenqi and Beijing Happy Time. As a result of these resolutions and the provisionof unlimited financial support from the Company to Beijing Happy Time, Qudian Inc. has been determined to be most closely associated with BeijingHappy Time within the group of related parties and was considered to be the primary beneficiary of Beijing Happy Time and its subsidiaries.We believe that our corporate structure and contractual arrangements comply with the current applicable PRC laws and regulations. Our PRClegal counsel, based on its understanding of the relevant laws and regulations, is of the opinion that each of the contracts among our wholly-ownedPRC subsidiary, our consolidated VIEs and their shareholders is valid, binding and enforceable in accordance with its terms. However, as there aresubstantial uncertainties regarding the interpretation and application of PRC laws and regulations, including the Regulations on Mergers andAcquisitions of Domestic Enterprises by Foreign Investors, or the M&A Rules and the Telecommunications Regulations and the relevant regulatorymeasures concerning the telecommunications industry, there can be no assurance that the PRC government authorities, such as the Ministry ofCommerce, or the MOFCOM, or the MIIT, or other authorities that regulate online consumer finance platforms and other participants in thetelecommunications industry, would agree that our corporate structure or any of the above contractual arrangements comply with PRC licensing,registration or other regulatory requirements, with existing policies or with requirements or policies that may be adopted in the future. PRC laws andregulations governing the validity of these contractual arrangements are uncertain and the relevant government authorities have broad discretion ininterpreting these laws and regulations.If our corporate structure and contractual arrangements are deemed by the MIIT or the MOFCOM or other regulators having competent authorityto be illegal, either in whole or in part, we may lose control of our consolidated VIEs and have to modify such structure to comply with regulatoryrequirements. However, there can be no assurance that we can achieve this without material disruption to our business. Further, if our corporatestructure and contractual arrangements are found to be in violation of any existing or future PRC laws or regulations, the relevant regulatory authoritieswould have broad discretion in dealing with such violations, including: • revoking our business and operating licenses; • levying fines on us; • confiscating any of our income that they deem to be obtained through illegal operations; • shutting down our services; • discontinuing or restricting our operations in China; • imposing conditions or requirements with which we may not be able to comply; • requiring us to change our corporate structure and contractual arrangements; • restricting or prohibiting our use of the proceeds from overseas offering to finance our PRC consolidated VIEs’ business and operations;and • taking other regulatory or enforcement actions that could be harmful to our business.Furthermore, new PRC laws, rules and regulations may be introduced to impose additional requirements that may be applicable to our corporatestructure and contractual arrangements. See “ Substantial uncertainties 40Source: Qudian Inc., 20-F, April 09, 2018Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Table of Contentsexist with respect to the enactment timetable, interpretation and implementation of the draft PRC Foreign Investment Law, and its enactment maymaterially and adversely affect our business and financial condition.” Occurrence of any of these events could materially and adversely affect ourbusiness, financial condition and results of operations. In addition, if the imposition of any of these penalties or requirement to restructure ourcorporate structure causes us to lose the rights to direct the activities of our consolidated VIEs or our right to receive their economic benefits, we wouldno longer be able to consolidate the financial results of such VIEs in our consolidated financial statements. However, we do not believe that suchactions would result in the liquidation or dissolution of our company, our wholly-owned subsidiaries in China or our consolidated VIEs or theirsubsidiaries. See see “Item 4. Information on the Company — B. Business Overview — Overview — Our Contractual Arrangements with ConsolidatedVIEs and Their Shareholders.”Our contractual arrangements with our consolidated VIEs may result in adverse tax consequences to us.We could face material and adverse tax consequences if the PRC tax authorities determine that our contractual arrangements with ourconsolidated VIEs were not made on an arm’s length basis and adjust our income and expenses for PRC tax purposes by requiring a transfer pricingadjustment. A transfer pricing adjustment could adversely affect us by (i) increasing the tax liabilities of our consolidated VIEs without reducing thetax liability of our subsidiaries, which could further result in late payment fees and other penalties to our consolidated VIEs for underpaid taxes; or(ii) limiting the ability of our consolidated VIEs to obtain or maintain preferential tax treatments and other financial incentives.We rely on contractual arrangements with our consolidated VIEs and their shareholders to operate our business, which may not be as effective asdirect ownership in providing operational control and otherwise have a material adverse effect as to our business.We rely on contractual arrangements with our consolidated VIEs and their shareholders to operate our business. For a description of thesecontractual arrangements, see “Item 4. Information on the Company — B. Business Overview — Overview — Our Contractual Arrangements withConsolidated VIEs and Their Shareholders.” All of our revenue are attributed to our consolidated VIEs. These contractual arrangements may not be aseffective as direct ownership in providing us with control over our consolidated VIEs. If our consolidated VIEs or their shareholders fail to performtheir respective obligations under these contractual arrangements, our recourse to the assets held by our consolidated VIEs is indirect and we may haveto incur substantial costs and expend significant resources to enforce such arrangements in reliance on legal remedies under PRC law. These remediesmay not always be effective, particularly in light of uncertainties in the PRC legal system. Furthermore, in connection with litigation, arbitration orother judicial or dispute resolution proceedings, assets under the name of any of record holder of equity interest in our consolidated VIEs, includingsuch equity interest, may be put under court custody. As a consequence, we cannot be certain that the equity interest will be disposed pursuant to thecontractual arrangement or ownership by the record holder of the equity interest.All of these contractual arrangements are governed by PRC law and provide for the resolution of disputes through arbitration in the PRC.Accordingly, these contracts would be interpreted in accordance with PRC laws and any disputes would be resolved in accordance with PRC legalprocedures. The legal environment in the PRC is not as developed as in other jurisdictions, such as the United States. As a result, uncertainties in thePRC legal system could limit our ability to enforce these contractual arrangements. In the event that we are unable to enforce these contractualarrangements, or if we suffer significant time delays or other obstacles in the process of enforcing these contractual arrangements, it would be verydifficult to exert effective control over our consolidated VIEs, and our ability to conduct our business and our financial condition and results ofoperations may be materially and adversely affected. See “ — Risks Relating to Doing Business in China — There are uncertainties regarding theinterpretation and enforcement of PRC laws, rules and regulations.” 41Source: Qudian Inc., 20-F, April 09, 2018Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Table of ContentsGanzhou Qudian, Hunan Qudian and Xiamen Qudian became our consolidated VIEs in 2017. Mr. Min Luo, our founder, chairman and chiefexecutive officer, and Mr. Lianzhu Lv, our director and head of user experience department, are the only shareholders of Ganzhou Qudian, and Mr. MinLuo and Mr. Hongjia He, our vice president, are the only shareholders of Hunan Qudian. Mr. Min Luo is the only shareholder of Xiamen Qudian. Webelieve such shareholding structure will enhance our administrative efficiency and reduce uncertainties associated with the enforcement of the relevantcontractual arrangements entered into with the new consolidated VIEs and their respective shareholder(s). Instead of relying on several shareholders’compliance with their respective contractual obligations, we will only rely on one or two shareholders’ compliance for each new consolidated VIE andwould only need to enforce against such shareholder(s) in the event of a breach. However, there can be no assurance that the shareholding structure ofthe new consolidated VIEs will deliver the expected benefits. If any of the shareholders of the new consolidated VIEs breaches his obligations underthe applicable contractual arrangements, our business, financial condition and results and operations could be materially and adversely affected.The shareholders of our consolidated VIEs may have potential conflicts of interest with us, which may materially and adversely affect our businessand financial condition.In connection with our operations in China, we rely on the shareholders of our consolidated VIEs to abide by the obligations under suchcontractual arrangements. The interests of these shareholders in their individual capacities as the shareholders of our consolidated VIEs may differ fromthe interests of our company as a whole, as what is in the best interests of our consolidated VIEs, including matters such as whether to distributedividends or to make other distributions to fund our offshore requirement, may not be in the best interests of our company. There can be no assurancethat when conflicts of interest arise, any or all of these individuals will act in the best interests of our company or those conflicts of interest will beresolved in our favor. In addition, these individuals may breach or cause our consolidated VIEs and their subsidiaries to breach or refuse to renew theexisting contractual arrangements with us.Currently, we do not have arrangements to address potential conflicts of interest the shareholders of our consolidated VIEs may encounter, onone hand, and as a beneficial owner of our company, on the other hand. We, however, could, at all times, exercise our option under the exclusive calloption agreement to cause them to transfer all of their equity ownership in our consolidated VIEs to a PRC entity or individual designated by us aspermitted by the then applicable PRC laws. In addition, if such conflicts of interest arise, we could also, in the capacity of attorney-in-fact of the thenexisting shareholders of our consolidated VIEs as provided under the power of attorney agreements, directly appoint new directors of our consolidatedVIEs. We rely on the shareholders of our consolidated VIEs to comply with PRC laws and regulations, which protect contracts and provide thatdirectors and executive officers owe a duty of loyalty to our company and require them to avoid conflicts of interest and not to take advantage of theirpositions for personal gains, and the laws of the Cayman Islands, which provide that directors have a duty of care and a duty of loyalty to act honestlyin good faith with a view to our best interests. However, the legal frameworks of China and the Cayman Islands do not provide guidance on resolvingconflicts in the event of a conflict with another corporate governance regime. If we cannot resolve any conflicts of interest or disputes between us andthe shareholders of our consolidated VIEs, we would have to rely on legal proceedings, which could result in disruption of our business and subject usto substantial uncertainty as to the outcome of any such legal proceedings.Our corporate actions will be substantially controlled by our founder, chairman and chief executive officer, Mr. Min Luo, who will have the abilityto control or exert significant influence over important corporate matters that require approval of shareholders, which may deprive you of anopportunity to receive a premium for your ADSs and materially reduce the value of your investment.Mr. Min Luo, our founder, chairman of the board and chief executive officer, beneficially owns all the Class B ordinary shares issued andoutstanding, representing 70.8% of our aggregate voting power as of March 31, 2018. As a result, Mr. Min Luo has the ability to control or exertsignificant influence over important 42Source: Qudian Inc., 20-F, April 09, 2018Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Table of Contentscorporate matters, investors may be prevented from affecting important corporate matters involving our company that require approval of shareholders,including: • the composition of our board of directors and, through it, any determinations with respect to our operations, business direction andpolicies, including the appointment and removal of officers; • any determinations with respect to mergers or other business combinations; • our disposition of substantially all of our assets; and • any change in control.These actions may be taken even if they are opposed by our other shareholders, including the holders of the ADSs. Furthermore, thisconcentration of ownership may also discourage, delay or prevent a change in control of our company, which could have the dual effect of deprivingour shareholders of an opportunity to receive a premium for their shares as part of a sale of our company and reducing the price of the ADSs. As a resultof the foregoing, the value of your investment could be materially reduced.If the custodians or authorized users of our controlling non-tangible assets, including chops and seals, fail to fulfill their responsibilities, ormisappropriate or misuse these assets, our business and operations may be materially and adversely affected.Under PRC law, legal documents for corporate transactions, including agreements and contracts such as the leases and sales contracts that ourbusiness relies on, are executed using the chop or seal of the signing entity or with the signature of a legal representative whose designation isregistered and filed with the relevant local branch of the SAIC. We generally execute legal documents by affixing chops or seals, rather than having thedesignated legal representatives sign the documents.We have three major types of chops — corporate chops, contract chops and finance chops. We use corporate chops generally for documents to besubmitted to government agencies, such as applications for changing business scope, directors or company name, and for legal letters. We use contractchops for executing leases and commercial contracts. We use finance chops generally for making and collecting payments, including issuing invoices.Use of corporate chops and contract chops must be approved by our legal department and administrative department, and use of finance chops must beapproved by our finance department. The chops of our subsidiaries and consolidated VIEs are generally held by the relevant entities so that documentscan be executed locally. Although we usually utilize chops to execute contracts, the registered legal representatives of our subsidiaries andconsolidated VIEs have the apparent authority to enter into contracts on behalf of such entities without chops, unless such contracts set forth otherwise.In order to maintain the physical security of our chops, we generally have them stored in secured locations accessible only to the designated keyemployees of our legal, administrative or finance departments. Our designated legal representatives generally do not have access to the chops.Although we have approval procedures in place and monitor our key employees, including the designated legal representatives of our subsidiaries andconsolidated VIEs, the procedures may not be sufficient to prevent all instances of abuse or negligence. There is a risk that our key employees ordesignated legal representatives could abuse their authority, for example, by binding our subsidiaries and consolidated VIEs with contracts against ourinterests, as we would be obligated to honor these contracts if the other contracting party acts in good faith in reliance on the apparent authority of ourchops or signatures of our legal representatives. If any designated legal representative obtains control of the chop in an effort to obtain control over therelevant entity, we would need to have a shareholder or board resolution to designate a new legal representative and to take legal action to seek thereturn of the chop, apply for a new chop with the relevant authorities, or otherwise seek legal remedies for the legal representative’s misconduct. If anyof the designated legal representatives obtains and misuses or misappropriates our chops and seals or other controlling intangible assets for whateverreason, we could experience disruption to our normal business operations. We may have to take corporate or legal action, which could involvesignificant time and 43Source: Qudian Inc., 20-F, April 09, 2018Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Table of Contentsresources to resolve while distracting management from our operations, and our business and operations may be materially and adversely affected.Substantial uncertainties exist with respect to the enactment timetable, interpretation and implementation of the draft PRC Foreign Investment Law,and its enactment may materially and adversely affect our business and financial condition.The MOFCOM published a discussion draft of the proposed Foreign Investment Law in January 2015 aiming to, upon its enactment, replace themajor existing laws and regulations governing foreign investment in China. While the MOFCOM solicited comments on this draft, substantialuncertainties exist with respect to the enactment timetable, interpretation and implementation of the proposed legislation and the extent of revision tothe currently proposed draft. The draft Foreign Investment Law, if enacted as proposed, may materially impact the entire legal framework regulatingforeign investments in China.Among other things, the draft Foreign Investment Law purports to introduce the principle of “actual control” in determining whether a companyis considered a foreign invested enterprise, or an FIE. The draft Foreign Investment Law specifically provides that entities established in China but“controlled” by foreign investors will be treated as FIEs, whereas an entity organized in a foreign jurisdiction, but cleared by the MOFCOM as“controlled” by PRC entities and/or citizens, would nonetheless be treated as a PRC domestic entity for investment in the “restriction category” thatcould appear on any such “negative list.” In this connection, “control” is broadly defined in the draft law to cover any of the following summarizedcategories: • holding 50% or more of the voting rights or similar rights and interests of the subject entity; • holding less than 50% of the voting rights or similar rights and interests of the subject entity but having the power to directly or indirectlyappoint or otherwise secure at least 50% of the seats on the board or other equivalent decision making bodies, or having the voting powerto materially influence the board, the shareholders’ meeting or other equivalent decision making bodies; or • having the power to exert decisive influence, via contractual or trust arrangements, over the subject entity’s operations, financial, staffingand technology matters.Once an entity is determined to be an FIE, and its investment amount exceeds certain thresholds or its business operation falls within a “negativelist” purported to be separately issued by the State Council in the future, market entry clearance by the MOFCOM or its local counterparts would berequired.The VIE structure has been adopted by many PRC-based companies, including us, to conduct business in the industries that are currently subjectto foreign investment restrictions in China. Under the draft Foreign Investment Law, VIEs that are controlled via contractual arrangements would alsobe deemed as FIEs, if they are ultimately “controlled” by foreign investors. For any companies with a VIE structure in an industry category that is in the“restriction category” that could appear on any such “negative list,” the existing VIE structure may be deemed legitimate only if the ultimatecontrolling person(s) is/are of PRC nationality (either PRC state owned enterprises or agencies, or PRC citizens). Conversely, if the actual controllingperson(s) is/are of foreign nationalities, then the VIEs will be treated as FIEs, in which case, the existing VIE structures will likely to be scrutinized andsubject to foreign investment restrictions and approval from the MOFCOM and other supervising authorities such as MIIT. Any operation in theindustry category on the “negative list” without market entry clearance may be considered as illegal.However, there are significant uncertainties as to how the control status of our consolidated VIEs would be determined under the enacted versionof the Foreign Investment Law. In addition, it is uncertain whether any of the businesses that we currently operate or plan to operate in the futurethrough our consolidated VIEs would be on the to-be-issued “negative list” and therefore be subject to any foreign investment restrictions orprohibitions. If our consolidated VIEs were deemed as an FIE under the enacted version of the Foreign Investment Law, and 44Source: Qudian Inc., 20-F, April 09, 2018Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Table of Contentsany of the businesses that we operate were in the “restricted” category on the to-be-issued “negative list,” such determination would materially andadversely affect the value of our ADSs. We also face uncertainties as to whether the enacted version of the Foreign Investment Law and the final“negative list” would mandate further actions, such as MOFCOM market entry clearance, to be completed by companies with existing VIE structureand whether such clearance can be timely obtained, or at all. If we were not considered as ultimately controlled by PRC domestic investors under theenacted version of the Foreign Investment Law, further actions required to be taken by us under the enacted Foreign Investment Law may materiallyand adversely affect our business and financial condition.In addition, our corporate governance practice may be materially impacted and our compliance costs could increase if we were not considered asultimately controlled by PRC domestic investors under the Foreign Investment Law, if enacted as currently proposed. For instance, the draft ForeignInvestment Law as proposed purports to impose stringent ad hoc and periodic information reporting requirements on foreign investors and theapplicable FIEs. Aside from investment implementation report and investment amendment report that would be required for each investment andalteration of investment specifics, an annual report would be mandatory, and large foreign investors meeting certain criteria would be required to reporton a quarterly basis. Any company found to be non-compliant with these information reporting obligations could potentially be subject to fines and/oradministrative or criminal liabilities, and the persons directly responsible could be subject to criminal liabilities.Risks Related to Doing Business in ChinaChanges in the political and economic policies of the PRC government may materially and adversely affect our business, financial condition andresults of operations and may result in our inability to sustain our growth and expansion strategies.Substantially all of our operations are conducted in the PRC and all of our revenue is sourced from the PRC. Accordingly, our financial conditionand results of operations are affected to a significant extent by economic, political and legal developments in the PRC.The PRC economy differs from the economies of most developed countries in many respects, including the extent of government involvement,level of development, growth rate, and control of foreign exchange and allocation of resources. Although the PRC government has implementedmeasures emphasizing the utilization of market forces for economic reform, the reduction of state ownership of productive assets, and the establishmentof improved corporate governance in business enterprises, a substantial portion of productive assets in China is still owned by the government. Inaddition, the PRC government continues to play a significant role in regulating industry development by imposing industrial policies. The PRCgovernment also exercises significant control over China’s economic growth by allocating resources, controlling payment of foreign currency-denominated obligations, setting monetary policy, regulating financial services and institutions and providing preferential treatment to particularindustries or companies.While the PRC economy has experienced significant growth in the past three decades, growth has been uneven, both geographically and amongvarious sectors of the economy. The PRC government has implemented various measures to encourage economic growth and guide the allocation ofresources. Some of these measures may benefit the overall PRC economy, but may also have a negative effect on us. Our financial condition and resultsof operations could be materially and adversely affected by government control over capital investments or changes in tax regulations that areapplicable to us. In addition, the PRC government has implemented in the past certain measures to control the pace of economic growth. Thesemeasures may cause decreased economic activity, which in turn could lead to a reduction in demand for our services and consequently have a materialadverse effect on our businesses, financial condition and results of operations. 45Source: Qudian Inc., 20-F, April 09, 2018Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Table of ContentsThere are uncertainties regarding the interpretation and enforcement of PRC laws, rules and regulations.Substantially all of our operations are conducted in the PRC, and are governed by PRC laws, rules and regulations. Our PRC subsidiaries andconsolidated VIEs are subject to laws, rules and regulations applicable to foreign investment in China. The PRC legal system is a civil law systembased on written statutes. Unlike the common law system, prior court decisions may be cited for reference but have limited precedential value.In 1979, the PRC government began to promulgate a comprehensive system of laws, rules and regulations governing economic matters ingeneral. The overall effect of legislation over the past three decades has significantly enhanced the protections afforded to various forms of foreigninvestment in China. However, China has not developed a fully integrated legal system, and recently enacted laws, rules and regulations may notsufficiently cover all aspects of economic activities in China or may be subject to significant degrees of interpretation by PRC regulatory agencies. Inparticular, because these laws, rules and regulations are relatively new, and because of the limited number of published decisions and the nonbindingnature of such decisions, and because the laws, rules and regulations often give the relevant regulator significant discretion in how to enforce them, theinterpretation and enforcement of these laws, rules and regulations involve uncertainties and can be inconsistent and unpredictable. In addition, thePRC legal system is based in part on government policies and internal rules, some of which are not published on a timely basis or at all, and which mayhave a retroactive effect. As a result, we may not be aware of our violation of these policies and rules until after the occurrence of the violation.Any administrative and court proceedings in China may be protracted, resulting in substantial costs and diversion of resources and managementattention. Since PRC administrative and court authorities have significant discretion in interpreting and implementing statutory and contractual terms,it may be more difficult to evaluate the outcome of administrative and court proceedings and the level of legal protection we enjoy than in moredeveloped legal systems. These uncertainties may impede our ability to enforce the contracts we have entered into and could materially and adverselyaffect our business, financial condition and results of operations.PRC regulations relating to investments in offshore companies by PRC residents may subject our PRC-resident beneficial owners or our PRCsubsidiaries to liability or penalties, limit our ability to inject capital into our PRC subsidiaries or limit our PRC subsidiaries’ ability to increasetheir registered capital or distribute profits.The SAFE promulgated the Circular on Relevant Issues Concerning Foreign Exchange Control on Domestic Residents’ Offshore Investment andFinancing and Roundtrip Investment through Special Purpose Vehicles, or SAFE Circular 37, on July 4, 2014, which replaced the former circularcommonly known as “SAFE Circular 75” promulgated by the SAFE on October 21, 2005. SAFE Circular 37 requires PRC residents to register withlocal branches of the SAFE in connection with their direct establishment or indirect control of an offshore entity, for the purpose of overseasinvestment and financing, with such PRC residents’ legally owned assets or equity interests in domestic enterprises or offshore assets or interests,referred to in SAFE Circular 37 as a “special purpose vehicle.” SAFE Circular 37 further requires amendment to the registration in the event of anysignificant changes with respect to the special purpose vehicle, such as increase or decrease of capital contributed by PRC individuals, share transfer orexchange, merger, division or other material event. In the event that a PRC shareholder holding interests in a special purpose vehicle fails to fulfill therequired SAFE registration, the PRC subsidiaries of that special purpose vehicle may be prohibited from making profit distributions to the offshoreparent and from carrying out subsequent cross-border foreign exchange activities, and the special purpose vehicle may be restricted in its ability tocontribute additional capital into its PRC subsidiary. Moreover, failure to comply with the various SAFE registration requirements described abovecould result in liability under PRC law for evasion of foreign exchange controls. According to the Notice on Further Simplifying and ImprovingPolicies for the Foreign Exchange Administration of Direct Investment released on February 13, 2015 by the SAFE, local banks will examine andhandle foreign exchange registration for overseas direct investment, including the initial foreign exchange registration and amendment registration,under SAFE Circular 37 from June 1, 2015. 46Source: Qudian Inc., 20-F, April 09, 2018Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Table of ContentsMr. Min Luo has completed the SAFE registration pursuant to SAFE Circular 75 in 2014. We have notified substantial beneficial owners ofordinary shares who we know are PRC residents of their filing obligation. Nevertheless, we may not be aware of the identities of all of our beneficialowners who are PRC residents. We do not have control over our beneficial owners and there can be no assurance that all of our PRC-resident beneficialowners will comply with SAFE Circular 37 and subsequent implementation rules, and there is no assurance that the registration under SAFE Circular37 and any amendment will be completed in a timely manner, or will be completed at all. The failure of our beneficial owners who are PRC residents toregister or amend their foreign exchange registrations in a timely manner pursuant to SAFE Circular 37 and subsequent implementation rules, or thefailure of future beneficial owners of our company who are PRC residents to comply with the registration procedures set forth in SAFE Circular 37 andsubsequent implementation rules, may subject such beneficial owners or our PRC subsidiaries to fines and legal sanctions. Failure to register or complywith relevant requirements may also limit our ability to contribute additional capital to our PRC subsidiaries and limit our PRC subsidiaries’ ability todistribute dividends to our company. These risks may have a material adverse effect on our business, financial condition and results of operations.Any failure to comply with PRC regulations regarding our employee share incentive plans may subject the PRC plan participants or us to fines andother legal or administrative sanctions.Pursuant to SAFE Circular 37, PRC residents who participate in share incentive plans in overseas non-publicly-listed companies due to theirposition as director, senior management or employees of the PRC subsidiaries of the overseas companies may submit applications to SAFE or its localbranches for the foreign exchange registration with respect to offshore special purpose companies. Our directors, executive officers and otheremployees who are PRC residents and who have been granted options may follow SAFE Circular 37 to apply for the foreign exchange registrationbefore our company becomes an overseas listed company. After our company becomes an overseas listed company upon completion of our initialpublic offering, we and our directors, executive officers and other employees who are PRC residents and who have been granted options have beensubject to the Notice on Issues Concerning the Foreign Exchange Administration for Domestic Individuals Participating in Stock Incentive Plan ofOverseas Publicly Listed Company, issued by SAFE in February 2012, according to which, employees, directors, supervisors and other managementmembers participating in any stock incentive plan of an overseas publicly listed company who are PRC residents are required to register with SAFEthrough a domestic qualified agent, which could be a PRC subsidiary of such overseas listed company, and complete certain other procedures. We willmake efforts to comply with these requirements upon completion of our initial public offering. However, there can be no assurance that they cansuccessfully register with SAFE in full compliance with the rules. Failure to complete the SAFE registrations may subject them to fines and legalsanctions and may also limit the ability to make payment under our share incentive plans or receive dividends or sales proceeds related thereto, or ourability to contribute additional capital into our wholly-foreign owned enterprises in China and limit our wholly-foreign owned enterprises’ ability todistribute dividends to us. We also face regulatory uncertainties that could restrict our ability to adopt additional share incentive plans for our directorsand employees under PRC law.We rely to a significant extent on dividends and other distributions on equity paid by our principal operating subsidiaries to fund offshore cash andfinancing requirements.We are a holding company and rely to a significant extent on dividends and other distributions on equity paid by our principal operatingsubsidiaries and on remittances from the consolidated VIEs, for our offshore cash and financing requirements, including the funds necessary to paydividends and other cash distributions to our shareholders, fund inter-company loans, service any debt we may incur outside of China and pay ourexpenses. When our principal operating subsidiaries or the consolidated VIEs incur additional debt, the instruments governing the debt may restricttheir ability to pay dividends or make other distributions or remittances to us. Furthermore, the laws, rules and regulations applicable to our PRCsubsidiaries and certain other subsidiaries permit payments of dividends only out of their retained earnings, if any, determined in accordance withapplicable accounting standards and regulations. 47Source: Qudian Inc., 20-F, April 09, 2018Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Table of ContentsUnder PRC laws, rules and regulations, each of our subsidiaries incorporated in China is required to set aside at least 10% of its net income eachyear to fund certain statutory reserves until the cumulative amount of such reserves reaches 50% of its registered capital. These reserves, together withthe registered capital, are not distributable as cash dividends. As a result of these laws, rules and regulations, our subsidiaries incorporated in China arerestricted in their ability to transfer a portion of their respective net assets to their shareholders as dividends, loans or advances. Certain of oursubsidiaries did not have any retained earnings available for distribution in the form of dividends as of December 31, 2017. In addition, registeredshare capital and capital reserve accounts are also restricted from withdrawal in the PRC, up to the amount of net assets held in each operatingsubsidiary.Limitations on the ability of our consolidated VIEs to make remittance to the wholly-foreign owned enterprise and on the ability of oursubsidiaries to pay dividends to us could limit our ability to access cash generated by the operations of those entities, including to make investmentsor acquisitions that could be beneficial to our businesses, pay dividends to our shareholders or otherwise fund and conduct our business.We may be treated as a resident enterprise for PRC tax purposes under the PRC Enterprise Income Tax Law, and we may therefore be subject toPRC income tax on our global income.Under the PRC Enterprise Income Tax Law and its implementing rules, enterprises established under the laws of jurisdictions outside of Chinawith “de facto management bodies” located in China may be considered PRC tax resident enterprises for tax purposes and may be subject to the PRCenterprise income tax at the rate of 25% on their global income. “De facto management body” refers to a managing body that exercises substantive andoverall management and control over the production and business, personnel, accounting books and assets of an enterprise. The State Administrationof Taxation issued the Notice Regarding the Determination of Chinese-Controlled Offshore-Incorporated Enterprises as PRC Tax Resident Enterpriseson the Basis of De Facto Management Bodies, or Circular 82, on April 22, 2009. Circular 82 provides certain specific criteria for determining whetherthe “de facto management body” of a Chinese-controlled offshore-incorporated enterprise is located in China. Although Circular 82 only applies tooffshore enterprises controlled by PRC enterprises, not those controlled by foreign enterprises or individuals, the determining criteria set forth inCircular 82 may reflect the State Administration of Taxation’s general position on how the “de facto management body” test should be applied indetermining the tax resident status of offshore enterprises, regardless of whether they are controlled by PRC enterprises. If we were to be considered aPRC resident enterprise, we would be subject to PRC enterprise income tax at the rate of 25% on our global income. In such case, our profitability andcash flow may be materially reduced as a result of our global income being taxed under the Enterprise Income Tax Law. We believe that none of ourentities outside of China is a PRC resident enterprise for PRC tax purposes. However, the tax resident status of an enterprise is subject to determinationby the PRC tax authorities and uncertainties remain with respect to the interpretation of the term “de facto management body.”Dividends payable to our foreign investors and gains on the sale of our ADSs or Class A ordinary shares by our foreign investors may become subjectto PRC tax.Under the Enterprise Income Tax Law and its implementation regulations issued by the State Council, a 10% PRC withholding tax is applicableto dividends payable to investors that are non-resident enterprises, which do not have an establishment or place of business in the PRC or which havesuch establishment or place of business but the dividends are not effectively connected with such establishment or place of business, to the extent suchdividends are derived from sources within the PRC. Similarly, any gain realized on the transfer of ADSs or Class A ordinary shares by such investors isalso subject to PRC tax at a current rate of 10%, subject to any reduction or exemption set forth in applicable tax treaties or under applicable taxarrangements between jurisdictions, if such gain is regarded as income derived from sources within the PRC. If we are deemed a PRC residententerprise, dividends paid on our Class A ordinary shares or ADSs, and any gain realized from the transfer of our Class A ordinary shares or ADSs,would be treated as income derived from sources within the PRC and would as a result be subject to PRC taxation. Furthermore, if we are deemed aPRC resident enterprise, 48Source: Qudian Inc., 20-F, April 09, 2018Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Table of Contentsdividends payable to individual investors who are non-PRC residents and any gain realized on the transfer of ADSs or Class A ordinary shares by suchinvestors may be subject to PRC tax at a current rate of 20%, subject to any reduction or exemption set forth in applicable tax treaties or underapplicable tax arrangements between jurisdictions. If we or any of our subsidiaries established outside China are considered a PRC resident enterprise,it is unclear whether holders of our ADSs or Class A ordinary shares would be able to claim the benefit of income tax treaties or agreements entered intobetween China and other countries or areas. If dividends payable to our non-PRC investors, or gains from the transfer of our ADSs or Class A ordinaryshares by such investors, are deemed as income derived from sources within the PRC and thus are subject to PRC tax, the value of your investment inour ADSs or Class A ordinary shares may decline significantly.We and our shareholders face uncertainties with respect to indirect transfers of equity interests in PRC resident enterprises or other assets attributedto a Chinese establishment of a non-Chinese company, or immovable properties located in China owned by non-Chinese companies.On February 3, 2015, the State Administration of Taxation, or the SAT, issued the Bulletin on Issues of Enterprise Income Tax on IndirectTransfers of Assets by Non-PRC Resident Enterprises, or Bulletin 7, which partially replaced and supplemented previous rules under the Notice onStrengthening Administration of Enterprise Income Tax for Share Transfers by Non-PRC Resident Enterprises, or SAT Circular 698, issued by the StateAdministration of Taxation, on December 10, 2009. Pursuant to Bulletin 7, an “indirect transfer” of assets, including equity interests in a PRC residententerprise, by non-PRC resident enterprises may be re-characterized and treated as a direct transfer of PRC taxable assets, if such arrangement does nothave a reasonable commercial purpose and was established for the purpose of avoiding payment of PRC enterprise income tax. As a result, gainsderived from such indirect transfer may be subject to PRC enterprise income tax. According to Bulletin 7, “PRC taxable assets” include assetsattributed to an establishment in China, immovable properties located in China, and equity investments in PRC resident enterprises, in respect ofwhich gains from their transfer by a direct holder, being a non-PRC resident enterprise, would be subject to PRC enterprise income taxes. Whendetermining whether there is a “reasonable commercial purpose” of the transaction arrangement, features to be taken into consideration include:whether the main value of the equity interest of the relevant offshore enterprise derives from PRC taxable assets; whether the assets of the relevantoffshore enterprise mainly consists of direct or indirect investment in China or if its income mainly derives from China; whether the offshore enterpriseand its subsidiaries directly or indirectly holding PRC taxable assets have real commercial nature which is evidenced by their actual function and riskexposure; the duration of existence of the business model and organizational structure; the replicability of the transaction by direct transfer of PRCtaxable assets; and the tax situation of such indirect transfer and applicable tax treaties or similar arrangements. In respect of an indirect offshoretransfer of assets of a PRC establishment, the resulting gain is to be included with the enterprise income tax filing of the PRC establishment or place ofbusiness being transferred, and would consequently be subject to PRC enterprise income tax at a rate of 25%. Where the underlying transfer relates tothe immovable properties located in China or to equity investments in a PRC resident enterprise, which is not related to a PRC establishment or placeof business of a non-resident enterprise, a PRC enterprise income tax of 10% would apply, subject to available preferential tax treatment underapplicable tax treaties or similar arrangements, and the party who is obligated to make the transfer payments has the withholding obligation. Where thepayor fails to withhold any or sufficient tax, the transferor is required to declare and pay such tax to the tax authority by itself within the statutory timelimit. Late payment of applicable tax will subject the transferor to default interest. Bulletin 7 does not apply to transactions of sale of shares byinvestors through a public stock exchange where such shares were acquired from a transaction through a public stock exchange. On October 17, 2017,the SAT issued the Announcement of the State Administration of Taxation on Issues Relating to Withholding at Source of Income Tax of Non-residentEnterprises, or SAT Circular 37, to completely repeal SAT Circular 698 and the second paragraph of Section 8 of Bulletin 7. According to SAT Circular37, the amount of taxable income equals the remainder after deducting the net equity value from the equity transfer income. Equity transfer incomemeans the consideration collected by the transferor from the equity transfer, including income in both monetary form and non-monetary form. Netequity value means the tax basis for acquiring such equity. The tax basis for the equity is the capital contribution costs actually paid by the equitytransferor to a PRC resident enterprise at the time of 49Source: Qudian Inc., 20-F, April 09, 2018Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Table of Contentsthe investment and equity participation, or the equity transfer costs actually paid at the time of acquisition of such equity to the original transferor ofsuch equity.There is uncertainty as to the application of Bulletin 7 and SAT Circular 37. We face uncertainties as to the reporting and other implications ofcertain past and future transactions where PRC taxable assets are involved, such as offshore restructuring, sale of the shares in our offshore subsidiariesor investments. Our company may be subject to filing obligations or taxed if our company is transferor in such transactions, and may be subject towithholding obligations if our company is transferee in such transactions, under SAT Circular 37 and Bulletin 7. For transfer of shares in our companyby investors that are non-PRC resident enterprises, our PRC subsidiaries may be requested to assist in the filing under SAT Circular 37 and Bulletin 7.As a result, we may be required to expend valuable resources to comply with SAT Circular 37 and Bulletin 7 or to request the relevant transferors fromwhom we purchase taxable assets to comply with these circulars, or to establish that our company should not be taxed under these circulars, which mayhave a material adverse effect on our financial condition and results of operations.We are subject to restrictions on currency exchange.All of our net income is denominated in Renminbi. The Renminbi is currently convertible under the “current account,” which includesdividends, trade and service-related foreign exchange transactions, but not under the “capital account,” which includes foreign direct investment andloans, including loans we may secure from our onshore subsidiaries or consolidated VIEs. Currently, certain of our PRC subsidiaries, may purchaseforeign currency for settlement of “current account transactions,” including payment of dividends to us, without the approval of the SAFE bycomplying with certain procedural requirements. However, the relevant PRC governmental authorities may limit or eliminate our ability to purchaseforeign currencies in the future for current account transactions. Foreign exchange transactions under the capital account remain subject to limitationsand require approvals from, or registration with, the SAFE and other relevant PRC governmental authorities. Since a significant amount of our futurenet income and cash flow will be denominated in Renminbi, any existing and future restrictions on currency exchange may limit our ability to utilizecash generated in Renminbi to fund our business activities outside of the PRC or pay dividends in foreign currencies to our shareholders, includingholders of our ADSs, and may limit our ability to obtain foreign currency through debt or equity financing for our subsidiaries and consolidated VIEs.Fluctuations in exchange rates could result in foreign currency exchange losses and could materially reduce the value of your investment.The value of the Renminbi against the U.S. dollar and other currencies may fluctuate and is affected by, among other things, changes in politicaland economic conditions and the monetary or fiscal policies adopted by the PRC government. On July 21, 2005, the PRC government changed itspolicy of pegging the value of the Renminbi to the U.S. dollar. Following the removal of the U.S. dollar peg, the Renminbi appreciated more than 20%against the U.S. dollar over the following three years. Between July 2008 and June 2010, the exchange rate between the Renminbi and the U.S. dollarhad been stable and traded within a narrow band. In June 2010, the PRC government indicated that it would make the foreign exchange rate of theRenminbi more flexible, which increases the possibility of sharp fluctuations of the Renminbi’s value in the near future and the unpredictabilityassociated with the Renminbi’s exchange rate. Since then, the Renminbi has fluctuated against the U.S. dollar, at times significantly and unpredictably.On November 30, 2015, the Executive Board of the International Monetary Fund (IMF) completed the regular five-year review of the basket ofcurrencies that make up the Special Drawing Right, or the SDR, and decided that with effect from October 1, 2016, Renminbi is determined to be afreely usable currency and will be included in the SDR basket as a fifth currency, along with the U.S. dollar, the Euro, the Japanese yen and the Britishpound. In the fourth quarter of 2016, the Renminbi has depreciated significantly in the backdrop of a surging U.S. dollar and persistent capital outflowsof China. With the development of the foreign exchange market and progress towards interest rate liberalization and Renminbi internationalization,the PRC government may in the future announce further changes to the exchange rate system, and we cannot assure 50Source: Qudian Inc., 20-F, April 09, 2018Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Table of Contentsyou that the Renminbi will not appreciate or depreciate significantly in value against the U.S. dollar in the future. It is difficult to predict how marketforces or PRC or U.S. government policy may impact the exchange rate between the Renminbi and the U.S. dollar in the future.All of our revenue and substantially all of our costs are denominated in Renminbi. We are a holding company and we rely on dividends paid byour operating subsidiaries in China for our cash needs. Any significant revaluation of Renminbi may materially and adversely affect our results ofoperations and financial position reported in Renminbi when translated into U.S. dollars, and the value of, and any dividends payable on, the ADSs inU.S. dollars. To the extent that we need to convert U.S. dollars we receive from our initial public offering into Renminbi for our operations,appreciation of the Renminbi against the U.S. dollar would have an adverse effect on the Renminbi amount we would receive. Conversely, if we decideto convert our Renminbi into U.S. dollars for the purpose of making payments for dividends on our ordinary shares or ADSs or for other businesspurposes, appreciation of the U.S. dollar against the Renminbi would have a negative effect on the U.S. dollar amount.PRC regulations establish more complex procedures for acquisitions conducted by foreign investors which could make it more difficult for us topursue growth through acquisitions.The M&A Rules promulgated by six PRC regulatory agencies on August 8, 2006 established new procedures and requirements that could makemerger and acquisition activities by foreign investors more time-consuming and complex, including requirements in some instances that the Ministryof Commerce be notified in advance of any change-of-control transaction in which a foreign investor takes control of a PRC domestic enterprise. OnFebruary 3, 2011, the General Office of the State Council promulgated the Notice on Launching the Security Review System for Mergers andAcquisitions of Domestic Enterprises by Foreign Investors, or the M&A Security Review Notice, which became effective on March 6, 2011. The M&ASecurity Review Notice provides for certain circumstances under which foreign investors’ acquisition of domestic enterprises shall be subject to thesecurity review of the PRC governments. The security review assesses such acquisition’s impact on national security, stable operation of nationaleconomy, basic living of the people, and R&D capacity for key technologies related to national security. On August 25, 2011, the Ministry ofCommerce of PRC promulgated the Regulation of Ministry of Commerce on Implementation of the Security Review System for Mergers andAcquisitions of Domestic Enterprises by Foreign Investors, or the M&A Security Review Regulation, which became effective on September 1, 2011.The M&A Security Review Regulation stipulates the requirements of application documents and security review procedures of the Ministry ofCommerce. In the future, we may grow our business in part by acquiring complementary businesses. Complying with the requirements of the M&ARules, the M&A Security Review Notice and the M&A Security Review Regulation to complete such transactions could be time-consuming, and anyrequired approval processes, including obtaining approval from the Ministry of Commerce or its provincial affiliates, may delay or inhibit our abilityto complete such transactions, which could affect our ability to expand our business or maintain our market share.The enforcement of the laws on Employment Contracts and other labor-related regulations in the PRC may adversely affect our business and ourresults of operations.On June 29, 2007, the National People’s Congress of China enacted the laws on Employment Contracts, or the Employment Contract Law, whichbecame effective on January 1, 2008, amended on December 28, 2012. The Employment Contract Law established new restrictions and increased costsfor employers to dismiss employees, including specific provisions related to fixed-term employment contracts, temporary employment, probation,consultation with the labor union and employee assembly, employment without a contract, dismissal of employees, compensation upon terminationand overtime work, and collective bargaining. According to the Employment Contract Law, an employer is obliged to sign a labor contract with anunlimited term with an employee if the employer continues to hire the employee after the expiration of two consecutive fixed-term labor contractssubject to certain conditions or after the employee has worked for the employer for ten consecutive years. The employer also has to pay compensationto an employee if the employer terminates an unlimited-term 51Source: Qudian Inc., 20-F, April 09, 2018Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Table of Contentslabor contract. Such compensation is also required when the employer refuses to renew a labor contract that has expired, unless it is the employee whorefuses to extend the expired contract or resign. In addition, under the Regulations on Paid Annual Leave for Employees, which became effective onJanuary 1, 2008 and its Implementation Rules on Paid Annual Leave for Employees, which became effective on September 18, 2008, employees whohave served more than one year for an employer are entitled to a paid vacation ranging from 5 to 15 days, depending on their accumulative total lengthof service. Employers who fail to allow for such vacation time must compensate their employees three times their regular salaries for each vacation daydisallowed, unless such employers can provide evidence, such as a copy of a written notice provided to their employees, that suggests the employersmade arrangements for their employees to take such annual leaves, but such employees voluntarily waived taking their leaves or such employeeswaived their right to such vacation days in writing.The audit report included in this annual report is prepared by an auditor who is not inspected by the Public Company Accounting Oversight Boardand, as such, our investors are deprived of the benefits of such inspection.Our independent registered public accounting firm that issues the audit report included in our annual report filed with the SEC, as auditors ofcompanies that are traded publicly in the United States and a firm registered with the U.S. Public Company Accounting Oversight Board, or thePCAOB, is required by the laws of the United States to undergo regular inspections by the PCAOB to assess its compliance with the laws of the UnitedStates and professional standards. Because our auditors are located in the People’s Republic of China, a jurisdiction where the PCAOB is currentlyunable to conduct inspections without the approval of the Chinese authorities, our auditors are not currently inspected by the PCAOB.Inspections of other firms that the PCAOB has conducted outside China have identified deficiencies in those firms’ audit procedures and qualitycontrol procedures, which may be addressed as part of the inspection process to improve future audit quality. This lack of PCAOB inspections in Chinaprevents the PCAOB from regularly evaluating our auditor’s audits and its quality control procedures. As a result, investors may be deprived of thebenefits of PCAOB inspections.The inability of the PCAOB to conduct inspections of auditors in China makes it more difficult to evaluate the effectiveness of our auditor’saudit procedures or quality control procedures as compared to auditors outside of China that are subject to PCAOB inspections. Investors may loseconfidence in our reported financial information and procedures and the quality of our consolidated financial statements.If additional remedial measures are imposed on the “big four” PRC-based accounting firms, including our independent registered publicaccounting firm, in administrative proceedings brought by the SEC alleging such firms’ failure to meet specific criteria set by the SEC with respectto requests for the production of documents, we could be unable to timely file future financial statements in compliance with the requirements of theExchange Act.Starting in 2011, the Chinese affiliates of the “big four” accounting firms, including our independent registered public accounting firm, wereaffected by a conflict between U.S. and Chinese law. Specifically, for certain U.S. listed companies operating and audited in mainland China, the SECand the PCAOB sought to obtain from the Chinese accounting firms access to their audit work papers and related documents. The firms were, however,advised and directed that under Chinese law they could not respond directly to the U.S. regulators on those requests, and that requests by foreignregulators for access to such papers in China had to be channeled through the CSRC.In late 2012, this impasse led the SEC to commence administrative proceedings under Rule 102(e) of its Rules of Practice and also under theSarbanes-Oxley Act of 2002 against the Chinese accounting firms, including our independent registered public accounting firm. In January 2014, theadministrative law judge reached an initial decision to impose penalties on the firms including a temporary suspension of their right to practice before 52Source: Qudian Inc., 20-F, April 09, 2018Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Table of Contentsthe SEC. The accounting firms filed a petition for review of the initial decision. On February 6, 2015, before a review by the commissioners of the SEChad taken place, the firms reached a settlement with the SEC. Under the settlement, the SEC accepts that future requests by the SEC for the productionof documents will normally be made to the CSRC. The firms will receive matching Section 106 requests, and are required to abide by a detailed set ofprocedures with respect to such requests, which in substance require them to facilitate production via the CSRC. If they fail to meet specified criteria,the SEC retains authority to impose a variety of additional remedial measures on the firms depending on the nature of the failure. Remedies for anyfuture noncompliance could include, as appropriate, an automatic six-month bar on a single firm’s performance of certain audit work, commencementof a new proceeding against a firm, or in extreme cases the resumption of the current proceeding against all four firms.In the event that the SEC restarts the administrative proceedings, depending upon the final outcome, listed companies in the United States withmajor PRC operations may find it difficult or impossible to retain auditors in respect of their operations in the PRC, which could result in financialstatements being determined to not be in compliance with the requirements of the Exchange Act, including possible delisting. Moreover, any negativenews about any such future proceedings against these audit firms may cause investor uncertainty regarding China-based, United States-listedcompanies and the market price of our ADSs may be adversely affected.If our independent registered public accounting firm were denied, even temporarily, the ability to practice before the SEC and we were unable totimely find another registered public accounting firm to audit and issue an opinion on our consolidated financial statements, our consolidatedfinancial statements could be determined not to be in compliance with the requirements of the Exchange Act. Such a determination could ultimatelylead to the delisting of our ADSs from the NYSE or deregistration from the SEC, or both, which would substantially reduce or effectively terminate thetrading of our ADSs in the United States.Risks Related to Our Ordinary Shares and ADSsThe trading price of our ADSs may be volatile, which could result in substantial losses to you.The trading prices of our ADSs have been, and are likely to continue to be, volatile and could fluctuate widely due to factors beyond our control.This may happen because of broad market and industry factors, like the performance and fluctuation in the market prices or the underperformance ordeteriorating financial results of other listed companies based in China. The securities of some of these companies have experienced significantvolatility since their initial public offerings, including, in some cases, substantial price declines in the trading prices of their securities. The tradingperformances of other Chinese companies’ securities after their offerings, including Internet companies, online retail and mobile commerce platformsand consumer finance service providers, may affect the attitudes of investors toward Chinese companies listed in the United States, which consequentlymay impact the trading performance of our ADSs, regardless of our actual operating performance. In addition, any negative news or perceptions aboutinadequate corporate governance practices or fraudulent accounting, corporate structure or matters of other Chinese companies may also negativelyaffect the attitudes of investors towards Chinese companies in general, including us, regardless of whether we have conducted any inappropriateactivities. Furthermore, securities markets may from time to time experience significant price and volume fluctuations that are not related to ouroperating performance, such as the large decline in share prices in the United States, China and other jurisdictions in late 2008, early 2009, the secondhalf of 2011 and in 2015, which may have a material and adverse effect on the trading price of our ADSs.In addition to the above factors, the price and trading volume of our ADSs may be highly volatile due to multiple factors, including thefollowing: • regulatory developments affecting us or our industry; • announcements of studies and reports relating to the quality of our credit offerings or those of our competitors; 53Source: Qudian Inc., 20-F, April 09, 2018Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Table of Contents • changes in the economic performance or market valuations of other consumer finance service providers; • actual or anticipated fluctuations in our quarterly results of operations and changes or revisions of our expected results; • changes in financial estimates by securities research analysts; • conditions in the market for consumer finance services; • announcements by us or our competitors of new product and service offerings, acquisitions, strategic relationships, joint ventures, capitalraisings or capital commitments; • additions to or departures of our senior management; • fluctuations of exchange rates between the Renminbi and the U.S. dollar; • release or expiry of lock-up or other transfer restrictions on our outstanding shares or ADSs; and • sales or perceived potential sales of additional Class A ordinary shares or ADSs.If securities or industry analysts do not publish research or publish inaccurate or unfavorable research about our business, the market price for ourADSs and trading volume could decline.The trading market for our ADSs will depend in part on the research and reports that securities or industry analysts publish about us or ourbusiness. If research analysts do not establish and maintain adequate research coverage or if one or more of the analysts who covers us downgrades ourADSs or publishes inaccurate or unfavorable research about our business, the market price for our ADSs would likely decline. If one or more of theseanalysts cease coverage of our company or fail to publish reports on us regularly, we could lose visibility in the financial markets, which, in turn, couldcause the market price or trading volume for our ADSs to 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.We currently intend to retain most, if not all, of our available funds and any future earnings to fund the development and growth of our business.As a result, we do not expect to pay any cash dividends in the foreseeable future. Therefore, you should not rely on an investment in our ADSs as asource for any future dividend income.Our board of directors has complete discretion as to whether to distribute dividends. Even if our board of directors decides to declare and paydividends, the timing, amount and form of future dividends, if any, will depend on, among other things, our future results of operations and cash flow,our capital requirements and surplus, the amount of distributions, if any, received by us from our subsidiaries, our financial condition, contractualrestrictions and other factors deemed relevant by our board of directors. Accordingly, the return on your investment in our ADSs will likely dependentirely upon any future price appreciation of our ADSs. There is no guarantee that our ADSs will appreciate in value or even maintain the price atwhich you purchased the ADSs. You may not realize a return on your investment in our ADSs and you may even lose your entire investment in ourADSs.Substantial future sales or perceived potential sales of our ADSs in the public market could cause the price of our ADSs to decline.Sales of our ADSs in the public market, or the perception that these sales could occur, could cause the market price of our ADSs to declinesignificantly. The total number of ordinary shares outstanding as of March 31, 2018 was 328,792,262, comprising 265,301,090 Class A ordinary sharesand 63,491,172 Class B ordinary shares. All ADSs representing our Class A ordinary shares sold in our initial public offering will be 54Source: Qudian Inc., 20-F, April 09, 2018Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Table of Contentsfreely transferable by persons other than our “affiliates” without restriction or additional registration under the U.S. Securities Act of 1933, as amended,or the Securities Act. All of the other ordinary shares outstanding will be available for sale, upon the expiration of the lock-up periods describedelsewhere in this annual report beginning from April 16, 2018 (if applicable to such holder), subject to volume and other restrictions as applicableunder Rules 144 and 701 under the Securities Act. Any or all of these ordinary shares may be released prior to the expiration of the applicable lock-upperiod at the discretion of the designated representatives. To the extent shares are released before the expiration of the applicable lock-up period andsold into the market, the market price of our ADSs could decline significantly.Certain major holders of our ordinary shares have the right to cause us to register under the Securities Act the sale of their shares, subject to theapplicable lock-up periods in connection with our initial public offering. Registration of these shares under the Securities Act would result in ADSsrepresenting these shares becoming freely tradable without restriction under the Securities Act immediately upon the effectiveness of the registration.Sales of these registered shares in the form of ADSs in the public market could cause the price of our ADSs to decline significantly.We have been named as a defendant in five putative shareholder class action lawsuits that could have a material adverse impact on our business,financial condition, results of operation, cash flows and reputation.We will have to defend against the putative shareholder class action lawsuits described in “Item 8. Financial Information — A. ConsolidatedStatements and Other Financial Information — Legal Proceedings.” We are currently unable to estimate the possible loss or possible range of loss, ifany, associated with the resolution of these lawsuits. There can be no assurance that we will prevail in defense of these lawsuits. Any adverse outcomeof these cases could have a material adverse effect on our business, financial condition, results of operation, cash flows and reputation. In addition,there can be no assurance that our insurance carriers will cover all or part of the defense costs, or any liabilities that may arise from these matters. Thelitigation process may utilize a significant portion of our resources and divert management’s attention from the day-to-day operations of our company,all of which could harm our business. We also may be subject to claims for indemnification related to these matters, and we cannot predict the impactthat indemnification claims may have on our business or financial results.You, as holders of ADSs, may have fewer rights than holders of our ordinary shares and must act through the depositary to exercise those rights.Holders of ADSs do not have the same rights of our shareholders and may only exercise the voting rights with respect to the underlying Class Aordinary shares in accordance with the provisions of the deposit agreement. Under our second amended and restated articles of association, theminimum notice period required to convene a general meeting will be 10 days. When a general meeting is convened, you may not receive sufficientnotice of a shareholders’ meeting to permit you to withdraw your Class A ordinary shares to allow you to cast your vote with respect to any specificmatter. In addition, the depositary and its agents may not be able to send voting instructions to you or carry out your voting instructions in a timelymanner. We will make all reasonable efforts to cause the depositary to extend voting rights to you in a timely manner, but there can be no assurancethat you will receive the voting materials in time to ensure that you can instruct the depositary to vote your ADSs. Furthermore, the depositary and itsagents will not be responsible for any failure to carry out any instructions to vote, for the manner in which any vote is cast or for the effect of any suchvote. As a result, you may not be able to exercise your right to vote and you may lack recourse if your ADSs are not voted as you requested. In addition,in your capacity as an ADS holder, you will not be able to call a shareholders’ meeting.Your right to participate in any future rights offerings may be limited, which may cause dilution to your holdings.We may from time to time distribute rights to our shareholders, including rights to acquire our securities. However, we cannot make rightsavailable to you in the United States unless we register both the rights and the 55Source: Qudian Inc., 20-F, April 09, 2018Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Table of Contentssecurities to which the rights relate under the Securities Act or an exemption from the registration requirements is available. Under the depositagreement, the depositary will not make rights available to you unless both the rights and the underlying securities to be distributed to ADS holders areeither registered under the Securities Act or exempt from registration under the Securities Act. We are under no obligation to file a registrationstatement with respect to any such rights or securities or to endeavor to cause such a registration statement to be declared effective and we may not beable to establish a necessary exemption from registration under the Securities Act. Accordingly, you may be unable to participate in our rights offeringsin the future and may experience dilution in your holdings.You may not receive cash dividends if the depositary decides it is impractical to make them available to you.The depositary will pay cash dividends on the ADSs only to the extent that we decide to distribute dividends on our Class A ordinary shares orother deposited securities, and we do not have any present plan to pay any cash dividends in the foreseeable future. See “Item 8. Financial Information— A. Consolidated Statements and Other Financial Information — Dividend Policy” To the extent that there is a distribution, the depositary of ourADSs has agreed to pay to you the cash dividends or other distributions it or the custodian receives on our Class A ordinary shares or other depositedsecurities after deducting its fees and expenses. You will receive these distributions in proportion to the number of Class A ordinary shares your ADSsrepresent. However, the depositary may, at its discretion, decide that it is inequitable or impractical to make a distribution available to any holders ofADSs. For example, the depositary may determine that it is not practicable to distribute certain property through the mail, or that the value of certaindistributions may be less than the cost of mailing them. In these cases, the depositary may decide not to distribute such property to you.You may be subject to limitations on transfer of your ADSs.Your ADSs are transferable on the books of the depositary. However, the depositary may close its transfer books at any time or from time to timewhen it deems expedient in connection with the performance of its duties. In addition, the depositary may refuse to deliver, transfer or register transfersof ADSs generally when our books or the books of the depositary are closed, or at any time if we or the depositary deems it advisable to do so becauseof any requirement of law or of any government or governmental body, or under any provision of the deposit agreement, or for any other reason.Certain judgments obtained against us by our shareholders may not be enforceable.We are an exempted company incorporated under the laws of the Cayman Islands. We conduct our operations outside the United States andsubstantially all of our assets are located outside the United States. In addition, substantially all of our directors and executive officers and the expertsnamed in this annual report reside outside the United States, and most of their assets are located outside the United States. As a result, it may bedifficult or impossible for you to bring an action against us or against them in the United States in the event that you believe that your rights have beeninfringed under the U.S. federal securities laws or otherwise. Even if you are successful in bringing an action of this kind, the laws of the CaymanIslands, China or other relevant jurisdiction may render you unable to enforce a judgment against our assets or the assets of our directors and officers.There is no statutory recognition in the Cayman Islands of judgments obtained in the United States, although the Cayman Islands will generallyrecognize as a valid judgment, a final and conclusive judgment in personam obtained in the federal or state courts in the United States under which asum of money is payable (other than a sum of money payable in respect of multiple damages, taxes or other charges of a like nature or in respect of afine or other penalty) and would give a judgment based thereon provided that (i) such courts had proper jurisdiction over the parties subject to suchjudgment; (ii) such courts did not contravene the rules of natural justice of the Cayman Islands; (iii) such judgment was not obtained by fraud; (iv) theenforcement of the judgment would not be contrary to the public policy of the Cayman Islands; (v) no new admissible evidence 56Source: Qudian Inc., 20-F, April 09, 2018Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Table of Contentsrelevant to the action is submitted prior to the rendering of the judgment by the courts of the Cayman Islands; and (vi) there is due compliance with thecorrect procedures under the laws of the Cayman Islands. There is uncertainty as to whether a judgment obtained from the United States courts underthe civil liability provisions of the securities laws will be determined by the courts of the Cayman Islands as penal or punitive in nature. If such adetermination is made, the courts of the Cayman Islands will not recognize or enforce the judgment against a Cayman Islands company. Because thecourts of the Cayman Islands have yet to rule on whether such judgments are penal or punitive in nature, it is uncertain whether they would beenforceable in the Cayman Islands.The recognition and enforcement of foreign judgments are provided for under the PRC Civil Procedure Law. PRC courts may recognize andenforce foreign judgments in accordance with the requirements of the PRC Civil Procedure Law based either on treaties between China and the countrywhere the judgment is made or on principles of reciprocity between jurisdictions. Under PRC law, a foreign judgment, which does not otherwise violatebasic legal principles, state sovereignty, safety or social public interest, may be recognized and enforced by a PRC court, based either on treatiesbetween China and the country where the judgment is made or on principles of reciprocity between jurisdictions. As there existed no treaty or otherform of reciprocity between China and the United States governing the recognition and enforcement of judgments as of the date of this prospectus,including those predicated upon the liability provisions of the United States federal securities laws, there is uncertainty whether and on what basis aPRC court would enforce judgments rendered by United States courts.You may face difficulties in protecting your interests, and your ability to protect your rights through U.S. courts may be limited, because we areincorporated under Cayman Islands law.We are an exempted company limited by shares incorporated under the laws of the Cayman Islands. Our corporate affairs are governed by ourmemorandum and articles of association, the Companies Law, Cap. 22 (Law 3 of 1961, as consolidated and revised) of the Cayman Islands and thecommon law of the Cayman Islands. The rights of shareholders to take action against the directors, actions by minority shareholders and the fiduciaryduties of our directors to us under Cayman Islands law are to a large extent governed by the common law of the Cayman Islands. The common law ofthe Cayman Islands is derived in part from comparatively limited judicial precedent in the Cayman Islands as well as from the common law of England,the decisions of whose courts are of persuasive authority, but are not binding, on a court in the Cayman Islands. The rights of our shareholders and thefiduciary duties of our directors under Cayman Islands law are not as clearly established as they would be under statutes or judicial precedent in somejurisdictions in the United States. In particular, the Cayman Islands have a less developed body of securities laws than the United States. Some U.S.states, such as Delaware, have more fully developed and judicially interpreted bodies of corporate law than the Cayman Islands. In addition, CaymanIslands companies may not have standing to initiate a shareholder derivative action in a federal court of the United States.Shareholders of Cayman Islands exempted companies like us have no general rights under Cayman Islands law to inspect corporate records or toobtain copies of lists of shareholders of these companies. Our directors have discretion under the second amended and restated memorandum andarticles of association to determine whether or not, and under what conditions, our corporate records may be inspected by our shareholders, but are notobliged to make them available to our shareholders. This may make it more difficult for you to obtain the information needed to establish any factsnecessary for a shareholder resolution or to solicit proxies from other shareholders in connection with a proxy contest.As a result of all of the above, our public shareholders may have more difficulty in protecting their interests in the face of actions taken bymanagement, members of the board of directors or controlling shareholders than they would as public shareholders of a company incorporated in theUnited States. The Companies Law is modeled after that of England and Wales but does not follow recent statutory enactments in England. In addition,the Companies Law differs from laws applicable to United States corporations and their shareholders. 57Source: Qudian Inc., 20-F, April 09, 2018Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Table of ContentsOur second amended and restated memorandum and articles of association contain anti-takeover provisions that could discourage a third partyfrom acquiring us, which could limit our shareholders’ opportunity to sell their shares, including Class A ordinary shares represented by our ADSs,at a premium.We have adopted the second amended and restated memorandum and articles of association, which became effective immediately prior to thecompletion of our initial public offering that contain provisions to limit the ability of others to acquire control of our company or cause us to engage inchange-of-control transactions. These provisions could have the effect of depriving our shareholders of an opportunity to sell their shares at a premiumover prevailing market prices by discouraging third parties from seeking to obtain control of our company in a tender offer or similar transaction. Forexample, our board of directors has the authority, without further action by our shareholders, to issue preferred shares in one or more series and to fixtheir designations, powers, preferences, privileges, and relative participating, optional or special rights and the qualifications, limitations orrestrictions, including dividend rights, conversion rights, voting rights, terms of redemption and liquidation preferences, any or all of which may begreater than the rights associated with our Class A ordinary shares, in the form of ADS or otherwise. Preferred shares could be issued quickly with termscalculated to delay or prevent a change in control of our company or make removal of management more difficult. If our board of directors decides toissue preferred shares, the price of our ADSs may fall and the voting and other rights of the holders of our Class A ordinary shares and ADSs may bematerially and adversely affected. In addition, our second amended and restated memorandum and articles of association contain other provisions thatcould limit the ability of third parties to acquire control of our company or cause us to engage in a transaction resulting in a change of control,including a provision that entitles each Class B ordinary share to 10 votes in respect of all matters subject to a shareholders’ vote.These provisions could have the effect of depriving our shareholders of an opportunity to sell their shares at a premium over prevailing marketprices by discouraging third parties from seeking to obtain control of our company in a tender offer or similar transaction.We are a foreign private issuer within the meaning of the rules under the Exchange Act, and as such we are exempt from certain provisionsapplicable to U.S. domestic public companies.Because we qualify as a foreign private issuer under the Exchange Act, we are exempt from certain provisions of the securities rules andregulations in the United States that are applicable to U.S. domestic issuers, including: • the rules under the Exchange Act requiring the filing with the SEC of quarterly reports on Form 10-Q or current reports on Form 8-K; • the sections of the Exchange Act regulating the solicitation of proxies, consents, or authorizations in respect of a security registered underthe Exchange Act; • the sections of the Exchange Act requiring insiders to file public reports of their stock ownership and trading activities and liability forinsiders who profit from trades made in a short period of time; and • the selective disclosure rules by issuers of material nonpublic information under Regulation FD.We are required to file an annual report on Form 20-F within four months of the end of each fiscal year. In addition, we intend to publish ourresults on a quarterly basis as press releases, distributed pursuant to the rules and regulations of the NYSE. Press releases relating to financial results andmaterial events will also be furnished to the SEC on Form 6-K. However, the information we are required to file with or furnish to the SEC will be lessextensive and less timely compared to that required to be filed with the SEC by U.S. domestic issuers. As a result, you may not be afforded the sameprotections or information that would be made available to you were you investing in a U.S. domestic issuer. 58Source: Qudian Inc., 20-F, April 09, 2018Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Table of ContentsAs a company incorporated in the Cayman Islands, we are permitted to adopt certain home country practices in relation to corporate governancematters that differ significantly from the NYSE corporate governance listing standards; these practices may afford less protection to shareholdersthan they would enjoy if we complied fully with the NYSE corporate governance listing standards.As a Cayman Islands company listed on the NYSE, we are subject to the NYSE corporate governance listing standards. However, the NYSEmarket rules permit a foreign private issuer like us to follow the corporate governance practices of its home country. Certain corporate governancepractices in the Cayman Islands, which is our home country, may differ significantly from the NYSE corporate governance listing standards.For instance, we are not required to: • have a majority of the board be independent (although all of the members of the audit committee must be independent under the ExchangeAct); • have a compensation committee or a nominating and corporate governance committee consisting entirely of independent directors; or • have regularly scheduled executive sessions with only independent directors each year.We have relied on and intend to continue to rely on some of these exemptions. As a result, you may not be provided with the benefits of certaincorporate governance requirements of the NYSE.There is a significant risk that we will be classified as a passive foreign investment company, or PFIC, which could result in adverse United Statestax consequences to United States investors.The determination of whether or not we are a PFIC is made on an annual basis and will depend on the composition of our income and assets fromtime to time. Specifically, for any taxable year, we will be classified as a PFIC for United States federal income tax purposes if either (i) 75% or more ofour gross income in that taxable year is passive income or (ii) the average percentage of our assets (which includes cash) by value in that taxable yearwhich produce, or are held for the production of, passive income is at least 50%. The calculation of the value of our assets will be based, in part, on thequarterly market value of our ADSs, which is subject to change. See “Item 10. Additional Information — E. Taxation — Certain United States FederalIncome Tax Considerations — Passive Foreign Investment Company.”In addition, there is uncertainty as to the treatment of our corporate structure and ownership of our consolidated VIEs for United States federalincome tax purposes. For United States federal income tax purposes, we consider ourselves to own the stock of our consolidated VIEs. If it isdetermined, contrary to our view, that we do not own the stock of our consolidated VIEs for United States federal income tax purposes (for instance,because the relevant PRC authorities do not respect these arrangements), we may be treated as a PFIC.We consider ourselves as a service provider with the primary business purpose of focusing on our data technology. We aim to facilitate credit toborrowers that are funded by institutional funding partners rather than by using our own capital. As such, fees received from borrowers are recorded asfinancing income or loan facilitation income and others on our consolidated statements of operations. However, we have historically funded, and maycontinue to fund, credit drawdowns with our own capital. In such case, the fees received from borrowers may be treated as interest for purposes of thePFIC rules. Given the foregoing and based on the past and projected composition and classification of our income and assets, we believe that there is asignificant risk that we will be classified as a PFIC for United States federal income tax purposes for 2017, and we may be classified as a PFIC in futuretaxable years. If we are a PFIC for any taxable year during which you hold our ADSs or Class A ordinary shares, our PFIC status could result in adverseUnited States federal income tax consequences to you if you are a United States Holder, as defined under “Item 10. Additional Information —E. Taxation — Certain United States Federal Income Tax Considerations.” For example, if we are or become a PFIC, you may become subject toincreased tax liabilities under United States federal income tax laws and 59Source: Qudian Inc., 20-F, April 09, 2018Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Table of Contentsregulations, and will become subject to burdensome reporting requirements. See “Item 10. Additional Information — E. Taxation — Certain UnitedStates Federal Income Tax Considerations — Passive Foreign Investment Company.” There can be no assurance that we will not be a PFIC for 2017 orany future taxable year.We will continue to incur increased costs as a result of being a public company, particularly after we cease to qualify as an “emerging growthcompany.”Since the completion of our initial public offering, we have incurred significant legal, accounting and other expenses that we did not incur as aprivate company. The Sarbanes-Oxley Act of 2002, as well as rules subsequently implemented by the SEC and the NYSE, imposes variousrequirements on the corporate governance practices of public companies. As a company with less than US$1,070,000,000 in total revenues for our lastfiscal year, we qualify as an “emerging growth company” pursuant to the JOBS Act. An emerging growth company may take advantage of specifiedreduced reporting and other requirements that are otherwise applicable generally to public companies. These provisions include exemption from theauditor attestation requirement under Section 404 of the Sarbanes-Oxley Act of 2002 in the assessment of the emerging growth company’s internalcontrol over financial reporting and permission to delay adopting new or revised accounting standards until such time as those standards apply toprivate companies. However, we have elected to “opt out” of the provision that allow us to delay adopting new or revised accounting standards and, asa result, we will comply with new or revised accounting standards as required when they are adopted for public companies. This decision to opt out ofthe extended transition period under the JOBS Act is irrevocable.We expect these rules and regulations to increase our legal and financial compliance costs and to make some corporate activities more time-consuming and costly. After we are no longer an “emerging growth company”, we expect to incur significant expenses and devote substantialmanagement effort toward ensuring compliance with the requirements of Section 404 of the Sarbanes-Oxley Act of 2002 and the other rules andregulations of the SEC. For example, as a result of becoming a public company, we will need to increase the number of independent directors and adoptpolicies regarding internal controls and disclosure controls and procedures. We also expect that operating as a public company will make it moredifficult and more expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced policy limits andcoverage or incur substantially higher costs to obtain the same or similar coverage. In addition, we will incur additional costs associated with ourpublic company reporting requirements. It may also be more difficult for us to find qualified persons to serve on our board of directors or as executiveofficers. We are currently evaluating and monitoring developments with respect to these rules and regulations, and we cannot predict or estimate withany degree of certainty the amount of additional costs we may incur or the timing of such costs.In the past, shareholders of a public company often brought securities class action suits against the company following periods of instability inthe market price of that company’s securities. If we were involved in a class action suit, it could divert a significant amount of our management’sattention and other resources from our business and operations, which could harm our results of operations and require us to incur significant expensesto defend the suit. Any such class action suit, whether or not successful, could harm our reputation and restrict our ability to raise capital in the future.In addition, if a claim is successfully made against us, we may be required to pay significant damages, which could have a material adverse effect onour financial condition and results of operations. ITEM 4.INFORMATION ON THE COMPANY A.History and Development of the CompanyWe were founded in April 2014 and operated our business through Beijing Happy Time Technology Development Co., Ltd., or Beijing HappyTime. We initially operated our business by facilitating merchandise credit and cash credit to college students on campuses across China. Starting fromNovember 2015, we shifted our focus to a broader base of young consumers in China, and we have terminated our on-campus business. Since 60Source: Qudian Inc., 20-F, April 09, 2018Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Table of ContentsJuly 2016, we have engage all borrowers as to our cash and merchandise credit products through online channels. In November 2017, we launchedbudget auto financing products under the “Dabai Auto” brand, and we have established a nationwide network of showrooms to engage prospective carbuyers.In September 2016, Qufengqi (Ganzhou) Information Technology Co., Ltd., or Ganzhou Qufenqi, was incorporated as a wholly foreign ownedentity in China. In November 2016, we incorporated Qudian Inc. under the laws of the Cayman Islands as our offshore holding company, andsubsequently, we established a wholly-owned subsidiary in the British Virgin Islands, QD Technologies Limited, in November 2016, and a wholly-owned subsidiary in Hong Kong, QD Data Limited, to be our intermediate holding company in December 2016, to facilitate our initial public offeringin the United States. The entire equity interest of Ganzhou Qufenqi was transferred from its former holding company to QD Data Limited. As a result ofthe restructuring in 2016, we hold equity interest in Ganzhou Qufenqi through our current offshore structure. At the same time, Ganzhou Qufenqientered into a series of contractual arrangements with Beijing Happy Time and its shareholders. In addition, pursuant to the resolutions of allshareholders of Qudian Inc. and the resolutions of the board of directors of Qudian Inc., the board of directors of Qudian Inc. or any officer authorizedby such board will cause Ganzhou Qufenqi to exercise its rights under such contractual arrangements. As a result of these resolutions and the provisionof unlimited financial support from the Company to Beijing Happy Time, Qudian Inc. has been determined to be most closely associated with BeijingHappy Time within the group of related parties and was considered to be the primary beneficiary of Beijing Happy Time and its subsidiaries.Ganzhou Qudian Technology Co., Ltd., or Ganzhou Qudian, Hunan Qudian Technology Development Co., Ltd., or Hunan Qudian, and XiamenQudian Technology Co., Ltd., or Xiamen Qudian, became our consolidated VIEs in 2017. We have entered into a series of contractual arrangementswith each new consolidated VIE and its shareholders, which allows us to exercise effective control over each new consolidated VIE and realizesubstantially all of the economic risks and benefits arising from such new consolidated VIE. The contractual arrangements for each consolidated VIE,including those as to the new consolidated VIEs, contain substantively identical provisions that afford us, through our wholly-owned subsidiaryGanzhou Qufenqi, the right to control all consolidated VIEs in the same manner and degree. Mr. Min Luo, our founder, chairman and chief executiveofficer, and Mr. Lianzhu Lv, our director and head of user experience department, are the only shareholders of Ganzhou Qudian, and Mr. Min Luo andMr. Hongjia He, our vice president, are the only shareholders of Hunan Qudian. Mr. Min Luo is the only shareholder of Xiamen Qudian. We believesuch shareholding structure will enhance our administrative efficiency and reduce uncertainties associated with the enforcement of the relevantcontractual arrangements entered into with the new consolidated VIEs and their respective shareholder(s). Instead of relying on several shareholders’compliance with their respective contractual obligations, we will only rely on one or two shareholders’ compliance for each new consolidated VIE andwould only need to enforce against such shareholder(s) in the event of a breach. The establishment of any of these new consolidated VIEs is notintended to, and will not, have an adverse impact on the rights of our ADS holders. For more information, see “Item 3. Key Information on theCompany — D. Risk Factors — Risks Relating to Our Corporate Structure — We rely on contractual arrangements with our consolidated VIEs andtheir shareholders to operate our business, which may not be as effective as direct ownership in providing operational control and otherwise have amaterial adverse effect as to our business.” We intend to utilize our new consolidated VIEs to continue to conduct our existing business of providingsmall cash and merchandise credit products and to also undertake new business opportunities, including leveraging our risk management model tohelp other financial services providers assess the credit profiles of their own customers according to their credit standards. We plan to transfer our creditbusiness under the Laifenqi brand to Ganzhou Qudian and our credit business under the Qudian brand to Xiamen Qudian over the next five years. As ofthe date of this annual report, Ganzhou Qudian and Xiamen Qudian have both commenced operations. We do not expect to transfer any existingbusiness to Hunan Qudian, but we may conduct new businesses through such entity in the future. Such plans may be changed due to futuredevelopments, including the availability of government incentives in the cities where the new consolidated VIEs are located. 61Source: Qudian Inc., 20-F, April 09, 2018Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Table of ContentsWe currently conduct our business in China mainly through our consolidated VIEs and their subsidiaries. We fund credit directly to ourborrowers through Fuzhou High-tech Zone Microcredit Co., Ltd., or Fuzhou Microcredit, and Ganzhou Happy Life Network Microcredit Co., Ltd., orGanzhou Microcredit, both of which have obtained approval of the relevant competent local authorities to provide credit. Our wholly-ownedsubsidiary Xiamen Qudian Financial Lease Ltd. and its subsidiaries operate the Dabai Auto business. B. BusinessOverviewOverviewAs a provider of online credit products, we use big data-enabled technologies, such as artificial intelligence and machine learning, to transformthe consumer finance experience in China. We target hundreds of millions of quality, unserved or underserved consumers in China. They are young,mobile-active consumers who need access to small credit for their discretionary spending or budget auto financing solutions, but are underserved bytraditional financial institutions due to their lack of traditional credit data and the operational inefficiency of traditional financial institutions. Webelieve our operating efficiency and big data analytics capability to understand our prospective borrowers from different behavioral and transactionalperspectives, assess their credit profiles and offer them instantaneous and affordable credit products with customized terms distinguishes our businessand offerings.We currently offer small credit products, which are comprised of cash credit products and merchandise credit products, as well as budget autofinancing products. We mainly generate (i) financing income from cash credit products, (ii) both financing income and sales commission fee frommerchandise credit products and (iii) both financing income and revenue from sales-type lease from budget auto financing products.We are a leading provider of online small consumer credit products in China. In 2017, we facilitated approximately RMB88.9 billion (US$13.7billion) in transactions to 11.7 million active borrowers. Small credit products serve consumers’ immediate needs for discretionary consumption. Theytypically have short durations, enabling us to quickly understand a borrower’s behavior and further refine our data analytics and credit assessmentmodel upon the completion of transaction cycles.We operate an online platform, with nearly all of the transactions facilitated through mobile devices, providing consumers with a convenientexperience. Prospective borrowers can apply for small credit on their mobile phones and receive approval within a few seconds. Approved borrowersare then able to draw down on their cash credit with cash disbursed immediately into their Alipay accounts in digital form. Borrowers also repay thecredit drawdowns through their Alipay accounts. In the three months ended December 31, 2017, our cash credit products had an average size ofapproximately RMB960 (US$148) and weighted average term of approximately two months. We also offer merchandise credit products to financeborrowers’ direct purchase of merchandise offered on our marketplace on installment basis. Through collaborating with more than 330 merchandisesuppliers, we offer an expanding range of product categories ranging from consumer electronics products to watches and sports and outdoor products tocapture approved borrowers’ growing consumption demand and enhance their online shopping experience. In the three months ended December 31,2017, our merchandise credit products had an average size of approximately RMB1,400 (US$215) and weighted average term of approximately ninemonths. To complement our small credit products, we offer budget auto financing products through our nationwide network of showrooms.We aggregate our borrowers’ behavioral data with data and credit analyses from various partners as inputs for our credit assessment model. As aninnovator in the application of artificial intelligence to financial services, we utilize machine learning to accurately assess borrowers’ credit profiles.We focus on data analyses that not only reflect borrowers’ ability to repay but also their willingness to do so. These analyses are based on theprospective borrowers’ social and shopping behavioral data, among others, in addition to the characteristic metrics such as locations anddemographics. We have increased the number of variables analyzed by our credit 62Source: Qudian Inc., 20-F, April 09, 2018Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Table of Contentsassessment system from a few to several hundred for each transaction, and we assign each borrower a personalized credit limit based on his or her creditprofile. As borrowers repay, they build credit histories with us. Based on the credit histories, our artificial intelligence-based credit assessment modelenables us to continually re-evaluate borrowers’ credit profiles and provide more personalized credit limits. We offer borrowers with stronger creditprofiles higher credit limits and longer repayment durations, thereby driving higher engagement with them.We have experienced robust credit performance. Our M1+ Delinquency Rate by Vintage for transactions in the first three quarters of 2017remained at less than 0.9% through December 31, 2017. M1+ Delinquency Rate by Vintage is defined as the total balance of outstanding principal of avintage for which any installment payment is over 30 calendar days past due as of a particular date (adjusted to reflect total amount of recovered pastdue payments for principal, before charge-offs), divided by the total initial principal in such vintage.We have established a strategic partnership with Ant Financial, one of our principal shareholders, and have in-depth cooperation in multipleareas of our business. Alipay, operated by Ant Financial, is a leading online and mobile third-party payment service provider in China. We haveengaged a portion of our active borrowers through different channels on the Alipay consumer interface since 2016. We also collaborate with ZhimaCredit, a credit assessment service provider operated by Ant Financial. Zhima Credit provides us with credit analysis information of prospectiveborrowers, which enhances our credit analysis capabilities. We also provide Zhima Credit with our credit analysis of borrowers to reflect repayment andother credit attributes and work with Zhima Credit to further develop more robust credit analysis capabilities. In addition, we are in ongoingdiscussions with Ant Financial to explore other collaboration opportunities, including various approaches to engage and serve prospective borrowers.To provide a good user experience, we have technology and funding arrangements in place to enable instant drawdown of credit by consumers.We collaborate with a variety of institutional funding partners such as banks and other institutions, to secure sufficient amounts of funding for creditdrawdowns. Institutional funding partners are interested in working with us because of the short duration of our credit products, our technology-drivencredit assessment capabilities and the diversified credit portfolio with attractive risk-adjusted returns. Our strong technological capabilities enable usto seamlessly integrate our system with those of our institutional funding partners, rapidly facilitate transactions and repayment settlements at amassive scale and forecast our funding needs on a real-time basis. We do not directly source funding from retail investors. Currently, we retain most ofthe credit risk with respect to the cooperation with institutional funding partners. We also utilize our own capital to fund the credit drawdowns toenhance user experience so that they can instantly receive funds after drawdown requests. Our longer-term objectives are to primarily leverage externalinstitutional funding and to transfer credit risk to or share it with a diversified group of institutional funding partners.We have achieved significant scale and experienced strong growth in our results of operations. Our total revenues increased fromRMB235.0 million in 2015 to RMB1,442.8 million in 2016, and further increased to RMB4,775.4 million (US$734.0 million) in 2017. We recordednet loss of RMB233.2 million in 2015. We recorded net income of RMB576.7 million and RMB2,164.5 million (US$332.7 million) in 2016 and 2017,respectively.Our Credit ProductsOur credit products are designed to address and serve the needs of creditworthy borrowers who we believe are of emerging prime credit qualitybut have limited credit history and access to traditional consumer credit from banks or other lenders in China. We primarily offer small cash andmerchandise credit products. Small credit products typically have short durations, enabling us to quickly understand a borrower’s behavior and furtherrefine our data analytics and credit assessment model. Small credit products also enjoy favorable risk characteristics compared to larger credit products.A borrower is more likely to repay a smaller amount on time to maintain the quality of his or her credit profile, which may impact future borrowingactivities. Benefits to fraudulent borrowers are also limited given the small amount of money borrowed. 63Source: Qudian Inc., 20-F, April 09, 2018Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Table of ContentsOur small credit products can be accessed through the Alipay mobile app or our Laifenqi and Qudian mobile apps, and cash is disbursed intoborrowers’ Alipay accounts in digital form.Our cash credit products comprise short-term, unsecured lines of credit that can be drawn down at any time, subject to our approval at the time ofeach drawdown request. Prospective borrowers complete an application and receive a decision on their application in as quick as a few seconds. Whena credit is drawn, the money is deposited directly into the borrower’s Alipay account and can be used anywhere Alipay is accepted. Borrowers aretypically charged financing service fees for cash credit drawdowns. In the three months ended December 31, 2017, our cash credit products had anaverage size of approximately RMB960 (US$148) and weighted average term of approximately two months.We also offer merchandise credit products to finance borrowers’ direct purchase of merchandise offered on our marketplace on installment basis.We operate a marketplace that connects consumers with merchandise suppliers. As the operator of the marketplace, we neither sell merchandise norhold inventory. Customers access our marketplace through mobile apps. Only customers with approved merchandise credit limits can make purchases,and we require a minimum amount of each purchase to be funded by utilizing our credit product. In the event the credit drawdown were insufficient topurchase the relevant merchandise, borrowers will need to pay for the portion that was not covered by the credit products using their own funds. Aborrower may also voluntarily pay a portion of the purchase price with his or her own funds. We currently collaborate with more than 330 merchandisesuppliers, including leading consumer brands and their authorized distributors, to offer 19 categories of merchandise from over 1,800 brands coveringprimarily consumer electronics, home appliances, watches and accessories, sports and outdoor merchandise and luggage. Borrowers are typicallycharged financing service fees for merchandise credit drawdowns. We also earn sales commission fee from our merchandise suppliers for ourintermediary services rendered. Sales commission fee represents fees earned from merchandise suppliers when borrowers purchase their merchandise onour marketplace and comprise (i) the difference between the retail prices of the merchandise sold to borrowers and the prices of the merchandise that wepay to the merchandise suppliers and (ii) rebates earned from merchandise suppliers. Such fees are determined based on our negotiation with therelevant merchandise suppliers. Merchandise suppliers do not receive any other amounts from us or borrowers.Merchandise credit products are typically larger in credit size and longer in duration compared to cash credit products. In the three months endedDecember 31, 2017, our merchandise credit products had an average size of approximately RMB1,400 (US$215) and weighted average term ofapproximately nine months.We utilize our proprietary data analytics and credit assessment model to determine the amount of credit available for each borrower. Forinformation regarding credit assessment, see “— Credit Approval and Servicing Process — Stage 3: Credit Assessment.” The full amount of such creditrepresents such borrower’s credit limit for merchandise credit products. A portion of the full amount represents the borrower’s credit limit for cash creditproducts. Nonetheless, while borrower may utilize funds received under cash credit products for any purpose, merchandise credit products can only beused to fund purchases on our marketplace. Borrowers’ credit limits are not the same as revolving lines of credit which can be utilized and paid downand utilized again because we have the right to not approve any additional draw downs. Upon receipt of a drawdown request, our credit assessmentmodel and risk management system normally review the application and re-evaluate the creditworthiness of such borrower to ensure that he or she isqualified for the requested drawdown.When borrowers draw down on their cash credit or utilize their merchandise credit to purchase merchandise on our marketplace, they may choosebetween several installment plans of different durations and financing service fees. The terms of the credit products are clearly stated in the electronicborrowing agreements borrowers enter into with us upon drawdowns: • Installments. Borrowers are generally required to make fixed weekly or monthly payments. The combined total represents the loanprincipal and financing service fees charged to borrowers. 64Source: Qudian Inc., 20-F, April 09, 2018Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Table of Contents • Durations. Durations of credit products facilitated typically range from one to six weeks or from one to six months for cash credit productsand from one to 12 months for merchandise credit products as of the date of this prospectus. Historically, we also offered merchandise creditproducts that require monthly payments ranging up to 24 months. • Prepayments. Borrowers may pay off their account balance in full at any time, although the total amount of repayment, including thefinancing service fees, will remain the same as a full duration credit product. • Penalty fee. A penalty fee for late payment is clearly disclosed in the agreement and will be imposed as a daily penalty rate of the amountpast due. • Repayment method. Repayments are made through the borrower’s Alipay account.The borrower may continue to utilize his or her credit as long as the borrower has made the requisite payments in a timely manner, and there areunused credit remaining, subject to our approval at the time of each drawdown request. Borrowers are not allowed to roll over cash credit products ormerchandise credit products upon maturity or otherwise change the terms of the transactions.To complement our small credit products, we offer budget auto financing products in the form of sales-type finance leases under the Dabai Autobrand. We purchase cars on our inventory and lease them to creditworthy car buyers. Each car buyer is required to make a down payment and payinstallments throughout the term of the lease. The legal title of the car is transferred to the car buyer upon full repayment. As of March 31, 2018, wehave cumulatively leased out over 6,600 cars since the launch of the Dabai Auto business.We primarily target prospective car buyers who have been our registered users and are eligible for higher credit limits. We engage prospective carbuyers and collect their preliminary credit information through mobile applications. A prospective car buyer who is approved in our preliminary creditassessment process is invited to one of our show rooms to complete the credit application. As of March 31, 2018, we have established 175 offline showrooms. Each qualified car buyer will receive a credit limit, and one of our sales representative will help such car buyer select a car that the car buyermay purchase under his or her credit limit. As of March 31, 2018, we offer over 1,100 models from over 70 brands. At each show room, we physicallydisplay one or two models that are popular in the local market. The retail price of the cars suggested by the relevant auto manufacturers typically rangefrom around RMB70 thousand (US$11 thousand) to around RMB230 thousand (US$35 thousand). To manage our inventory risk, we purchase carsfrom car manufacturers and dealers based on car buyers’ demand. It typically takes around 20 days for us to deliver a car to the car buyer after the carbuyer selects the model. In some instances, the delivery time can be as short as two days. As aids to our repossession efforts in the event of car buyers’defaults, we install telematics devices on cars and retain car keys before delivering cars to car buyers.The terms of the lease are clearly stated in the lease agreement a car buyer enters into with us: • Down payment. Each car buyer is required to make a down payment at the start of the lease term. The down payment typically ranges from10% to 20% of the suggested retail price. • Installments. Each car buyer pays monthly installments over a period of three or four years. • Prepayment. We charge a prepayment fee to each car buyer who wishes to pay off the outstanding principal before maturity. The fee isbased on a percentage of the outstanding principal amount at the time of prepayment. • Late payment penalty fee. A penalty fee for late payment is laid out in the agreement and will be imposed as a daily penalty rate of theamount past due. • Mileage limit. To preserve the residual value of leased cars, we impose a limit on mileage for each year, which is typically 25,000kilometers. We charge fees on car buyers whose usage exceeds such 65Source: Qudian Inc., 20-F, April 09, 2018Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Table of Contents limit, but we return such fees to car buyers upon full repayment of outstanding amounts under the leases.Risk ManagementTo maintain healthy credit performance, we developed a rigorous credit assessment model and robust risk management system. As an innovatorin the application of artificial intelligence to financial services, we analyze a variety of behavioral data typically ignored by traditional financialinstitutions. Leveraging machine learning, we measure prospective borrowers’ willingness and ability to repay based on behavioral data, along withdata and credit analyses from various partners. Our machine learning-based approach also enables us to continuously refine our credit assessmentmodel based on insights from the high volume of transaction data that we collect. The short-term nature of our credit products contributes to frequentrepayments and repeat borrowing activities, which drive the volume and comprehensiveness of the data we collect and analyze. During the threemonths ended December 31, 2017, we processed an average of 11,515 credit drawdowns and 29,420 repayments per hour. We continuously test,validate and optimize our model by changing the types of data we analyze. In particular, as we identify creditworthy borrowers whom our modelpreviously regarded as risky and raise the credit limits for quality borrowers, we are able to increase the amount of transactions without undertakingsignificantly more risk.Fraud PreventionOur fraud prevention system identifies suspicious activities efficiently with a low false positive rate and minimum friction in user experience.Machine learning enables us to analyze prospective borrowers’ behavioral patterns and address different types of fraud risks, including known fraudtypes, new fraud types as well as organized frauds. We aggregate data from both internal and external sources and undertake multiple steps to identifyfrauds: • Information Authentication. We use information from external databases to match the information provided by the prospective borrower. Ifthe relevant information does not match, such application will be declined. • Restricted List Search. We collaborate with other institutions to screen prospective borrowers who are on restricted lists maintained by suchinstitutions. We utilize more than 30 such lists, which contain individuals whose records indicate higher risk of fraud. • Anti-fraud Models. For those potential borrowers without hits from restricted list searches, we will employ machine learning algorithms toscreen for suspicious behavioral patterns. We utilize supervised machine learning to identify known fraud types, including those withhighly complex patterns, and our system becomes more effective as it collects more data. We utilize unsupervised machine learning todevelop an abnormal user labeling system, which enables us to identify new fraud types. By analyzing relationships among prospectiveborrowers, we are also able to identify those displaying attributes of organized frauds and deny their credit applications.Every applicant who passes our fraud prevention system is assigned a credit limit, the size of which is determined by our credit assessmentsystem.Credit AssessmentOur credit assessment system has undergone significant evolutions since our inception in April 2014. Prior to November 2015, we primarilyengaged borrowers offline and utilized traditional credit assessment methodologies such as in-person collection of borrower information as wellin-person interviews. Our borrower engagement efforts shifted from offline to online since November 2015, and we have fully automated datacollection and credit assessment methodologies accordingly. In the fourth quarter of 2017, we adopted a new credit assessment system, which we referto as QD score and is built on the experience and data we have gained since our inception. 66Source: Qudian Inc., 20-F, April 09, 2018Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Table of ContentsQD ScoreQD score analyzes a large number of variables for each transaction and enable us to better differentiate between creditworthy borrowers and lowerquality borrowers. Such variables include (i) internal data, such as historical transaction data backed by actual repayment and delinquency behavior,and (ii) data from external parties, such as social network stability, liquid asset level, consumption level and credit repayment and delinquency history.Compared to our earlier credit assessment systems, QD score takes into account more variables relating to (i) prospective borrowers’ credit applicationsand delinquencies with other financial service providers and (ii) prospective borrowers’ ability to repay. We believe such variables have enhanced ourability to identify prospective borrowers who have borrowed from multiple sources and therefore present higher level of credit risk as well as our abilityto accurately assess prospective borrowers’ ability to repay. For repeat borrowers, we place greater emphasis on such borrowers’ transaction data on ourplatform, which we believe are more reliable than credit data we collect from external parties. We have cumulatively facilitated over 136.1 millioncredit transaction on our platform, which gives us proprietary data advantage in terms of users’ credit quality with regards to repayment anddelinquency behavior.QD score correlates positively with credit quality and ranges from 300 to 1,000. We offer borrowers with better credit quality progressivelyhigher credit limits. Credit limits assigned to eligible borrowers currently range from RMB200 to RMB10,000.Historical PracticesOur credit assessment system has undergone significant changes since our inception in April 2014. Prior to November 2015, we primarilyengaged borrowers offline and utilized traditional risk management methodologies such as in-person interviews and in-person collection of borrowerinformation, which included education background, PRC identity card and student identification card. We assessed borrowers’ risk profiles based onthe completeness of their information, and we divided them into multiple segments, each corresponding to a different credit limit.Our borrower engagement efforts shifted from offline to online in November 2015, and we have started to automate our data collection processand credit assessment system. During the period from November 2015 to January 2017, we assessed borrowers’ credit profiles based on a large numberof inputs, such as Zhima Credit Score, the borrower’s delinquency record, the number of credit applications submitted by the borrower to otherfinancial services providers and delinquency rates in the region where a prospective borrower resides. None of the inputs by itself alone isdeterminative in our analysis. We assigned borrowers highly differentiated credit limits based on their credit profiles.In January 2017, we rolled out a major upgrade of our risk management system and adopted two distinct credit assessment systems for newborrowers and borrowers who have established certain credit histories with us. These systems allowed us to better utilize transaction data on ourplatform as well as distinguish the credit quality of borrowers. In the fourth quarter of 2017, we combined the two systems into a more enhancedsystem, namely QD score.Dabai AutoWe assess credit risk for our budget auto financing products in two steps, an online process and an offline process. In the online process, we takeinto consideration many of the variables that we analyze for our small credit products. We screen applicants for fraud risk, and each applicant whopasses the fraud screening is assigned a credit score using our credit assessment model. Applicants with credit scores that exceed a threshold receivepreliminary credit limits that correspond with their credit scores and are invited to complete their applications at one of our offline show rooms.At our show rooms, our employees collect additional information from applicants, such as PRC identity cards and drivers’ licenses. We utilizefacial recognition technology to verify each applicant’s identity. In 67Source: Qudian Inc., 20-F, April 09, 2018Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Table of Contentsaddition, we obtain applicants’ credit reports from the Credit Reference Center of the People’s Bank of China, evaluate their credit histories, includingtheir borrowing and repayment records with respect to home loans, auto loans and credit card loans, as well as search for any negative records in datacenters maintained by the public security bureaus and courts. We verify the work address and residential address provided by each applicant againstthe location data we obtain from third-party sources. Each applicant is also required to provide contact information of several contact persons, and wemay make phone calls with such contact persons to verify the information provided by the applicant. We assign credit limits to applicants upon thecompletion of the offline credit assessment process. We may increase the credit limits for applicants based on additional information submitted bythem, such as bank statements, record of real estate ownership and tax payment record.Our Risk Management TeamWe have established a dedicated risk management team comprising of 333 employees as of December 31, 2017. Our risk management team meetsregularly to examine the credit and enterprise risks of our company, and is intimately involved in portfolio management, credit model development,validation and optimization. Tasks performed by our risk management team includes reporting on origination trends, monitoring of portfolioperformance and stability, risk concentrations, building and maintaining credit models, performing economic stress tests on our portfolio, optimizingcredit decisioning processes and conducting peer benchmarking and exogenous risk assessments.A majority of our risk management team members are responsible for credit management and collection. We have implemented payment andcollection policies and practices, included through automated repayment process in which borrowers authorize deduction from their Alipay accountsfor the amount of scheduled repayments. These policies and practices are designed to optimize regulatory compliant repayment, while also providingsuperior borrower experience. Our collections teams are trained to help borrowers to understand the value of their credit profile, explore availablepayment alternatives and make reasonable arrangements to repay outstanding balances. Our employees contact borrowers following the first missedpayment and periodically thereafter. Our primary methods of contacting past due borrowers are to send reminders through text, voice and instantmessages, phone calls, letters and emails.We have developed a machine learning algorithm to better allocate collection resources based on more detailed grouping of larger delinquencyrisk, which we rolled out in the second quarter of 2017. The algorithm places delinquent borrowers into different groups based on internal blacklistcheck, credit history and QD score. Higher risk groups are allocated with more collection resources as the likelihood of their outstanding balancebecoming longer-term delinquent or even uncollectable is generally higher. We expect to both improve our collection efficiency and reducedelinquency under this algorithm.BorrowersWe target the large and growing number of creditworthy borrowers in China who we believe are of emerging prime credit quality but havelimited credit history and access to traditional consumer credit from banks or other lenders. As we have been focused on providing credit products toyoung consumers across China, we have gained extensive experience and understanding into the behavior and consumption preference of suchdemographic of users since our inception. In 2017, approximately 88% of active borrowers are between 18 and 35 years of age. Zhima Credit Scoreserves as one of the many inputs for our credit assessment model. Borrowers with approved amounts of credit from us typically have Zhima CreditScores of at least 620. Zhima Credit Scores are limited by the amount of information available to Zhima Credit and therefore may not be fully reflectiveof borrowers’ creditworthiness. Based on our analysis of such borrowers’ behavioral data, we may determine some of the borrowers with low ZhimaCredit Scores to be creditworthy and approve credit to such borrowers. As one of our strategies to broaden our borrower base, we have started to engageborrowers whose Zhima Credit Scores are below 620. 68Source: Qudian Inc., 20-F, April 09, 2018Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Table of ContentsWe have engaged a portion of our active borrowers through different channels on the Alipay consumer interface since 2016, although fromDecember 2017 onward, we have encouraged our repeat borrowers to directly engage us through our mobile applications. We also seek to diversify ourborrower engagement channels by collaborating with other leading Internet companies. In addition, we have started to promote the use of our mobileapplications, and we have experienced an increase in transactions conducted through these mobile applications.We have experienced significant growth in the number of borrowers since inception. As of December 31, 2015, 2016 and 2017, approximately1.5 million, 11.2 million and 26.2 million registered users were approved with credit, respectively. In 2015, 2016 and 2017, we arranged credit forapproximately 1.2 million, 6.1 million and 11.7 million active borrowers, respectively. Out of the total active borrowers in 2015, 2016 and 2017,respectively; repeat borrowers, made up approximately 40.4%, 68.4% and 81.9% of our total active borrowers, respectively. We believe the increase inrepeat borrowers reflects borrower loyalty and our credit products’ ability to address borrower consumption needs. On average, an active borrower drewdown approximately 7.9 times in 2017.As of December 31, 2017, borrowers with outstanding credit drawdowns utilized 45.6% of their credit limits on average. We believe borrowerswho did not utilize the maximum amounts available for drawdowns under their respective credit limits tend to be those who utilize credit responsibly.PricingCredit limits for small credit products are determined based on assessments performed by our proprietary credit assessment model and riskmanagement system. Our credit assessment model takes into account factors such as identity characteristics, credit history, payment overdue history,payment capacity, behavioral characteristics and online social network activity, and assign each borrower a personalized credit limit based on his orher credit profile.We continually review and assess the credit profiles of borrowers at each drawdown request. If the credit profile of a prospective borrowerchanges, the amount and duration of credit that such borrower may be able to draw down under the credit limit would also change. As borrowers repay,they build credit histories with us. Based on the credit histories, our artificial intelligence-based credit assessment model enables us to continuallyre-evaluate borrowers’ credit profiles and provide more personalized credit limits. We offer borrowers with stronger credit profiles higher credit limitsand longer repayment durations, thereby driving higher engagement with them. In addition to personalized credit limits, we plan to offer personalizedfinancing service fees that reflect borrowers’ credit profiles.Pricing for credit drawdowns borrowed under cash credit and merchandise credit products are quoted in the form of the size of each installmentpayment and the number of installments required. For cash credit and merchandise credit products, the combined total represents the loan principal andfinancing service fees charged to borrowers. A credit product with duration of one week only requires a one-time payment upon maturity. A penalty feefor late payment is imposed as a daily penalty rate of the amount past due. All fees are clearly disclosed to the borrower upfront when the transaction isfacilitated. In an effort to comply with potentially applicable laws and regulations, we adjusted the pricing of our credit products in April 2017 toensure that the annualized fee rates charged on all credit drawdowns do not exceed 36%.The financing service fee of a credit product is determined by its size and duration. Credit products of larger size and longer duration generallycorrespond to higher amount of financing service fees. For borrowers with strong credit profiles, we may offer them discounts as to financing servicefees. In addition, we hold promotional campaigns from time to time and charge lower financing service fees during such campaigns. Such discountswere RMB6.4 million, RMB10.2 million and RMB1.5 million (US$0.2 million) for the years ended December 31, 2015, 2016 and 2017, respectively. 69Source: Qudian Inc., 20-F, April 09, 2018Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Table of ContentsFundingWe collaborate with institutional funding partners and, in certain cases, utilize our own capital to fund the credit we facilitate. We believeinstitutions provide us with an efficient way to secure a large amount of funding, while being generally more stable than retail investors by nature. Inaddition, while we intend to focus on leveraging technology, rather than capital, to serve the broad consumer base in China, we fund certain creditdrawdowns to our borrowers to provide ourselves with funding flexibility. We have established online small credit companies and utilized trustsfunded by us for such purpose. The table below sets forth a breakdown by funding sources for total amount of transactions in the periods presented: Year Ended December 31, 2015 2016 2017 RMB RMB RMB US$ (in thousands) On-balance sheet transactions: Credit drawdowns that were funded by institutional funding partners 3,162,153 10,698,269 47,247,820 7,261,857 Credit drawdowns transferred to institutional funding partners 3,162,153 8,987,195 22,430,109 3,447,445 Credit drawdowns funded through trusts(1) — 1,711,074 24,817,711 3,814,412 Credit drawdowns that were funded by our own capital 1,091,693 19,523,408 31,225,916 4,799,335 Total on-balance sheet transactions 4,253,846 30,221,677 78,473,736 12,061,192 Off-balance sheet transactions — 2,008,961 10,469,933 1,609,199 Total 4,253,846 32,230,638 88,943,669 13,670,392 (1)Excludes credit drawdowns funded by our own capital through trusts.The table below sets forth a breakdown by funding sources, as a percentage of the amount of transactions, in the periods presented: Year Ended December 31, 2015 2016 2017 % On-balance sheet transactions Credit drawdowns that were funded by institutional funding partners 74.3 33.2 53.1 Credit drawdowns transferred to institutional funding partners 74.3 27.9 25.2 Credit drawdowns funded through trusts(1) — 5.3 27.9 Credit drawdowns that were funded by our own capital 25.7 60.6 35.1 Total on-balance sheet transactions 100.0 93.8 88.2 Off-balance sheet transactions 0.0 6.2 11.8 Total 100.0 100.0 100.0 (1)Excludes credit drawdowns funded by our own capital through trusts.We select funding sources to fund credit facilitated by us based on various factors, including the fees charged by such funding sources, amount ofthe credit drawdowns to be funded, the credit drawdown requirement of the funding sources at that time and the timing of the availability of fund fromthe funding sources. The financing service fee of a credit product is determined by its size and duration, instead of the funding arrangement related tothe transaction. For more information, see “— Pricing.” 70Source: Qudian Inc., 20-F, April 09, 2018Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Table of ContentsFunding Provided Directly by Institutional Funding PartnersWe have entered into cooperative agreements with banks in China and started to fund credit drawdowns to borrowers under such arrangements inApril 2017. The banks are able to utilize our data-driven credit assessment model to screen potential borrowers who are traditionally underserved bybanks due to the lack of credit data. Under such agreements, we refer to such banks qualified credit applications from borrowers, including ourassessment of their credit profiles and our suggested credit limits. They will then review the credit applications independently in accordance with theircredit assessment standards and approve credit for drawdown. Once a credit limit is approved and funding is requested, the banks will fund the credit tothe borrower directly. The relevant bank is identified as the lender under the borrowing agreement. The borrower is required to repay the principal andfinancing service fees directly to the relevant bank. Such bank will in turn deduct the principal and fees due to it from the repayment and remit theremainder to us as our loan facilitation fees. When the borrower defaults, we are obligated to repay the full overdue amount to the relevant banks.We also entered into a cooperative agreement with a consumer finance company in September 2016 pursuant to which the consumer financecompany funded the credit we facilitated to the borrower directly. Such arrangement with the consumer finance company was similar to those enteredinto with banks.In 2017, the amount of transactions facilitated under these arrangements with banks and the consumer finance company wereRMB10,469.9 million (US$1,609.2 million). We recognize loan facilitation fees earned from banks and the consumer finance company as loanfacilitation income and others, which were RMB302.0 million (US$46.4 million) in 2017. For each credit drawdown directly funded by banks and theconsumer finance company, we record the fair value of guarantee liabilities, which represent the present value of our expected payout based on theestimated delinquency rate and the applicable discount rate for time value. As of December 31, 2017, guarantee liabilities under our arrangement withbanks and the consumer finance company was RMB47.0 million (US$7.2 million). In 2017, we paid banks and the consumer finance companyRMB124.8 million (US$19.2 million) for borrower defaults.Funding Provided through TrustsInstitutional funding partners, including banks, asset management companies and other institutions, also currently provide credit indirectly toborrowers through trusts we established in collaboration with trust companies. Each trust has a specified term. We consolidate the trusts’ financialresults in our consolidated financial statements in accordance with U.S. GAAP. Institutional funding partners invests in our trusts in the form of trustunits, which entitle the institutional funding partner to a fixed rate of return on the investment. Pursuant to the cooperative agreement with the trustcompany, we are designated as the service provider for the trusts. If a credit application is approved by us, the credit drawdown will be funded from thetrusts to the borrower directly. The trust is identified as the lender under the borrowing agreement. The borrower is required to repay the principal andfinancing service fees directly to the trust. The trust remits to the institutional funding partners pursuant to the terms of the trust that reflect (i) thepre-agreed rate of return and (ii) funds initially provided by the institutional funding partners. In the event payments made by borrowers are less thanthe amount that would reflect the pre-agreed rate of return and funds initially provided by the institutional funding partners, we are obligated to makeup for the deficit so that the institutional funding partners still receive such total amount. Any remaining amount in the trust is retained by us. The trustcompany is responsible for administering the trust and is paid a service fee.We also fund certain trusts with our own capital. In 2017, the amount of transactions facilitated through trusts was RMB38,808.6 million(US$5,964.8 million), of which RMB24,817.7 million (US$3,814.4 million) was funded by institutional funding partners and RMB13,990.9 million(US$2,150.4 million) was funded with our own capital.While the amount of transactions that a trust can provide is limited by the applicable trust agreement, we may establish additional trusts asnecessary. In addition, each of the trusts has its own funding criteria, including 71Source: Qudian Inc., 20-F, April 09, 2018Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Table of Contentssizes and durations of credit products, borrowers’ ages, type of products (i.e., cash credit or merchandise credit) and minimum annualized fee rate. Thefunding criteria of a trust are in part based on the relevant funding criteria of the institutional funding partners that provided funds into such trust.Following such criteria, we have facilitated a significant amount of transactions through our trusts. Since the trust company administering such trustshas been licensed by financial regulatory authorities to lend, credit drawdowns funded under such arrangement are not private lending transactionswithin the meaning of the Private Lending Judicial Interpretation issued by the Supreme People’s Court of the PRC in August 2015. As a result, undersuch arrangement, we will not be deemed as a lender or a provider of financial services by the PRC regulatory authorities or becoming subject tosupervision and restrictions on lending under the applicable laws and regulations. For more information, see “Risk Factors — Risk Relating to OurBusiness and Industry — We may be deemed as a lender or a provider of financial services by the PRC regulatory authorities.”Credit Drawdowns Transferred to Institutional Funding PartnersWe transfer credit drawdowns to certain institutional funding partners, including P2P platforms historically. Such arrangements involve us firstdisbursing credit to borrowers with our own funds before we aim to transfer such credit drawdowns to institutional funding partners. We have ceasedtransferring credit drawdowns to P2P platforms and certain other institutional funding partners in April 2017. We made such decision due to therelatively high cost of funds provided by P2P platforms. We also took into account the regulatory uncertainties faced by P2P platforms. The change infunding arrangements did not have any impact on existing credit drawdown outstanding, as we continued to pay P2P platforms fees on creditdrawdowns previously transferred to them in accordance with the relevant agreements. The change in funding arrangements has not had any negativeimpact on total revenues or liquidity requirements, as we have started to cooperate with other institutional funding partners. The other institutionalfunding partners provide cheaper funding sources compared to P2P platforms, helping us to maintain low funding costs.The steps involved in the funding arrangements are set forth below.Step 1: credit drawdownWe first disburse credit to borrowers with our own funds when borrowers draw down on their credit. Borrowers are required to make fixed weeklyor monthly payments to us. The combined total represents the principal and financing service fees charged to borrowers.Step 2: transferAfter credit drawdown, we aim to transfer certain credit drawdowns to institutional funding partners. Members of our funding team periodicallycommunicate with our institutional funding partners to understand their investing needs. Typically, an institutional funding partner specifies a quotafor the amount of transactions that it is willing to fund for a specified period, which was non-binding. To meet such quota, our automated selectionsystem groups credit drawdowns into portfolios based on the criteria specified by our institutional funding partners, such as sizes and durations ofcredit drawdowns and borrowers’ ages. Following such criteria, we have transferred a significant amount of transactions to institutional fundingpartners. We seek to refer each portfolio to the institutional funding partner that offers the lowest funding cost. For credit drawdowns that are approved,the institutional funding partners pay us the principal amounts of such credit drawdowns.Step 3: repayments to institutional funding partnersAfter transfers, borrowers continue to make all payments of principal and financing service fees to us. We then remit to the institutional fundingpartners all loan principals and fees payable. If borrowers default on their payment obligations, we are generally still obligated to repay ourinstitutional funding partners all loan principals and fees payable in respect of credit drawdowns funded by them. Under our historical arrangementswith P2P platforms, we made payments to P2P platforms, instead of retail investors of such platforms. In addition, we guaranteed the repayment of thecredit drawdowns to P2P platforms, instead of retail investors of such platforms. 72Source: Qudian Inc., 20-F, April 09, 2018Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Table of ContentsWe segregated our assets from those assets of the institutional funding partners through separate bank accounts designated for institutionalfunding partners to whom we transfer credit drawdowns. Upon the transfer of a portfolio of credit drawdowns, the relevant institutional funding partnerdeposited into such bank account an amount equivalent to the aggregate principal amount of the credit drawdowns transferred. We subsequentlytransferred such amount to our Alipay accounts. When borrowers make repayments, such repayments are deposited into our Alipay accounts. We thentransfer amounts payable to the institutional funding partners to the separate bank accounts from which we remit such amounts to the institutionalfunding partners.Our Online Small Credit CompaniesWe established two online small credit companies, Fuzhou Microcredit and Ganzhou Microcredit, in 2016. Each online small credit company isauthorized to provide credit drawdowns up to three times of its respective net capital pursuant to the relevant laws and regulations. In 2017,RMB16,970.3 million (US$2,608.3 million) of credit drawdowns initially funded by us were funded through our online small credit companies,representing approximately 19.1% of the total amount of transactions facilitated during such period. Since December 2017, our two online small creditcompanies have been subject to inspections by the local regulatory authorities as part of a broader regulatory effort to promote compliance by onlinesmall credit companies in China. If our online small credit companies were found to be in violation of applicable laws or regulations, we could beordered to rectify such violation or even cease the operations of our online small credit companies. We have not received any notification fromregulatory authorities as to the outcomes of such inspections. In light of the inspections, we have voluntarily and temporarily ceased funding creditdrawdowns through our online small credit companies since December 2017, and we have facilitated credit drawdowns through other fundingarrangements.Our Partnership with Ant FinancialIn 2015, we approached Ant Financial for a potential partnership of business cooperation. We have established a rapidly expanding business as aprovider of online credit products and demonstrated strong capabilities in data technology and risk management. Ant Financial, which operatesAlipay, offers us valuable channels to engage Alipay’s large number of users. Furthermore, Alipay requires its users to provide personal identificationinformation and verifies such information, which differentiates Alipay from its competitors and contributes to our risk management efforts.Furthermore, Ant Financial and us agreed to strengthen the strategic partnership through an equity investment by Ant Financial. In September 2015,Ant Financial’s wholly owned subsidiary API (Hong Kong) Investment Limited became a shareholder of Qufenqi Inc., a former holding company ofBeijing Happy Time. We started to engage prospective borrowers through the Alipay consumer interface in November 2015. Since then, we haveestablished in-depth cooperation with Ant Financial in multiple areas of our business. In connection with our restructuring in 2016, API (Hong Kong)Investment Limited became one of the principal shareholders of Qudian Inc.Borrower Engagement. We have engaged a portion of our active borrowers through different channels on the Alipay consumer interface since2016, although from December 2017 onward, we have encouraged our repeat borrowers to directly engage us through our mobile applications. Wepromote our products and launch campaigns through the public service window on the Alipay consumer interface, which is free of charge andgenerally available to third parties. We also actively promote the public service window to our existing borrowers by showing them instructions onhow to access our products through this channel. In addition, we historically engaged Alipay users through Alipay’s dedicated channel for onlineconsumer credit products, for which we paid a fee. Such arrangement was terminated in February 2017. We then entered into an agreement, which weamended and restated in August 2017, to engage Alipay users through Alipay’s dedicated channel for online third-party service providers, for whichwe pay a fee consistent with fees that Alipay would charge other similar third-party service providers on this channel as determined by Alipay fromtime to time. Compared to the dedicated channel for online consumer credit products, this channel provides our brand more prominence in the Alipayconsumer interface. Such agreement, as amended and restated, has an initial term of one year that will expire in August 2018. Thereafter, the agreementwill be automatically renewed for successive one-year periods unless otherwise terminated prior to the expiration of each term by either party. Theagreement allows Alipay to adjust or terminate our access to the channel at any time based on Alipay’s campus life business strategy and QuCampusmeeting the relevant performance targets as set forth by Alipay. The agreement may also be 73Source: Qudian Inc., 20-F, April 09, 2018Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Table of Contentsterminated by either party for cause, such as breach of contract. Alipay is a leading online and mobile payment service provider in China, which webelieve is a highly efficient channel in enabling us to engage prospective borrowers. At the same time, we believe our credit products enhance userawareness and engagement of Alipay, thereby creating a mutually beneficial relationship.In March 2017, we entered into an online personal loan cooperation agreement with Chongqing Alibaba Small Loans Co., Ltd., or ChongqingSmall Loans, a subsidiary of Ant Financial that operates the Jiebei consumer credit business. The Jiebei platform can be accessed through the Alipayconsumer interface. Pursuant to such agreement, we have started to engage borrowers through the Jiebei platform. Prospective borrowers can submitcredit applications through the Jiebei platform. Chongqing Small Loans will refer us credit applications from specific geographic areas and ranges insize. Chongqing Small Loans also provides us with relevant information of such prospective borrowers pursuant to the relevant authorizations fromthem. We assess prospective borrowers’ credit profiles and inform Chongqing Small Loans of our decisions. Chongqing Small Loans will in turn notifythe applicants who have been approved with credit. We will fund the credit to borrowers, who will repay principals and financing service fees to us.Pursuant to the agreement, we pay certain fees to Chongqing Small Loans based on a percentage of financing service fees we receive from borrowers.The term of the agreement is one year and can be terminated by either party with 30 days’ notice.Credit Service. Beijing Happy Time and several of its subsidiaries have each entered into credit service agreements with Zhima Credit. Pursuantto these credit service agreements, Zhima Credit provides us with credit analysis information of prospective borrowers, including Zhima Credit Scores,which serves as one of the many inputs for our credit assessment model. We pay Zhima Credit fees for such credit analysis. Zhima Credit waived feesfor certain credit services from March 2017 to March 2018. We expect to start paying fees for such services starting from April 2018. We also provideZhima Credit with our credit analysis of borrowers to reflect repayment and other credit attributes. Such credit analysis is provided by or to ZhimaCredit only with the relevant authorization of prospective borrowers during the credit application process.The credit service agreements typically provide for an initial term of one year, and can be automatically renewed unless either party providesnotice to the other of its decision not to renew 30 days prior to the expiration of the relevant agreement. Each credit service agreement may beterminated for cause, such as due to uncured material breach by a party or a party’s bankruptcy, liquidation or dissolution.Credit Analysis Collaboration. We collaborate with Zhima Credit to share insights into the application of data technology that further enhancethe effectiveness of our own credit analysis models. The collaboration facilitates our efforts in developing innovative algorithms that dynamically andaccurately categorizes individuals and assesses potential credit risk. The algorithms are designed specifically for small credit targeting youngconsumers and are incorporated into our credit assessment model to further optimize our risk assessment capabilities. While we have engaged in suchcollaborations with Zhima Credit, we retain control over and authority to make changes to our proprietary credit assessment model and riskmanagement system.Payment Processing and Settlement. Borrowers receive proceeds from credit drawdowns as well as make repayments through their Alipayaccounts. For on-balance sheet transactions, we disburse funds to, and collect repayments from, borrowers through our Alipay accounts. For off-balancesheet transactions, our institutional funding partners utilize their own Alipay accounts and transact with borrowers directly. We have entered intoagreements with Ant Financial for payment processing and settlement services in connection with our Alipay accounts. Pursuant to such agreements,we are charged a fixed amount for each credit drawdown funded by our Alipay accounts as well as a percentage of each repayment made to our Alipayaccounts. The payment processing and settlement agreements typically provide for an initial term of one year, which can be automatically renewedunless either party provides notice to the other of its decision not to renew 30 days prior to the expiration of the relevant agreement.QuCampus. To further enhance user engagement efforts, in October 2016 we formed a joint venture with Ant Financial, QuCampus, a companyorganized under the laws of the PRC. As of the date of this prospectus, QuCampus is owned approximately 45.9% by us, 44.1% by Ant Financial and10.0% by Ganzhou Happy Share, a limited partnership established in connection with the share incentive plan to be established by QuCampus. 74Source: Qudian Inc., 20-F, April 09, 2018Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Table of ContentsMr. Min Luo, our founder, chairman and chief executive officer, is the general partner of Ganzhou Happy Share. We do not expect Mr. Min Luo to be aparticipant in the share incentive plan to be established by QuCampus. Pursuant to our framework agreement with Ant Financial, we have committed toinvest an aggregate of RMB190 million in QuCampus. We have invested RMB70.0 million (US$10.8 million) as of December 31, 2017. The bookvalue of our equity interests in QuCampus as of December 31, 2017 was RMB44.5 million (US$6.8 million), which equals to our investment ofRMB70.0 million (US$10.8 million) for such equity interests after deducting our share of QuCampus’ loss. Ant Financial has committed to invest anaggregate of RMB100 million in QuCampus, and it has invested RMB35.0 million (US$5.4 million) as of December 31, 2017. We and Ant Financialwill each pay the remainder of the respective committed amount if the board of directors of QuCampus determines that such investment is warranted byQuCampus’ operational and financial needs. Ganzhou Happy Share has committed to invest an aggregate of RMB10 million in QuCampus, and suchamount is expected to be paid when participants in the equity incentive plan pay exercise prices in connection with the exercise of their equity awards.We have entered into a shareholders’ agreement with QuCampus, Ant Financial, Ganzhou Happy Share and Mr. Min Luo. Such shareholders’agreement provided that: • Board representation. The board of directors of QuCampus consists of four directors. We and Ant Financial are entitled to nominate twodirectors each. We and Ant Financial have also agreed to vote in favor of the nominees of the other party. • Preemptive rights. We and Ant Financial enjoy preemptive rights with respect to all or part of any increase in registered capital ofQuCampus. • Right of first refusal. We and Ant Financial enjoy the right of first refusal as to any proposed sale of equity interests by a shareholder. • Transfer restrictions. We and Ganzhou Happy Share are prohibited from, directly or indirectly, transferring or pledging equity interests inQuCampus without Ant Financial’s approval. • Non-compete. QuCampus may not issue any equity interests to, or purchase any equity interests of, a competitor of us or Ant Financial.We have provided operational support by, among others, transferring our offline campus borrower engagement team to the joint venture.Accessible through the Alipay consumer interface, QuCampus’ services cover various aspects of the daily life of college students, including thoserelated to academia, social connection, networking and other campus life related services. Through their mobile devices, users of QuCampus are able tocarry out activities such as paying their tuition and living expenses, searching for part-time jobs, finding deals and coupons for restaurants andmerchandises, selling second-hand goods and raising funds for student organizations. Alipay will provide the joint venture with points of user trafficunder the campus life channel on the Alipay consumer interface. We believe our extensive historical on-the-ground operational experiences andunderstandings as to the behavior, social needs and consumption preferences of college students across China enable the joint venture to better designand introduce relevant services. QuCampus earned a small amount of advertising fees in 2017. Going forward, we expect QuCampus will also earnservice fees from businesses that engage users through the QuCampus platform. Given its focus on college students, QuCampus offers a valuable userengagement channel for businesses that provide career services, professional trainings or other services targeting students. QuCampus’ cost consistsprimarily of salaries and benefits for its employees, and such cost is recognized on an accrual basis. We view the joint venture as a valuableopportunity to connect with young consumers outside of the context of credit facilitation, thereby gaining further insights as to the behavior, socialneeds and consumption preferences of such consumers. We believe such insights will enable us to improve terms of our credit products, identifyattractive merchandise for our marketplace, refine our credit assessment model and risk management system and cultivate long-term customerrelationships.Our Merchandise SuppliersWe operate an online marketplace where consumers purchase merchandise offered by third-party merchandise suppliers with our merchandisecredit products. We currently collaborated with more than 330 75Source: Qudian Inc., 20-F, April 09, 2018Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Table of Contentsmerchandise suppliers, including leading consumer brands and their authorized distributors to offer in demand merchandise from over 1,800 brandswith relatively high price points, such as iPhones and other mobile phones, tablets and computers, on our marketplace. Our product offerings alsoinclude consumer electronics, home appliances, watches and accessories, sports and outdoor merchandise and luggage. We believe we enable leadingconsumer brands and their authorized distributors/retailers to reach a large customer base who previously may not have sufficient resources to purchaseproducts from these brands and their authorized distributors/retailers, thereby increasing demand for their merchandise. As of December 31, 2017, therewere over 349,000 SKUs offered on our marketplace.We have implemented a strict and systematic selection process for merchandise and suppliers. We have established a dedicated merchandisingteam responsible for identifying potential merchandise and suppliers. We select merchandise on the basis of brands that we expect will resonate withour users. Once a potential product is identified, we conduct due diligence reviews on potential merchandise suppliers’ qualifications based on ourselection criteria, including performing background checks and examining relevant government permits and brand authorization and qualificationcertificates for their merchandise. We also evaluate their abilities to meet borrowers’ demands for timely supply of merchandise and to provide high-quality after-sales customer service, as well as their product offering prices and scale of business.We generally enter into framework supply agreements with merchandise suppliers annually based on our standard form contract. Such contractsset forth the price that we will remit to merchandise suppliers when borrowers purchase merchandise. Our standard form contract requires merchandisesuppliers to represent that their merchandise are authentic and from lawful sources and do not infringe upon lawful rights of third parties and to pay usliquidated damages for any breach. As we serve as a sales and marketing channel that connects borrowers, as customers, and consumer brands and theirdistributors, as merchandise suppliers, our merchandise suppliers are responsible for order fulfillment. After sales services are also provided bymerchandise suppliers, although our user service personnel handle initial customer queries and connect such customers with the respectivemerchandise suppliers. We typically request our merchandise suppliers to guarantee a minimum amount of inventory to ensure the supply ofmerchandise to borrowers. We constantly communicate with our merchandise suppliers to keep them informed of any changes to demand and tounderstand inventory level for merchandise offered on our marketplace. We do not carry any inventory.We typically earn sales commission fee from merchandise suppliers when a borrower purchases their merchandise, and such fees comprise (i) thedifference between the retail prices of the merchandise sold to borrowers and the prices of the merchandise that we pay to the merchandise suppliersand (ii) rebates earned from merchandise suppliers. The sales commission fee we collect from our merchandise suppliers typically range up to 20% ofthe price of the relevant merchandise that we pay to the merchandise suppliers. Our merchandise suppliers currently grant us a credit period of three to30 days after the date that a borrower purchases the relevant merchandise on our marketplace. We may also earn rebates from merchandise suppliers.Credit Approval and Servicing ProcessWe believe that we provide a convenient and user-friendly credit application process, a credit assessment mechanism that accurately determinesan applicant’s creditworthiness and a superior overall user experience. Our proprietary credit assessment model and risk management system enables usto provide an automated online application process that aims to provide a simple, seamless and efficient experience to users. Prospective borrowersmay complete the application and receive a decision on their application as quick as a few seconds. Once approved, we generally provide suchprospective borrowers with both cash credit products and merchandise credit products. Approved borrowers are then able to draw down on their cashcredit with funds available in their Alipay accounts within a few minutes or complete the purchase of merchandise on our marketplace utilizing theirmerchandise credit products. 76Source: Qudian Inc., 20-F, April 09, 2018Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Table of ContentsWe have created a simple and quick process for users to apply for small credit as illustrated below. Stage 1: Online Credit ApplicationOur online credit application process begins with the submission of a credit application by a prospective borrower. A typical prospectiveborrower is a user who has already registered on Alipay, which requires the input of his or her real name, PRC identity card information and mostfrequently used mobile phone number for authentication. Given the significant coverage of Alipay in China, we believe most of the targeted borrowershave completed this part of registration process before applying for credit from us.A registered Alipay user can apply for credit through mobile apps. As part of the credit application process, the prospective borrower is asked toprovide basic personal information that typically includes their name, PRC identity card information, mobile phone number and their authorization forus to run a credit background check, including access to their record on Zhima Credit.Stage 2: Data Aggregation and VerificationUpon receiving a completed application by a prospective borrower, our proprietary risk management system and fraud prevention system arepopulated with information from the submitted credit application, including, with authorization of the relevant users, credit analysis for suchprospective borrower provided by third parties. For borrowers who have established certain credit histories with us, our credit assessment model placesa strong focus on data from internal sources, such as such borrowers’ repayment and delinquency record, than external data. This data is then used toverify applicants’ identity and for fraud detection. We utilize restricted list searches provided by third-parties as well as our proprietary machinelearning algorithms to screen for fraudulent applications. Applicants identified to present higher risk of fraud are declined by our fraud preventionsystem.Stage 3: Credit AssessmentAfter completion of the data aggregation and verification process, the prospective borrower’s application either proceeds to the next phase of theapplication process or the prospective borrower is notified of the decision that the application is declined.Our proprietary credit assessment model has been powered by our massive database, including data from approximately 47.6 million applicantsand approximately 14.5 million borrowers that have accounted for approximately 136.1 million cumulative credit drawdowns facilitated as ofDecember 31, 2017. As testimony to 77Source: Qudian Inc., 20-F, April 09, 2018Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Table of Contentsthe flexibility and scalability of our technology infrastructure, in connection with and prior to the Singles Day promotional campaign onNovember 11, 2017, we were able to facilitate in one day over 562,000 transactions. Our proprietary data analytics and credit assessment model isoptimized to fit the realities of the Chinese market and tailored for each channel through which we engage prospective borrowers, using big data andfast data from sources that target borrowers in China. Our credit assessment model uses our own scoring criteria, and is routinely monitored, tested,updated and validated by our risk management team. Following credit evaluation, our credit determination system makes a determination as to whetherthe applicant is qualified, and a qualified borrower receives short-term, unsecured amount of credit. The full amount of such credit represents suchborrower’s credit limit for merchandise credit products. A portion of the full amount represents the borrower’s credit limit for cash credit products.Nonetheless, while borrower may utilize funds received under cash credit products for any purpose, merchandise credit products can only be used tofund purchases on our marketplace. Unqualified applicants are notified of the decision of their applications being declined, although such applicantsare not prohibited from applying again in the future.Building on the experience and data we have gained since our inception, we have developed a new credit assessment system, QD score, and wehave started to apply such system to our small credit products since the fourth quarter of 2017. Continuously refined by machine learning algorithmsand the high volume of transaction data we collect, QD score analyzes a large number of variables for each transaction and enables us to betterdifferentiate between creditworthy borrowers and lower quality borrowers.Stage 4: Credit UtilizationOnce the credit application is approved, borrowers can request drawdowns under their respective credit. Upon receipt of a drawdown request, ourcredit assessment model and risk management system normally review the application and re-evaluate the creditworthiness of such borrower to ensurethat he or she is qualified for the requested drawdown. If the credit profile of a prospective borrower changes, the credit limits for such borrower mayvary. If the borrower has made the requisite payments in a timely manner, and there are unused credit remaining, the borrower may continue to utilizehis or her credit, subject to our approval at the time of each drawdown request. Once the drawdown request is approved, we or our institutional fundingpartners, as applicable, will then fund credit to borrowers. Funding typically occurs in as quickly as a few seconds after a request for drawdown is madeand approved. In the event we do not approve a drawdown request, we aim to notify the relevant customer of such decision within ten minutes after therequest is made.Stage 5: Servicing and CollectionWe utilize an automated process to help borrowers to make their scheduled payments. Upon origination, we establish a payment schedule withpayment occurring on a set business day each month or week. Borrowers then make scheduled repayments online, or authorize deduction from theirAlipay accounts the amount of scheduled repayments. In 2017, most of the scheduled repayments were made automatically from the borrowers’ Alipayaccounts.For borrowers who do not use the automated repayment process, we provide payment reminder services, such as sending reminders through textand instant messages on the day a repayment is due. Once a repayment is past due, we also send additional reminder text and instant messages duringthe first two calendar days of delinquency.Our collection efforts extend to every delinquent borrower. Our collection process is divided into distinct stages based on the severity ofdelinquency, which dictates the level of collection steps taken. For example, automatic reminders through text and instant messages are sent to adelinquent borrower as soon as the collections process commences, and we take such measures to address delinquencies typically caused by borrowers’oversight. If the payment is still outstanding after these reminders, our collection system will initiate automated voice calls, which we believe are moredifficult for borrowers to ignore compared to text and instant 78Source: Qudian Inc., 20-F, April 09, 2018Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Table of Contentsmessages. In the event such efforts remain unsuccessful, our collection team will make phone calls and disclose such delinquency to Zhima Credit if apayment is more than 20 calendar days past due. We inform the relevant borrowers of our intention to make such reports and the adverse impact ofdelinquencies on their credit histories, which may convince such borrowers to pay the amounts past due. For larger amounts past due, we may alsoconduct in-person visits. We may stop collection efforts when credit drawdowns are 180 calendar days overdue and collection attempts have reached acertain number. In the event of (i) death of the borrower, (ii) identification of fraud, and the fraud is officially reported to and filed with relevant lawenforcement departments or (iii) the amount remained outstanding 180 calendar days past due and therefore deemed uncollectible, we will charge offthe relevant outstanding amount. Substantially all of our charge-offs since our inception were due to amounts that remain outstanding 180 calendardays past due and therefore deemed uncollectible.The following table sets forth the amount of delinquent principal and financing service fees for on-balance sheet transactions we successfullyrecovered through our collection efforts during the periods presented, as a percentage of the balance of outstanding principal and financing service feespast due for on-balance sheet transactions as of the end of the periods presented: Year Ended December 31, 2015 2016 2017 Percentage of delinquent principal and services fees for on-balance sheettransactions recovered 20.1% 35.1% 44.2% In addition to our own collection efforts, we have engaged other parties to conduct debt collection for us from June 2016 to October 2016, as weexplored various methods of collection. Such parties have collected a total of approximately RMB150 thousand for us during the period. As we viewedcooperation with such parties to be ineffective, we have since terminated such cooperation.As part of the major upgrade of our risk management system in January 2017, we have developed a machine learning algorithm to better allocatecollection resources based on more detailed grouping of larger delinquency risk, which we rolled out in the second quarter of 2017. The algorithmplaces delinquent borrowers into different groups based on internal blacklist check, credit history and QD score. Higher risk groups are allocated withmore collection resources as the likelihood of their outstanding balance becoming longer-term delinquent or even uncollectable is generally higher.For example, we assign collection staff with more experience in negotiation to contact these borrowers. We expect to both improve our collectionefficiency and reduce delinquency under this algorithm.Collection and Repossession for Dabai AutoOur collection and repossession efforts extend to every delinquent car buyer. As soon as a car buyer misses a scheduled repayment, our collectionteam tries to contact the car buyer by phone and remind the car buyer about consequences of default. Our collection team will arrange in-person visitswith the car buyer if phone calls turn out to be ineffective. Pursuant to our lease agreement with the car buyer, we have the right to repossess the car asearly as seven days after the car buyer becomes delinquent. As aids to our repossession efforts, we install telematics devices on cars and retain car keysbefore delivering cars to car buyers.Our Information Technology and SecurityOverviewOur network is configured with multiple layers of security modules to isolate our databases from unauthorized access. We use sophisticatedsecurity protocols for communication among applications and we encrypt private information, such as an applicant’s identification number.Our systems infrastructure is currently deployed and our data is currently maintained on customized cloud computing services. We believe byutilizing cloud computing we are able to quickly scale capacity and ensure 79Source: Qudian Inc., 20-F, April 09, 2018Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Table of Contentsthere is sufficient bandwidth to meet the significant growth of our business and the increase in the number of our users, while reducing capitalexpenditure obligations. We have multiple layers of redundancy to ensure reliability of our systems and services. We also have a working dataredundancy model with comprehensive backups of our databases and software.Our technology and product development department, which comprised 203 employees as of December 31, 2017, including core team memberswith extensive experiences with leading Internet, online retail and mobile commerce and fintech companies in China, focuses on the following thatsupport our long-term business growth: • maintaining and strengthening our proprietary data and analytics systems, including our decisioning engine, proprietary risk managementsystem and fraud prevention system; and • ensuring our technology system, including front-end and back-end management systems, collection systems, financial systems, securityprotocols and business continuity plans are well established, reviewed, tested and continuously strengthened.Technology SystemOur proprietary technology system, which supports all key aspects of our online platform, is designed to optimize for scalability and flexibility.The system is designed to handle the large volume of data required to evaluate a large number of prospective borrower applications quickly andaccurately and to manage a large number of borrowers yet flexible enough to capitalize on changing user preferences, market trends and technologicaladvances. As testimony to the flexibility and scalability of our technology system, in connection with and prior to the Singles Day promotionalcampaign on November 11, 2017, we were able to facilitate in one day over 562,000 transactions. Our software development life cycle is rapid anditerative to increase the efficiency and capacity of our system. We are able to implement software updates while maintaining our system stability. Wecontinually employ technological innovations to improve our technology system, which performs a variety of integrated and core functions,including: • Front-end systems. Include external interfaces and mobile apps that users use when applying for credit and managing their accounts. • Back-end management systems. Our back-end systems include, among other things, our user credit and repayment management system,merchandise procurement system, merchandise management system and user information management system. • Collection systems. Primarily include contract management system, operational and marketing management system and automated phonesystem. • Financial systems. Systems that manage the external interface for funds transfers, including integration of our system with those of theinstitutional funding partners to ensure a seamless experience for the borrowers and the institutional funding partners, as well as for themanagement of daily financial and accounting, reconciliation and reporting functions. Such systems include, among others: • Transaction clearing system. The system is highly automated and capable of rapidly facilitating a massive number of transactionsunder a diverse array of funding arrangements. The system has been seamlessly integrated with the systems of various institutionalfunding partners, including banks. It automatically selects the proper funding source for each credit drawdown based on the largenumber of funding criteria specified by our institutional funding partners. The system adapts to new funding arrangements quickly.For example, it typically takes two days to complete the configuration for a new trust and two weeks to do so for a new off-balancesheet funding arrangement with a bank. • Repayment settlement system. Upon receiving borrowers’ repayments, the system separates such cash inflows into principals,financing service fees, fees payable to institutional funding partners and penalty fees on a real-time basis and settles with therelevant parties accordingly. 80Source: Qudian Inc., 20-F, April 09, 2018Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Table of Contents • Liquidity forecast system. The system provides real-time forecasts on our funding needs by monitoring the fund inflows andoutflows, and such forecasts are valuable information for us to manage liquidity. • Security. We collect and store personally identifiable user information, including names, addresses, identification information andfinancial accounts information for the sole purpose of individual credit assessment. We retrieve this information with user’s consentand have safeguards designed to protect such information, including the application of Advanced Encryption Standard, or AES. Westore our data in encrypted form, which offers an additional layer of protection. We also verify data interchange with ourinstitutional funding partners using digital signatures, which enhances the security of such interchange. We also have createdcontrols to limit employee access to such information and to monitor access.Marketing and Borrower EngagementOur marketing efforts are designed to attract and retain borrowers and build brand awareness and reputation. Our marketing efforts are primarilyonline, and we use an array of online marketing channels to attract borrowers, including: • Contractual Arrangement with Ant Financial. We have engaged a portion of our active borrowers through different channels on the Alipayconsumer interface since 2016. We promote our products and launch campaigns through the public service window on the Alipayconsumer interface, which is free of charge and generally available to third parties. • Arrangement with Other Leading Internet and Mobile Channels. We also utilize other leading Internet and mobile platforms in China,including leading Android app stores in China and Apple App Store, to obtain qualified leads for prospective new borrowers. We do notcurrently pay any fees to acquire leads through Android app stores and Apple App Store. We employ and continually optimize the relevantkey words associated with our apps to enhance users’ ability to find our apps in such stores.Furthermore, we believe reputation and word-of-mouth referral will also drive continued organic growth in borrowers. We believe once borrowersare satisfied with their experiences, they will continue to utilize our credit for other needs or to make other purchases on our marketplace, or referringtheir friends and colleagues to our credit products.We have established three brands through which our credit products are marketed, Laifenqi, Qudian and Dabai Auto. We leverage and positionthese brands to better target and engage prospective borrowers. We have historically marketed our Laifenqi brand to focus on offering cash creditproducts to prospective borrowers. On the other hand, we have historically marketed our Qudian brand as the destination for the purchase ofmerchandise through merchandise credit products. We market our budget auto financing products under the Dabai Auto brand. We believe our cashcredit products will continue to help us engage targeted quality borrowers to whom we may offer merchandise credit and other products in the future.CompetitionThe online consumer finance industry in China is intensely competitive and we compete with other consumer finance service providers ingeneral. We compete with other financial products and companies that attract borrowers, institutional funding partners or both. For example, withrespect to borrowers, we compete with other consumer finance service providers, including online consumer finance services, such as JD Finance,WeBank and Huabei and Jiebei of Ant Financial, as well as traditional financial institutions, such as banks and consumer finance companies. Inparticular, we and Jiebei both engage borrowers through the Alipay consumer interface and may compete for borrower engagement. Principal methodsof competition include enhancing data analytics capabilities, engaging borrowers cost effectively and strengthening funding sources. With respect to 81Source: Qudian Inc., 20-F, April 09, 2018Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Table of Contentsinstitutional funding partners, we primarily compete with other investment products and asset classes, such as equities, bonds, investment trustproducts, bank savings accounts and real estate. We believe that we are able to offer attractive returns with low investment thresholds not availablefrom other asset classes.As evidenced by our market leadership, we believe that our proprietary risk management system and our ability to offer personalized andaffordable credit products make us more attractive and efficient to both borrowers and institutional funding partners, providing us with a competitiveadvantage. In light of the low barriers to entry in the online consumer finance industry, more players may enter this market and increase the level ofcompetition. We anticipate that more established Internet, technology and financial services companies that possess large, existing user bases,substantial financial resources and established distribution channels may also enter the market in the future. We believe that our brands, scale, networkeffects, historical data and performance record provide us with competitive advantages over existing and potential competitors.We also compete with other providers of budget auto financing products, such as Youxin and Yixin, offline auto retailers such as 4S dealers aswell as online auto retail platforms. We primarily target prospective car buyers who have been our registered users and are eligible for higher creditlimits. We believe our large user base offers us a distinct competitive advantage.Intellectual PropertyWe regard our trademarks, domain names, copyrights, know-how, proprietary technologies and similar intellectual property as critical to oursuccess, and we rely on trademark and trade secret law and confidentiality, invention assignment and non-compete agreements with our employees andothers to protect our proprietary rights. We have registered 26 trademarks in the PRC for “ ”, “Qufenqi” and other trademarks. We also have 51trademarks under application in the PRC. We are the registered holder of 24 domain names in the PRC that include qudian.com and laifenqi.com. Wewere also granted 24 copyrights that corresponding to our proprietary techniques in connection with our systems.SeasonalityWe experience seasonality in our business, reflecting a combination of seasonality patterns of the retail market and our promotional activities. Inrecent years, many online and offline retailers in China hold promotions on November 11 and December 12 of each year, which drives significantincrease in retail sales. Higher retail sales during the shopping seasons may generate greater demand for our credit products. As a result, we typicallyrecord higher total revenues during the fourth quarter of each year compared to other quarters. On the other hand, our total revenues for the first quartertend to be lower due to the Chinese New Year holiday that generally reduces borrowing activities. In addition, we hold promotional campaigns onMarch 21 (our anniversary), November 11 and December 12 by charging lower financing service fees, which may also increase the number of borrowerswho utilize our credit products and thus increase our total revenues for the relevant periods.Overall, the historical seasonality of our business has been mild due to our rapid growth but may increase further in the future. Due to our limitedoperating history, the seasonal trends that we have experienced in the past may not apply to, or be indicative of, our future operating results.InsuranceWe provide social security insurance including pension insurance, unemployment insurance, work-related injury insurance and medicalinsurance for our employees. We also purchased employer’s liability insurance and additional commercial health insurance to increase insurancecoverage of our employees. We do not maintain property insurance policies covering our equipment and other property that are essential to ourbusiness operation to safeguard against risks and unexpected events. We do not maintain business interruption insurance or general third-partyliability insurance, nor do we maintain product liability insurance or key-man insurance. We consider our insurance coverage to be sufficient for ourbusiness operations in China. 82Source: Qudian Inc., 20-F, April 09, 2018Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Table of ContentsRegulationThis section sets forth a summary of the most significant rules and regulations that affect our business activities in China or the rights of ourshareholders to receive dividends and other distributions from us.Regulation Related to Foreign Investment RestrictionsInvestment activities in the PRC by foreign investors are principally governed by the Guidance Catalog of Industries for Foreign Investment, orthe Catalog, which was promulgated and is amended from time to time by the Ministry of Commerce and the National Development and ReformCommission. The Catalog divides industries into three categories: encouraged, restricted and prohibited. Industries not listed in the Catalog aregenerally deemed as constituting a fourth “permitted” category and open to foreign investment unless specifically restricted by other PRC regulations.Industries such as VATS (other than online retail and mobile commerce) are restricted to foreign investment.According to the Administrative Regulations on Foreign-Invested Telecommunications Enterprises issued by the State Council on December 11,2001 and amended on September 10, 2008 and February 6, 2016 respectively, foreign-invested value-added telecommunications enterprises must be inthe form of a Sino-foreign equity joint venture. The regulations restrict the ultimate capital contribution percentage held by foreign investor(s) in aforeign-invested value-added telecommunications enterprise to 50% or less and require the primary foreign investor in a foreign invested value-addedtelecommunications enterprise to have a good track record and operational experience in the VATS industry.In July 2006, the predecessor, the MIIT issued the Circular of the Ministry of Information Industry on Strengthening the Administration ofForeign Investment in Value-added Telecommunications Business, or the MIIT Circular, according to which, a foreign investor in thetelecommunications service industry of China must establish a foreign invested enterprise and apply for a telecommunications businesses operationlicense. The MIIT Circular further requires that: (i) PRC domestic telecommunications business enterprises must not, through any form, lease, transferor sell a telecommunications businesses operation license to a foreign investor, or provide resources, offices and working places, facilities or otherassistance to support the illegal telecommunications services operations of a foreign investor; (ii) value-added telecommunications enterprises or theirshareholders must directly own the domain names and trademarks used by such enterprises in their daily operations; (iii) each value-addedtelecommunications enterprise must have the necessary facilities for its approved business operations and maintain such facilities in the regionscovered by its license; and (iv) all VATS providers are required to maintain network and Internet security in accordance with the standards set forth inrelevant PRC regulations. If a license holder fails to comply with the requirements in the MIIT Circular and cure such non-compliance, the MIIT or itslocal counterparts have the discretion to take measures against such license holder, including revoking its license for value-added telecommunicationsbusiness, or the VATS License.In light of the above restrictions and requirements, we conduct our value-added telecommunications businesses through our consolidated VIEs.Regulations Related to VATSAmong all of the applicable laws and regulations, the Telecommunications Regulations of the People’s Republic of China, or the TelecomRegulations, promulgated by the PRC State Council in September 25, 2000 and amended on July 29, 2014 and February 6, 2016 respectively, is theprimary governing law, and sets out the general framework for the provision of telecommunications services by domestic PRC companies. Under theTelecom Regulations, telecommunications service providers are required to procure operating licenses prior to their commencement of operations. TheTelecom Regulations distinguish “basic telecommunications services” from “VATS.” VATS are defined as telecommunications and informationservices provided through public networks. The Telecom Catalogue was issued as an attachment to the Telecom Regulations to categorize 83Source: Qudian Inc., 20-F, April 09, 2018Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Table of Contentstelecommunications services as either basic or value-added. In February 2003 and December 2015, the Telecom Catalogue was updated respectively,categorizing online data and transaction processing, information services, among others, as VATS.The Administrative Measures on Telecommunications Business Operating Licenses, promulgated by the MIIT in 2009 and most recentlyamended in July 2017, which set forth more specific provisions regarding the types of licenses required to operate VATS, the qualifications andprocedures for obtaining such licenses and the administration and supervision of such licenses. Under these regulations, a commercial operator ofVATS must first obtain a VATS License, from the MIIT or its provincial level counterparts, otherwise such operator might be subject to sanctionsincluding corrective orders and warnings from the competent administration authority, fines and confiscation of illegal gains and, in the case ofsignificant infringements, the websites may be ordered to close.In September 2000, the State Council issued the Administrative Measures on Internet Information Services, which was amended in January 2011.Internet information service is a kind of information service categorized as a VATS in the current Telecom Catalogue attached to theTelecommunications Regulation as most recently updated in December 2015. Pursuant to these measures, “Internet information services” refers to theprovision of information through the Internet to online users, and are divided into “commercial Internet information services” and “non-commercialInternet information services.” A commercial Internet information services operator must obtain a VATS license for Internet information services, or theICP license, from the relevant government authorities before engaging in any commercial Internet information services operations in China, while theICP license is not required if the operator will only provide Internet information on a non-commercial basis. According to the Administrative Measureson Telecommunications Business Operating Licenses, the ICP license has a term of five years and can be renewed within 90 days before expiration.Beijing Happy Time, one of our consolidated VIEs, and Qufenqi (Beijing) Information Technology Co., Ltd, a subsidiary of Beijing Happy Time,have both obtained ICP licenses for provision of commercial Internet information services issued by Beijing Telecommunication Administration inSeptember 2015 and March 2017, respectively. As the implementing rules of the Administrative Measures on Telecommunications Business OperatingLicenses or the Telecom Catalogue have not been published, it remains uncertain as to how the “commercial Internet information services” and“non-commercial Internet information services” are interpreted and distinguished, and whether online consumer finance service providers like us willbe deemed as commercial Internet information service operator, or operators of online data and transaction processing, therefore there is uncertainty asto whether any or all of our consolidated VIEs, or the subsidiaries of our consolidated VIEs need to obtain ICP licenses, or VATS license for online dataand transaction processing services, or any other VATS licenses in order to be in full compliance with regulatory requirements with respect to VATS.In addition to the Telecommunications Regulations of the People’s Republic of China and other regulations above, provision of commercialInternet information services on mobile Internet applications are regulated by the Administrative Provisions on Information Services of Mobile InternetApplications, which was promulgated by the State Internet Information Office on June 28, 2016. The information service providers of mobile internetapplications are subject to requirements under the Administrative Provisions on Information Services of Mobile Internet Applications, includingacquiring relevant qualifications required by laws and regulations and being responsible for management of information security.Regulations Related to Internet Information Security and Privacy ProtectionPRC government authorities have enacted laws and regulations with respect to Internet information security and protection of personalinformation from any abuse or unauthorized disclosure. Internet information in China is regulated and restricted from a national security standpoint.The Standing Committee of the National People’s Congress, China’s national legislative body, enacted the Decisions on Maintaining Internet Securityin December 2000, which may subject violators to criminal punishment in China for any effort to: (i) gain improper entry into 84Source: Qudian Inc., 20-F, April 09, 2018Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Table of Contentsa computer or system of strategic importance; (ii) disseminate politically disruptive information; (iii) leak state secrets; (iv) spread false commercialinformation; or (v) infringe intellectual property rights. The Ministry of Public Security has promulgated measures that prohibit use of the Internet inways which, among other things, result in a leakage of state secrets or a spread of socially destabilizing content. If an Internet information serviceprovider violates these measures, the Ministry of Public Security and the local security bureaus may revoke its operating license and shut down itswebsites.Under the Several Provisions on Regulating the Market Order of Internet Information Services, issued by the MIIT in December 2011, an Internetinformation service provider may not collect any user personal information or provide any such information to third parties without the consent of auser and it must expressly inform the users of the method, content and purpose of the collection and processing of such user personal information andmay only collect such information necessary for the provision of its services. An Internet information service provider is also required to properlymaintain the user personal information, and in case of any leak or likely leak of the user personal information, the Internet information service providermust take immediate remedial measures and, in severe circumstances, make an immediate report to the telecommunications regulatory authority. Inaddition, pursuant to the Decision on Strengthening the Protection of Online Information issued by the Standing Committee of the National People’sCongress in December 2012 and the Order for the Protection of Telecommunication and Internet User Personal Information issued by the MIIT in July2013, any collection and use of user personal information must be subject to the consent of the user, abide by the principles of legality, rationality andnecessity and be within the specified purposes, methods and scopes. An Internet information service provider must also keep such information strictlyconfidential, and is further prohibited from divulging, tampering or destroying any such information, or selling or providing such information to otherparties. An Internet information service provider is required to take technical and other measures to prevent the collected personal information fromany unauthorized disclosure, damage or loss. Any violation of these laws and regulations may subject the Internet information service provider towarnings, fines, confiscation of illegal gains, revocation of licenses, cancellation of filings, closedown of websites or even criminal liabilities.Pursuant to the Notice of the Supreme People’s Court, the Supreme People’s Procuratorate and the Ministry of Public Security on LegallyPunishing Criminal Activities Infringing upon the Personal Information of Citizens, issued in 2013, and the Interpretation of the Supreme People’sCourt and the Supreme People’s Procuratorate on Several Issues regarding Legal Application in Criminal Cases Infringing upon the PersonalInformation of Citizens, which was issued on May 8, 2017 and took effect on June 1, 2017, the following activities may constitute the crime ofinfringing upon a citizen’s personal information: (i) providing a citizen’s personal information to specified persons or releasing a citizen’s personalinformation online or through other methods in violation of relevant national provisions; (ii) providing legitimately collected information relating to acitizen to others without such citizen’s consent (unless the information is processed, not traceable to a specific person and not recoverable); (iii)collecting a citizen’s personal information in violation of applicable rules and regulations when performing a duty or providing services; or(iv) collecting a citizen’s personal information by purchasing, accepting or exchanging such information in violation of applicable rules andregulations.The Internet Finance Guidelines jointly released by ten PRC regulatory agencies in July 2015 purport, among other things, to require Internetfinance service providers to improve technology security standards, and safeguard customer and transaction information. The Internet FinanceGuidelines also prohibit Internet finance service providers from illegally selling or disclosing customers’ personal information. The PBOC and otherrelevant regulatory authorities will jointly adopt the implementing rules. Pursuant to the Ninth Amendment to the Criminal Law issued by theStanding Committee of the National People’s Congress in August 2015, which became effective in November 2015, any Internet service provider thatfails to fulfill the obligations related to Internet information security administration as required by applicable laws and refuses to rectify upon orders issubject to criminal penalty for the result of (i) any dissemination of illegal information in large scale; (ii) any severe effect due to the leakage of theclient’s information; (iii) any serious loss of criminal evidence; or (iv) other severe situation, and any individual or entity that (i) sells or providespersonal information to others in 85Source: Qudian Inc., 20-F, April 09, 2018Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Table of Contentsa way violating the applicable law, or (ii) steals or illegally obtain any personal information is subject to criminal penalty in severe situation.In November 2016, the Standing Committee of the National People’s Congress promulgated the Network Security Law of the People’s Republicof China, or the Network Security Law, which took effect as of June 1, 2017. The Network Security Law is formulated to maintain the network security,safeguard the cyberspace sovereignty, national security and public interests, protect the lawful rights and interests of citizens, legal persons and otherorganizations, and requires that a network operator, which includes, among others, Internet information services providers, take technical measures andother necessary measures in accordance with the provisions of applicable laws and regulations as well as the compulsory requirements of the nationaland industrial standards to safeguard the safe and stable operation of the networks, effectively respond to the network security incidents, prevent illegaland criminal activities, and maintain the integrity, confidentiality and availability of network data. The Network Security Law emphasizes that anyindividuals and organizations that use networks is required to comply with the PRC Constitution and laws, abide by public order and cannot endangernetwork security or make use of networks to engage in unlawful activities such as endangering national security, economic order and social order, andinfringing the reputation, privacy, intellectual property rights and other lawful rights and interests of other people. The Network Security Law hasreaffirmed the basic principles and requirements as specified in other existing laws and regulations on personal information protections, such as therequirements on the collection, use, processing, storage and disclosure of personal information, and internet service providers being required to taketechnical and other necessary measures to ensure the security of the personal information they have collected and prevent the personal informationfrom being divulged, damaged or lost. Any violation of the provisions and requirements under the Network Security Law may subject the Internetservice provider to warnings, fines, confiscation of illegal gains, revocation of licenses, cancellation of filings, closedown of websites or even criminalliabilities.In providing our online consumer finance service, we collect certain personal information from borrowers, and also need to share the informationwith our business partners such as institutional funding partners for the purpose of facilitating credit to borrowers. We have obtained consent fromborrowers to collect and use their personal information, and have also established information security systems to protect the user information and toabide by other network security requirements under such laws and regulations. However, there is uncertainty as to how the network securityrequirements for maintaining network security and protecting customers’ personal information will be interpreted and implemented. We cannot assureyou that our existing policies and procedures will be deemed to be in full compliance with any laws and regulations that are applicable, or may becomeapplicable to us in the future.Regulations Related to Loans and IntermediationThe PRC Contract Law governs the formation, validity, performance, enforcement and assignment of contracts. The PRC Contract Law requiresthat the interest rates charged under a loan agreement must not violate the applicable provisions of the PRC laws and regulations. In accordance withthe Private Lending Judicial Interpretations issued by the Supreme People’s Court of the PRC on August 6, 2015, which came into effect onSeptember 1, 2015, private lending is defined as financing between individuals, legal entities and other organizations. Loans funded by financialinstitutions which are licensed by financial regulatory authorities are not private lending transactions. When private loans between individuals arepaid by wire transfer, the loan contracts between individuals came into effect upon the deposit of funds to the borrower’s account. If either the lender orthe borrower is not a natural person, the loan contracts become applicable effective upon execution of the loan contract, unless otherwise agreed by theparties or otherwise provided by laws and administrative regulations. In the event that the loans are made through an online consumer finance lendingplatform and the platform only provides intermediary services, the courts will dismiss the claims of the parties concerned against the platformdemanding the repayment of loans by the platform as guarantors. However, if the online consumer finance service provider guarantees repayment of theloans as evidenced by its web page, advertisements or other media, or the court is provided with other proof, the lender’s claim alleging that the onlineconsumer service 86Source: Qudian Inc., 20-F, April 09, 2018Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Table of Contentsprovider assumes the obligations of a guarantor will be upheld by the courts. The Private Lending Judicial Interpretations also provide that agreementsbetween the lender and borrower on loans with interest rates below 24% per annum are valid and enforceable. As to loans with interest rates per annumbetween 24% and 36%, if the interest on the loans has already been paid to the lender, and so long as such payment has not damaged the interest of thestate, the community and any third parties, the courts will turn down the borrower’s request to demand the return of the interest payment. If the annualinterest rate of a private loan is higher than 36%, the excess will be void and will not be enforced by the courts.Pursuant to the PRC Contract Law, a creditor may assign its rights under an agreement to a third party, provided that the debtor is notified. Upondue assignment of the creditor’s rights, the assignee is entitled to the creditor’s rights and the debtor must perform the relevant obligations under theagreement for the benefit of the assignee. In addition, according to the PRC Contract Law, an intermediation contract is a contract whereby anintermediary presents to its client an opportunity for entering into a contract or provides the client with other intermediary services in connection withthe conclusion of a contract, and the client pays the intermediary service fees. Our business practice of connecting our institutional funding partners,certain of which are online lending information intermediaries, with individual borrowers may constitute intermediary service, and our serviceagreements with borrowers and investors may be deemed as intermediation contracts under the PRC Contract Law. Pursuant to the PRC Contract Law,an intermediary must provide true information relating to the proposed contract. If an intermediary conceals any material fact intentionally or providesfalse information in connection with the conclusion of the proposed contract, which results in harm to the client’s interests, the intermediary may notclaim for service fees and is liable for the damages caused.Regulations Related to Cash Loan LendingThe Office of the Leading Group for Specific Rectification against Online Finance Risks and the Office of the Leading Group for SpecificRectification against P2P Online Lending Risks jointly issued the Circular on Regulating and Rectifying Cash Loan Business on December 1, 2017, orCircular 141. Among other things, Circular 141 provides that: • The overall capital cost charged on a borrower, comprised of interests and fees, should be in compliance with the judicial interpretations bythe Supreme People’s Court of the PRC regarding interest rates in private lending; according to the Private Lending JudicialInterpretations, if the annual interest rate of a private loan is higher than 36%, the excess will be void and will not be enforced by thecourts; • A provider of cash loan shall not deduct interests, service fees, management fees or deposits from the loan principal or set excessiveoverdue interest, late fee or penalty interest; • A bank may not outsource its core business functions, such as credit assessment and risk management, to third parties; • A bank participating in loan facilitation transactions may not accept credit enhancement services from a third party which has not obtainedany license or approval to provide guarantees, including credit enhancement service in the form of a commitment to assume default risks;and • A bank may not permit its service provider in cash loan business to collect interest or fees from borrowers.We adjusted the pricing of certain of our credit products in April 2017 to ensure that the annualized fee rates charged on all credit drawdowns donot exceed 36%.We have entered into arrangements with several banks which directly fund credit drawdowns to borrowers. When a borrower defaults, we areobligated to repay the full overdue amount to the relevant bank. As Circular 141 is relatively new, it remains uncertain how the regulatory authoritieswill interpret and enforce the requirements. We have engaged in discussions with the banks, and we will assist them in satisfying their complianceneeds as the regulatory framework evolves. 87Source: Qudian Inc., 20-F, April 09, 2018Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Table of ContentsRegulations Related to Small Credit CompaniesUnder the Guiding Opinions of the China Banking Regulatory Commission and the People’s Bank of China on the Pilot Operation of SmallCredit Companies which was promulgated by the CBRC and the PBOC on May 4, 2008, or the Guiding Opinions on Small Credit Companies, a smallcredit company is a company which is specialized in operating a small credit business, established with investments from natural persons, legal-personenterprises or other social organizations, and does not accept any public deposits. Currently there is no regulatory authority at the national level withrespect to the administration and supervision of small credit companies in the PRC. Pursuant to the Guiding Opinions on Small Credit Companies, if aprovincial government determines a competent department (office of finance or relevant organizations) to be responsible for the supervision andadministration of small credit companies and the regulation of risks associated with small credit companies, such provincial government may carry outthe pilot operation of small credit companies within such province. The applicant is required to file an application with the competent department ofthe provincial government to apply for setting up a small credit company. The major sources of funds of a small credit company are required be thecapital paid by shareholders, donated capital and the capital borrowed from a maximum of two banking financial institutions. Furthermore, the balanceof the capital borrowed from banking financial institutions within the scope as prescribed by applicable laws and regulations cannot exceed 50% of thenet capital, and the interest rate and term of the borrowed capital is required to be determined by the company with the banking financial institutionsupon consultation, and the interest rate on the borrowed capital is required to be determined by taking the Shanghai Inter-bank Offered Rate as the baserate. When granting credit, small credit companies are required to adhere to the principle of “small sum and decentralization.” They are encouraged toprovide credit services for farmers and mini-size enterprises and make greater efforts in increasing their number of clients and enlarging the coverage ofservices. The outstanding amount of credit granted by a small credit company to a same borrower cannot exceed 5% of the net capital of the company.Small credit companies are required to operate on the market-oriented principle. The interest ceiling is floating but cannot exceed the ceilingprescribed by the judicatory authority, and the interest floor is required to be 0.9 times the base interest rate published by the PBOC. The specificfloating range is required to be determined independently according to the market principles. In addition, according to the Guiding Opinions on SmallCredit Companies, small credit companies are required to establish and improve the corporate governance structure, the loan management system, theenterprise financial accounting system, a prudent and normative asset classification system and provision system for accurate asset classification andadequate provision of bad debt reserves as well as the information disclosure system and are required to accept public scrutiny and cannot carry outillegal fund-raising in any form.Government authorities in Jiangxi Province where our online small credit companies Fuzhou Microcredit and Ganzhou Microcredit areincorporated have issued a series of rules on the administration of small credit companies incorporated within Jiangxi Province. Pursuant to theMeasures of Jiangxi Province for Supervision on Small Credit Companies (Pilot Scheme) which was promulgated by the Jiangxi Provincial FinanceOffice on April 1, 2012, the finance offices of the province and various municipalities are responsible for the supervision and administration of smallcredit companies incorporated in Jiangxi. The small credit companies are required to comply with various requirements including, among others,prohibition from acquiring the public deposits, restrictions that funds obtained from banking financial institutions cannot exceed a specifiedproportion and the number of cooperating banking financial institutions cannot exceed two, and 100% asset loss reserve adequacy rate.In particular, as to supervision of online small credit, Jiangxi Provincial Finance Office, as competent supervising authority together with thefinance offices in various municipalities and counties in Jiangxi for the supervision and administration of online small credit companies incorporatedin Jiangxi, promulgated the Measures of Jiangxi Province for Supervision on Online Small Credit Companies (Pilot Scheme) on September 5, 2016,which allow online small credit companies incorporated in Jiangxi Province to operate online small credit businesses subject to certain requirementsincluding but not limited to: (i) the business scope of an online small credit company is required to be the conduct of online small credit business viaonline platform and 88Source: Qudian Inc., 20-F, April 09, 2018Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Table of Contentsthe conduct of offline small credit and equity investment business in the county where it is incorporated and surrounding counties within thecorresponding municipality, (ii) the operating capital of such business should not be lower than 70% of the total operation capital, (iii) the totalamount of funds raised from third parties by an online small credit companies cannot exceed two times of its net capital, (iv) an online small creditcompany is prohibited from raising funds from Internet platforms, and (v) the interest rate for loans funded by an online small credit company shallcomply with the restrictions on interest rate as specified in applicable laws and regulations, which we understand shall include the restriction oninterest rate as specified in the Private Lending Judicial Interpretations, that if the annual interest rate is higher than 36%, the excess will be void andwill not be enforced by the courts. On January 3, 2017, Jiangxi Provincial Finance Office promulgated the Notice on Adjusting and Supplementing theMeasures of Jiangxi Province for Supervision on Online Small Credit Companies (Pilot Scheme), or the Supplemental Notice, which provides furtherrequirements on online small credit companies incorporated in Jiangxi Province to operate online small credit businesses, including: (i) since thepromulgation date of the Supplemental Notice, the establishment and modification of the online small credit companies and the extension of businessscope of a small credit company to include online small credit business shall be approved by the Jiangxi Provincial Finance Office, rather than thefinancial offices in municipalities, and the financial offices in municipalities and counties shall be responsible for the preliminary review for suchapproval, (ii) the minimum register capital for an online small credit company is RMB500 million, (iii) to conduct strict control over the establishmentof, or holding equity of online small credit companies by internet financial companies, (iv) one person or entity may only establish or hold equity ofonly one online small credit company within Jiangxi Province. We understand that the Supplement Notice shall apply to the small credit companiesthat to be established after the promulgation of the Supplemental Notice, and should not be applicable to Fuzhou Microcredit and GanzhouMicrocredit, our online small credit companies, which were established before the promulgation of the Supplemental Notice.Fuzhou Microcredit and Ganzhou Microcredit have obtained the approval to operate small credit businesses as issued by the competentsupervising authority, which allows Fuzhou Microcredit and Ganzhou Microcredit to conduct nationwide small credit businesses through the Internetand other kinds of offline small credit business as indicated in the approval to operate small credit business. However, as the regulatory regime andpractice with respect to online small credit companies are evolving, there is uncertainty as to how the requirements in the above rules will beinterpreted and implemented and whether there will be new rules issued which would establish further requirements and restrictions on online smallcredit companies. We cannot assure you that our existing practice will be deemed to be in full compliance with any laws and regulations that areapplicable, or may become applicable to us in the future.Regulations Related to Online Peer-to-Peer LendingOn July 18, 2015, ten PRC regulatory agencies, including the PBOC, the MIIT and the CBRC, jointly issued the Guidelines on Promoting theHealthy Development of Internet Finance, or the Internet Finance Guidelines. The Internet Finance Guidelines define “online peer-to-peer lending” asdirect loans between parties through an Internet platform, which is under the supervision of CBRC, and governed by the PRC Contract Law, theGeneral Principles of the Civil Law of the PRC, and related judicial interpretations promulgated by the Supreme People’s Court. Online peer-to-peerlending institutions are required to specify their nature as information intermediaries, mainly provide information services for the direct lendingbetween borrowers and lenders, and can neither provide credit enhancement services nor engage in illegal fund-raising.On April 12, 2016, the General Office of the State Council issued the Implementing Scheme of Special Rectification of Risks in the InternetFinance Sector, which emphasizes that P2P platforms shall specify their nature as information intermediaries and can never engage in certain activities,including but not limited to, setting up capital pool, extending loans and illegal fund raising. In addition, without approval from competent regulator,P2P platforms shall not engage in financial business activities such as asset management, debt or equity transfer, and high-risk allocation in securitymarkets. Furthermore, P2P platforms are required to segregate assets of lenders and borrowers in qualified banks as depositary institutions from theirown assets. 89Source: Qudian Inc., 20-F, April 09, 2018Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Table of ContentsOn August 17, 2016, the CBRC, the MIIT, Ministry of Public Security and State Internet Information Office promulgated The Interim Measuresfor Administration of the Business Activities of Online Lending Information Intermediary Institutions, or the Interim Online Lending InformationIntermediary Measures, to regulate the business activities of online lending information intermediary institutions. The “online lending” as specified inthe Interim Online Lending Information Intermediary Measures refers to direct lending between peers, which can be natural persons, legal persons orother organizations, through Internet platforms, which we understand is equivalent to the “online peer-to-peer lending” as defined in the InternetFinance Guidelines. According to the Interim Online Lending Information Intermediary Measures, “online lending information intermediaryinstitution” refer to financial information intermediaries that are engaged in the lending information business and directly provide peers, which can benatural persons, legal persons or other organizations, 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 InterimOnline Lending Information Intermediary Measures are only applicable to private lending transactions according to relevant interpretations by theChina Banking Regulatory Commission. Loans funded by financial institutions which are licensed by financial regulatory authorities are not privatelending transactions within the meaning of the Private Lending Judicial Interpretation issued by the Supreme People’s Court of the PRC in August2015.The Interim Online Lending Information Intermediary Measures generally require that online lending information intermediary institutions shallnot engage in credit enhancement services, direct or indirect cash concentration or illegal fundraising, and stipulate a supervisory system and list theadministrative responsibilities of different supervisory authorities, among others, the banking regulatory authority of the State Council and itsdispatching offices are responsible for formulating a regulatory and administrative system for the business activities of online lending informationintermediary institutions and to regulate the behaviors thereof, and the provincial-level governments are responsible for institutional regulation of theonline lending information intermediary institutions within their respective jurisdictions. Furthermore, an online lending information intermediaryinstitution and its branches are required, within 10 working days after obtaining the business license, to complete record-filing and registration withthe local financial regulatory department of the place of the industrial and commercial registration by presenting relevant materials. After completingthe record-filing and registration with the local financial regulatory authority, they are required to apply for an appropriate telecommunicationbusiness operation permit in accordance with relevant provisions of competent communication departments, and to include serving as an Internetlending information intermediary in its business scope. An intermediary institution that fails to apply for telecommunication business operation permitas required cannot carry out an online lending information intermediary business.According to these Interim Online Lending Information Intermediary Measures, online lending information intermediary institutions cannotdirectly or indirectly engage in the following activities: (1) financing their own operations with the funds of lenders; (2) accepting or collectingdirectly or indirectly the funds of lenders; (3) providing lenders with a guarantee or promise to guarantee principal and interest thereon directly or indisguised form; (4) publicizing or promoting financing projects by themselves or by delegating or authorizing a third party at physical places otherthan by electronic means such as the Internet, landlines, mobiles etc.; (5) extending loans, except otherwise provided by applicable laws andregulations; (6) splitting the term of any financing project; (7) offering wealth management and other financial products by themselves to raise funds,and selling as agent bank wealth management, securities company asset management, fund, insurance or trust products and other financial products;(8) conducting asset securitization business or transferring of creditors’ rights in the forms of assets packaging, asset securitization, trust asset, fundshares etc.; (9) engaging in any form of mixture, bundling or agency with other institutions in investment, agency in sale, brokerage and other businessexcept as permitted by laws, regulations and relevant regulatory provisions on online lending; (10) falsifying or exaggerating the truthfulness andearnings outlook of financing projects, concealing the defects and risks of financing projects, making false advertising or promotion, etc. by usingambiguous words or other fraudulent means, fabricating or spreading false or incomplete information, impairing the business reputation of others ormisleading lender or borrowers; (11) providing information intermediary services for the high-risk financing with 90Source: Qudian Inc., 20-F, April 09, 2018Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Table of Contentsthe borrowed funds to be used for investment in stocks, over-the-counter fund distribution, futures contracts, structured funds and other derivativeproducts; (12) engaging in a business such as crowd-funding in equity; and (13) other activities prohibited by laws and regulations. The Interim OnlineLending Information Intermediary Measures also stipulate the following obligations as the business principles of online lending informationintermediary institutions: (1) providing, in accordance with laws, regulations and contracts, lenders and borrowers with collection, arrangement,identification, screening and online publication of direct lending information as well as the relevant services such as credit assessment, matchingbetween borrowing and lending, financing consulting and online dispute resolution; (2) conducting necessary examination of the qualification andeligibility of lenders and borrowers, authenticity of information as well as the authenticity and legitimacy of financing projects; (3) taking reasonablemeasures to prevent fraudulent behaviors and announcing and terminating relevant network-based lending activities in a timely manner upondiscovery of any fraudulent behaviors or any other circumstances impairing the interests of lenders; (4) conducting continuously the activities forpopularization of the knowledge and education of the risks of network-based lending, strengthening risk disclosure, guiding lenders to participate innetwork-based lending in small-amount and scattered manner and ensuring that lenders are fully aware of lending risks; (5) submitting relevantinformation in accordance with laws, regulations and relevant regulatory provisions on network-based lending, of which the information on creditors’rights and liabilities in connection with network-based lending shall be submitted to and registered with the relevant data statistical departments in atimely manner; (6) keeping proper custody of the data and transaction information of lenders and borrowers without deleting, tampering with, illegallyselling or divulging the basic information and transaction information of lenders and borrowers; (7) performing according to law the anti-moneylaundering and anti-terrorist financing obligations, such as client identity identification, suspicious transaction reporting, keeping the identity dataand transaction records of clients, etc.; (8) cooperating with relevant departments in properly handling the work relating to preventing, investigatingand punishing the finance-related illegal activities and crimes; (9) ensuring the work relating to the Internet information content management as wellas network and information security pursuant to the relevant requirements; and (10) other obligations prescribed by the banking regulatory authority ofthe State Council and the provincial people’s governments of the places of industrial and commercial registration. Furthermore, in offline physicallocations, online lending information intermediary institutions shall not operate businesses other than risk management and necessary businessprocesses such as information collection and confirmation, post-loan tracking and pledge management in accordance with online-lending regulations.Online lending information intermediary institutions shall, based on their risk management capabilities, set upper limits on the loan balance of a singleborrower borrowing both from one online lending intermediary and from all online lending information intermediary institutions. In the case of naturalpersons, this limit shall not be more than RMB200,000 for one online lending intermediary and not more than RMB1 million in total from allplatforms, while the limit for a legal person or organization shall not be more than RMB1 million for one online lending intermediary and not morethan RMB5 million in total from all platforms. For the protection of investors and borrowers, the Interim Online Lending Information IntermediaryMeasures require that online lending information intermediary institutions (i) separate their own capital from funds received from lenders andborrowers and (ii) select a qualified banking financial institution as their funding depository institution, which shall perform depository andadministration responsibilities as required. In addition, the Interim Online Lending Information Intermediary Measures provide for other miscellaneousrequirements for online lending information intermediary institutions, including but not limited to, risk assessment and disclosure, auditing andauthentication, industry association, reporting obligations, information security and disclosure and legal liabilities. Online lending informationintermediary institutions established prior to the effectiveness of the Interim Online Lending Information Intermediary Measures have a transitionperiod of twelve months to rectify any activities that are non-compliant with the Interim Online Lending Information Intermediary Measures, exceptwith respect to criminal activity, which must be terminated immediately.In February 2017, the CBRC released the Guidance on Depositary Business of Online Lending Funds, or Depositary Guidance, to regulate fundsdepositories for online lending information intermediary institutions. The Depositary Guidance defines depositories as commercial banks that provideonline lending fund depository services, and stipulates that the depositories shall not be engaged in offering any guarantee, including: (i) offering 91Source: Qudian Inc., 20-F, April 09, 2018Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Table of Contentsguarantees for lending transaction activities conducted by online lending information intermediary institutions, or undertaking any liability for breachof contract related to such activities; (ii) offering guarantees to lenders, guarantying principal and dividend payments or bearing the risks associatedwith fund lending operations for lenders. The Depositary Guidance also stipulates certain conditions that must be met before depositories are entitledto develop an online lending fund depository business, including: (i) having a good credit record and not having been included on the List ofEnterprises with Abnormal Operations or the List of Enterprises with Serious Illegal and Dishonest Acts; (ii) satisfying various requirements relating tothe technological systems of such entity’s depository fund business and general operations, including but not limited to assuming fund administrationresponsibilities and not outsourcing or assigning such entity’s responsibilities to third parties to set up accounts, process trading information or verifytrading passwords; and (iii) setting up special deposit accounts to hold online lending capital and sub-accounts for online lenders and borrowers aswell as guarantors, and in order to assure fund security, use separate accounts to hold private capital of online lending information intermediaryinstitutions. In addition, the Depositary Guidance prohibits depositories from outsourcing or assigning their responsibilities to set up capital accounts,deal with transaction information, verify trading passwords and various other services to third parties, provided, however, that certain cooperationregarding payment services with third-party payment companies and depository banks is permitted in accordance with clarifications by the CBRC.Apart from the requirements set forth in the Interim Online Lending Information Intermediary Measures and the Registration Guidance, the DepositaryGuidance imposes certain responsibilities on online lending information intermediary institutions, including requiring them to enter into funddepository agreements with only one commercial bank to provide fund depository services, organize independent auditing on funds depositoryaccounts of borrowers and investors and various other services. The Depositary Guidance requires online lending information intermediary institutionsto perform various obligations, and prohibits them advertising their services with the information of their depository except for in accordance withnecessary exposure requirements. The Guidance also raises other business standards and miscellaneous requirements for depositories and onlinelending information intermediary institutions as well. Online lending information intermediary institutions and commercial banks conducting theonline depository services prior to the effectiveness of the Guidance have a six-month grace period to rectify any activities not in compliance with theGuidance.On December 8, 2017, the Office of the Leading Group for Specific Rectification against P2P Online Lending Risks issued the Circular onSpecific Rectification and Inspection Relating to P2P Online Lending Risks, or Circular 57. Circular 57 requires local regulatory authorities to jointlyinspect and evaluate as to whether an online lending information intermediary has complied with in the Interim Online Lending InformationIntermediary Measures. An online lending information intermediary may not complete record-filing and registration until it receives joint approvalfrom the local financial regulator and the local branch of the CBRC as to its rectification measures. Circular 57 prohibits four forms of credit transfers:(i) asset securitization or transfer creditor’s rights in form of packaged assets, securitized assets, trust assets or fund shares; (ii) loans initially funded bya management member of related party and subsequently transferred to lenders on the P2P platform; (iii) wealth management products (whether withfixed terms or redeemable on demand) that are matched with transferred loans; and (iv) using creditor’s rights from P2P platforms as pledge to borrowfunds from other lenders. On the other hand, Circular 57 provides that infrequent transfers of loans among lenders are deemed to be in compliance withthe relevant laws and regulations.We do not engage in direct loan facilitation between peers, which can be natural persons, legal persons or other organizations. While we facilitateloans that are directly funded by certain institutional funding partners such as banks, such companies are financial institutions licensed by financialregulatory authorities to lend. Facilitation of loans pursuant to our arrangements with such licensed financial institutions is not subject to theregulation set forth in the Interim Online Lending Information Intermediary Measures. As such, we do not consider our company as an “online lendinginformation intermediary institution” regulated under the above regulations. However, we cannot assure you that the CBRC or other PRC regulatoryauthorities would not expand the applicability of the Interim Online Lending Information Intermediary Measures and regard us as an “online lendinginformation intermediary institution.” In the event that we are deemed as an online lending 92Source: Qudian Inc., 20-F, April 09, 2018Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Table of Contentsinformation intermediary institution by the PRC regulatory authorities in the future, we may have to make registration with the local financialregulatory authority and apply for telecommunication business operating licenses if required by the competent authorities, and our current businesspractice may be considered to be not in compliance with the Interim Online Lending Information Intermediary Measures, and accordingly, ourbusiness, results of operations and financial position will be materially and adversely affected.Regulations Related to Illegal Fund-RaisingRaising funds by entities or individuals from the general public must be conducted in strict compliance with applicable PRC laws andregulations to avoid administrative and criminal liabilities. The Measures for the Banning of Illegal Financial Institutions and Illegal FinancialBusiness Operations promulgated by the State Council in July 1998, and the Notice on Relevant Issues Concerning the Penalty on Illegal Fund-Raising issued by the General Office of the State Council in July 2007 explicitly prohibit illegal public fund-raising. The main features of illegalpublic fund-raising include: (i) illegally soliciting and raising funds from the general public by means of issuing stocks, bonds, lotteries or othersecurities without obtaining the approval of relevant authorities, (ii) promising a return of interest or profits or investment returns in cash, properties orother forms within a specified period of time, and (iii) using a legitimate form to disguise the unlawful purpose.To further clarify the criminal charges and punishments relating to illegal public fund-raising, the Supreme People’s Court promulgated theJudicial Interpretations to Issues Concerning Applications of Laws for Trial of Criminal Cases on Illegal Fund-Raising, or the Illegal Fund-RaisingJudicial Interpretations, which came into force in January 2011. The Illegal Fund-Raising Judicial Interpretations provide that a public fund-raisingwill constitute a criminal offense related to “illegally soliciting deposits from the public” under the PRC Criminal Law, if it meets all the followingfour criteria: (i) the fund-raising has not been approved by the relevant authorities or is concealed under the guise of legitimate acts; (ii) the fund-raising employs general solicitation or advertising such as social media, promotion meetings, leafleting and short message service, or SMS,advertising; (iii) the fundraiser promises to repay, after a specified period of time, the capital and interests, or investment returns in cash, property inkind and other forms; and (iv) the fund-raising targets the general public as opposed to specific individuals. Pursuant to the Illegal Fund-RaisingJudicial Interpretations, an offender that is an entity will be subject to criminal liabilities, if it illegally solicits deposits from the general public orillegally solicits deposits in disguised form (i) with the amount of deposits involved exceeding RMB1,000,000, (ii) with over 150 fund-raising targetsinvolved, or (iii) with the direct economic loss caused to fund-raising targets exceeding RMB500,000, or (iv) the illegal fund-raising activities havecaused baneful influences to the public or have led to other severe consequences. An individual offender is also subject to criminal liabilities but withlower thresholds. In addition, an individual or an entity who has aided in illegal fund-raising from the general public and charges fees, including butnot limited to agent fees, rewards, rebates and commission, would constitute an accomplice of the crime of illegal fund-raising. In accordance with theOpinions of the Supreme People’s Court, the Supreme People’s Procurator and the Ministry of Public Security on Several Issues concerning theapplication of Law in the Illegal Fund-Raising Criminal Cases, administrative proceedings for determining the nature of illegal fund-raising activitiesis not a prerequisite procedure for the initiation of criminal proceeding concerning the crime of illegal fund-raising, and the administrativedepartments’ failure in determining the nature of illegal fund-raising activities does not affect the investigation, prosecution and trial of casesconcerning the crime of illegal fund-raising.Regulation Related to Finance LeaseThe Measures on the Administration of Foreign Investment in the Leasing Industry, or the Measures, were promulgated by the MOFCOM onFebruary 3, 2005 and amended on October 28, 2015 to regulate the operations of foreign-invested finance lease businesses. The Measures apply to theestablishment of foreign-invested enterprises by foreign investors such as foreign companies, enterprises and other economic organizations in the formof Sino-foreign equity joint ventures, Sino-foreign cooperative joint ventures and wholly foreign-owned enterprises in the PRC to engage in thefinance lease business as well as to carry out business activities. Under 93Source: Qudian Inc., 20-F, April 09, 2018Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Table of Contentsthe Measures, the total assets of the foreign investors of a foreign-funded finance lease company may not be less than five million U.S. dollars. Foreign-invested finance lease enterprises must satisfy the following conditions: (i) the term of operation of a foreign-invested finance lease company in theform of a limited liability company shall not normally exceed 30 years; and (ii) it shall be staffed by appropriate professionals and its seniormanagement personnel shall possess the appropriate professional qualifications and not less than three years’ experience in the business. Since ourCompany was converted from a limited liability company into a joint stock limited company in September 2015, the condition referred to in condition(i) above no longer applies to us as we have ceased to be a limited liability company.Foreign-invested finance lease enterprises may conduct the following businesses: (i) finance lease business; (ii) leasing business; (iii) purchasingproperties to be leased from PRC or overseas; (iv) residual disposal of and maintenance of leased properties; (v) consultancy and guarantee of leasetransactions and (vi) other businesses approved by the examination and approval authority. “Finance lease business” refers to the trading activities inwhich a lessor, based on a lessee’s designation with respect to the seller and the leased object, agrees to purchase the assets underlying the leases from aseller and makes the leased object available to the lessee for use and collects rent thereon from the lessee. Foreign-invested finance lease enterprisesmay carry out finance lease activities by way of direct leasing, sub-leasing, sale-leaseback, leveraged leasing, entrusted leasing and joint leasingtransactions. For the purpose of the Measures, the leasing property includes: (i) movable properties such as manufacturing equipment,telecommunication equipment, medical devices, scientific and research equipment, inspection and testing equipment, engineering and machineryequipment and office equipment; (ii) transportation equipment, such as airplanes, automobiles and ships; and (iii) intangible properties such assoftware and technology that are attached to the moveable properties and transportation equipment mentioned above, provided that the value of suchattached intangible properties shall not exceed half of the value of the leased properties that can qualify as leased properties under a finance lease.For the purposes of risk prevention and guaranteeing the security of business operations, generally, the risk assets of a finance lease companyshall not exceed 10 times of the total amount of its net assets. The risk assets shall be determined based on residual assets, namely, the result afterdeducting cash, bank deposits, PRC treasury securities and entrusted leased assets from the total assets of the company.A foreign-invested finance lease company shall submit the business operation report of the previous year and the financial statement of theprevious year audited by an accounting firm to the MOFCOM no later than March 31 of each year.The Administrative Measures of Supervision on Finance Lease Enterprises, or the Administrative Measures, was formulated by the MOFCOMand became effective on October 1, 2013. According to the Administrative Measures, the MOFCOM and the provincial-level commerce authorities arein charge of the supervision and administration of finance lease enterprises. A finance lease company shall report, according to the requirements of theMOFCOM, the relevant data in a timely and truthful manner through the National Finance Lease Company Management Information System.Specifically, a finance lease enterprise shall, submit, within 15 business days after the end of each quarter, the statistics on and summary of its operationin the preceding quarter, and statistics on and summary of its operations in the preceding year as well as its financial and accounting report (includingappended notes thereto) audited by an auditing firm for the preceding year prior to April 30 of each year. In the event of a change of name, a relocationto another region, an increase or decrease of registered capital, a change of organizational form, an adjustment of ownership structure or other changes,a finance lease company shall report to the competent provincial-level commerce authority in advance. A foreign-invested finance lease company thatundergoes such changes shall go through approval and other procedures according to the relevant provisions. A finance lease company shall, withinfive business days after registering such changes, log into the National Finance Lease Company Management Information System to modify the aboveinformation.Finance lease enterprises should use real entities, which have clear ownership and capable of generating revenue, as lessor to carry out thefinance lease business. Finance lease enterprises shall not engage in deposits, 94Source: Qudian Inc., 20-F, April 09, 2018Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Table of Contentsloans, entrusted loans or other financial services or inter-bank borrowing unless permission has been granted from the relevant departments. Financelease enterprises must not carry out illegal fund-raising activities under the name of a finance lease company. According to the AdministrativeMeasures, finance lease enterprises shall strengthen their internal risk controls, and establish effective systems for classifying at risk assets, and adopt acredit appraisal system for the lessee, a post recovery and disposal system and a risk alert mechanism. A finance lease company shall also establish anaffiliated transaction management system, and exclude persons related to the affiliated transactions from the voting or decision-making process foraffiliated transactions where the lessee is an affiliate. In the event of any purchase of equipment from an affiliated production company, the settlementprice for such equipment shall not be lower than the price offered by such company to any third party of such equipment or equipment of the samebatch.The Administrative Measures also contain regulatory provisions specifically focusing on sale-leaseback transactions. The subject matter of asale-leaseback transaction shall be properties that possess economic functions and produce continuous economic benefits. A finance lease companyshall not accept any property to which a lessee has no title, or on which any mortgage has been created, or which has been sealed up or seized by anyjudicial organ, or whose ownership has any other defects as the subject matter of a sale-leaseback transaction. A finance lease company shall giveadequate consideration to and objectively evaluate assets leased back, set purchasing prices for subject matter thereof with reference to reasonablepricing basis in compliance with accounting principles, and shall not purchase any subject matter at a price in excess of the value thereof.Pursuant to the Circular of the General Office of the Ministry of Commerce on Strengthening and Improving the Approval and Administrationover Foreign-invested Finance Lease Companies, or the Circular, foreign-invested finance lease companies that failed to conduct substantive financelease business operations in the previous fiscal year or failed to pass the annual inspection and had violations of laws and regulations, shall be orderedby the local authority to make rectifications and report the information on such rectification to the MOFCOM. Foreign-invested finance leasecompanies shall not engage in deposits, loans, entrusted loans or inter-bank borrowing and equity investment unless permission has been granted fromrelevant departments. The Circular specifies that foreign-invested finance lease companies are not allowed to provide direct or indirect financing tolocal governmental financing companies which undertake public welfare project in any form in order to prevent fiscal and financial risks.The Guiding Opinions on Accelerating the Development of Finance Lease Industry, or the Guiding Opinion, was promulgated by the GeneralOffice of the State Council of the PRC on August 31, 2015; the Guiding Opinion’s main task is to accelerate the development of the finance leaseindustry in four aspects: system and mechanism reform, development in major fields, innovative development and industry supervision. According tothe Guiding Opinion, there is no minimum registered capital requirement for subsidiaries of a finance lease company, a finance lease company isallowed to engage in a side business which is related to its main business, private capital and independent third-party service providers are encouragedto incorporate the finance lease company and applications for filing or obtaining a license for business deals in medical devices for the finance leasecompany will be facilitated.The Contract Law of the PRC, or the PRC Contract Law, promulgated by the National People’s Congress effective from October 1, 1999 regulatesthe civil contractual relationship among natural persons, legal persons and other organizations. Chapter 14 of the PRC Contract Law sets forthmandatory rules about finance lease contracts including that finance lease contracts shall be in written form and shall include terms such as the name,quantity, specifications, technical performance and inspection method of the leased property, the lease term, the composition, payment term, paymentmethod and currency of the rent and the ownership of the leased property upon expiration of the lease.Under finance lease contracts, the lessor shall conclude a purchase contract based on the lessee’s selections in respect of the seller and the leasedproperty, and the seller shall deliver the leased property to the lessee as agreed. The lessee has the rights of a buyer when taking delivery of the leasedproperty. 95Source: Qudian Inc., 20-F, April 09, 2018Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Table of ContentsWithout the consent of the lessee, the lessor may not modify relevant details related to the lessee of the purchase contract that has beenconcluded based on the lessee’s selections in respect of the seller and the leased property. The lessor is not liable for injury to the body or damage tothe property of a third party caused by the leased property while in the possession of the lessee. However, the ownership of the leased property vests inthe lessor. If they have not stipulated in which party ownership shall vest upon expiration, if such stipulation is not clear, or if ownership cannot bedetermined in accordance with the PRC Contract Law, the ownership of the leased property shall vest in the lessor.Pursuant to the PRC Contract Law, unless otherwise agreed upon by the parties, the rental shall be determined according to the major part orwhole of the costs for the purchasing the leased property and reasonable profits of the lessor.Our subsidiary Xiamen Qudian Financial Lease Ltd. has obtained the approval to operate finance lease business as issued by the MOFCOM.Anti-money Laundering RegulationsThe PRC Anti-money Laundering Law, which became effective in January 2007, sets forth the principal anti-money laundering requirementsapplicable to financial institutions as well as non-financial institutions with anti-money laundering obligations, including the adoption ofprecautionary and supervisory measures, establishment of various systems for client identification, retention of clients’ identification information andtransactions records, and reports on large transactions and suspicious transactions. According to the PRC Anti-money Laundering Law, financialinstitutions subject to the PRC Anti-money Laundering Law include banks, credit unions, trust investment companies, stock brokerage companies,futures brokerage companies, insurance companies and other financial institutions as listed and published by the State Council, while the list of thenon-financial institutions with anti-money laundering obligations will be published by the State Council. The PBOC and other governmentalauthorities issued a series of administrative rules and regulations to specify the anti-money laundering obligations of financial institutions and certainnon-financial institutions, such as payment institutions. However, the State Council has not promulgated the list of the non-financial institutions withanti-money laundering obligations.The Internet Finance Guidelines jointly released by ten PRC regulatory agencies in July 2015, purport, among other things, to require Internetfinance service providers to comply with certain anti-money laundering requirements, including the establishment of a customer identificationprogram, the monitoring and reporting of suspicious transactions, the preservation of customer information and transaction records, and the provisionof assistance to the public security department and judicial authority in investigations and proceedings in relation to anti-money laundering matters.The PBOC will formulate implementing rules to further specify the anti-money laundering obligations of Internet finance service providers.We have implemented various policies and procedures, such as internal controls and “know-your-customer” procedures, for anti-moneylaundering purposes. However, as the implementing rules of the Internet Finance Guidelines have not been published, there is uncertainty as to how theanti-money laundering requirements in the Guidelines will be interpreted and implemented, and whether online consumer finance service providerslike us must abide by the rules and procedures set forth in the PRC Anti-money Laundering Law that are applicable to non-financial institutions withanti-money laundering obligations. We cannot assure you that our existing anti-money laundering policies and procedures will be deemed to be in fullcompliance with any anti-money laundering laws and regulations.Regulations Related to Intellectual Property RightsThe Standing Committee of the National People’s Congress, or the SCNPC, the State Council and the National Copyright Administration, or theNCAC, have promulgated various rules and regulations relating to the 96Source: Qudian Inc., 20-F, April 09, 2018Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Table of Contentsprotection of software in China, including without limitation the PRC Copyright Law, adopted in 1997 and revised in 2001, 2010 respectively, with itsimplementation rules adopted in 1991 and revised in 2002, 2011 and 2013 respectively, and the Regulations for the Protection of Computer Softwareas promulgated on January 30, 2013. Under these rules and regulations, software owners, licensees and transferees may register their rights in softwarewith the NCAC or its local branches and obtain software copyright registration certificates. Although such registration is not mandatory under PRClaw, software owners, licensees and transferees are encouraged to go through the registration process to enjoy the better protections afforded toregistered software rights.The PRC Trademark Law, adopted in 1982 and revised in 1993, 2001 and 2013 respectively, with its implementation rules adopted in 2002 andrevised in 2014, protects registered trademarks. The PRC Trademark Office of the State Administration for Industry and Commerce, or the SAIC,handles trademark registrations and grants a protection term of ten years to registered trademarks.Domain names are protected under the Administrative Measures on China Internet Domain Names, which was promulgated by the MIIT onAugust 24 and became effective on November 1, 2017. The MIIT is in charge of the overall administration of domain names in China. The registrationof domain names in PRC is on a “first-apply-first-registration” basis. A domain name applicant will become the domain name holder upon thecompletion of the application procedure.Regulations Related to EmploymentOn June 29, 2007, the SCNPC, adopted the Labor Contract Law, or LCL, which became effective as of January 1, 2008 and was revised in 2012.The LCL requires employers to enter into written contracts with their employees, restricts the use of temporary workers and aims to give employeeslong-term job security. Pursuant to the LCL, employment contracts lawfully concluded prior to the implementation of the LCL and continuing as ofthe date of its implementation will continue to be performed. Where an employment relationship was established prior to the implementation of theLCL but no written employment contract was concluded, a contract must be concluded within one month after the LCL’s implementation.According to the Social Insurance Law promulgated by SCNPC and effective from July 1, 2011, the Regulation of Insurance for Work-RelatedInjury, the Provisional Measures on Insurance for Maternity of Employees, Regulation of Unemployment Insurance, the Decision of the State Councilon Setting Up Basic Medical Insurance System for Staff Members and Workers in Cities and Towns, the Interim Regulation on the Collection andPayment of Social Insurance Premiums and the Interim Provisions on Registration of Social Insurance, an employer is required to contribute the socialinsurance for its employees in the PRC, including the basic pension insurance, basic medical insurance, unemployment insurance, maternity insuranceand injury insurance. Under the Regulations on the Administration of Housing Funds, promulgated by the State Council on April 3, 1999 and asamended on March 24, 2002, an employer is required to make contributions to a housing fund for its employees.Regulations Related to Foreign ExchangeRegulation on Foreign Currency ExchangeThe principal regulations governing foreign currency exchange in China are the Foreign Exchange Administration Regulations, most recentlyamended in August 2008. Under the PRC foreign exchange regulations, payments of current account items, such as profit distributions, interestpayments and trade and service-related foreign exchange transactions, can be made in foreign currencies without prior approval from SAFE bycomplying with certain procedural requirements. By contrast, approval from or registration with appropriate government authorities is required whereRMB is to be converted into foreign currency and remitted out of China to pay capital account items, such as direct investments, repayment of foreigncurrency-denominated loans, repatriation of investments and investments in securities outside of China. 97Source: Qudian Inc., 20-F, April 09, 2018Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Table of ContentsIn November 2012, SAFE promulgated the Circular of Further Improving and Adjusting Foreign Exchange Administration Policies on ForeignDirect Investment, which substantially amends and simplifies the current foreign exchange procedure. Pursuant to this circular, the opening of variousspecial purpose foreign exchange accounts, such as pre-establishment expenses accounts, foreign exchange capital accounts and guarantee accounts,the reinvestment of RMB proceeds derived by foreign investors in the PRC, and remittance of foreign exchange profits and dividends by a foreign-invested enterprise to its foreign shareholders no longer require the approval or verification of SAFE, and multiple capital accounts for the same entitymay be opened in different provinces, which was not possible previously. In addition, SAFE promulgated another circular in May 2013, whichspecifies that the administration by SAFE or its local branches over direct investment by foreign investors in the PRC must be conducted by way ofregistration and banks must process foreign exchange business relating to the direct investment in the PRC based on the registration informationprovided by SAFE and its branches. On February 28, 2015, SAFE promulgated the Notice on Further Simplifying and Improving the Administration ofthe Foreign Exchange Concerning Direct Investment, or SAFE Notice 13. After SAFE Notice 13 became effective on June 1, 2015, instead of applyingfor approvals regarding foreign exchange registrations of foreign direct investment and overseas direct investment from SAFE, entities and individualsmay apply for such foreign exchange registrations from qualified banks. The qualified banks, under the supervision of SAFE, may directly review theapplications and conduct the registration.On March 30, 2015, SAFE promulgated the Circular of the SAFE on Reforming the Management Approach regarding the Settlement of ForeignCapital of Foreign-invested Enterprise, or Circular 19, which expands a pilot reform of the administration of the settlement of the foreign exchangecapitals of foreign-invested enterprises nationwide. Circular 19 came into force and replaced both the Circular of the State Administration of ForeignExchange on Issues Relating to the Improvement of Business Operations with Respect to the Administration of Foreign Exchange Capital Payment andSettlement of Foreign-invested Enterprises, or Circular 142 and the Circular of the State Administration of Foreign Exchange on Issues concerning thePilot Reform of the Administrative Approach Regarding the Settlement of the Foreign Exchange Capitals of Foreign-invested Enterprises in CertainAreas, or Circular 36 on June 1, 2015. Circular 19 allows all foreign-invested enterprises established in the PRC to use their foreign exchange capitalsto make equity investment and removes certain other restrictions had been provided in Circular 142. However, Circular 19 continues to prohibitforeign-invested enterprises from, among other things, using RMB fund converted from its foreign exchange capitals for expenditure beyond itsbusiness scope and providing entrusted loans or repaying loans between non-financial enterprises. SAFE promulgated the Notice of the StateAdministration of Foreign Exchange on Reforming and Standardizing the Foreign Exchange Settlement Management Policy of Capital Account, orCircular 16, effective in June 2016, which reiterates some of the rules set forth in Circular 19, but Compared to Circular 19, Circular 16 provides thatdiscretionary foreign exchange settlement applies to foreign exchange capital, foreign debt offering proceeds and remitted foreign listing proceeds,and the corresponding RMB capital converted from foreign exchange are not restricted from extending loans to related parties or repaying the inter-company loans (including advances by third parties). However, there exist substantial uncertainties with respect to the interpretation andimplementation in practice with respect to the Circular 16. Circular 19 or Circular 16 may delay or limit us from using the proceeds of offshoreofferings to make additional capital contributions or loans to our PRC subsidiaries and any violations of these circulars could result in severe monetaryor other penalties.In January 2017, SAFE promulgated the Circular on Further Improving Reform of Foreign Exchange Administration and OptimizingGenuineness and Compliance Verification, or Circular 3, which stipulates several capital control measures with respect to the outbound remittance ofprofit from domestic entities to offshore entities, including (i) under the principle of genuine transaction, banks shall check board resolutions regardingprofit distribution, the original version of tax filing records and audited financial statements; and (ii) domestic entities shall hold income to account forprevious years’ losses before remitting the profits. Moreover, pursuant to Circular 3, domestic entities shall make detailed explanations of the sourcesof capital and utilization arrangements, and provide board resolutions, contracts and other proof when completing the registration procedures inconnection with an outbound investment. 98Source: Qudian Inc., 20-F, April 09, 2018Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Table of ContentsRegulations on Foreign Exchange Registration of Overseas Investment by PRC ResidentsSAFE issued SAFE Circular on Relevant Issues Relating to Domestic Resident’s Investment and Financing and Roundtrip Investment throughSpecial Purpose Vehicles, or SAFE Circular 37, that became effective in July 2014, replacing the Circular of the State Administration of ForeignExchange on Issues Concerning the Regulation of Foreign Exchange in Equity Finance and Return Investments by Domestic Residents throughOffshore Special Purpose Vehicles, or SAFE Circular 75. SAFE Circular 37 regulates foreign exchange matters in relation to the use of special purposevehicles, or SPVs, by PRC residents or entities to seek offshore investment and financing or conduct round trip investment in China. Under SAFECircular 37, a SPV refers to an offshore entity established or controlled, directly or indirectly, by PRC residents or entities for the purpose of seekingoffshore financing or making offshore investment, using legitimate onshore or offshore assets or interests, while “round trip investment” refers to directinvestment in China by PRC residents or entities through SPVs, namely, establishing foreign-invested enterprises to obtain the ownership, controlrights and management rights. SAFE Circular 37 provides that, before making contribution into an SPV, PRC residents or entities are required tocomplete foreign exchange registration with SAFE or its local branch. SAFE promulgated the Notice on Further Simplifying and Improving theAdministration of the Foreign Exchange Concerning Direct Investment in February 2015, which took effect on June 1, 2015. This notice has amendedSAFE Circular 37 requiring PRC residents or entities to register with qualified banks rather than SAFE or its local branch in connection with theirestablishment or control of an offshore entity established for the purpose of overseas investment or financing.PRC residents or entities who had contributed legitimate onshore or offshore interests or assets to SPVs but had not obtained registration asrequired before the implementation of the SAFE Circular 37 must register their ownership interests or control in the SPVs with qualified banks. Anamendment to the registration is required if there is a material change with respect to the SPV registered, such as any change of basic information(including change of the PRC residents, name and operation term), increases or decreases in investment amount, transfers or exchanges of shares, andmergers or divisions. Failure to comply with the registration procedures set forth in SAFE Circular 37 and the subsequent notice, or makingmisrepresentation on or failure to disclose controllers of the foreign-invested enterprise that is established through round-trip investment, may result inrestrictions being imposed on the foreign exchange activities of the relevant foreign-invested enterprise, including payment of dividends and otherdistributions, such as proceeds from any reduction in capital, share transfer or liquidation, to its offshore parent or affiliate, and the capital inflow fromthe offshore parent, and may also subject relevant PRC residents or entities to penalties under PRC foreign exchange administration regulations.Regulations Related to Stock Incentive PlansSAFE promulgated the Circular of the State Administration of Foreign Exchange on Issues concerning the Administration of Foreign ExchangeUsed for Domestic Individuals’ Participation in Equity Incentive Plans of Companies Listed Overseas, or the Stock Option Rules in February 2012,replacing the previous rules issued by SAFE in March 2007. Under the Stock Option Rules and other relevant rules and regulations, PRC residents whoparticipate in stock incentive plan in an overseas publicly-listed company are required to register with SAFE or its local branches and complete certainother procedures. Participants of a stock incentive plan who are PRC residents must retain a qualified PRC agent, which could be a PRC subsidiary ofthe overseas publicly listed company or another qualified institution selected by the PRC subsidiary, to conduct the SAFE registration and otherprocedures with respect to the stock incentive plan on behalf of the participants. In addition, the PRC agent is required to amend the SAFE registrationwith respect to the stock incentive plan if there is any material change to the stock incentive plan, the PRC agent or other material changes. The PRCagent must, on behalf of the PRC residents who have the right to exercise the employee share options, apply to SAFE or its local branches for an annualquota for the payment of foreign currencies in connection with the PRC residents’ exercise of the employee share options. The foreign exchangeproceeds received by the PRC residents from the sale of shares under the stock incentive plans granted and dividends distributed by the overseas listedcompanies must be remitted into the bank accounts in the PRC opened by the PRC agents before distribution to such PRC residents. 99Source: Qudian Inc., 20-F, April 09, 2018Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Table of ContentsWe have adopted a 2016 Equity Incentive Plan, under which we have the discretion to grant a broad range of equity-based awards to eligibleparticipants. See “Item 6. Directors, Senior Management and Employees — B. Compensation — 2016 Equity Incentive Plan.” We have advised therecipients of awards under our 2016 Equity Incentive Plan to handle foreign exchange matters in accordance with the Stock Option Rules. However, wecannot assure you that they can successfully register with SAFE in full compliance with the Stock Option Rules. Any failure to complete theirregistration pursuant to the Stock Option Rules and other foreign exchange requirements may subject these PRC individuals to fines and legal oradministrative sanctions, and may also limit our ability to contribute additional capital to our PRC subsidiary, limit our PRC subsidiary’s ability todistribute dividends to us or otherwise materially adversely affect our business.Regulations Related to Dividend DistributionUnder our current corporate structure, our Cayman Islands holding company may rely on dividend payments from Ganzhou Qufenqi, which is awholly foreign-owned enterprise incorporated in China, to fund any cash and financing requirements we may have. The principal regulationsgoverning distribution of dividends of foreign holding companies include the Foreign Investment Enterprise Law, issued in 1986 and amended in2000 and 2016, and the Implementation Rules under the Foreign Investment Enterprise Law, issued in 1990 and amended in 2001 and 2014respectively. Under these regulations, foreign investment enterprises in the PRC may pay dividends only out of their accumulated profits, if any,determined in accordance with PRC accounting standards and regulations. In addition, foreign investment enterprises in the PRC are required toallocate at least 10% of their respective accumulated profits each year, if any, to fund certain reserve funds unless these reserves have reached 50% ofthe registered capital of the enterprises. These reserves are not distributable as cash dividends. A PRC company is not permitted to distribute any profitsuntil any losses from prior fiscal years have been offset. Profits retained from prior fiscal years may be distributed together with distributable profitsfrom the current fiscal year.Regulations Related to TaxationEnterprise Income TaxIn March 2007, the National People’s Congress enacted the Enterprise Income Tax Law, and in December 2007, the State Council promulgatedthe Implementing Rules of the Enterprise Income Tax Law, or the Implementing Rules, both of which became effective on January 1, 2008. TheEnterprise Income Tax Law (i) reduces the top rate of enterprise income tax from 33% to a uniform 25% rate applicable to both foreign-investedenterprises and domestic enterprises and eliminates many of the preferential tax policies afforded to foreign investors, (ii) permits companies tocontinue to enjoy their existing tax incentives, subject to certain transitional phase-out rules and (iii) introduces new tax incentives, subject to variousqualification criteria.The Enterprise Income Tax Law also provides that enterprises organized under the laws of jurisdictions outside China with their “de factomanagement bodies” located within China may be considered PRC resident enterprises and therefore be subject to PRC enterprise income tax at therate of 25% on their worldwide income. The Implementing Rules further define the term “de facto management body” as the management body thatexercises substantial and overall management and control over the production and operations, personnel, accounts and properties of an enterprise. If anenterprise organized under the laws of jurisdiction outside China is considered a PRC resident enterprise for PRC enterprise income tax purposes, anumber of unfavorable PRC tax consequences could follow. First, it would be subject to the PRC enterprise income tax at the rate of 25% on itsworldwide income. Second, a 10% withholding tax would be imposed on dividends it pays to its non-PRC enterprise shareholders and with respect togains derived by its non-PRC enterprise shareholders from transfer of its shares.According to the Enterprise Income Tax Law, dividends generated after January 1, 2008 and payable by a foreign-invested enterprise in China toits foreign enterprise investors are subject to a 10% withholding tax, 100Source: Qudian Inc., 20-F, April 09, 2018Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Table of Contentsunless any such foreign investor’s jurisdiction of incorporation has a tax treaty with China that provides for a preferential withholding arrangement.Pursuant to the Notice of the State Administration of Taxation on Negotiated Reduction of Dividends and Interest Rates, which was issued onJanuary 29, 2008 and supplemented and revised on February 29, 2008, and the Arrangement between Mainland China and the Hong Kong SpecialAdministrative Region for the Avoidance of Double Taxation and Prevention of Fiscal Evasion with Respect to Taxes on Income, which becameeffective on December 8, 2006 and applies to income derived in any year of assessment commencing on or after April 1, 2007 in Hong Kong and in anyyear commencing on or after January 1, 2007 in the PRC, such withholding tax rate may be lowered to 5% if a Hong Kong enterprise is deemed thebeneficial owner of any dividend paid by a PRC subsidiary by PRC tax authorities and holds at least 25% of the equity interest in that particular PRCsubsidiary at all times within the 12-month period immediately before distribution of the dividends. Furthermore, the State Administration of Taxation,or the SAT, promulgated the Notice on the Interpretation and Recognition of Beneficial Owners in Tax Treaties in October 2009, which stipulates thatnon-resident enterprises that cannot provide valid supporting documents as “beneficial owners” may not be approved to enjoy tax treaty benefits.Specifically, it expressly excludes an agent or a “conduit company” from being considered as a “beneficial owner” and a “beneficial owner” analysis isrequired to be conducted on a case-by-case basis following the “substance-over-the-form” principle.On October 17, 2017, the SAT issued the Announcement of the State Administration of Taxation on Issues Relating to Withholding at Source ofIncome Tax of Non-resident Enterprises, or SAT Circular 37, to completely repeal SAT Circular 698 and the second paragraph of Section 8 of Bulletin7. Under Bulletin 7, an “indirect transfer” of assets, including equity interests in a PRC resident enterprise, by a non-resident enterprise may bere-characterized and treated as a direct transfer of PRC taxable assets, if such transfer does not have a reasonable commercial purpose and wasestablished for the purpose of avoiding payment of PRC enterprise income tax. As a result, gains derived from such indirect transfer may be subject toPRC enterprise income tax. According to SAT Circular 37, the amount of taxable income equals the remainder after deducting the net equity valuefrom the equity transfer income. Equity transfer income means the consideration collected by the transferor from the equity transfer, including incomein both monetary form and non-monetary form. Net equity value means the tax basis for acquiring such equity. The tax basis for the equity is thecapital contribution costs actually paid by the equity transferor to a PRC resident enterprise at the time of the investment and equity participation, orthe equity transfer costs actually paid at the time of acquisition of such equity to the original transferor of such equity.Value-Added Tax and Business TaxPursuant to applicable PRC tax regulations, any entity or individual conducting business in the service industry is generally required to pay abusiness tax at the rate of 5% on the revenues generated from providing such services. However, if the services provided are related to technologydevelopment and transfer, such business tax may be exempted subject to approval by the relevant tax authorities. Whereas, pursuant to the ProvisionalRegulations on Value-Added Tax of the PRC and its implementation regulations, unless otherwise specified by relevant laws and regulations, anyentity or individual engaged in the sales of goods, provision of processing, repairs and replacement services and importation of goods into China isgenerally required to pay a value-added tax, or VAT, for revenues generated from sales of products, while qualified input VAT paid on taxablepurchase can be offset against such output VAT.In November 2011, the Ministry of Finance and the State Administration of Taxation promulgated the Pilot Plan for Imposition of Value-AddedTax to Replace Business Tax. In March 2016, the Ministry of Finance and the State Administration of Taxation further promulgated the Notice onFully Promoting the Pilot Plan for Replacing Business Tax by Value-Added Tax, which became effective on May 1, 2016. Pursuant to the pilot planand relevant notices, VAT is generally imposed in lieu of business tax in the modern service industries, including the VATS, on a nationwide basis.VAT of a rate of 6% applies to revenue derived from the provision of some modern services. Unlike business tax, a taxpayer is allowed to offset thequalified input VAT paid on taxable purchases against the output VAT chargeable on the modern services provided. 101Source: Qudian Inc., 20-F, April 09, 2018Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Table of ContentsRegulations Related to M&A and Overseas ListingsOn August 8, 2006, six PRC regulatory agencies, including the Ministry of Commerce, the State-owned Assets Supervision and AdministrationCommission, the SAT, the SAIC, the China Securities Regulatory Commission, or CSRC, and the SAFE, jointly issued the Regulations on Mergers andAcquisitions of Domestic Enterprises by Foreign Investors, or the M&A Rules, which became effective on September 8, 2006 and was amended onJune 22, 2009. The M&A Rules, among other things, require that (i) PRC entities or individuals obtain MOFCOM approval before they establish orcontrol a SPV overseas, provided that they intend to use the SPV to acquire their equity interests in a PRC company at the consideration of newlyissued share of the SPV, or Share Swap, and list their equity interests in the PRC company overseas by listing the SPV in an overseas market; (ii) theSPV obtains MOFCOM’s approval before it acquires the equity interests held by the PRC entities or PRC individual in the PRC company by ShareSwap; and (iii) the SPV obtains CSRC approval before it lists overseas.The Anti-Monopoly Law promulgated by the Standing Committee of the National People’s Congress on August 30, 2007 and effective onAugust 1, 2008 requires that transactions which are deemed concentrations and involve parties with specified turnover thresholds must be cleared byMOFCOM before they can be completed. In addition, on February 3, 2011, the General Office of the State Council promulgated a Notice onEstablishing the Security Review System for Mergers and Acquisitions of Domestic Enterprises by Foreign Lenders, or Circular 6, which officiallyestablished a security review system for mergers and acquisitions of domestic enterprises by foreign investors. Further, on August 25, 2011, MOFCOMpromulgated the Regulations on Implementation of Security Review System for the Merger and Acquisition of Domestic Enterprises by ForeignLenders, or the MOFCOM Security Review Regulations, which became effective on September 1, 2011, to implement Circular 6. Under Circular 6, asecurity review is required for mergers and acquisitions by foreign investors having “national defense and security” concerns and mergers andacquisitions by which foreign investors may acquire the “de facto control” of domestic enterprises with “national security” concerns. Under theMOFCOM Security Review Regulations, MOFCOM will focus on the substance and actual impact of the transaction when deciding whether a specificmerger or acquisition is subject to security review. If MOFCOM decides that a specific merger or acquisition is subject to security review, it will submitit to the Inter-Ministerial Panel, an authority established under the Circular 6 led by the National Development and Reform Commission, or NDRC, andMOFCOM under the leadership of the State Council, to carry out the security review. The regulations prohibit foreign investors from bypassing thesecurity review by structuring transactions through trusts, indirect investments, leases, loans, control through contractual arrangements or offshoretransactions. 102Source: Qudian Inc., 20-F, April 09, 2018Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Table of ContentsC.Organizational StructureThe following diagram illustrates our company’s organizational structure, and the place of formation, ownership interest and affiliation of each ofour principal subsidiaries and affiliated entities as of December 31, 2017. It omits certain entities that are immaterial to our results of operations,business and financial condition. Except as otherwise specified, equity interests depicted in this diagram are held as to 100%. The relationshipsbetween each of Ganzhou Qudian, Hunan Qudian, Xiamen Qudian and Beijing Happy Time and Ganzhou Qufenqi as illustrated in this diagram aregoverned by contractual arrangements and do not constitute equity ownership. (1)Includes 17 subsidiaries of Xiamen Leasing located in various cities across China. Xiamen Leasing and its subsidiaries are primarily involved inoperating Dabai Auto, our budget auto financing business.(2)Mr. Min Luo, our founder, chairman and chief executive officer, and Mr. Lianzhu Lv, our director and head of user experience department,respectively hold 99.0% and 1.0% of equity interests in Ganzhou Qudian.(3)Mr. Min Luo and Mr. Hongjia He, our vice president, respectively hold 99.0% and 1.0% of equity interests in Hunan Qudian. 103Source: Qudian Inc., 20-F, April 09, 2018Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Table of Contents(4)The following table sets forth the shareholders of Beijing Happy Time, their respective equity interests in Beijing Happy Time and theirrespective relationships with shareholders of Qudian Inc. as of the date of this annual report. For further information as to the principalshareholders of Qudian Inc., see “Item 6. Directors, Senior Management and Employees — E. Share Ownership.” Shareholders Relationship with shareholders ofQudian Inc. Amount ofRegisteredCapital Percentage ofEquityInterests RMB Mr. Min Luo Holds 100% equity interests in Qufenqi HoldingLimited 5,025,579 21.0 Phoenix Auspicious Internet Investment L.P. andShenzhen Huasheng Qianhai Investment Co., Ltd. Affiliates of Phoenix Auspicious FinTech InvestmentL.P. and Wa Sung Investment Limited, collectivelyreferred to as Phoenix Entities 4,596,670 19.2 Beijing Kunlun Tech Co., Ltd. Affiliate of Kunlun Group Limited 4,587,496 19.2 Ningbo Yuanfeng Venture Capital L.P. Affiliate of Source Code Accelerate L.P. 3,757,355 15.7 Shanghai Yunxin Venture Capital Co., Ltd. Affiliate of API (Hong Kong) Investment Limited 2,985,744 12.5 Jiaxing Blue Run Quchuan Investment L.P. and TianjinBlue Run Xinhe Investment Center L.P. Affiliates of Ever Bliss Fund, L.P. and Joyful BlissLimited, collectively referred to as Zhu Entities 1,681,366 7.0 Tianjin Happy Share Asset Management L.P., referred toas Tianjin Happy Share(a) Not applicable 1,251,742 5.2 (a)Tianjin Happy Share was established in connection with the share incentive plan of Beijing Happy Time. For more information, see “Item 6.Directors, Senior Management and Employees — B. Compensation — 2015 Share Incentive Plan.” (5)We plan to transfer our credit business under the Qudian brand to Xiamen Qudian.(6)Includes (i) Xiamen Qudian Commercial Factoring Co., Ltd., Jiangxi Chunmian Technology Development Co., Ltd., Ganzhou Qudian CommerceDevelopment Co., Ltd. and Xiamen Junda Network Technology Co., Ltd., which we expect to utilize to explore new business opportunities, and(ii) Ganzhou Laifenqi Technology Development Co., Ltd. and Xinjiang Qudian Technology Co., Ltd., to which we plan to transfer our creditbusiness under the Laifenqi brand.(7)Material subsidiaries of Beijing Happy Time include (i) Fuzhou Happy Time Technology Development Co., Ltd., Ganzhou Happy FenqiTechnology Development Co., Ltd. and Tianjin Happy Time Technology Development Co., Ltd., which operate our websites and mobile appsunder the Qudian brand, (ii) Tianjin Qufenqi Technology Co., Ltd. and Ganzhou Happy Fenqi Network Service Co., Ltd., which operate ourwebsites and mobile apps under the Laifenqi brand, and (iii) Ganzhou Happy Life Network Microcredit Co,.Ltd. and Fuzhou High-tech ZoneMicrocredit Co., Ltd., which are our online small credit companies.(8)QuCampus is owned approximately 45.9% by us, 44.1% by Ant Financial and 10.0% by Ganzhou Happy Share, a limited partnership establishedin connection with the share incentive plan to be established by QuCampus. Mr. Min Luo, our founder, chairman and chief executive officer, isthe general partner of Ganzhou Happy Share. We do not consolidate the financial results of QuCampus in our consolidated financial statements. 104Source: Qudian Inc., 20-F, April 09, 2018Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Table of ContentsOur Contractual Arrangements with Consolidated VIEs and Their ShareholdersDue to PRC legal restrictions on foreign ownership and investment in, among other areas, VATS, which include the operations of Internet contentproviders, or ICPs, we, similar to all other entities with foreign-incorporated holding company structures operating in our industry in China, currentlyconduct these activities mainly through Beijing Happy Time and its subsidiaries. We established three new consolidated VIEs, Ganzhou Qudian,Hunan Qudian and Ganzhou Qudian, in 2017. We effectively control each consolidated VIE through a series of contractual arrangements with suchVIE, its shareholders and Ganzhou Qufenqi, as described in more detail below, which collectively enables us to: • exercise effective control over each of our consolidated VIEs and its subsidiaries; • receive substantially all the economic benefits of each of our consolidated VIEs; and • have an exclusive option to purchase all or part of the equity interests in the equity interest in or all or part of the assets of each of ourconsolidated VIEs when and to the extent permitted by PRC law.In addition, pursuant to the resolutions of all shareholders of Qudian Inc. and the resolutions of the board of directors of Qudian Inc., the board ofdirectors of Qudian Inc. or any officer authorized by such board shall cause Ganzhou Qufenqi to exercise Ganzhou Qufenqi’s rights under the power ofattorney agreements entered into among Ganzhou Qufenqi, each of our consolidated VIEs and the nominee shareholders of each of our consolidatedVIEs and Ganzhou Qufenqi’s rights under the exclusive call option agreement between Ganzhou Qufenqi and each of our consolidated VIEs. As aresult of these resolutions and the provision of unlimited financial support from the Company to each of our consolidated VIEs, Qudian Inc. has beendetermined to be most closely associated with each of our consolidated VIEs within the group of related parties and was considered to be the primarybeneficiary of each of our consolidated VIEs. We have consolidated their financial results in our consolidated financial statements in accordance withU.S. GAAP.In the opinion of Tian Yuan Law Firm, our PRC legal counsel: • the ownership structures of Ganzhou Qufenqi and our consolidated VIEs in China do not violate any applicable PRC law, regulation, orrule currently in effect; and • the contractual arrangements among Ganzhou Qufenqi, each of our consolidated VIEs and its shareholders governed by PRC laws are valid,binding and enforceable in accordance with their terms and applicable PRC laws, rules, and regulations currently in effect, and will notviolate any applicable PRC law, regulation, or rule currently in effect.However, we have been further advised by our PRC legal counsel, Tian Yuan Law Firm, that there are substantial uncertainties regarding theinterpretation and application of current and future PRC laws, rules and regulations. In particular, in January 2015, the MOFCOM published adiscussion draft of the proposed Foreign Investment Law for public review and comments. Among other things, the draft Foreign Investment Lawexpands the definition of foreign investment and introduces the principle of “actual control” in determining whether a company is considered aforeign-invested enterprise, or an FIE. Under the draft Foreign Investment Law, VIEs would also be deemed as FIEs, if they are ultimately “controlled”by foreign investors, and be subject to restrictions on foreign investments. However, the draft law has not arrived at a position on what actions will betaken with respect to the existing companies with the “variable interest entity” structure, whether or not these companies are controlled by Chineseparties. It is uncertain when the draft may be signed into law, if at all, and whether any final version would have substantial changes from the draft.Accordingly, the PRC regulatory authorities may in the future take a view that is contrary to the opinion of our PRC legal counsel. We have beenfurther advised by our PRC legal counsel that if the PRC government finds that the agreements that establish the structure for operating our business donot comply with PRC government restrictions on foreign investment in the aforesaid business we engage in, we could be subject to severe penaltiesincluding being prohibited from continuing operations. See “Item 3. Key Information — D. Risk Factors — Risks Relating to Our Corporate Structure.” 105Source: Qudian Inc., 20-F, April 09, 2018Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Table of ContentsThe following is a summary of the currently effective contractual arrangements by and among our wholly-owned subsidiary, Ganzhou Qufenqi,each of our consolidated VIEs, and its shareholders.Agreements that Provide Us with Effective Control over Our Consolidated VIEs and Their SubsidiariesEquity Interest Pledge Agreements. Pursuant to the equity interest pledge agreements, the shareholders of our consolidated VIEs have pledged allof their equity interest in our consolidated VIEs as a continuing first priority security interest, as applicable, to respectively guarantee our consolidatedVIEs and their shareholders’ performance of their obligations under the relevant contractual arrangements, which include the exclusive businesscooperation agreements, exclusive call option agreements and power of attorney agreements. If our consolidated VIEs or any of their shareholdersbreach their contractual obligations under these agreements, Ganzhou Qufenqi, as pledgee, will be entitled to certain rights regarding the pledgedequity interests. In the event of such breaches, Ganzhou Qufenqi’s rights include forcing the auction or sale of all or part of the pledged equity interestsof the applicable consolidated VIE and receiving proceeds from such auction or sale in accordance with PRC law. Upon purchase of equity interests inthe applicable consolidated VIE by other persons, Ganzhou Qufenqi and such persons will need to enter into contractual arrangements that are similarto existing ones in order for Ganzhou Qufenqi to effectively control such consolidated VIE. Each of the shareholders of our consolidated VIEs agreesthat, during the term of the applicable equity interest pledge agreement, such shareholder will not dispose of the pledged equity interests or create orallow creation of any encumbrance on the pledged equity interests without the prior written consent of Ganzhou Qufenqi. Ganzhou Qufenqi is entitledto all dividends and other distributions declared by our consolidated VIEs except as it agrees otherwise in writing. Each equity interest pledgeagreement will remain effective until the applicable consolidated VIE and its shareholders discharge all their obligations under the contractualarrangements. We have registered pledges of equity interest in each of our consolidated VIEs with the relevant offices of the administration for industryand commerce in accordance with the PRC Property Rights Law.Power of Attorney Agreements. Pursuant to the power of attorney agreements, each shareholder of our consolidated VIEs has irrevocablyappointed the Ganzhou Qufenqi to act as such shareholder’s exclusive attorney-in-fact to exercise all shareholder rights, including the right to attendand vote on shareholder’s meetings and appoint directors and executive officers. In the absence of contrary written instructions of Ganzhou Qufenqi,each power of attorney agreement will remain in force for so long as the shareholder remains a shareholder of the applicable consolidated VIE.Agreements that Allow Us to Receive Economic Benefits from our Consolidated VIEs and Their SubsidiariesExclusive Business Cooperation Agreements. Under the exclusive business cooperation agreements, Ganzhou Qufenqi has the exclusive right toprovide the consolidated VIEs and their subsidiaries that generate substantial income, including Ganzhou Happy Fenqi, Ganzhou Network, andFuzhou Microcredit, or the profitable consolidated VIEs and their subsidiaries, with technical support, consulting services and other services. Inexchange, Ganzhou Qufenqi is entitled to receive a service fee from each of the profitable consolidated VIEs on a monthly basis and at an amountequivalent to all of its net income as confirmed by Ganzhou Qufenqi. Ganzhou Qufenqi owns the intellectual property rights arising out of theperformance of the exclusive business cooperation agreement. In addition, each of the consolidated VIEs and their subsidiaries has granted GanzhouQufenqi an exclusive right to purchase any or all of the business or assets of each of the profitable consolidated VIEs and their subsidiaries at thelowest price permitted under PRC law. Unless otherwise agreed by the parties, this agreement will continue remaining effective.Agreements that Provide Us with the Option to Purchase the Equity Interest in Beijing Happy TimeExclusive Call Option Agreements. Pursuant to the exclusive call option agreements, our consolidated VIEs and each of their shareholders haveirrevocably granted Ganzhou Qufenqi an exclusive option to purchase, or 106Source: Qudian Inc., 20-F, April 09, 2018Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Table of Contentshave its designated person or persons to purchase, at its discretion at any time, to the extent permitted under PRC law, all or part of such shareholder’sequity interests in the applicable, or any or all or the assets of such consolidated VIE. For reasons discussed in this section, there may be PRC legalrestrictions on Ganzhou Qufenqi’s ability to directly purchase such equity interests or assets. In the event such equity interests or assets are sold topersons designated by Ganzhou Qufenqi, Ganzhou Qufenqi and such persons will need to enter into contractual arrangements that are similar to theexisting ones in order for Ganzhou Qufenqi to exercise effective control over and receive substantially all the economic benefits of such equityinterests or assets. As for the equity interests in a consolidated VIE, the purchase price should be equal to the minimum price as permitted by PRC law.As for the assets of a consolidated VIE, the purchase price should be equal to the book value of the assets or the minimum price as permitted byapplicable PRC law, whichever is higher. Without Ganzhou Qufenqi’s prior written consent, each consolidated VIE and its shareholders have agreedthat such consolidated VIE shall not amend its articles of association, increase or decrease the registered capital, sell or otherwise dispose of its assets orbeneficial interest, create or allow any encumbrance on its assets or other beneficial interests, provide any loans or guarantees and etc. GanzhouQufenqi is entitled to all dividends and other distributions declared by each consolidated VIE except as it agrees otherwise in writing, and theshareholders of each consolidated VIE have agreed to pay any such dividends or distributions to Ganzhou Qufenqi. Each agreement will remaineffective until all equity interests of the applicable consolidated VIE held by its shareholders and all assets of such consolidated VIE have beentransferred or assigned to Ganzhou Qufenqi or its designated person(s).Financial Support Undertaking LettersWe executed a financial support undertaking letter addressed to each consolidated VIE, pursuant to which we irrevocably undertake to provideunlimited financial support to such consolidated VIE to the extent permissible under the applicable PRC laws and regulations, regardless of whethersuch consolidated VIE has incurred an operational loss. The form of financial support includes but is not limited to cash, entrusted loans andborrowings. We will not request repayment of any outstanding loans or borrowings from a consolidated VIE if it or its shareholders do not havesufficient funds or are unable to repay such loans or borrowings. Each letter is effective from the date of the other agreements entered into amongGanzhou Qufenqi, the applicable consolidated VIE and its shareholders until the earlier of (i) the date on which all of the equity interests of suchconsolidated VIE have been acquired by or its designated representative(s), and (ii) the date on which we in our sole and absolute discretionunilaterally terminates the applicable financial support undertaking letter.We expect to provide the financial support if and when required with a portion of the proceeds from our initial public offering and proceeds fromthe issuance of equity or debt securities in the future. D.FacilitiesOur corporate headquarters are located in Beijing, China, where we lease approximately 4,133 square meters of office space pursuant to a leaseexpiring in June 2019. We also maintain leased properties of approximately 1,315 square meters, 1,626 square meters and 6,000 square meters,respectively, in Xiamen, Tianjin and Fuzhou in Jiangxi Province, pursuant to leases expiring in September 2019, September 2018 and February 2019,respectively. As of March 31, 2018, we also leased 175 show rooms in cities across China in connection with our Dabai Auto business. The size of eachshow room typically ranges between 50 to 150 square meters.In January 2018, we purchased the use rights with respect to a parcel of land of approximately 53,239 square meters located in Xiamen, FujianProvince for a price of RMB106 million. Pursuant to the contract we signed with the local government authorities, our land use rights will last for 40years. We plan to build our innovation park on such parcel of land.We believe that we will be able to obtain adequate facilities to accommodate our future expansion plans. 107Source: Qudian Inc., 20-F, April 09, 2018Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Table of ContentsITEM 4A.UNRESOLVED STAFF COMMENTSNone. ITEM 5.OPERATING AND FINANCIAL REVIEW AND PROSPECTSYou should read the following discussion and analysis of our financial condition and results of operations in conjunction with our consolidatedfinancial statements and the related notes included elsewhere in this annual report. This discussion may contain forward-looking statements basedupon current expectations that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-lookingstatements as a result of various factors, including those set forth under “Item 3. Key Information — D. Risk Factors” or in other parts of this annualreport. A.Operating ResultsOverviewAs a provider of online credit products, we use big data-enabled technologies, such as artificial intelligence and machine learning, to transformthe consumer finance experience in China. We target hundreds of millions of quality, unserved or underserved consumers in China. They are young,mobile-active consumers who need access to small credit for their discretionary spending or budget auto financing solutions, but are underserved bytraditional financial institutions due to their lack of traditional credit data and the operational inefficiency of traditional financial institutions. Webelieve our operating efficiency and big data analytics capability to understand our prospective borrowers from different behavioral and transactionalperspectives, assess their credit profiles and offer them instantaneous and affordable credit products with customized terms distinguishes our businessand offerings.We currently offer small credit products, which are comprised of cash credit products and merchandise credit products, as well as budget autofinancing products. We mainly generate (i) financing income from cash credit products, (ii) both financing income and sales commission fee frommerchandise credit products and (iii) both financing income and revenue from sales-type lease from budget auto financing products.We are a leading provider of online small consumer credit products in China. In 2017, we facilitated approximately RMB88.9 billion (US$13.7billion) in transactions to 11.7 million active borrowers. Small credit products serve consumers’ immediate needs for discretionary consumption. Theytypically have short durations, enabling us to quickly understand a borrower’s behavior and further refine our data analytics and credit assessmentmodel upon the completion of transaction cycles.We have experienced robust credit performance. Our M1+ Delinquency Rate by Vintage for transactions in the first three quarters of 2017remained at less than 0.9% through December 31, 2017. M1+ Delinquency Rate by Vintage is defined as the total balance of outstanding principal of avintage for which any installment payment is over 30 calendar days past due as of a particular date (adjusted to reflect total amount of recovered pastdue payments for principal, before charge-offs), divided by the total initial principal in such vintage.To provide a good user experience, we have technology and funding arrangements in place to enable instant drawdown of credit by consumers.We collaborate with a variety of institutional funding partners such as banks and other institutions, to secure sufficient amounts of funding for creditdrawdowns. Institutional funding partners are interested in working with us because of the short duration of our credit products, our technology-drivencredit assessment capabilities and the diversified credit portfolio with attractive risk-adjusted returns. Our strong technological capabilities enable usto seamlessly integrate our system with those of our institutional funding partners, rapidly facilitate transactions and repayment settlements at amassive scale and forecast our funding needs on a real-time basis. We do not directly source funding from retail investors. Currently, we retain most ofthe credit risk with respect to the cooperation with institutional funding partners. We also utilize our own 108Source: Qudian Inc., 20-F, April 09, 2018Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Table of Contentscapital to fund the credit drawdowns to enhance user experience so that they can instantly receive funds after drawdown requests. Our longer-termobjectives are to primarily leverage external institutional funding and to transfer credit risk to or share it with a diversified group of institutionalfunding partners.We have achieved significant scale and experienced strong growth in our results of operations. Our total revenues increased fromRMB235.0 million in 2015 to RMB1,442.8 million in 2016, and further increased to RMB4,775.4 million (US$734.0 million) in 2017. We recordednet loss of RMB233.2 million in 2015. We recorded net income of RMB576.7 million and RMB2,164.5 million (US$332.7 million) in 2016 and 2017,respectively.Key Factors Affecting Our Results of OperationsNumber and Engagement of BorrowersWe have engaged a portion of our active borrowers through different channels on the Alipay consumer interface since 2016. Our ability tocontinue to engage borrowers efficiently is significantly affected by our relationships and the terms of our collaborations with Ant Financial. Detailedarrangements with Ant Financial, including borrower engagement fees, may change from time to time, which affects our results of operations. As weseek to broaden our borrower base, our success in collaborating with other leading Internet companies and other marketing efforts will affect the sizeand credit quality of our borrower base. In addition, our brand, reputation, user experience and the pricing of our credit products will affect ourborrower retention capability and repeat transactions by borrowers.Our Partnership with Ant FinancialWe have established a strategic partnership with Ant Financial. Our collaboration with Ant Financial has an important effect on our results ofoperations. We benefit from Alipay’s strong brand recognition and wide adoption in China. In particular, we are able to promote our products andlaunch campaigns through the public service window on the Alipay consumer interface, a borrower engagement channel which is free of charge andgenerally available to third parties. We have also utilized borrower engagement channels on the Alipay consumer interface in which we pay a fee. Tothe extent we rely more heavily on paid channels, our costs for borrower engagement would increase. Furthermore, policies of the Alipay consumerinterface affect our fee rates and may also affect other aspects of product designs. Effective from November 30, 2017, annualized fee rates (covering allinterest, fees and charges) for all leads generated from the Alipay consumer interface have been subject to a cap of 24% set by Alipay. On the otherhand, such cap does not apply to transactions facilitated through our mobile applications, and the maximum annualized fee rates for such transactionsare instead set at 36%, in accordance with current PRC laws and regulations on relevant lending activities. Our ability to engage borrowers through ourmobile applications will affect our revenues and profit margin.We also collaborate with Zhima Credit to enhance the credit analysis capabilities of our business. Given that the online consumer finance marketin China continues to evolve, we are in ongoing discussions with Ant Financial to explore other collaboration opportunities, including variousapproaches to engage and serve prospective borrowers. Changes to our arrangement with Ant Financial in borrower engagement and other aspects ofour business could affect our borrower engagement efficiency, the growth of our business and our profitability.Risk ManagementOur ability to effectively evaluate a borrower’s credit profile affects our ability to offer attractive borrowing terms. The quality of our riskmanagement system affects the delinquency rates of the transactions we facilitate. We periodically adjust our allowance for loan principal andfinancing service fee receivables when we believe that the future collection of the principal of on-balance sheet transactions is unlikely. We base theallowance for 109Source: Qudian Inc., 20-F, April 09, 2018Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Table of Contentsloan principal and financing service fee receivables primarily on historical loss experience using a roll rate-based model applied to our principal andfinancing service fee receivables portfolios and, to a lesser extent, macroeconomic factors. As such, an increase in delinquency rates of on-balancesheet transactions will result in a higher allowance for loan principal and financing service fee receivables. We recognize any increase in allowance forloan principal and financing service fee receivables as provision for loan principal and financing service fee receivables for the relevant period. Wecharge off loan principal and financing service fee receivables as a reduction to the allowance for loan principal and financing service fee receivableswhen the principal and financing service fee receivables are deemed to be uncollectible. For each off-balance sheet transaction, we record the fair valueof guarantee liabilities, which represent the present value of our expected payout based on the estimated delinquency rate and the applicable discountrate for time value. The loan facilitation fees payable to us, net of guarantee liabilities which were allocated from the consideration in connection withsuch credit drawdowns, are recognized as loan facilitation income and others. As such, an increase in expected delinquency rates of off-balance sheettransactions will result in an increase in the fair value of guarantee liabilities, which is recognized as loss on guarantee liabilities in our results ofoperations.Funding Sources, Costs and Risk TransferThe growth of our business is dependent on our ability to secure sufficient funding for the transactions that we facilitate. We primarily work withinstitutional funding partners to fund the credit we facilitate. We do not directly source funding from retail investors. The availability of funds from theinstitutional funding partners that we collaborate with affects our liquidity and the amount of transactions that we will be able to facilitate. The cost ofcapital for funds from institutional funding partners that we collaborate with during any specific period impacts our profitability.We collaborate with institutional funding partners in several ways. There are credit drawdowns that are initially funded by us and subsequentlytransferred to or funded indirectly by institutional funding partners through trusts that we established with trust companies. For such arrangements, werecognize financing income from borrowers including interest collected on behalf of our institutional funding partners. We record interest expenses ofborrowings on funds provided by such institutional funding partners as cost of revenues. For this type of transactions, we retain full credit risk andrecord them on our balance sheet. As we incur interest expenses of borrowings on such funding arrangement, an increase in such arrangement mayadversely affect our profit margin. We also collaborate with certain institutional funding partners that provide funds directly to borrowers for creditdrawdowns that we facilitate, which enables us to facilitate additional transactions without utilizing our capital resources. Such institutional fundingpartners deduct the principal and service fees due to them from borrowers’ repayments and remit the remainder to us as our loan facilitation fees. Suchloan facilitation fees, net of the fair value of guarantee liabilities which was deducted from the consideration, are recognized as loan facilitation incomeand others. We do not incur interest expenses of borrowings on their funding. As such, an increase in such arrangement may enhance our profit margin.We record the credit drawdowns funded under such arrangements off-balance sheet. Depending on the arrangement with the specific institutionalfunding partner, we either assume full credit risk or share credit risk with the institutional funding partner. The fair value of guarantee liabilities, whichrepresents the present value of our expected payouts due to defaults under off-balance sheet transactions, is recorded on our balance sheet.While we intend to focus on leveraging technology, rather than capital, to serve the broad consumer base in China, we also fund certain creditdrawdowns by our borrowers ourselves. We have established online small credit companies and utilized trusts funded by us for such purpose.Increasing utilization of our own capital during any specific period in order to enhance user experience and funding flexibility would also enhance ourprofit margin.Product OfferingsWe primarily offer small cash and merchandise credit products that typically have short durations. Our revenue and profitability are subject to theamount of financing service fees charged and the number of 110Source: Qudian Inc., 20-F, April 09, 2018Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Table of Contentstransactions we facilitate. Amount of financing service fees per transaction is a function of the size and duration of credit products. Credit products oflarger size and longer duration generally correspond to higher financing service fees. In addition, borrowers with strong credit profiles may be offereddiscounts as to financing service fees. In April 2017, we lowered the financing service fee levels for certain cash credit products to ensure that theannualized fee rates charged on all credit drawdowns do not exceed 36%. We may further lower the financing service fee levels in the future inresponse to customer characteristics, market demand, competition and regulations, which would impact our revenue and profitability. In addition, therelative contribution in amount of transactions facilitated under our various credit products affects revenue and profitability. We launched Dabai Auto,our budget auto financing products, in November 2017. Dabai Auto’s economic terms, cost structure and the credit profiles of target borrowers differfrom those of our small credit products.In addition, we are in ongoing discussions with Ant Financial to explore other collaboration opportunities. Such cooperation may affect ourrange of product offerings. Furthermore, we may also leverage our credit assessment model to help other financial services providers assess the creditprofiles of their own customers according to their credit standards, and our ability to execute such plan may affect the growth of our business andprofitability. We expect to charge fees for such credit assessment services.Economic Conditions and Regulatory Environment in ChinaThe demand for credit from borrowers is dependent upon overall economic conditions in China. General economic factors, including the interestrate environment and unemployment rates, may affect borrowers’ willingness to seek credit. For example, significant increases in interest rates couldcause prospective borrowers to defer obtaining credit as they wait for interest rates to decrease. Additionally, a slowdown in the economy, resulting in arise in the unemployment rate and/or a decrease in real income, may affect individuals’ level of disposable income. This may affect borrowers’repayment capability and their willingness to seek credit, which may potentially affect credit drawdowns and/or delinquency rates.The regulatory environment for the online consumer finance industry in China is developing and evolving, creating both challenges andopportunities that could affect our financial performance. Due to the relatively short history of online consumer finance industry in China, the PRCgovernment has not adopted a clear regulatory framework governing our industry. We will continue to make efforts to ensure that we are compliantwith the existing laws, regulations and governmental policies relating to our industry and to comply with new laws and regulations or changes underexisting laws and regulations that may arise in the future. While new laws and regulations or changes to existing laws and regulations could makefacilitating credit to borrowers more difficult or expensive, or making such credit products more difficult for borrowers or institutional funding partnersto accept or on terms favorable to us, these events could also provide new product and market opportunities.Credit PerformanceThe credit performance of the transactions we facilitate affects our financial condition and results of operations. If one payment for a creditdrawdown facilitated by us is past due, the remaining payments that are not yet due are also considered past due for the purpose of evaluating theperformance of the credit drawdown. Based on our experience, credit drawdowns past due 1 to 30 calendar days would be largely recovered bycollection, therefore our focus on credit performance are those transactions for which any installment payment was more than 30 calendar days (“M1+”)past due. We closely monitor the credit performance measured by the M1+ Delinquency Rates by Vintage, which track the lifetime performance of thecredit drawdowns originated in a certain vintage.M1+ Delinquency Rate by VintageWe define “M1+ Delinquency Rate by Vintage” as the total balance of outstanding principal of a vintage for which any installment payment isover 30 calendar days past due as of a particular date (adjusted to reflect total 111Source: Qudian Inc., 20-F, April 09, 2018Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Table of Contentsamount of recovered past due payments for principal, before charge-offs), divided by the total initial principal in such vintage.We separate the vintages from 2014 to 2015 when we were mainly engaged in the offline market, and the vintages since the first quarter of 2016after the transition of our business to the current model.The following chart displays the historical lifetime cumulative M1+ Delinquency Rate by Vintage from the second month after credit drawdownsup to the twelfth month after such transactions for all transactions for 2014 and each of the quarters in 2015, without taking into account charge-offs:The following chart displays the historical lifetime cumulative M1+ Delinquency Rate by Vintage from the second month after credit drawdownsup to the twelfth month after such transactions for all transactions for each of the quarters in 2016 and the first three quarters in 2017, without takinginto account charge-offs: M1+ Delinquency Rate by Vintage for vintages in 2016 remained at a level of 0.5% or less up to December 31, 2017 as a result of our effectivecredit assessment model and risk management system despite serving a more diverse customer group. After we started to engage borrowers online inNovember 2015, we have fully automated our data collection and risk management process and placed increasing emphasis on big data analytics.M1+ Delinquency Rate by Vintage for the first three quarters of 2017 remained at less than 0.9% up to December 31, 2017. The increase indelinquency rate was due to deterioration in overall credit quality across the industry, as liquidity, measured by credit availability, for borrowersdeclined in late 2017. We swiftly implemented a conservative strategy of reducing credit volumes in December of 2017 to protect credit quality, andwe have witnessed stabilization of initial delinquency for new transactions facilitated in January 2018. 112Source: Qudian Inc., 20-F, April 09, 2018Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Table of ContentsCredit Performance DataThe following table provides the total balance of outstanding principal for on-balance sheet transactions where the longest past due period of aninstallment payment was 1 to 30, 31 to 60, 61 to 90 and more than 90 calendar days as of the dates presented: Delinquent for As of 1-30calendardays 31-60calendardays 61-90calendardays More than90 calendardays Total RMB RMB RMB RMB RMB US$ (in thousands) December 31, 2015 10,582 4,791 4,345 11,615 31,333 4,622 December 31, 2016 74,833 19,549 14,678 29,770 138,830 20,479 December 31, 2017 401,975 124,457 98,289 181,194 805,915 123,867 The following table provides the balance of outstanding financing service fees for on-balance sheet transactions where the longest past dueperiod of an installment payment was 1 to 30, 31 to 60 and 61 to 90 calendar days as of the dates presented(1): Delinquent for As of 1-30calendardays 31-60calendardays 61-90calendardays Total RMB RMB RMB RMB US$ (in thousands) December 31, 2015 157 98 132 387 57 December 31, 2016 1,851 757 680 3,288 485 December 31, 2017 11,111 5,410 5,376 21,897 3,366 (1)Financing service fees are reversed post 90 calendar days.We actively service and collect principal and financing service fees that are past due. The following table sets forth the amount of principal andfinancing service fees for on-balance sheet transactions that were recovered for the periods presented: Year Ended December 31, 2015 2016 2017 RMB RMB RMB US$ (in thousands) Amount recovered past due payments for principal 9,739 102,353 361,354 55,539 Amount recovered past due payments for financing service fees 1,294 6,099 20,701 3,182 The following table sets forth the amount we charged off for the periods presented: Year Ended December 31, 2015 2016 2017 RMB RMB RMB US$ (in thousands) Amount charged off 12,591 49,427 191,023 29,360 We charge off loan principal and financing service fee receivables if any of the conditions specified in our charge-off policy is satisfied,including the amount remain outstanding 180 calendar days past due and therefore deemed uncollectible. 113Source: Qudian Inc., 20-F, April 09, 2018Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Table of ContentsWe actively detect and prevent fraud utilizing our proprietary risk management system and fraud prevention system. The following table setsforth the amount of losses due to borrower fraud identified by us for the periods presented: Year Ended December 31, 2015 2016 2017 RMB RMB RMB US$ (in thousands) Amount of losses due to identified borrower fraud 537 3,473 4,226 650 The amount of transactions has increased significantly since inception, which is accompanied by an increase in the amount of losses due toidentified borrower fraud.Provision RatioWe define “Provision Ratio” as the amount of provision for loan principal and financing service fee receivables incurred during a period as apercentage of the total amount of on-balance sheet transactions during such period. The following table sets forth our Provision Ratio for the periodspresented: Year Ended December 31, 2015 2016 2017 Provision Ratio 1.06% 0.40% 0.77% We periodically adjust our allowance for loan principal and financing service fee receivables when we believe that the future collection ofprincipal is unlikely. We base the allowance for loan principal and financing service fee receivables primarily on historical loss experience using a rollrate-based model applied to our principal and financing service fee receivables portfolios and, to a lesser extent, macroeconomic factors. We recognizeany increase in allowance for loan principal and financing service fee receivables as provision for loan principal and financing service fee receivablesfor the relevant period. Our Provision Ratio decreased from 1.06% in 2015 to 0.40% in 2016 primarily due to the fact that we enhanced our creditassessment model and risk management system, as we have fully automated our data collection and risk management process and placed increasingemphasis on big data analytics. Our Provision Ratio increased to 0.77% in 2017 due to an increase in delinquency rate in 2017.Allowance RatioWe define “Allowance Ratio” as the amount of allowance for loan principal and financing service fee receivables as of a date as a percentage ofthe total amount of loan principal and financing service fee receivables as of such date. The following table sets forth our Allowance Ratio andprincipal turnover ratio as of the dates presented: As of or for the yearended December 31, 2015 2016 2017 Allowance Ratio 1.51% 2.09% 5.60% Principal turnover ratio(1) 1.9x 6.1x 8.6x (1)Represents amount of transactions in 2015, 2016 and 2017, divided by outstanding principal at the respective period end. Allowance Ratioincreased from 1.51% as of December 31, 2015 to 2.09% as of December 31, 2016, which was primarily due to the fact that we started facilitatingcredit products with shorter durations in late 2015. As a result, many of such credit drawdowns were repaid within the same period in which theywere facilitated, resulting in a lower period-end outstanding principal that did not reflect the increase in total amount of transactions during suchperiods. Our principal turnover ratio 114Source: Qudian Inc., 20-F, April 09, 2018Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Table of Contents increased from 1.9x for the year ended December 31, 2015 to 6.1x for the year ended December 31, 2016. Given the short-term nature of ourcredit products, the amount of on-balance sheet transactions during 2016 was 6.1 times the outstanding on-balance sheet principal as ofDecember 31, 2016. As such, the performance of transactions is more accurately reflected when assessed based on the amount of transactionsfacilitated during a period than based on the outstanding principal as of the period end. For a more accurate indication as to our enhanced riskmanagement capability, please refer to the Provision Ratio as elaborated above.Allowance Ratio increased from 2.09% as of December to 5.60% as of December 31, 2017, which was due to increases in both delinquency rateand principal turnover ratio in 2017. 115Source: Qudian Inc., 20-F, April 09, 2018Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Table of ContentsAs of December 31, 2015 Non-delinquent 1-30 days 31-60 days 61-90 days 91-120 days 121-150 days 151-180 days Total Over 180days(1) Loan principal andfinancing servicefee receivables (inRMB thousands) 2,229,431 10,739 4,889 4,477 3,434 4,142 4,039 2,261,151 12,022 Allowance for loanprincipal andfinancing servicefee receivables (inRMB thousands) 11,555 5,031 3,706 3,685 2,948 3,627 3,634 34,187 12,022 Allowance Ratio 0.52% 46.85% 75.81% 82.31% 85.85% 87.57% 89.97% 1.51% 100.00% (1)Amounts remain outstanding 180 days past due and therefore deemed uncollectible are charged off.As of December 31, 2016 Non-delinquent 1-30 days 31-60 days 61-90 days 91-120 days 121-150 days 151-180 days Total Over 180days(1) Loan principal andfinancing servicefee receivables (inRMB thousands) 4,877,508 76,684 20,305 15,358 11,429 9,187 9,154 5,019,626 57,974 Allowance for loanprincipal andfinancing servicefee receivables (inRMB thousands) 18,891 33,850 14,780 12,280 9,383 7,857 8,072 105,114 57,974 Allowance Ratio 0.39% 44.14% 72.79% 79.96% 82.09% 85.53% 88.18% 2.09% 100.00% (1)Amounts remain outstanding 180 days past due and therefore deemed uncollectible are charged off.As of December 31, 2017 Non-delinquent 1-30 days 31-60 days 61-90 days 91-120 days 121-150 days 151-180 days Total Over 180days(1) Loan principal andfinancing servicefee receivables (inRMB thousands) 8,449,987 413,086 129,867 103,665 81,133 60,812 39,249 9,277,799 245,263 Allowance for loanprincipal andfinancing servicefee receivables (inRMB thousands) 35,678 168,737 88,723 78,325 64,623 50,042 33,126 519,254 245,263 Allowance Ratio 0.42% 40.85% 68.32% 75.56% 79.65% 82.29% 84.40% 5.60% 100.00% (1)Amounts remain outstanding 180 days past due and therefore deemed uncollectible are charged off. 116Source: Qudian Inc., 20-F, April 09, 2018Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Table of ContentsWe base the allowance for loan principal and financing service fee receivables primarily on historical loss experience using a roll rate-basedmodel, and as indicated in the tables above, we record such allowance even with respect to loans that are non-delinquent. The Allowance Ratio for loanprincipal more than 180 days past due is 100%. We also charge off such loan principal in accordance with our charge-off policy.M1+ Delinquency Coverage RatioWe define “M1+ Delinquency Coverage Ratio” as the balance of allowance for principal and financing service fee receivables at the end of aperiod, divided by the total balance of outstanding principal for on-balance sheet transactions for which any installment payment was more than 30calendar days past due as of the end of such period. As of December 31, 2015 2016 2017 M1+ Delinquency Coverage Ratio 1.6x 1.6x 1.3x M1+ Delinquency Coverage Ratio was above 1.0x as of December 31, 2015, 2016 and 2017, indicating that our allowance for principal andfinancing service fee receivables was adequate to cover delinquency balance.Charge-Off RatioWe define “Charge-Off Ratio” as the amount of loan principal receivables we charged off during a period, divided by the total amount ofon-balance sheet transactions during such period. Year EndedDecember 31, 2015 2016 2017 % Charge-Off Ratio 0.30% 0.16% 0.24% 117Source: Qudian Inc., 20-F, April 09, 2018Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Table of ContentsComponents of Results of OperationsRevenuesOur total revenues comprise financing income, sales commission fee, revenue from sales-type lease, penalty fees and loan facilitation income andothers. Our total revenues are presented net of origination costs, VAT and related surcharges. Financing income represents financing service fees thatwe collect from borrowers for on-balance sheet transactions, which we have facilitated since inception in April 2014. Sales commission fee representsfee earned from merchandise suppliers in connection with merchandise credit products. Revenue from sales-type lease represents the sales price of carswe sell to car buyers in connection with our budget auto financing products. Penalty fees represent fees we charge borrowers for late repayment. Loanfacilitation income and others represent loan facilitation fees earned from certain institutional funding partners in connection with off-balance sheettransactions, a type of funding arrangement that started in September 2016. For more information, see “Item 5. Operating and Financial Review andProspects — A. Operating Results — Critical Accounting Policies — Revenue Recognition.” The following table sets forth the breakdown of our totalrevenues, both in absolute amount and as a percentage of our total revenues, for the periods presented: Year Ended December 31, 2015 2016 2017 RMB % of totalrevenues RMB % of totalrevenues RMB US$ % of totalrevenues (in thousands, except for percentages) Revenues Financing income 153,554 65.3 1,271,456 88.1 3,642,184 559,793 76.3 Sales commission fee 62,182 26.5 126,693 8.8 797,167 122,522 16.7 Revenue from sales-type lease — — — — 26,084 4,009 0.5 Penalty fees 19,271 8.2 22,943 1.6 7,922 1,218 0.2 Loan facilitation income and others — — 21,754 1.5 302,010 46,418 6.3 Total revenues 235,007 100.0 1,442,846 100.0 4,775,366 733,960 100.0 Financing IncomeFinancing income represents financing service fees that we collect from borrowers for on-balance sheet transactions, which we have facilitatedsince inception in April 2014. Financing income is net of origination costs, VAT and related surcharges. The amount of financing income for eachtransaction is primarily based upon the amount and duration of such credit product. The aspects of our operations that give rise to interest incomeinclude, among others, the time value of money associated with the funds lent to borrowers and the credit risk that we undertake. Therefore, werecognize financing income using the effective interest method.For borrowers with strong credit profiles, we may offer them discounts as to financing service fees. When a borrower applies a discount to aspecific installment, such discount reduces the amount that the borrower is obligated to repay for such installment. Therefore, the discount represents areduction in the future cash flows from the credit drawdown and is recorded as a reduction to financing income utilizing the effective interest ratemethod.Sales Commission FeeSales commission fee represents fee earned from merchandise suppliers when borrowers purchase their merchandise on our marketplace andcomprise (i) the difference between the retail prices of the merchandise sold to borrowers and the prices of the merchandise that we pay to themerchandise suppliers and (ii) rebates earned from merchandise suppliers. 118Source: Qudian Inc., 20-F, April 09, 2018Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Table of ContentsRevenue from Sales-Type LeaseWe recognize the sales price of cars, which consists of down payment and principal under the sales-type finance leases, as revenue from sales-type leases.Penalty FeesPenalty fees represent fees we charge borrowers for late repayment. As collectability is not reasonably assured, the penalty fee is recorded on acash basis.Loan Facilitation Income and OthersLoan facilitation income and others represent loan facilitation fees earned from certain institutional funding partners for credit directly funded bythem, a type of funding arrangement that started in September 2016. The relevant institutional funding partners deduct the principal and fees due tothem from borrowers’ repayments and remit the remainder to us as our loan facilitation fees. Such loan facilitation fees, net of the fair value ofguarantee liabilities which was deducted from the consideration, are recognized as loan facilitation income and others. Loan facilitation income andothers represent (i) an initial intermediary fee earned from the institutional funding partners on the origination date in consideration of our loanfacilitation services and (ii) a recurring fee earned from such institutional funding partners in consideration of our post-origination services.Operating Cost and ExpensesOur operating cost and expenses consist of cost of revenues, sales and marketing expenses, general and administrative expenses, research anddevelopment expenses, loss on guarantee liabilities and provision for loan principal, financing service fee receivables and other receivables. Thefollowing table sets forth our operating cost and expenses, both in absolute amount and as a percentage of our total revenues, for the periods presented: Year Ended December 31, 2015 2016 2017 RMB % RMB % RMB US$ % (in thousands, except for percentages) Operating cost and expenses: Cost of revenues 148,417 63.2 267,862 18.6 880,846 135,384 18.4 Sales and marketing 192,603 82.0 182,458 12.6 431,749 66,359 9.0 General and administrative 42,426 18.1 108,786 7.5 183,674 28,230 3.8 Research and development 37,530 16.0 52,275 3.6 153,258 23,555 3.2 Loss on guarantee liabilities — — 861 0.1 150,152 23,078 3.1 Provision for loan principal, financing service fee receivables and otherreceivables 45,111 19.2 132,177 9.2 605,164 93,012 12.9 Total 466,086 198.3 744,418 51.6 2,404,843 369,618 50.4 119Source: Qudian Inc., 20-F, April 09, 2018Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Table of ContentsThe following table sets forth our operating cost and expenses paid to related parties for the periods presented: Year Ended December 31, 2015 2016 2017 RMB RMB RMB US$ (in thousands) Operating cost and expenses paid to related parties: Cost of revenues(1) 8,185 47,337 223,169 34,300 Sales and marketing(2) — 36,150 238,115 36,598 Total 8,185 83,486 461,284 70,898 (1)Primarily includes (i) payment processing and settlement fees to Alipay, (ii) fees related to credit analysis information provided by Zhima Credit,(iii) fees related to cloud computing services provided by Alibaba Cloud Computing and (iv) interest expenses of borrowings from GuoshengFinancial Holding Inc. in connection with its investment in one of our trusts.(2)Includes borrower engagement fees to Alipay and Zhima Credit.No general and administrative or research and development expenses were paid to related parties during the periods presented.Cost of RevenuesOur cost of revenues represent interest expenses of borrowings, which are fees paid or payable to institutional funding partners, cost of sales-typelease, which primarily consists of cost of cars we purchase, and other lending related costs, which include payment processing and settlement fees,including those paid to Alipay. The following table sets forth components of our cost of revenues, both in absolute amount and as a percentage of ourtotal revenues, for the periods presented: Year Ended December 31, 2015 2016 2017 RMB % RMB % RMB US$ % (in thousands, except for percentages) Cost of revenues: Interest expenses of borrowings 122,706 52.2 210,950 14.6 686,890 105,573 14.4 Cost of sales-type lease — — — — 23,895 3,673 0.5 Other lending related costs 25,711 10.9 56,912 3.9 170,061 26,138 3.5 Total 148,417 63.2 267,862 18.6 880,846 135,384 18.4 Interest expenses of borrowings depend on the institutional funding partners which we work with to fund the transactions we facilitate.Historically, we typically group credit drawdowns into portfolios and transfer them to institutional funding partners. Such institutional fundingpartners then provide us with funding for the credit drawdowns transferred, which are recorded as short-term borrowings and long-term borrowings onour consolidated balance sheet. After collecting principals and financing service fees from borrowers, we remit to these institutional funding partnersall principals and fees payable. If borrowers default on their payment obligations, we are generally obligated to repay these institutional fundingpartners all principals and fees payable in respect of credit drawdowns funded by them. We have ceased transferring credit drawdowns to P2P platformsin April 2017. We recognize fees paid to such institutional funding partners as interest expenses of borrowing in our cost of revenues. Starting inDecember 2016, we also collaborate with trust companies to enable certain institutional funding partners to provide funding to borrowers throughtrusts. Such trust arrangements provide a specified rate of return to the institutional funding partners. The amount accrued that reflects such 120Source: Qudian Inc., 20-F, April 09, 2018Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Table of Contentspre-agreed rate of return payable to the institutional funding partners is also recognized as interest expenses of borrowings. Fee rates vary amonginstitutional funding partners. As of December 31, 2017, the weighted average interest rate for the outstanding borrowings was approximately 9.40%.The interests payable to institutional funding partners are lower than financing service fees we collect from borrowers on the credit drawdownstransferred. Certain institutional funding partners provide funds directly to borrowers for credit that we facilitate, and we do not recognize interestexpenses of borrowings relating to such credit drawdowns. In addition, when utilizing our own capital to fund credit, we also do not incur interestexpenses of borrowings.Sales and MarketingSales and marketing expenses consist primarily of expenses related to borrower engagement and retention, such as fees paid to Alipay andgeneral brand awareness building. Sales and marketing expenses also include salaries, benefits and share-based compensation related to our sales andmarketing staff.General and AdministrativeGeneral and administrative expenses consist primarily of share-based compensation, salaries and benefits related to accounting and finance,business development, legal, human resources and other personnel, as well as professional service fees related to various corporate activities.Research and DevelopmentResearch and development expenses consist primarily of share-based compensation, salaries and benefits related to technology and productdevelopment personnel, as well as rental expenses related to offices for our technology and product development personnel.Loss on Guarantee LiabilitiesFor each off-balance sheet transaction, we record the fair value of guarantee liabilities, which represents the present value of our expected payoutbased on the estimated delinquency rate and the applicable discount rate for time value. The financing service fees payable to us, net of guaranteeliabilities which were deducted from the consideration in connection with such transaction, are recognized as loan facilitation income and others. Anyincrease in the fair value of guarantee liabilities of off-balance sheet transactions is recognized as loss on guarantee liabilities in our results ofoperations. We started to facilitate off-balance sheet transactions in September 2016 and recognized RMB0.9 million and RMB150.2 million (US$23.1million) of loss on guarantee liabilities in 2016 and 2017, respectively.Provision for Loan Principal, Financing Service Fee Receivables and Other ReceivablesWe periodically adjust our allowance for loan principal and financing service fee receivables when we believe that the future collection ofprincipal is unlikely. We base this allowance primarily on historical loss experience using a roll rate-based model applied to our principal andfinancing service fees receivables portfolios and, to a lesser extent, macroeconomic factors. For information regarding our accounting policy related toallowance for loan principal and financing service fee receivables, see “— Critical Accounting Policies — Loan Principal and Financing Service FeeReceivables.” We periodically adjust our allowance for other receivables when we believe that the future collection of receivables from merchandisesuppliers is unlikely. Each merchandise supplier is obligated to refund us the amount we have paid, if the relevant borrower returns previouslypurchased merchandise in accordance with the product return policies of our marketplace. We recognize any increase in allowance for loan principal,financing service fee receivables and other receivables as provision for loan principal, financing service fee receivables and other receivables for therelevant period. The 121Source: Qudian Inc., 20-F, April 09, 2018Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Table of Contentsfollowing table sets forth the provision for loan principal, financing service fee receivables and other receivables, both in an absolute amount and as apercentage of total revenues, for the periods presented. Year Ended December 31, 2015 2016 2017 RMB % RMB % RMB US$ % (in thousands, except for share and per share data) Provision for loan principal, financing service fee receivables and other receivables 45,111 19.2 132,177 9.2 605,164 93,012 12.7 The amounts payable to institutional funding partners due to borrower defaults were RMB18.3 million, RMB32.6 million and RMB34.8 million(US$5.3 million) in 2015, 2016 and 2017, respectively. Such amounts were included in provision for loan principal, financing service fee receivablesand other receivables.Share-based CompensationThe following table sets forth the effect of share-based compensation expenses on our operating cost and expenses line items, both in an absoluteamount and as a percentage of total revenues, for the periods presented. Year Ended December 31, 2015 2016 2017 RMB % RMB % RMB US$ % (in thousands) Sales and marketing 23,691 10.1 690 0.0 1,891 291 0.0 General and administrative 11,425 4.9 18,986 1.3 42,849 6,586 0.9 Research and development 20,492 8.7 2,457 0.2 19,316 2,969 0.4 Total 55,607 23.7 22,134 1.5 64,056 9,845 1.3 See “— Critical Accounting Policies — Measurement of Share-based Compensation” for a description of what we account for the compensationcost from share-based payment transactions.TaxationCayman IslandsWe are an exempted company incorporated in the Cayman Islands. Under the current laws of the Cayman Islands, we are not subject to tax basedupon profits, income, gains or appreciations and there is no taxation in the nature of inheritance tax or estate duty. In addition, upon payment ofdividends by us to our shareholders, no Cayman Islands withholding tax will be imposed.Hong KongOur subsidiary incorporated in Hong Kong is subject to Hong Kong profit tax at a rate of 16.5%. No Hong Kong profit tax has been levied as wedid not have assessable profit that was earned in or derived from the Hong Kong subsidiary during the periods presented. Hong Kong does not impose awithholding tax on dividends.ChinaGenerally, our subsidiary and consolidated VIEs in China are subject to enterprise income tax on their taxable income in China at a rate of 25%.The enterprise income tax is calculated based on the entity’s global income as determined under PRC tax laws and accounting standards. 122Source: Qudian Inc., 20-F, April 09, 2018Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Table of ContentsWe are subject to VAT at a rate of 6% on the services we provide to borrowers, less any deductible VAT we have already paid or borne. We arealso subject to surcharges on VAT payments in accordance with PRC law.Dividends paid by our wholly foreign-owned subsidiary in China to our intermediary holding company in Hong Kong will be subject to awithholding tax rate of 10%, unless the relevant Hong Kong entity satisfies all the requirements under the Arrangement between the PRC and theHong Kong Special Administrative Region on the Avoidance of Double Taxation and Prevention of Fiscal Evasion with respect to Taxes on Incomeand Capital and receives approval from the relevant tax authority. If our Hong Kong subsidiary satisfies all the requirements under the tax arrangementand receives approval from the relevant tax authority, then the dividends paid to the Hong Kong subsidiary would be subject to withholding tax at thestandard rate of 5%.If our holding company in the Cayman Islands or any of our subsidiaries outside of China were deemed to be a “resident enterprise” under thePRC Enterprise Income Tax Law, it would be subject to enterprise income tax on its worldwide income at a rate of 25%.Critical Accounting PoliciesWe prepare our consolidated financial statements in conformity with U.S. GAAP, which requires us to make judgments, estimates andassumptions. We continually evaluate these estimates and assumptions based on the most recently available information, our own historicalexperiences and various other assumptions that we believe to be reasonable under the circumstances. Since the use of estimates is an integralcomponent of the financial reporting process, actual results could differ from our expectations as a result of changes in our estimates. Some of ouraccounting policies require a higher degree of judgment than others in their application and require us to make significant accounting estimates.The following descriptions of critical accounting policies should be read in conjunction with our consolidated financial statements and otherdisclosures included in this annual report. When reviewing our consolidated financial statements, you should consider (i) our selection of criticalaccounting policies, (ii) the judgments and other uncertainties affecting the application of such policies and (iii) the sensitivity of reported results tochanges in conditions and assumptions.Revenue RecognitionBorrowers can withdraw cash (or cash installment credit services) or purchase products (e.g. personal consumer electronics) (or merchandiseinstallment credit services) up to their approved credit limits and elect the installment repayment period, mainly ranging from 1 to 12 installments(either weekly or monthly) through our applications or via borrowers’ Alipay accounts. We charge service fees for facilitating the financing, managingthe financing platform and for acting as a guarantor for the financing. The service fees are recorded as financing income in the statement ofcomprehensive (loss)/income in accordance with ASC 310. We may subsequently transfer the credit drawdowns to institutional funding partners.The sales commission fee is fixed based on the retail sales price without considering the financing terms chosen by the borrower. Salescommission fee is recorded net of the related cost on delivery date, as we do not assume inventory risk for the products and is considered to be an agentin accordance with ASC 605. Accordingly, we recognize the sales commission fee when persuasive evidence of an arrangement exists, delivery hasoccurred, the sales price is fixed or determinable and collection is probable.We launched Dabai Auto, our budget auto financing products, in November 2017. We purchase cars on our inventory and lease them tocreditworthy car buyers. The legal title of the leased assets is with us until the leasing period ends. The fair value of the leased assets at lease inceptionis greater than its cost or carrying amount. Consequently, we have classified the leases as sales-type finance leases for financial accounting purposes.We report the discounted present value of future minimum lease payments as a finance lease receivable on our 123Source: Qudian Inc., 20-F, April 09, 2018Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Table of Contentsbalance sheet and accrue interest on the balance of the finance lease receivable based on the interest rate inherent in the applicable lease over the termof the lease. The interest earned on finance lease receivables is recognized using the effective interest method. We recognize interest earned on financeleases receivables as financing income. We recognize the sales price of cars, which consists of down payment and principal under the sales-type financeleases, as revenue from sales-type leases.Since September 2016, we have entered into credit facilitation arrangement with several financial institutions. We match borrowers with thefinancial institutions which directly fund credit to borrowers, and we provide post-origination services, for example, short messaging reminder servicesthroughout the term of the loans. For each successful match, we earn an initial intermediary fee and a recurring service fee throughout the term of thecredit products from the relevant financial institution. Borrowers make repayments directly to the financial institutions and the financial institutionswill then remit the initial intermediary fees and recurring service fees to us on a periodic basis. The two deliverables provided by us are loan facilitationservices and post origination services. In addition, we provide a guarantee to the financial institutions which require us to make payments to thefinancial institutions based on the overdue rate of the credit portfolio under this arrangement. We consider the loan facilitation services and the postorigination services as a multiple element revenue arrangement, and the financial institutions as the sole customers in the arrangement. We firstallocate the consideration to the guarantee liability equaling to the fair value of the guarantee liability. The remaining consideration is allocated to theloan facilitation services and post origination services on a relative selling price method. We do not have vendor specific objective evidence, or VSOE,of selling price for the loan facilitation services and post origination services because we do not provide loan facilitation services or post originationservices on a standalone basis. There is also no third-party evidence of the prices charged by third-party service providers when such services are soldseparately as the basis of revenue allocation. As a result, we use our best estimate of selling prices of loan facilitation services and post originationservices as the basis of revenue allocation. Nevertheless, the amount allocated to the delivered loan facilitation services is limited to the amount that isnot contingent on the delivery of the undelivered post-origination services in accordance with ASC 605-25. The loan facilitation services and postorigination services are recorded as loan facilitation income and others in the consolidated statements of comprehensive (loss)/income.For loan facilitation services, post-origination services and sales commission fee, we recognize revenue when the following four revenuerecognition criteria are met: (i) persuasive evidence of an arrangement exists, (ii) services have been rendered, (iii) the fee is fixed or determinable, and(iv) collectability is reasonably assured, in accordance with ASC 605, Revenue Recognition, or ASC 605. As collectability is uncertain in relation tothe remaining loan facilitation income due to the potential default by borrowers such that they are not considered to be fixed or determinable, theremaining loan facilitation income is recorded on a cash basis.Loan Principal and Financing Service Fee ReceivablesLoan principal and financing service fee receivables represent payments due from borrowers who utilize our credit products. Loan principal andfinancing service fee receivables are recorded at amortized cost (i.e. unpaid principal and deferred origination costs), net of allowance for loanprincipal. Deferred origination costs are netted against revenue and amortized over the financing term using the effective interest method.Allowance for Loan Principal and Financing Service Fee ReceivablesWe consider the loans to be homogenous as they are all unsecured consumer loans of similar principal amounts. The profile of the borrowers arealso similar, i.e., age, credit histories and employment status. Therefore, we apply a consistent credit risk management framework to the entire portfolioof loans in accordance with ASC 450-20, Loss Contingencies.Allowance for loan principal and financing service fee receivables losses is calculated based on historical loss experience using a roll rate-basedmodel. The roll rate-based model stratifies the loan principal and financing 124Source: Qudian Inc., 20-F, April 09, 2018Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Table of Contentsservice fee receivables by delinquency stages (i.e., current, 1-30 days past due, and 31-60 days past due, etc.) and projects forward in one-monthincrements using historical roll rates. In each month of the simulation, losses on the loan principal and financing service fee receivables types arecaptured, and the ending delinquency stratification serves as the beginning point of the next iteration. This process is repeated on a monthly rollingbasis. The loss rate calculated for each delinquency stage is then applied to the respective loan principal and service fees balance. We adjust theallowance that is determined by the roll rate-based model for various Chinese macroeconomic factors, i.e., gross-domestic product rates, per capitadisposable income, interest rates and consumer price indexes. Each of these macroeconomic factors are equally weighted, and a score is applied to eachfactor based on year-on-year increases and decreases in that respective factor.Loan principal and financing service fee receivables are charged off when a settlement is reached for an amount that is less than the outstandingbalance or when we have determined the balance is uncollectable. In general, we consider loan principal and financing service fee receivables meetingany of the following conditions as uncollectable and charged-off: (i) death of the borrower; (ii) identification of fraud, and the fraud is officiallyreported to and filed with relevant law enforcement departments or (iii) the amount remained outstanding 180 days past due and therefore deemeduncollectible.For the year ended December 31, 2016, we considered loan principal and financing service fee receivables meeting any of the followingconditions as uncollectible and charged off: (1) death of the borrower; (ii) identification of fraud, and the fraud is officially reported to and filed withrelevant law enforcement departments or (iii) the amount remained outstanding 180 days past due and after we concludes that we have exhausted itscollection efforts.In order to align our charge-off policy with ASC 310-10-35-41, we revised its charge-off policy such that all loans that are 180 days past due aretherefore deemed uncollectible and charged-off.The change in the charge-off policy had no impact our provision for loan losses for the year ended December 31, 2016 as the balance of loans180 days past due was fully offset by the allowance before charge-off and only results in a net off of the loan principal and financing service feereceivables and its allowance balance. The change in the charge-off policy as a result of the correction of an error did not have a material impact on our2016 audited consolidated financial statements.Nonaccrual Loan Principal and Financing Service Fee ReceivablesWe do not accrue financing service fee on loan principals that are considered impaired or are more than 90 days past due. A correspondingallowance is determined under ASC 450-20 and allocated accordingly. After an impaired financing service fee receivable has been placed onnonaccrual status, financing service fee will be recognized when cash is received on a cash basis cost recovery method by applying first to reduceprincipal and then to financing income thereafter. Financing service fee accrued but not received is generally reversed against financing income.Financing service fee receivables may be returned to accrual status after all of the borrower’s delinquent balances of loan principal and financingservice fee have been settled and the borrower remains current for an appropriate period.Finance Lease ReceivablesFinance lease receivables represent the discounted present value of future minimum lease payments. Finance lease receivables are recorded atamortized cost, including the gross amount of minimum lease payments receivable, net of allowance and unearned revenue.The automobile leasing service is offered to individual customers. We consider the finance lease receivables to be homogenous and applycollective assessment for its allowance in accordance with ASC 450-20. The allowance for finance lease receivables is calculated based on historicalloss experience using a roll rate-based model which is the same as the model used for loan principal and financing service fee receivables. 125Source: Qudian Inc., 20-F, April 09, 2018Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Table of ContentsWhen the finance lease receivables are overdue, we could repossess the cars and then dispose such cars via auction, consignment orre-acquisition, so we could recover, minimize or mitigate the loss of finance lease receivables.We do not accrue financing income on finance lease receivables that are more than 90 days past due. A corresponding allowance is determinedunder ASC 450-20 and allocated accordingly. After an impaired finance lease receivable has been placed on nonaccrual status, financing income willbe recognized when cash is received on a cash basis cost recovery method by applying first to reduce principal and then to interest thereafter.Financing income accrual generally resumes once an account has received payments bringing the delinquency to less than 90 days past due.In the event that the finance lease receivables are past due for 180 days, we may consider charging off the finance lease receivables. Theuncollectible portion will be charged off such that the remaining balance is equal to the estimated fair value of the collateral less costs to sell and thenthe repossessed cars will be accounted as “repossessed assets” measured at fair value.Guarantee LiabilitiesAs part of our cooperation with various financial institutions, we provide guarantee on the principal and accrued interest repayment of thedefaulted loans to the financial institutions, even in the event the loans are subsequently sold by the financial institutions.The financial guarantee is accounted for as a credit derivative under ASC 815 because the scope exemption in ASC 815-10-15-58(c) is not met.The guarantee liabilities are remeasured at each reporting period. The change in fair value of the guarantee liabilities is recorded as loss on guaranteeliabilities in the consolidated statements of comprehensive (loss)/income. When we settle the guarantee liabilities through performance of theguarantee by making requisite payments on the respective defaulted loans, we record a corresponding deduction to the guarantee liabilities.Subsequent collection from the borrower through the financial institutions will be recognized as a reversal of deduction to guarantee liabilities.Income TaxesWe account for income taxes using the asset and liability method, which requires the recognition of deferred tax assets and liabilities for theexpected future consequences of events that have been recognized in the consolidated financial statements or in our tax returns. Deferred tax assets andliabilities are recognized on the basis of the temporary differences that exist between the tax bases of assets and liabilities and their reported amounts inthe consolidated financial statements using enacted tax rates in effect for the year in which the differences are expected to reverse. Changes in deferredtax assets and liabilities are recorded in earnings. Deferred tax assets are reduced by a valuation allowance through a charge to income tax expensewhen, in the opinion of management, it is more-likely-than-not that a portion of or all of the deferred tax assets will not be realized. Potential forrecovery of deferred tax assets is evaluated by estimating the future taxable profits expected and considering prudent and feasible tax planningstrategies. The components of the deferred tax assets and liabilities are classified as non-current on the consolidated balance sheets.We account for uncertainty in income taxes recognized in the consolidated financial statements by applying a two-step process to determine theamount of the benefit to be recognized. First, the tax position must be evaluated to determine the likelihood that it will be sustained upon externalexamination by the taxing authorities. If the tax position is deemed more-likely-than-not to be sustained (defined as a likelihood of more than fiftypercent of being sustained upon an audit, based on the technical merits of the tax position). The tax position is then assessed to determine the amountof benefits to recognize in the consolidated financial statements. The amount of the benefits that may be recognized is the largest amount that has agreater than 50% likelihood of being realized upon ultimate settlement. Interest and penalties on income taxes will be classified as 126Source: Qudian Inc., 20-F, April 09, 2018Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Table of Contentsa component of the provisions for income taxes. We did not recognize any income tax due to uncertain tax position or incur any interest and penaltiesrelated to potential underpaid income tax expenses for the years ended December 31, 2015 and 2016 and 2017, respectively.Measurement of Share-based CompensationIn August 2014, Qufenqi Inc., a former holding company of Beijing Happy Time, adopted a share incentive plan, or the 2014 Share IncentivePlan. For information regarding the 2014 Share Incentive Plan, see “Item 6. Directors, Senior Management and Employees — B. Compensation ofDirectors and Executive Officers — 2014 Share Incentive Plan.” On various dates from August 2014 to December 2014, 18,373,219 share options weregranted to certain of our employees and a third-party consultant. On various dates in 2015, 2,449,800 share options were granted to certain of ouremployees.On December 26, 2015, Beijing Happy Time adopted a share incentive plan, or the 2015 Share Incentive Plan. For information regarding the2015 Share Incentive Plan, see “Item 6. Directors, Senior Management and Employees — B. Compensation of Directors and Executive Officers — 2015Share Incentive Plan.” On December 26, 2015, options to purchase 15,814,019 virtual shares pursuant to the 2015 Share Incentive Plan were issued tocertain of our employees and a third-party consultant to replace the 15,814,019 share options granted to such individuals under the 2014 ShareIncentive Plan.On December 9, 2016, Qudian Inc. adopted an equity incentive plan, or the 2016 Equity Incentive Plan. For information regarding the 2016Equity Incentive Plan, see “Item 6. Directors, Senior Management and Employees — B. Compensation of Directors and Executive Officers — 2016Equity Incentive Plan.” The maximum number of ordinary shares subject to equity awards pursuant to the 2016 Equity Incentive Plan is 15,814,019initially. On January 1, 2018, and on every January 1 thereafter for eight years, the aggregate number of ordinary shares reserved and available forissuance pursuant to awards granted under the 2016 Equity Incentive Plan will be increased by 1.0% of the total number of ordinary shares outstandingon December 31 of preceding calendar year. Unless terminated earlier, the 2016 Equity Incentive Plan will terminate automatically in 2026.In December 2016, we granted 15,299,019 options to purchase our ordinary shares to certain of our employees and a third-party consultantpursuant to the 2016 Equity Incentive Plan to replace all awards under the 2015 Share Incentive Plan. On May 3, 2017, we granted 494,904 options topurchase our ordinary shares to certain of our employees pursuant to the 2016 Equity Incentive Plan. On August 17, 2017, we granted 200,000 optionsto purchase our ordinary shares to our independent director appointees and certain of our employees pursuant to the 2016 Equity Incentive Plan.Share-based payment transactions with employees, such as share options are measured based on the grant date fair value of the equity instrument.We recognize the compensation costs net of estimated forfeitures using the straight-line method, over the applicable vesting period. The estimate offorfeitures will be adjusted over the requisite service period to the extent that actual forfeitures differ, or are expected to differ, from such estimates.Changes in estimated forfeitures will be recognized through a cumulative catch-up adjustment in the period of change and will also impact the amountof stock compensation expense to be recognized in future periods. Share options granted to employees with market conditions attached are measured atfair value on the grant date and are recognized as the compensation costs over the estimated requisite service period, regardless of whether the marketcondition has been met.A change in any of the terms or conditions of share options or a replacement of a share option plan is accounted for as a modification of shareoptions. We calculate the incremental compensation cost of a modification as the excess of the fair value of the modified option over the fair value ofthe original option immediately before its terms are modified, measured based on the share price and other pertinent factors at the modification date.For vested options, we recognize incremental compensation cost in the period the modification 127Source: Qudian Inc., 20-F, April 09, 2018Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Table of Contentsoccurred. For unvested options, we recognize, over the remaining requisite service period, the sum of the incremental compensation cost and theremaining unrecognized compensation cost for the original award on the modification date.Excluding the options containing market and service vesting conditions, we calculated the estimated fair value of the options on the respectivegrant dates using a binomial option pricing model with assistance from independent valuation firms, with the following assumptions: Year Ended December 31, 2015 2016 2017Risk-free interest rate 2.00%–2.43% 2.47% 1.56%–2.33%Volatility 46.6%–50.3% 49.8%–49.9% 50.9%–52.4%Expected exercise multiple 2.2–2.8 2.2–2.8 2.2–2.8Dividend yield 0% 0% 0%Expected term (in years) 10 10 10Exercise price (RMB) 0.0 0.0 0.0Fair value of share options (RMB) 3.82–12.63 25.89–26.04 81.94-94.22Determining the fair value of the share options required us to make complex and subjective judgments, assumptions and estimates, whichinvolved inherent uncertainty. Had we used different assumptions and estimates, the resulting fair value of the share options and the resulting share-based compensation expenses could have been different.The following table sets forth the fair value of options and ordinary shares estimated at the dates of option grants indicated below with theassistance from an independent valuation firm: Date of Options Grant(1) OptionsGranted ExercisePrice IntrinsicValue Fair Value ofOption Fair Value ofOrdinaryShares Discount forLack ofMarketability DiscountRate Type ofValuations August 29, 2014 10,900,000 US$0.00 US$0.11 US$0.11 US$0.11 20.0% 25.5% Retrospective November 1, 2014 7,473,219 US$0.00 US$0.36 US$0.36 US$0.36 20.0% 25.0% Retrospective March 1, 2015 2,042,500 US$0.00 US$0.61 US$0.61 US$0.61 20.0% 24.5% Retrospective June 4, 2015 407,300 US$0.00 US$0.79 US$0.79 US$0.79 20.0% 23.0% Retrospective December 26, 2015 15,814,019 US$0.00 US$1.95 US$1.95 US$1.95 20.0% 21.0% Retrospective December 9, 2016 1,433,800 US$0.00 US$3.75 US$3.75 US$3.75 5.0% 20.5% Retrospective December 30, 2016 13,865,219 US$0.00 US$3.75 US$3.75 US$3.75 5.0% 20.5% Retrospective May 3, 2017 494,904 US$0.00 US$11.88 US$11.88 US$11.88 5.0% 20.0% Retrospective August 17, 2017 200,000 US$0.00 US$14.12 US$14.12 US$14.12 3.0% 20.0% Retrospective (1)Include options that are issued close to the valuation dates indicated, and such options are valued at the nearest valuation date.In determining the fair value of our ordinary shares, we applied the income approach / discounted cash flow, or DCF, analysis based on ourprojected cash flow using management’s best estimate as of the valuation date. The determination of the fair value of our ordinary shares requirescomplex and subjective judgments to be made regarding our projected financial and operating results, our unique business risks, the liquidity of ourshares and our operating history and prospects at the time of valuation.The major assumptions used in calculating the fair value of ordinary shares include: • Weighted average cost of capital, or WACC: The discount rates we listed in the table above were based on the WACCs determined basedon a consideration of the factors, including risk-free rate, comparative industry risk, equity risk premium, company size and non-systematicrisk factors. 128Source: Qudian Inc., 20-F, April 09, 2018Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Table of Contents • Comparable companies: In deriving the WACCs, which are used as the discount rates under the income approach, nine publicly tradedcompanies were selected for reference as our guideline companies. The guideline companies were selected based on the following criteria:(i) online retail and mobile commerce companies or companies that provide financial lending services and (ii) China-based companies thatare publicly listed in the United States, publicly listed companies in China and United States-based publicly listed companies. • Discount for lack of marketability, or DLOM: DLOM was quantified by the Finnerty’s Average-Strike put options model. Under thisoption-pricing model, which assumed that the put option is struck at the average price of the stock before the privately held shares can besold, the cost of the put option was considered as a basis to determine the DLOM. This option pricing model is one of the methodscommonly used in estimating DLOM as it can take into consideration factors like timing of a liquidity event, such as an initial publicoffering, and estimated volatility of our shares. The farther the valuation date is from an expected liquidity event, the higher the put optionvalue and thus the higher the implied DLOM. The lower DLOM is used for the valuation, the higher is the determined fair value of theordinary shares. DLOM remained 20% in the period from inception to 2015.The income approach involves applying appropriate discount rates to estimated cash flows that are based on earnings forecasts. The growthrates of our total revenues, as well as major milestones that we have achieved, contributed to the increase in the fair value of our ordinary shares fromRMB3.82 to RMB94.22. However, these fair values are inherently uncertain and highly subjective. The assumptions used in deriving the fair valuesare consistent with our business plan. These assumptions include: no material changes in the existing political, legal and economic conditions inChina; our ability to retain competent management, key personnel and staff to support our ongoing operations; and no material deviation in marketconditions from economic forecasts. These assumptions are inherently uncertain. The risks associated with achieving our forecasts were assessed inselecting the appropriate discount rates. 129Source: Qudian Inc., 20-F, April 09, 2018Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Table of ContentsResults of Operations for Continuing OperationsThe following tables set forth a summary of our consolidated results of operations for the periods presented. Our historical results presentedbelow are not necessarily indicative of the results that may be expected for any future period. Year Ended December 31, 2015 2016 2017 RMB RMB RMB US$ (in thousands, except for share and per share data) Revenues: Financing income 153,554 1,271,456 3,642,184 559,793 Sales commission fee 62,182 126,693 797,167 122,522 Revenue from sales-type lease — — 26,083 4,009 Penalty fees 19,271 22,943 7,922 1,218 Loan facilitation income and others — 21,754 302,010 46,418 Total revenues 235,007 1,442,846 4,775,366 733,960 Operating cost and expenses: Cost of revenues (148,417) (267,862) (880,846) (135,384) Sales and marketing (192,603) (182,458) (431,749) (66,359) General and administrative (42,426) (108,786) (183,674) (28,230) Research and development (37,530) (52,275) (153,258) (23,555) Loss on guarantee liabilities — (861) (150,152) (23,078) Provision for loan principal, financing service fee receivables and other receivables (45,111) (132,176) (605,164) (93,012) Total operating cost and expenses (466,086) (744,418) (2,404,843) (369,618) Other operating income — 14,646 50,703 7,794 (Loss)/income from operations (231,078) 713,074 2,421,226 372,136 Interest and investment income, net 2,889 1,857 4,211 647 Foreign exchange gain/(loss), net 752 (9,651) (7,177) (1,103) Other income 779 47 2,108 324 Other expenses (6,505) (1,834) (363) (56) Net (loss)/income before income taxes (233,164) 703,493 2,420,005 371,948 Income tax expenses — (126,840) (255,546) (39,277) Net (loss)/income (233,164) 576,653 2,164,459 332,671 130Source: Qudian Inc., 20-F, April 09, 2018Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Table of Contents Year Ended December 31, 2015 2016 2017 (%) Revenues: Financing income 65.3 88.1 76.3 Sales commission fee 26.5 8.8 16.7 Revenue from sales-type lease — — 0.5 Penalty fees 8.2 1.6 0.2 Loan facilitation income and others — 1.5 6.3 Total revenues 100.0 100.0 100.0 Operating cost and expenses: Cost of revenues (63.2) (18.6) (18.4) Sales and marketing (82.0) (12.6) (9.0) General and administrative (18.1) (7.5) (3.8) Research and development (16.0) (3.6) (3.2) Loss on guarantee liabilities — (0.1) (3.1) Provision for loan principal, financing service fee receivables and other receivables (19.2) (9.2) (12.9) Total operating cost and expenses (198.3) (51.6) (50.4) Other operating income — 1.0 1.1 (Loss)/income from operations (98.3) 49.4 50.7 Interest and investment income, net 1.2 0.1 0.1 Foreign exchange gain/(loss), net 0.3 (0.7) (0.2) Other income 0.3 0.0 0.0 Other expenses (2.8) (0.1) (0.0) Net (loss)/income before income taxes (99.2) 48.8 50.7 Income tax expenses — (8.8) (5.4) Net (loss)/income (99.2) 40.0 45.3 Comparison of Year Ended December 31, 2017 and Year Ended December 31, 2016Total revenues. Our total revenues in 2017 increased by 231.0% to RMB4,775.4 million (US$734.0 million) from RMB1,442.8 million in 2016,primarily due to the increase in financing income as a result of the substantial increase in the volume of on-balance sheet transactions. Financingincome totaled RMB 3,642.2 million (US$559.8 million) in 2017, increasing 186.5% from RMB1,271.5 million in 2016. Loan facilitation income andothers increased to RMB302.0 million (US$46.4 million) in 2017, up 1288.3% from RMB21.8 million in 2016, as a result of the substantial increase inthe volume of off-balance sheet transactions. Sales commission fee increased to RMB797.2 million (US$122.5 million) in 2017, up 529.2% fromRMB126.7 million in 2016. The significant year-over-year growth in sales commission fee was mainly the result of an increase in merchandise creditutilized by borrowers to purchase merchandise via Qudian’s marketplace.Total operating cost and expenses. Total operating cost and expenses increased by 223.1% to RMB2,404.8 million (US$369.6 million) in 2017from RMB744.4 million in 2016. • Cost of revenues. Our cost of revenues increased by 228.8% to RMB880.8 million (US$135.4 million) in 2017 from RMB267.9 million in2016, primarily due to higher interest expenses on borrowings because of increased use of funds provided by institutional funding partners. • Sales and marketing expenses. Our sales and marketing expenses increased by 136.6% to RMB431.7 million (US$66.4 million) in 2017from RMB182.5 million in 2016. The increase was primarily due to higher borrower engagement fees in 2017, compared with 2016. 131Source: Qudian Inc., 20-F, April 09, 2018Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Table of Contents • General and administrative expenses. Our general and administrative expenses increased by 68.8% to RMB183.7 million (US$28.2million) in 2017 from RMB108.8 million in 2016. The increase was primarily attributable to the increase of administrative fee payable totrust companies as a result of increased use of trust funding, the increase in share-based compensation expenses for general andadministrative personnel and the increase in professional service fee expenses. • Research and development expenses. Our research and development expenses increased by 193.2% to RMB153.3 million (US$23.6million) in 2017 from RMB52.3 million in 2016. The increase was primarily due to an increase in salaries and benefits expenses, in order tofurther enhance our data analytics and risk management capabilities, the increase in professional service fee expenses and the increasedshare-based compensation expense for research and development personnel. • Provision for loan principal, financing service fee receivables and other receivables. Our provision for loan principal, financing servicefee receivables and other receivables increased by 357.8% to RMB605.2 million (US$93.0 million) in 2017 from RMB132.2 million in2016. The increase was primarily due to an increase in the M1+ overdue loan principals and financing services fees receivables, which weintend to provide sufficient allowance to cover.Income from operations. Our income from operations in 2017 was RMB2,421.2 million (US$372.1 million), representing a 239.5% increase fromRMB713.1 million during the prior year.Income tax expenses. Our income tax expenses increased by 101.5% to RMB255.5 million (US$39.3 million) in 2017 from RMB126.8 million in2016, primarily due to the increase in taxable income.Net income. Our net income totaled RMB2,164.5 million (US$332.7 million) in 2017, up 275.3% from RMB576.7 million in 2016. Net incomeattributable to the Company’s shareholders per diluted share was RMB7.09 (US$1.09), compared with RMB1.90 in the prior year.Adjusted net (loss)/income. Our adjusted net income attributable to the Company’s shareholders, which excludes share-based compensationexpenses, increased by 272.2% to RMB2,228.5 million (US$342.5 million) from RMB598.8 million in the prior year. Adjusted net income attributableto the Company’s shareholders per diluted share increased to RMB7.30 (US$1.12) from RMB1.97 in the prior year.Comparison of Year Ended December 31, 2016 and Year Ended December 31, 2015Total revenues. Our total revenues increased from RMB235.0 million in 2015 to RMB1,442.8 million in 2016 primarily due to increase infinancing income from RMB153.6 million in 2015 to RMB1,271.5 million in 2016 as a result of the substantial increase in amount of on-balance sheettransactions facilitated from approximately RMB4,253.8 million in 2015 to RMB30,221.7 million in 2016. The increase in amount of on-balancesheet transactions facilitated was due to the substantial increase in the number of active borrowers from 1.2 million in 2015 to 6.1 million in 2016.Such increase in the number of active borrowers was primarily the result of (i) the shift of our target borrower base from college students to youngconsumers in general and (ii) increase in borrower engagement efficiency. The introduction of an increasing number of short-term credit productsoffered in the fourth quarter of 2015, the attractiveness of our products and our brand value also led to an increase in drawdowns by borrowers of theircredit. The number of transactions per active borrower increased from 2.2 in 2015 to 6.6 in 2016. Such short-term credit drawdowns generated lowerrevenue per transaction, partially offsetting the higher revenue driven by increasing number of transactions.Loan facilitation income and others increased from nil in 2015 to RMB21.8 million in the same period in 2016. We generate loan facilitationincome and others in connection with off-balance sheet transactions, which we started to facilitate in September 2016.Total operating cost and expenses. Our total operating cost and expenses increased from RMB466.1 million in 2015 to RMB744.4 million in2016, primarily attributable to the increase in cost of revenues, provision for 132Source: Qudian Inc., 20-F, April 09, 2018Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Table of Contentsloan principal and financing service fees and general and administrative expenses, partially offset by a decrease in sales and marketing expenses. • Cost of revenues. Our cost of revenues increased from RMB148.4 million in 2015 to RMB267.9 million in 2016 in connection with theincrease in interest expenses of borrowings due to increase in funds provided by institutional funding partners.Our cost of revenues as a percentage of our total revenues decreased from 63.2% to 18.6% during the same period, primarily due to adecrease in cost of funding offered by institutional funding partners and an increase in the portion of our own capital utilized to fund creditdrawdowns facilitated in 2016 which does not incur interest expenses of borrowings. • Sales and marketing expenses. Our sales and marketing expenses decreased from RMB192.6 million in 2015 to RMB182.5 million in2016. This was primarily due to (i) an increase in borrower engagement efficiency through the Alipay consumer interface and (ii) ourability to engage prospective borrowers through a free channel on the Alipay consumer interface generally available to third parties, whichwas partially offset by the increase in salaries and benefits paid to sales and marketing personnel. Such expenses increased fromRMB79.4 million in 2015 to RMB96.4 million in 2016 due to an increase in sales and marketing personnel from January 2016 to July2016, partially offset by the phase-out of our offline sales and marketing team after July 2016, since which time all of our borrowers wereengaged through online channels. Our sales and marketing expenses as a percentage of our total revenues decreased from 82.0% to 12.6%during the same period. • General and administrative expenses. Our general and administrative expenses increased from RMB42.4 million in 2015 toRMB108.8 million in 2016, primarily due to an increase in salaries and benefits paid primarily as a result of increase in the number ofgeneral and administrative personnel. Our general and administrative expenses as a percentage of our total revenues decreased from 18.1%to 7.5% during the same period, primarily due to the significant increase in our total revenues that has resulted in economies of scale. • Research and development expenses. Our research and development expenses increased from RMB37.5 million in 2015 toRMB52.3 million in 2016, primarily due to an increase in salaries and benefits paid as a result of the increase in the number of research anddevelopment personnel to focus on enhancing our data analytics and risk management capabilities. Our research and developmentexpenses as a percentage of our total revenues decreased from 16.0% in 2015 to 3.6% in 2016, primarily due to the significant increase inour total revenues that has resulted in economies of scale. • Loss on guarantee liabilities. We recognized loss on guarantee liabilities of RMB0.9 million in 2016 based on the present value of theexpected payouts in connection with borrowers defaults on the off-balance sheet transactions we facilitated. • Provision for loan principal, financing service fee receivables and other receivables. Our provision for loan principal, financing servicefee receivables and other receivables increased from RMB45.1 million in the 2015 to RMB132.2 million in 2016, primarily due to increasein credit drawdowns. Our Provision Ratio, which is the amount of provision for loan principal and financing service fee receivablesincurred during a period as a percentage of the total amount of on-balance sheet transactions during such period, decreased from 1.06% in2015 to 0.40% in 2016, primarily due to a lower delinquency rate of recent vintages, which is used as one of the inputs for estimating theprovision amount. Such lower delinquency rate of recent vintages was due to our enhanced credit assessment model and risk managementsystem capabilities.Other operating income. We recognized other operating income of RMB14.6 million in 2016 in connection with VAT refunds received from therelevant tax authorities.Interest and investment income, net. Our interest and investment income decreased from RMB2.9 million in 2015 to RMB1.9 million in 2016,primarily due to our share of the loss of QuCampus recognized in the amount 133Source: Qudian Inc., 20-F, April 09, 2018Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Table of Contentsof RMB4.8 million in 2016, which was partially offset by (i) an increase in investment income of short-term investments from RMB0.8 million in 2015to RMB3.4 million in 2016, and (ii) the increase in interest income from RMB2.1 million in 2015 to RMB3.3 million in 2016.Foreign exchange gain, net. We recognized foreign exchange gain, net, of RMB0.8 million in 2015. We recognized foreign exchange loss, net,of RMB9.7 million in 2016.Other income. Our other income was RMB0.8 million in 2015 primarily due to the government grants received. Our other income wasRMB47,186 in 2016.Other expenses. Our other expenses were RMB6.5 million in 2015, primarily due to donation of RMB6.5 million. Our other expenses wereRMB1.8 million in 2016, primarily due to donation of RMB1.0 million.Income tax expenses. We incurred income tax expense of RMB126.8 million in 2016. We did not incur any income tax expense in 2015 as weincurred net loss during the period.Net (loss)/income. As a result of the foregoing, we incurred a net loss of RMB233.2 million in 2015 as compared to net income ofRMB576.7 million in 2016.Adjusted net (loss)/income. We incurred adjusted net loss, which is defined as net loss excluding share-based compensation expenses, ofRMB177.6 million in 2015 as compared to adjusted net income, which is defined as net income excluding share-based compensation expenses, ofRMB598.8 million in 2016. Adjusted net (loss)/income is not defined under U.S. GAAP and are not presented in accordance with U.S. GAAP. B.Liquidity and Capital ResourcesOur primary sources of liquidity have been cash provided by operating activities and funds provided by our shareholders, including through theissuance of equity securities, which have historically been sufficient to meet our working capital and substantially all of our capital expenditurerequirements. In October 2017, we completed our initial public offering in which we issued and sold an aggregate of 35,625,000 ADSs, representing35,625,000 Class A ordinary shares, resulting in net proceeds to us of approximately US$799.6 million.In 2015, net cash used in operating activities was RMB102.3 million, and in 2016 and 2017, we had net cash provided by operating activities ofRMB794.1 million and RMB3,076.1 million (US$472.8 million), respectively.As of December 31, 2017, we had cash and cash equivalents of RMB6,832.3 million (US$1,050.1 million), as compared to cash and cashequivalents of RMB785.8 million as of December 31, 2016.As of December 31, 2017, we had short-term amounts due from Alipay of RMB549.8 million (US$84.5 million), as compared to short-termamounts due from Alipay of RMB404.6 million as of December 31, 2016. These represent amounts deposited in our Alipay accounts, and areunrestricted as to withdrawal and use and readily available to us on demand.In March and April 2017, Beijing Happy Time, our consolidated VIE, entered into two term loans with Sichuan Xinwang Bank Co., Ltd. with anaggregate maximum amount of RMB300.0 million (US$44.3 million). Each term loan has a fixed interest rate of 7.5% per annum and a term of twelvemonths. We utilized the proceeds from the drawdown to satisfy our working capital needs. We fully repaid such borrowings by end of 2018.In November 2017, Beijing Happy Time, our consolidated VIE, entered into a credit agreement with Guotou Taikang Trust Co., Ltd., or GuotouTaikang. Pursuant to such agreement, Beijing Happy Time drew down 134Source: Qudian Inc., 20-F, April 09, 2018Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Table of ContentsRMB195.0 million (US$30.0 million) in December 2017. The loan has a fixed interest rate of 5.7% per annum and a term of one year. As collateral forsuch loan, our subsidiary Qufengqi (HK) Limited has deposited US$30.0 million in a bank account designated by Guotou Taikang. We receive intereston such deposit at a rate of 2.7% per annum.In February 2018, Beijing Happy Time, our consolidated VIE, entered into a credit agreement with Xiamen International Bank Co., Ltd., orXiamen International Bank. Pursuant to such agreement, Beijing Happy Time has been granted a credit limit of up to RMB300.0 million (US$46.1million). Beijing Happy Time drew down RMB300.0 million (US$46.1 million) in March 2018. The borrowings have a fixed interest rate of 4.18% perannum, and we expect to fully repay in December 2018. As collateral for such borrowings, our subsidiary Qufengqi (HK) Limited has depositedUS$50.0 million in a bank account designated by Xiamen International Bank. We receive interest on such deposit at a rate of 0.08% per annum.We established two online small credit companies, Fuzhou Microcredit and Ganzhou Microcredit, in 2016. Each online small credit company isauthorized to provide credit drawdowns up to three times of its respective net capital pursuant to the relevant laws and regulations.The following table sets forth our total assets, total liabilities and total net assets/(liabilities) as of the dates indicated. As of December 31, 2015 2016 2017 RMB RMB RMB US$ (in thousands) Total assets 2,675,596 7,117,599 19,380,416 2,978,715 Total liabilities 3,306,965 4,604,010 9,840,049 1,512,388 Total net assets/(liabilities)(1) (631,369) 2,513,589 9,540,367 1,466,327 (1)Defined as total assets minus total liabilities.We recorded total net liabilities of RMB631.4 million as of December 31, 2015 and total net assets of RMB2,513.6 million as of December 31,2016. The change was primarily due to (i) a decrease in short-term amounts due to related parties from RMB1,606.1 million to RMB20.5 million due tosettlement of such amounts and (ii) as we achieved profitability in 2016 with net income of RMB576.7 million. Our total net assets increased fromRMB2,513.6 million as of December 31, 2016 to RMB9,540 million (US$1,466 million) as of December 31, 2017. The increase was primarily due to(i) proceeds from issuance of ordinary shares of RMB5,339.5 million (US$820.7 million) and (ii) net income of RMB2,164.5 million (US$332.7million) in 2017.The table below sets forth certain balance sheet items related to credit facilitation. The increase in such line items since December 31, 2015 is inline with our business growth. As of December 31, 2015 2016 2017 RMB RMB RMB US$ (in thousands) Short-term loan principal and financing service fee receivables 2,060,768 4,826,791 8,758,545 1,346,164 Long-term loan principal and financing service fee receivables 177,582 87,822 — — Short-term borrowings and interest payables 1,562,883 4,183,231 7,979,415 1,226,414 Long-term borrowings and interest payables 89,358 76,052 510,024 78,389 135Source: Qudian Inc., 20-F, April 09, 2018Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Table of ContentsWe believe that the cash we received from our initial public offering and the anticipated cash flows from operating activities will be sufficient tomeet our anticipated working capital requirements and capital expenditures in the ordinary course of business for the next 12 months. We may,however, need additional cash resources in the future if we experience changes in business conditions or other developments, or if we find and wish topursue opportunities for investment, acquisition, capital expenditure or similar actions. If we determine that our cash requirements exceed the amountof cash and cash equivalents we have on hand at the time, we may seek to issue equity or debt securities or obtain credit facilities. The issuance andsale of additional equity would result in further dilution to our shareholders. The incurrence of indebtedness would result in increased fixedobligations and could result in operating covenants that would restrict our operations. We cannot assure you that financing will be available inamounts or on terms acceptable to us, if at all. See “Item 3. Key Information — D. Risk Factors — Risks Relating to Our Business and Our Industry —We may need additional capital to pursue business objectives and respond to business opportunities, challenges or unforeseen circumstances, andfinancing may not be available on terms acceptable to us, or at all.”Our ability to manage our working capital, including receivables and other assets and accrued expenses and other liabilities, may materiallyaffect our financial condition and results of operations.The following table sets forth a summary of our cash flows for the periods presented: Year Ended December 31, 2015 2016 2017 RMB RMB RMB US$ (in thousands) Summary Consolidated Cash Flow Data: Net cash (used in)/provided by operating activities (102,320) 794,063 3,076,140 472,794 Net cash used in investing activities (1,864,955) (3,598,137) (705,568) (108,444) Net cash provided by/(used in) financing activities 2,175,460 3,379,730 3,753,911 576,965 Cash and cash equivalents at beginning of period 1,929 210,114 785,770 120,771 Cash and cash equivalents at end of period 210,114 785,770 6,832,306 1,050,106 Operating ActivitiesNet cash provided by operating activities was RMB3,076.1 million (US$472.8 million) in 2017, primarily due to net income ofRMB2,164.5 million (US$332.7 million), adjusted for (i) provision for loan principal, financing service fee receivables and other receivables ofRMB605.2 million (US$93.0 million), (ii) share-based compensation expenses of RMB64.1 million (US$9.8 million), (iii) share of loss from equitymethod investment of RMB20.7 million (US$3.2 million), and (iv) changes in working capital. Adjustment for changes in working capital primarilyconsisted of (i) a decrease in restricted cash of RMB278.3 million (US$42.8 million), which was primarily due to a decrease in the amount of cash heldby our consolidated trusts due to payment for expenses related to operating activities, (ii) an increase in interest payables of RMB121.4 million(US$18.7 million), which was primarily due to an increase in borrowings from institutional funding partners, (iii) an increase in guarantee liabilities ofRMB165.6 million (US25.5 million), which was primarily due to an increase in the amount of off-balance sheet transactions facilitated and (iv) anincrease in other current and non-current liabilities of RMB144.7 million (US$22.2 million), which was primarily due to (i) an increase in tax payableof RMB107.8 million (US$16.6 million), (ii) an increase in accrued payroll of RMB65.6 million (US$10.1 million) and (iii) a decrease in payable toexternal service providers of RMB28.8 million (US$4.4 million), which was partially offset by (i) an increase in financing service fee receivables ofRMB79.0 million (US$12.1 million), which was primarily due to the increase in amount of transactions we facilitated, (ii) an increase in deferred taxassets of RMB97.7 million (US$15.0 million) and (iii) an increase in other current and non-current assets of RMB308.8 million (US$47.5 million),which was primarily due to (i) an increase in prepayments for cars of RMB141.1 million (US$21.7 million), (ii) an increase in prepayments for land useright and prepaid expenses of RMB59.8 million (US$9.2 million) and (iii) an increase in guarantee deposits of RMB72.5 million (US$11.1 million). 136Source: Qudian Inc., 20-F, April 09, 2018Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Table of ContentsNet cash provided by operating activities was RMB794.1 million in 2016, primarily due to net income of RMB576.7 million, adjusted for(i) provision for loan principal, financing service fee receivables and other receivables of RMB132.2 million, (ii) share-based compensation expense ofRMB22.1 million, (iii) amortization of deferred origination costs of RMB24.6 million, and (iv) changes in working capital. Adjustments for changes inworking capital primarily consisted of an increase in other current and non-current liabilities of RMB264.4 million, which was primarily the result of(i) an increase in other tax payables of RMB79.6 million and (ii) an increase in payable to suppliers of RMB59.0 million, which was primarily due tobetter credit terms offered by merchandise suppliers as a result of our increasing bargaining power, which was partially offset by (i) an increase infinancing service fee receivables of RMB48.5 million, which was primarily due to the increase in amount of transactions we facilitated and (ii) anincrease in other current and non-current assets of RMB39.0 million, which primarily consisted of guarantee deposits held by our institutional fundingpartners.Net cash used in operating activities was RMB102.3 million in 2015, primarily due to a net loss of RMB233.2 million, adjusted for (i) provisionfor loan principal, financing service fee receivables and other receivables of RMB45.1 million, (ii) amortization of deferred origination costs ofRMB17.6 million, (iii) share-based compensation expense of RMB55.6 million, and (iv) changes in working capital. Adjustments for changes inworking capital primarily consisted of (i) an increase in other current and non-current liabilities of RMB31.9 million, which was primarily the result ofan increase in payable to suppliers of RMB16.1 million in connection with the increase in the amount of merchandise credit facilitated in 2015 and(ii) an increase in interest payables of RMB6.2 million due to an increase in the amount of funding provided by institutional funding partners for loandrawdowns we facilitated, which was partially offset by an increase in other current and non-current assets of RMB28.2 million due primarily toincrease in the guarantee deposits held by institutional funding partners and an increase in the amounts receivable from merchandise suppliers.Investing ActivitiesNet cash used in investing activities was RMB705.6 million (US$108.4 million) in 2017, which was attributable to (i) RMB50,840.4 million(US$7,814.0 million) in payments to originate loan principal, and (ii) RMB1,155.2 million (US$177.5 million) in purchases of short-term investments,which was partially offset by (i) RMB50,042.1 million (US$7,691.3 million) in proceeds from collection of loan principal and (ii) proceeds fromredemption of short-term investments of RMB1,285.4 million (US$197.6 million).Net cash used in investing activities was RMB3,598 million in 2016, which was attributable to (i) RMB30,219.0 million in payments tooriginate loan principal, and (ii) RMB4,910.3 million in purchase of short-term investments, which was partially offset by (i) RMB27,075.2 million inproceeds from collection of loan principal. We also paid RMB70.0 million related to our investment in QuCampus in 2016.Net cash used in investing activities was RMB1,865.0 million in 2015, which was attributable to (i) RMB4,250.3 million in payments tooriginate loan principal and (ii) RMB877.2 million in purchase of short-term trading investments, which was partially offset by(i) RMB2,437.8 million in proceeds from collection of loan principal and (ii) RMB828.2 million in proceeds from redemption of short terminvestments.Financing ActivitiesNet cash provided by financing activities was RMB3,753.9 million (US$577.0 million) in 2017, which was primarily attributable to (i) proceedsfrom issuance of ordinary shares of RMB5,339.5 million (US$820.7) million, which was related to our initial public offering, (ii) proceeds fromborrowings of RMB8,731.1 million (US$1,342.0 million), representing remittance of funds from institutional funding partners to us, and (iii) proceedsfrom related parties of RMB850.5 million (US$130.7 million), primarily representing financing from Guosheng Financing Holding Inc. in connectionwith its investment in one of our trusts, partially offset by (i) repayment of borrowings of RMB10,814.4 million (US$1,662.1 million), representingrepayment to the institutional funding partners, (ii) repurchase of ordinary shares of RMB421.2 million (US$64.7 million), 137Source: Qudian Inc., 20-F, April 09, 2018Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Table of Contents(iii) payment of guarantee deposits to institutional funding partners of RMB161.1 million (US$24.8 million) and (iv) refund of guarantee deposits frominstitutional funding partners of RMB286.7 million (US$44.1 million).Net cash provided by financing activities was RMB3,379.7 million in 2016, which was primarily attributable to proceeds from borrowings ofRMB9,487.2 million, representing the remittance of funds from institutional funding partners to us, and capital contribution from shareholders ofRMB2,546.2 million, partially offset by repayment of borrowings of RMB6,897.8 million, representing repayment to the institutional fundingpartners.Net cash provided by financing activities was RMB2,175.5 million in 2015, which was primarily attributable to (i) proceeds from borrowings ofRMB3,162.2 million representing the remittance of funds from institutional funding partners to us and (ii) proceeds from related parties ofRMB665.3 million, representing non-interest bearing loan from Qufenqi Inc., the former holding company of Beijing Happy Time, partially offset byrepayment of borrowings of RMB1,984.0 million, representing repayment to the institutional funding partners.Capital ExpendituresWe made capital expenditures of RMB1.5 million, RMB4.6 million and RMB11.3 million (US$1.7 million) in 2015, 2016 and 2017,respectively. In these periods, our capital expenditures were mainly used for purchases of equipment and intangible assets and leaseholdimprovements. We will continue to make capital expenditures to meet the expected growth of our business.Holding Company StructureQudian Inc. is a holding company with no material operations of its own. We conduct our operations primarily through our subsidiary,consolidated VIEs and their subsidiaries in China. As a result, Qudian Inc.’s ability to pay dividends depends upon dividends paid by our PRCsubsidiary. If our existing PRC subsidiary or any newly formed ones incur debt on their own behalf in the future, the instruments governing their debtmay restrict their ability to pay dividends to us. In addition, our wholly foreign-owned subsidiary in China is permitted to pay dividends to us only outof its retained earnings, if any, as determined in accordance with PRC accounting standards and regulations. Under PRC law, each of our subsidiary,our consolidated VIEs and their subsidiaries in China is required to set aside at least 10% of its after-tax profits each year, if any, to fund certainstatutory reserve funds until such reserve funds reach 50% of its registered capital. In addition, our wholly foreign-owned subsidiary in China mayallocate a portion of its after-tax profits based on PRC accounting standards to enterprise expansion funds and staff bonus and welfare funds at itsdiscretion, and our consolidated VIEs and their subsidiaries may allocate a portion of its after-tax profits based on PRC accounting standards to adiscretionary surplus fund at their discretion. The statutory reserve funds and the discretionary funds are not distributable as cash dividends.Remittance of dividends by a wholly foreign-owned company out of China is subject to examination by the banks designated by SAFE. Our PRCsubsidiary has not paid dividends and will not be able to pay dividends until they generate accumulated profits and meet the requirements for statutoryreserve funds.Recent Accounting PronouncementsA list of recent accounting pronouncements that are relevant to us is included in note 2 to our consolidated financial statements, which areincluded in this annual report. C.Research and DevelopmentWe have focused on and will continue to invest in our technology system, which supports all key aspects of our online platform and is designedto optimize for scalability and flexibility. 138Source: Qudian Inc., 20-F, April 09, 2018Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Table of ContentsOur research and development expenses were RMB37.5 million, RMB52.3 million and RMB153.3 million (US$23.6 million) in 2015, 2016 and2017, respectively. D.Trend InformationOther than as disclosed elsewhere in this annual report, we are not aware of any trends, uncertainties, demands, commitments or events for theyear ended December 31, 2017 that are reasonably likely to have a material effect on our total net revenues, income, profitability, liquidity or capitalreserves, or that caused the disclosed financial information to be not necessarily indicative of future operating results or financial conditions. E.Off - Balance Sheet ArrangementsSince September 2016, we have entered into several arrangements with financial institutions that provides funding directly to borrowers fortransactions that we facilitate. As of December 31, 2017, guarantee liabilities related to such arrangement were RMB47.0 million (US$7.2 million). Asof December 31, 2017, the maximum potential undiscounted future payment we would be required to make was RMB2,035.9 million (US$312.9million). F.Tabular Disclosure of Contractual ObligationsThe following table sets forth our contractual obligations as of December 31, 2017. Payment due by period Total Less than1 Year 1 – 3 Years 3 – 5 Years More than5 Years RMB US$ RMB (in thousands) Operating lease commitments 93,186 14,322 43,905 49,280 — — Long-term borrowings and interest payable 558,356 85,818 38,018 520,338 — — Operating lease obligations represent leasing arrangements relating to the lease of our office premises. ITEM 6.DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES A.Directors and Senior ManagementDirectors and Executive OfficersThe following table sets forth information regarding our directors and executive officers as of December 31, 2017. Name Age Position/TitleMin Luo 35 Chairman and Chief Executive OfficerChao Zhu 38 DirectorLi Du 37 DirectorShilei Li 33 DirectorYi Cao 33 DirectorLianzhu Lv 33 Director and Head of User Experience DepartmentYifan Li 51 Independent DirectorRocky Ta-Chen Lee 44 Independent DirectorCarl Yeung 38 Chief Financial OfficerMr. Min Luo is our founder, chairman of our board of directors, and, since the inception of our company in 2014, has served as our chiefexecutive officer. Prior to founding our company, Mr. Luo served as a vice 139Source: Qudian Inc., 20-F, April 09, 2018Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Table of Contentspresident of marketing of OkBuy.com, an online marketplace for apparel and shoe products in China, from 2010 to 2013. Mr. Luo was a founder andchief executive officer of Jiyiri.com, an online birthday-related service provider, from 2007 to 2009, and a co-founder of dipian.com, an online socialplatform for college students, from 2006 to 2007. Mr. Luo received a bachelor’s degree in telecommunication engineering from Jiangxi NormalUniversity in 2004.Mr. Chao Zhu has been a director of our company since November 2015. He has been a director and later, a senior director of the strategicinvestment division of Ant Financial since 2014. From 2006 to 2014, he served in the investment banking department of China International CapitalCorporation Ltd., an investment bank listed on the Hong Kong Stock Exchange, as an associate, vice president and executive director. Mr. Zhureceived a bachelor’s degree in economics from Fudan University in 2002 and a master’s degree in economics from Fudan University in 2006.Mr. Li Du has been a director of our company since February 2016. Mr. Du has been an executive director and general manager of BeijingPhoenix Wealth Holding Co., Ltd. since 2014. He has also served as the chairman of the board of directors of Guosheng Financial Holding Inc., afinancial holding company listed on the Shenzhen Stock Exchange, and its subsidiary, Golden Sun Securities Co., Ltd., a securities company in Chinasince 2016. In addition, Mr. Du has served as the chairman of the board of directors of Guangzhou Tech-Long Wrapping Machinery Inc. since 2016.Mr. Du received a master’s degree in finance from Peking University in 2008.Mr. Shilei Li has been a director of our company since March 2017. Mr. Li has been the chairman of Beijing Jirui Capital Management Co., Ltd.,an asset management company, since 2015. From 2007 to 2015, Mr. Li served as director of investing at Zhongguancun Xingye (Beijing) InvestmentManagement Co., Ltd., which is an asset management company. Mr. Li received a bachelor’s degree in financial management from Jilin University in2005 and a master’s degree in software engineering from Beijing Institute of Technology in 2007.Mr. Yi Cao has been a director of our company since February 2016. Mr. Cao is the founding partner of Source Code Capital since its inceptionin 2014. Prior to founding Source Code Capital, Mr. Cao was a vice president at Sequoia Capital Advisory Consulting (Beijing) Co., Ltd. from 2009 to2014. From 2007 to 2008, Mr. Cao worked as an investment manager at Ceyuan Investment Consulting (Beijing) Co., Ltd. From 2006 to 2007, heworked as an analyst at C2 Capital Group, Inc. Mr. Cao received a bachelor’s degree in computer science from Tsinghua University in 2006.Mr. Lianzhu Lv has been our director since November 2015 and has served as the head of our user experience department since 2014. From 2010to 2013, Mr. Lv served as a product design manager at OkBuy.com, an online marketplace for apparel and shoe products in China. From 2008 to 2009,he worked as a user interface designer of Jiyiri.com, an online birthday-related service provider in China. From 2005 to 2008, he worked as a supervisorof the mobile department of 95 Online Information Technology Co., Ltd. Mr. Lv graduated from Cangzhou Technical College with a major incomputer application in 2005.Mr. Yifan Li has served as our independent director since October 2017. Mr. Li has served as a board director and a vice president of GeelyHolding Group Co., Ltd., an automotive manufacturing company, since October 2014. From May 2014 to September 2014, he was vice president andinternational chief financial officer of Sanpower Group Co., Ltd., a company in the technology and modern service industries. From December 2010 toFebruary 2014, he served as vice president and chief financial officer of China Zenix Auto International Co., Ltd., a manufacturer of commercialvehicle wheels listed on the NYSE. Mr. Li is also currently a director and a member of the audit committee for a number of companies, includingXinyuan Real Estate Co., Ltd., a real estate developer listed on the NYSE, Shanghai International Port (Group) Co., Ltd., a port management companylisted on the Shanghai Stock Exchange, Heilongjiang Interchina Water Co., Ltd., a water supply and treatment company listed on the Shanghai StockExchange, and Huaxin Securities Co., Ltd., a securities company in China. Mr. Li received his MBA from the University of Chicago Booth School ofBusiness in 2000, his master’s degree 140Source: Qudian Inc., 20-F, April 09, 2018Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Table of Contentsin accounting from University of Texas at Dallas in 1994, and his bachelor’s degree in economics from Fudan University in 1989. Mr. Li is a CertifiedPublic Accountant in the United States and a Chartered Global Management Accountant. His business address is Room 815, 1760 Jiangling Road,Binjiang District, Hangzhou, Zhejiang, PRC, 310051.Mr. Rocky Ta-Chen Lee has served as our independent director since October 2017. Mr. Lee has served as an international partner and head ofthe U.S. corporate practice of King & Wood Mallesons since January 2017. From June 2010 to December 2016, Mr. Lee served as the Asia managingpartner and head of Greater China corporate practice of Cadwalader, Wickersham & Taft LLP. From January 2006 to May 2010, Mr. Lee served as apartner of DLA Piper UK LLP. Mr. Lee received a Juris Doctorate degree from University of California, Los Angeles and a bachelor’s degree in arts inlegal studies from University of California Berkeley. His business address is 40/F, Tower A, Beijing Fortune Plaza, 7 Dongsanhuan Zhonglu, ChaoyangDistrict, Beijing, China.Mr. Carl Yeung has served as our chief financial officer since October 2016. Mr. Yeung also currently serves as a director of Bumps to BabesLimited, a baby and maternity retail store chain in Hong Kong. Prior to joining our company, Mr. Yeung was a co-founder of Bababaobei EcommerceLimited, a baby and maternity cross-border e-commerce platform in China since 2015. From 2013 to 2016, Mr. Yeung served as a chief financial officerand a chief strategy officer of BAIOO Family Interactive Limited, a children’s web game developer in China listed on the Hong Kong Stock Exchange.From 2010 to 2013, he served as the chief financial officer of Sky-Mobi Limited, a leading mobile app platform in China previously listed onNASDAQ, and he was a director of Sky-Mobi Limited from 2013 to 2016. From 2006 to 2010, Mr. Yeung was the chief financial officer of ATA Inc., acomputer-based testing and testing-related service provider based in China and listed on NASDAQ, and he was a director of ATA Inc. from 2006 to2008. From 2008 to 2010, Mr. Yeung also served as an independent non-executive director of China Natural Gas, Inc., an energy company in Chinapreviously listed on NASDAQ. From 2002 to 2006, Mr. Yeung worked as an analyst and later on as an associate at Merrill Lynch (Asia Pacific)Limited. Mr. Yeung received his bachelor’s degree in economics with concentrations in finance and operations management from the Wharton School,University of Pennsylvania, and his bachelor’s degree in applied science with a concentration in systems engineering from the School of Engineeringand Applied Sciences, University of Pennsylvania, in 2002.The business address for all of our executive officers and directors is 15/F Lvge Industrial Building 1 Datun, Chaoyang District, Beijing 100012,the People’s Republic of China. B.CompensationCompensationIn 2017, we and our subsidiaries and consolidated VIEs paid aggregate cash compensation of approximately RMB5.2 million (US$0.8 million)to our directors and executive officers as a group. We did not pay any other cash compensation or benefits in kind to our directors and executiveofficers. We have not set aside or accrued any amount to provide pension, retirement or other similar benefits to our directors and executive officers.Our PRC subsidiaries and consolidated VIEs are required by law to make contributions equal to certain percentages of each employee’s salary for his orher pension insurance, medical insurance, unemployment insurance and other statutory benefits and a housing provident fund. Our board of directorsmay determine compensation to be paid to the directors and the executive officers. The compensation committee will assist the directors in reviewingand approving the compensation structure for the directors and the executive officers.Employment Agreements and Indemnification AgreementsWe have entered into employment agreements with each of our executive officers. Under these agreements, each of our executive officers isemployed for a specified time period. We may terminate employment for cause, at any time, without advance notice, for certain acts of the executiveofficer, such as conviction or plea of guilty 141Source: Qudian Inc., 20-F, April 09, 2018Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Table of Contentsto a felony or any crime involving moral turpitude, willful misconduct or gross negligence to our detriment, or serious breach of duty of loyalty to us.We may also terminate an executive officer’s employment without cause upon three-month advance written notice. In such case of termination by us,we will provide severance payments to the executive officer as expressly required by applicable law of the jurisdiction where the executive officer isbased. The executive officer may resign at any time with a three-month advance written notice.Each executive officer has agreed to hold, both during and within two years after the termination or expiry of his or her employment agreement,in strict confidence and not to use, except as required in the performance of his or her duties in connection with the employment or pursuant toapplicable law, any of our confidential information or trade secrets, any confidential information or trade secrets of our business partners, or theconfidential or proprietary information of any third party received by us and for which we have confidential obligations. The executive officers havealso agreed to disclose in confidence to us all inventions, designs and trade secrets which they conceive, develop or reduce to practice during theexecutive officer’s employment with us and to assign all right, title and interest in them to us, and assist us in obtaining and enforcing patents,copyrights and other legal rights for these inventions, designs and trade secrets.In addition, each executive officer has agreed to be bound by non-competition and non-solicitation restrictions during the term of his or heremployment and typically for one year following the last date of employment. Specifically, each executive officer has agreed not to (i) approachborrowers, institutional funding partners, merchandise suppliers or other persons or entities introduced to the executive officer in his or her capacity asa representative of us for the purpose of doing business with such persons or entities that will harm our business relationships with these persons orentities; (ii) assume employment with or provide services to any of our competitors, or engage, whether as principal, partner, licensor or otherwise, anyof our competitors, without our express consent; or (iii) seek directly or indirectly, to solicit the services of any of our employees who is employed byus on or after the date of the executive officer’s termination, or in the year preceding such termination, without our express consent.We have entered into indemnification agreements with each of our directors and executive officers. Under these agreements, we may agree toindemnify our directors and executive officers against certain liabilities and expenses incurred by such persons in connection with claims made byreason of their being a director or officer of our company.2014 Share Incentive PlanIn August 2014, Qufenqi Inc., the former holding company of Beijing Happy Time, adopted the 2014 Share Incentive Plan, which allows us togrant share awards of such company to our employees, officers, directors and individual consultants who render services to us. The maximum numberof shares that may be issued pursuant to all awards under the 2014 plan is 20,824,447 ordinary shares of the former holding company of Beijing HappyTime. On various dates from August 2014 to December 2014, 18,373,219 share options were granted to certain of our employees and a third-partyconsultant at exercise prices of RMB0.0 per share, which have vesting periods of four years. On various dates in 2015, 2,449,800 share options weregranted to certain of our employees at exercise prices of RMB0.0 per share, which have vesting periods of four years. The 2014 Share Incentive Planwas subsequently terminated in 2015.2015 Share Incentive PlanOn December 26, 2015, Beijing Happy Time adopted the 2015 Share Incentive Plan, which allows us to grant equity awards of virtual shares ofTianjin Happy Share to employees, officers, directors and individual consultants. Tianjin Happy Share is a limited partnership established under thelaws of PRC, which owns 5.24% of the equity interest in Beijing Happy Time as of the date of this annual report. We divided the partnership interest inTianjin Happy Share into 15,814,019 virtual shares and awarded the options to purchase virtual shares to grantees of the 2015 Share Incentive Plan,which enabled the grantees to enjoy beneficial ownership of Beijing 142Source: Qudian Inc., 20-F, April 09, 2018Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Table of ContentsHappy Time through their respective virtual shares in Tianjin Happy Share. On December 26, 2015, all options to purchase 15,814,019 virtual shareswere issued to certain of our employees and a third-party consultant to replace the 15,814,019 share options granted to such individuals under the2014 Share Incentive Plan. All share options granted under the 2014 Share Incentive Plan were canceled.As of the date of this annual report, the sole general partner of Tianjin Happy Share is Mr. Lianzhu Lv, and the limited partners are certainemployees and a third party consultant.As part of our restructuring in 2016, Tianjin Happy Share, as a shareholder of Beijing Happy Time, entered into the contractual arrangementswith Ganzhou Qufenqi and Beijing Happy Time and its other shareholders, according to which Ganzhou Qufenqi will exercise effective control overBeijing Happy Time and realize substantially all of the economic risks and benefits arising from Beijing Happy Time and its subsidiaries in lieu ofTianjin Happy Share and other shareholders of Beijing Happy Time. See “Item. 4 Information on the Company — B. Business Overview — Overview— Our Contractual Arrangements with Consolidated VIEs and Their Shareholders.” for more information.Furthermore, as part of the restructuring in 2016, Tianjin Happy Share entered into a share entrustment agreement with Qufenqi Holding Limited,pursuant to which Qufenqi Holding Limited holds 15,814,019 ordinary shares of Qudian Inc. as the nominal shareholder on behalf of Tianjin HappyShare. Qufenqi Holding Limited is entitled to exercise the voting rights as the nominal shareholder with regard to these 15,814,019 ordinary shares ofQudian Inc., while the pecuniary interests of these shares belong to Tianjin Happy Share. As such, grantees of the 2015 Share Incentive Plan enjoy thepecuniary interests of the 15,814,019 shares, representing 5.24% of the equity interest of Qudian Inc. in proportion to their relevant numbers of optionsto purchase virtual shares of Tianjin Happy Share.As of December 2016, the 2015 Share Incentive Plan was terminated. In April 2017, Tianjin Happy Share and Qufenqi Holding Limitedterminated the share entrustment agreement, and we canceled the 15,814,019 shares that Qufenqi Holding Limited holds on behalf of Tianjin HappyShare.2016 Equity Incentive PlanOn December 9, 2016, Qudian Inc. adopted the 2016 Equity Incentive Plan, which allows us to grant share options, restricted shares, restrictedshare units and other share-based awards to our employees, directors and consultants. The maximum number of ordinary shares may be subject toequity awards pursuant to the 2016 Equity Incentive Plan is 15,814,019 initially. On January 1, 2018, and on every January 1 thereafter for eight years,the aggregate number of ordinary shares reserved and available for issuance pursuant to awards granted under the 2016 Equity Incentive Plan will beincreased by 1.0% of the total number of ordinary shares outstanding on December 31 of preceding calendar year. Unless terminated earlier, the 2016Equity Incentive Plan will terminate automatically in 2026.AdministrationThe 2016 Equity Incentive Plan is administered by (i) the compensation committee, (ii) such other committee of the board to which the boarddelegates the power to administer the 2016 Equity Incentive Plan or (iii) the board. The administrator will determine the provisions and terms andconditions of each equity award.Change in ControlIn the event of a change in control, the administrator may provide for acceleration of equity awards, purchase of equity awards from holders orreplacement of equity awards. 143Source: Qudian Inc., 20-F, April 09, 2018Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Table of ContentsTermUnless terminated earlier, the 2016 Equity Incentive Plan will continue in effect for a term of ten years from the date of its adoption.Award AgreementsGenerally, equity awards granted under the 2016 Equity Incentive Plan are evidenced by an award agreement providing for the number ofordinary shares subject to the award, and the terms and conditions of the award, which must be consistent with the 2016 Equity Incentive Plan.Vesting ScheduleThe administrator determines the vesting schedule of each equity award granted under the 2016 Equity Incentive Plan, which vesting schedulewill be set forth in the award agreement for such equity award.Amendment and TerminationThe board of directors may at any time amend or terminate the 2016 Equity Incentive Plan, subject to certain exceptions.Granted OptionsIn December 2016, we granted 15,299,019 options to purchase our ordinary shares to certain of our employees and a third-party consultant. As ofDecember 31, 2016, 5,850,808 options were fully vested, and 9,448,211 options were subject to the applicable vesting schedules. In May 2017, wegranted 494,904 options to purchase our ordinary shares to certain of our employees, and such options were subject to the applicable vestingschedules. In August 2017, our board of directors approved the grant of 200,000 options to purchase our ordinary shares to our independent directorappointees and certain of our employees, and such options were subject to the applicable vesting schedules. In March 2018, our board of directorsapproved the grant of 998,000 options to purchase our ordinary shares to certain of our employees, and such options were subject to the applicablevesting schedules. Certain options previously granted were subsequently cancelled.The table below summarizes, as of the date of this annual report, the options we have granted to our directors and executive officers. Name Position OrdinarySharesUnderlyingOptionsAwarded OptionExercise Price Grant Date OptionExpiration DateLianzhu Lv Director 5,695,219 US$0.0 December 30, 2016 December 8, 2026Yifan Li Independentdirectorappointee * US$0.0 October 17, 2017 December 8, 2026Rocky Ta-Chen Lee Independentdirectorappointee * US$0.0 October 17, 2017 December 8, 2026Carl Yeung CFO * US$0.0 December 9, 2016 December 8, 2026 *Less than 1% of our outstanding shares, assuming conversion of our preferred shares into ordinary shares.Equity Incentive TrustThe Qudian Inc. Equity Incentive Trust, or the Equity Incentive Trust, is a trust established by a deed dated December 30, 2016 between us andArk Trust (Hong Kong) Limited, or Ark Trust, as trustee of the Equity 144Source: Qudian Inc., 20-F, April 09, 2018Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Table of ContentsIncentive Trust, through which our ordinary shares, dividends and other rights and interests under awards granted pursuant to our equity incentiveplans may be provided to certain of recipients of equity awards granted pursuant to our share incentive plans. As of the date of this annual report, allparticipants in the Equity Incentive Trust are our employees.Participants in the Equity Incentive Trust transfer their equity awards to Ark Trust to be held for their benefit. Upon satisfaction of vestingconditions and request by grant recipients, Ark Trust will exercise the equity awards and transfer the relevant ordinary shares, dividends and otherrights and interest under the equity awards to the relevant grant recipients.In April 2017, we directly issued 13,865,219 ordinary shares pursuant to our 2016 Equity Incentive Plan to Ark Trust in its capacity as trustee ofthe Equity Incentive Trust. As of March 31, 2018, 2,112,500 of such ordinary shares are underlying shares of unvested options, and such shares aredeemed not outstanding. The trust deed provides that Ark Trust shall not exercise the voting rights attached to such ordinary shares unless otherwisedirected by the plan administrator, which is our board of directors as of the date of this annual report, or its authorized representative. C.Board PracticesOur board of directors consists of eight directors. A director is not required to hold any shares in our company to qualify to serve as a director. Adirector may vote with respect to any contract or any proposed contract or arrangement in which he is interested, and if he does so his vote shall becounted and he may be counted in the quorum at any meeting of our directors at which any such contract or proposed contract or arrangement isconsidered, provided (a) such director has declared the nature of his interest at the meeting of the board at which the question of entering into thecontract or arrangement is first considered if he knows his interest then exists, or in any other case at the first meeting of the board after he knows he isor has become so interested, either specifically or by way of a general notice and (b) if such contract or arrangement is a transaction with a related party,such transaction has been approved by the audit committee. The directors may exercise all the powers of the company to borrow money, to mortgage orcharge its undertaking, property and uncalled capital, and to issue debentures or other securities whenever money is borrowed or as security for anydebt, liability or obligation of the company or of any third party. None of our non-executive directors has a service contract with us that provides forbenefits upon termination of service.Committees of the Board of DirectorsOur board of directors has established an audit committee, a compensation committee and a nominating and corporate governance committee.We have adopted a charter for each of the committees. Each committee’s members and functions are described below.Audit CommitteeOur audit committee consists of Yifan Li, Rocky Ta-Chen Lee, and Li Du. Yifan Li is the chairperson of our audit committee. Yifan Li satisfiesthe criteria of an audit committee financial expert as set forth under the applicable rules of the SEC. Each of Yifan Li and Rocky Ta-Chen Lee satisfiesthe requirements for an “independent director” within the meaning of Section 303A of the NYSE Listed Company Manual and will meet the criteria forindependence set forth in Rule 10A-3 of the Exchange Act. Our audit committee will consist solely of independent directors within one year of ourinitial public offering.The audit committee oversees our accounting and financial reporting processes and the audits of our financial statements. Our audit committee isresponsible for, among other things: • selecting the independent auditor; 145Source: Qudian Inc., 20-F, April 09, 2018Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Table of Contents • pre-approving auditing and non-auditing services permitted to be performed by the independent auditor; • annually reviewing the independent auditor’s report describing the auditing firm’s internal quality control procedures, any material issuesraised by the most recent internal quality control review, or peer review, of the independent auditors and all relationships between theindependent auditor and our company; • setting clear hiring policies for employees and former employees of the independent auditors; • reviewing with the independent auditor any audit problems or difficulties and management’s response; • reviewing and, if material, approving all related party transactions on an ongoing basis; • reviewing and discussing the annual audited financial statements with management and the independent auditor; • reviewing and discussing with management and the independent auditors major issues regarding accounting principles and financialstatement presentations; • reviewing reports prepared by management or the independent auditors relating to significant financial reporting issues and judgments; • discussing earnings press releases with management, as well as financial information and earnings guidance provided to analysts and ratingagencies; • reviewing with management and the independent auditors the effect of regulatory and accounting initiatives, as well as off-balance sheetstructures, on our financial statements; • discussing policies with respect to risk assessment and risk management with management, internal auditors and the independent auditor; • timely reviewing reports from the independent auditor regarding all critical accounting policies and practices to be used by our company,all alternative treatments of financial information within U.S. GAAP that have been discussed with management and all other materialwritten communications between the independent auditor and management; • establishing procedures for the receipt, retention and treatment of complaints received from our employees regarding accounting, internalaccounting controls or auditing matters and the confidential, anonymous submission by our employees of concerns regarding questionableaccounting or auditing matters; • annually reviewing and reassessing the adequacy of our audit committee charter; • such other matters that are specifically delegated to our audit committee by our board of directors from time to time; • meeting separately, periodically, with management, internal auditors and the independent auditor; and • reporting regularly to the full board of directors.Compensation CommitteeOur compensation committee consists of Yifan Li, Rocky Ta-Chen Lee, and Chao Zhu. Yifan Li is the chairperson of our compensationcommittee. Each of Yifan Li and Rocky Ta-Chen Lee satisfies the requirements for an “independent director” within the meaning of Section 303A ofthe NYSE Listed Company Manual.Our compensation committee is responsible for, among other things: • reviewing, evaluating and, if necessary, revising our overall compensation policies; 146Source: Qudian Inc., 20-F, April 09, 2018Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Table of Contents • reviewing and evaluating the performance of our directors and senior officers and determining the compensation of our senior officers; • reviewing and approving our senior officers’ employment agreements with us; • setting performance targets for our senior officers with respect to our incentive compensation plan and equity-based compensation plans; • administering our equity-based compensation plans in accordance with the terms thereof; and such other matters that are specificallydelegated to the remuneration committee by our board of directors from time to time.Nominating and Corporate Governance CommitteeOur nominating and corporate governance committee consists of Yifan Li, Rocky Ta-Chen Lee, and Min Luo. Rocky Ta-Chen Lee is thechairperson of our nominating and corporate governance committee. Each of Yifan Li and Rocky Ta-Chen Lee satisfies the “independence”requirements of Section 303A of the NYSE Listed Company Manual. The nominating and corporate governance committee assists the board ofdirectors in selecting individuals qualified to become our directors and in determining the composition of the board and its committees. Thenominating and corporate governance committee is responsible for, among other things: • selecting and recommending to the board nominees for election by the shareholders or appointment by the board; • reviewing annually with the board the current composition of the board with regards to characteristics such as independence, knowledge,skills, experience and diversity; • making recommendations on the frequency and structure of board meetings and monitoring the functioning of the committees of the board;and • advising the board periodically with regards to significant developments in the law and practice of corporate governance as well as ourcompliance with applicable laws and regulations, and making recommendations to the board on all matters of corporate governance and onany remedial action to be taken.Duties of DirectorsUnder Cayman Islands law, our directors have a fiduciary duty to act honestly in good faith with a view to our best interests. Our directors alsohave a duty to exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances. In fulfilling theirduty of care to us, our directors must ensure compliance with our second amended and restated memorandum and articles of association. A shareholderhas the right to seek damages if a duty owed by our directors is breached.The functions and powers of our board of directors include, among others: • conducting and managing the business of our company; • representing our company in contracts and deals; • appointing attorneys for our company; • select senior management such as managing directors and executive directors; • providing employee benefits and pension; • managing our company’s finance and bank accounts; • exercising the borrowing powers of our company and mortgaging the property of our company; and 147Source: Qudian Inc., 20-F, April 09, 2018Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Table of Contents • exercising any other powers conferred by the shareholders meetings or under our second amended and restated memorandum and articlesof association.Terms of Directors and Executive OfficersOur directors may be elected by a resolution of our board of directors, or by an ordinary resolution of our shareholders, pursuant to our secondamended and restated memorandum and articles of association. Each of our directors will hold office until his or her successor takes office or until hisor her earlier death, resignation or removal or the expiration of his or her term as provided in the written agreement with our company, if any. A directorwill cease to be a director if, among other things, the director (i) dies, or becomes bankrupt or makes any arrangement or composition with his creditors;(ii) is found to be or becomes of unsound mind, (iii) resigns his office by notice in writing to the company, or (iv) without special leave of absence fromour board, is absent from six consecutive board meetings and our directors resolve that his office be vacated. Our officers are elected by and serve at thediscretion of the board of directors. D.EmployeesAs of December 31, 2017, we had a total of 1,614 employees. The following table sets forth the breakdown of our employees as of December 31,2017 by function: Function Number ofEmployees % of Total Dabai Auto(1) 737 45.7 Risk management 333 20.6 Technology and product development 203 12.6 User services 94 5.8 Finance 74 4.6 Operation management 103 6.4 General administrative and others 63 3.9 Sales and marketing(2) 7 0.4 Total 1,614 100.0 (1)As of December 31, 2017, our Dabai Auto team engaged in various tasks related to the launch of the new business. The team will be categorizedinto specific functions as the business matures.(2)The size of our sales and marketing team decreased from 186 as of December 31, 2016 to 7 as of December 31, 2017. The decrease was primarilydue to the transfer of sales staff in call centers to other functions.As of December 31, 2017, 395 and 493 of our employees were based in Beijing and Fuzhou in Jiangxi Province, respectively. The remainders ofour employees were based in various other locations across China.As of December 31, 2015 and 2016, we have a total of 1,752 and 798 employees, respectively. The decrease was primarily due to the shift in ourfocus on acquiring and providing credit to prospective borrowers online rather than through offline channels. As such, we reduced the number ofemployees that were responsible for acquiring and serving prospective borrowers offline. The number of our employees increased to 1,614 as ofDecember 31, 2017 in response to the expansion of our business.We believe we offer our employees competitive compensation packages and a dynamic work environment that encourages initiative and is basedon merit. As a result, we have generally been able to attract and retain qualified personnel and maintain a stable core management team. We plan to hireadditional experienced and talented employees in the areas such as big data analytics, risk management and operation management as we expand ourbusiness. 148Source: Qudian Inc., 20-F, April 09, 2018Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Table of ContentsAs required by PRC regulations, we participate in various statutory employee benefit plans, including social insurance funds, namely a pensioncontribution plan, a medical insurance plan, an unemployment insurance plan, a work-related injury insurance plan and a maternity insurance plan,and a housing provident fund. We are required under PRC law to make contributions to employee benefit plans at specified percentages of the salaries,bonuses and certain allowances of our employees, up to a maximum amount specified by the local government from time to time. In addition, wepurchased employer’s liability insurance and additional commercial health insurance to increase insurance coverage of our employees. We enter intostandard labor, confidentiality and non-compete agreements with our employees. The non-compete restricted period typically expires two years afterthe termination of employment, and we agree to compensate the employee with a certain percentage of his or her pre-departure salary during therestricted period.We believe that we maintain a good working relationship with our employees, and we have not experienced any major labor disputes. E.Share OwnershipThe following table sets forth information as of the date of this annual report with respect to the beneficial ownership of our ordinary shares by: • each of our directors and executive officers; and • each person known to us to own beneficially 5.0% or more of our ordinary shares.Beneficial ownership is determined in accordance with the rules of the SEC and includes voting or investment power with respect to, or thepower to receive the economic benefit of ownership of, the securities. In computing the number of shares beneficially owned by a person and thepercentage ownership of that person, we have included shares that the person has the right to acquire within 60 days, including through the exercise ofany option or other right or the conversion of any other security.The total number of ordinary shares outstanding as of March 31, 2018 was 328,792,262, comprising 265,301,090 Class A ordinary shares and63,491,172 Class B ordinary shares, excluding (i) ordinary shares represented by the ADSs repurchased by the Company; (ii) 2,112,500 ordinary sharesunderlying unvested options that are issued but deemed to be not outstanding and held by Ark Trust in its capacity as trustee of the Equity IncentiveTrust, (iii) ordinary shares issuable upon the exercise of outstanding share options and (iv) ordinary shares reserved for future issuance under our shareincentive plans Ordinary Shares Beneficially Owned Class Aordinary shares Class Bordinary shares Percentage oftotal ordinaryshares on anas-convertedbasis Percentageof aggregatevoting power** Directors and Executive Officers: Min Luo(1) — 63,491,172 19.3 70.5 Chao Zhu — — — — Li Du(2) 56,214,906 — 17.1 6.2 Shilei Li — — — — Yi Cao(3) 45,041,814 — 13.7 5.0 Lianzhu Lv(4) 5,695,219 — 1.7 0.6 Yifan Li — — — — Rocky Ta-Chen Lee — — — — Carl Yeung * * * * Directors and Executive Officers as a Group 107,139,439 63,491,172 51.9 82.4 149Source: Qudian Inc., 20-F, April 09, 2018Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Table of Contents Ordinary Shares Beneficially Owned Class A ordinary shares Class B ordinary shares Percentage oftotal ordinaryshares on an as-convertedbasis Percentageof aggregatevoting power** Principal Shareholders Qufenqi Holding Limited(1) — 63,491,172 19.3 70.5 Phoenix Entities(5) 56,214,906 — 17.1 6.2 Kunlun Group Limited(6) 55,603,706 — 16.9 6.2 Source Code Accelerate L.P.(7) 45,041,814 — 13.7 5.0 API (Hong Kong) Investment Limited(8) 37,720,709 — 11.5 4.2 Zhu Entities(9) 20,379,351 — 6.2 2.3 *Beneficially owns less than 1% of our outstanding shares.**For each person and group included in this column, percentage of voting power is calculated by dividing the voting power beneficially ownedby such person or group by the voting power of all of our Class A and Class B ordinary shares as a single class. In respect of all matters subject toa shareholders’ vote, each Class A ordinary share is entitled to one vote, and each Class B ordinary share is entitled to ten votes, voting togetheras one class. Each Class B ordinary share is convertible into one Class A ordinary share at any time by the holder thereof. Class A ordinary sharesare not convertible into Class B ordinary shares under any circumstances.(1)Represents 63,491,172 Class B ordinary shares held by Qufenqi Holding Limited, a limited liability company established in the British VirginIslands. Qufenqi Holding Limited is indirectly wholly owned by a trust of which Mr. Min Luo and his wife are the beneficiaries. Mr. Min Luo isour founder, chairman of the board and chief executive officer. The registered address of Qufenqi Holding Limited is Geneva Place, WaterfrontDrive, P.O. Box 3469, Road Town, Tortola, British Virgin Islands.(2)Represents (i) 42,055,426 Class A ordinary shares held by Phoenix Auspicious FinTech Investment L.P. and (ii) 14,159,480 Class A ordinaryshares held by Wa Sung Investment Limited. Phoenix Auspicious FinTech Investment L.P. and Wa Sung Investment Limited are collectivelyreferred to in this annual report as the Phoenix Entities. For a description of the beneficial ownership of our Class A ordinary shares held by thePhoenix Entities, see footnote 5 below. Mr. Du disclaims beneficial ownership of our Class A ordinary shares held by the Phoenix Entities,except to the extent of his pecuniary interest in these shares.(3)Represents 45,041,814 Class A ordinary shares held by Source Code Accelerate L.P. For a description of the beneficial ownership of our Class Aordinary shares held by Source Code Accelerate L.P., see footnote 7 below. Mr. Cao disclaims beneficial ownership of our Class A ordinary sharesheld by Source Code Accelerate L.P., except to the extent of his pecuniary interest in these shares.(4)Mr. Lianzhu Lv was granted 5,695,219 share options under the 2016 Equity Incentive Plan. All of such share options have vested as of the dateof the annual report.(5)Represents (i) 42,055,426 Class A ordinary shares held by Phoenix Auspicious FinTech Investment L.P. and (ii) 14,159,480 Class A ordinaryshares held by Wa Sung Investment Limited. Phoenix Auspicious FinTech Investment L.P. is a limited partnership organized under the laws ofthe Cayman Islands. The general partner of Phoenix Auspicious FinTech Investment L.P. is Phoenix Wealth (Cayman) Asset ManagementLimited, an exempted company incorporated under the laws of the Cayman Islands with limited liability, which is controlled by Mr. Li Du. Theregistered address of Phoenix Auspicious FinTech Investment L.P. is P.O. Box 2075, #31 The Strand, 46 Canal Point Drive, Grand CaymanKY1-1105, Cayman Islands. Wa Sung Investment Limited is a limited liability company incorporated under the laws of Hong Kong and asubsidiary of Guosheng Financial Holding Inc., or Guosheng, a public company listed on the Shenzhen Stock Exchange. Based on Guosheng’spublic filings, Mr. Li Du has control over Guosheng as of the date of this annual report. The registered address of Wa Sung Investment Limited isUnit 606, 6th Floor, Alliance Building, 133 Connaught Road Central, Hong Kong.(6)Represents 55,603,706 Class A ordinary shares held by Kunlun Group Limited, a limited liability company incorporated under the laws of HongKong, which is wholly owned by Beijing Kunlun Tech Co., Ltd., or 150Source: Qudian Inc., 20-F, April 09, 2018Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Table of Contents Kunlun, a public company listed on the Shenzhen Stock Exchange. The registered address of Kunlun Group Limited is Unit 204, 2/F, MalaysiaBuilding, 50 Gloucester Road, Wanchai, Hong Kong. Mr. Yahui Zhou, general manager and chairman of the board of directors of Kunlun, servedas a director of our company from February 2016 to February 2017.(7)Represents 45,041,814 Class A ordinary shares held by Source Code Accelerate L.P., a limited partnership organized under the laws of theCayman Islands. The general partner of Source Code Accelerate L.P. is Source Code Investment Mercury Co., which is indirectly controlled byMr. Yi Cao. The registered address of Source Code Accelerate L.P. and Source Code Investment Mercury Co. are Harneys Services (Cayman)Limited, 4th Floor, Harbour Place, 103 South Church Street, George Town, P. O. Box 10240, Grand Cayman KY1-1002, Cayman Islands.(8)Represents 37,720,709 Class A ordinary shares held by API (Hong Kong) Investment Limited, a limited liability company incorporated under thelaws of Hong Kong. API (Hong Kong) Investment Limited is wholly owned by Ant Financial. The registered address of API (Hong Kong)Investment Limited is 26/F, Tower One, Times Square, 1 Matheson ST, Causeway Bay, Hong Kong.(9)Represents (i)18,449,253 Class A ordinary shares held by Ever Bliss Fund, L.P., (ii) 1,930,098 Class A ordinary shares held by Joyful BlissLimited. Ever Bliss Fund, L.P. is a limited partnership organized under the laws of the Cayman Islands with its registered office at the Office ofSertus Incorporations (Cayman) Limited, Sertus Chambers, Governors Square, Suite # 5-204, 23 Lime Tree Bay Avenue, P.O. Box 2547, GrandCayman, KY1-1104, Cayman Islands. Joyful Bliss Limited is a limited liability company incorporated under the laws of Hong Kong with itsregistered office at RM 1501, 15/F SPA CTR 53-55, Lockhart Rd Wanchai, Hong Kong. Each of Ever Bliss Fund, L.P. and Joyful Bliss Limited isultimately controlled by Mr. Tianyu Zhu. Mr. Tianyu Zhu served as a director of our company from February 2016 to September 2017.We are not aware of any of our shareholders being affiliated with a registered broker-dealer or being in the business of underwriting securities.Except as otherwise disclosed in this annual report on Form 20-F, none of our existing shareholders has voting rights that differ from the votingrights of other shareholders. We are not aware of any arrangement that may, at a subsequent date, result in a change of control of our company. ITEM 7.MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS A.Major ShareholdersPlease refer to “Item 6. Directors, Senior Management and Employees — F. Share Ownership.” B.Related Party TransactionsTransactions and Agreements with Ant Financial and Its Related PartiesWe have established a strategic partnership with Ant Financial, one of our principal shareholders, and have in-depth cooperation in multipleareas of our business.We incurred RMB8.2 million, RMB41.2 million and RMB114.2 million (US$17.5 million) of payment processing and settlement fees to Alipayin 2015, 2016 and 2017, respectively.We incurred RMB6.2 million and RMB21.4 million (US$3.3 million) of fees related to credit analysis information provided by Zhima Credit in2016 and 2017, respectively. No such fees were incurred in 2015.We incurred RMB36.1 million and RMB16.0 million (US$2.5 million) of borrower engagement fees to Zhima Credit in 2016 and 2017,respectively. We incurred RMB222.1 million (US$34.1 million) of borrower engagement fees to Alipay in 2017. No such fees were incurred in 2015. 151Source: Qudian Inc., 20-F, April 09, 2018Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Table of ContentsWe incurred RMB23.2 million (US$3.6 million) of fees related to cloud computing services provided by Alibaba Cloud Computing Co., Ltd. in2017. No such fees were incurred in 2015 or 2016.Amounts due from Alipay were RMB33.8 million, RMB404.6 million and RMB549.8 million (US$84.5 million) as of December 31, 2015 and2016 and 2017, respectively. These are amounts deposited in our Alipay accounts and are unrestricted as to withdrawal and use and readily availableto us on demand. We use our Alipay accounts to disburse credit to and collect repayments from borrowers.Amounts due to Zhima Credit were RMB19.6 million and RMB3.1 million (US$0.5 million) as of December 31, 2016 and 2017, respectively.Such amounts represent fees related to credit analysis information and borrower engagement fees payable to Zhima Credit.Transactions with Mr. Min LuoAs of December 31, 2015, we had amount due to Mr. Min Luo of RMB145.5 million. Such amount represented non-interest bearing financingthat Beijing Happy Time received from Mr. Min Luo. Amount due to Mr. Min Luo was settled in 2016.Transactions with GuoshengGuosheng Financial Holding Inc. and Guosheng Securities Asset Management Co.. Ltd. are controlled by our director Mr. Li Du. These entitiesinvested in our trusts, and such investments are recognized as borrowings by us. As of December 31, 2017, amount due to Guosheng Financial HoldingInc. was RMB631.7 million (US$97.1 million); amount due to Guosheng Securities Asset Management Co.. Ltd. was RMB83.5 million (US$12.8million).Transactions with Certain Other Members of Our Key Management and Their Immediate FamiliesBesides our transactions with Mr. Min Luo and Guosheng, we have engaged in transactions with certain other members of our key managementand their immediate families, none of whom are our executive officers or directors.As of December 31, 2015, 2016 and 2017, we had amounts due from our key management and their immediate families of RMB2.8 million,RMB1.3 million and RMB1.0 million (US$0.2 million), respectively. Such amounts represented (i) principal and financing service fee receivables fromcertain of our key management and their immediate families who utilized our credit products and (ii) advances to certain of our key management inconnection with our daily operations, such as use by the relevant employees to purchase domain names that were subsequently transferred to us.Transactions with the Former Holdings Companies of Beijing Happy TimeAs of December 31, 2015, we had amounts due to Qufenqi Inc., a former holding company of Beijing Happy Time, and Qufenqi (HK) Limited, aformer holding company of Ganzhou Qufenqi, of RMB368.3 million and RMB1,092.3 million, respectively. Such amounts have been substantiallysettled. As of December 31, 2016 and 2017, we had amounts due to Qufenqi Inc. of RMB0.9 million, which was interest free and payable on demand.As of December 31, 2016, we had amounts due from Qufenqi Inc. of RMB180.0 million. Such amounts primarily consisted of a financingcommitment from a shareholder to acquire equity interests in Qufenqi Inc., which has not been consummated. We have substantially settled suchamounts in April 2017. 152Source: Qudian Inc., 20-F, April 09, 2018Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Table of ContentsContractual Arrangements with Our VIEs and Their ShareholdersPRC laws and regulations currently restrict foreign ownership and foreign investment in VATS in China. As a result, we operate our relevantbusiness through contractual arrangements among Ganzhou Qufenqi, our wholly-owned PRC subsidiary, Beijing Happy Time, our consolidated VIE,and the shareholders of Beijing Happy Time. We established three new consolidated VIEs, Ganzhou Qudian, Hunan Qudian and Xiamen Qudian, in2017. Ganzhou Qufenqi has entered into a series of contractual arrangements with each new consolidated VIE and its shareholders. For a description ofthese contractual arrangements, see “Item 4. Information on the Company — B. Business Overview — Overview — Our Contractual Arrangements withConsolidated VIEs and Their Shareholders.” C.Interests of Experts and CounselNot Applicable. ITEM 8.FINANCIAL INFORMATION A.Consolidated Statements and Other Financial InformationWe have appended consolidated financial statements filed as part of this annual report.Legal and Administrative ProceedingsWe may from time to time be subject to various legal or administrative claims and proceedings arising in the ordinary course of business.Litigation or any other legal or administrative proceeding, regardless of the outcome, is likely to result in substantial cost and diversion of ourresources, including our management’s time and attention.We and certain of our directors and officers were named as defendants in four putative securities class actions filed in the United States DistrictCourt for the Southern District of New York: Ramnath v. Qudian Inc. et al., Civil Action No. 1:17-cv-09741-RA (S.D.N.Y.), Maia v. Min Luo et al.,Civil Action No. 1:17-cv-09796-RA (S.D.N.Y.), Foat v. Qudian Inc. et al., Civil Action No. 1:17-cv-09875-RA (S.D.N.Y.), and Perez v. Qudian Inc. etal., Civil Action No. 1:17-cv-09903-RA (S.D.N.Y.) (collectively, the “Federal Actions”). The Federal Actions — purportedly brought on behalf of aclass of persons who allegedly suffered damages as a result of their purchase of our ADSs pursuant and/or traceable to our IPO — allege violations ofSections 11 and 15 of the United States Securities Act of 1933 in connection with our disclosure of business and regulatory risks.On March 16, 2018, the Court entered an order consolidating the Federal Actions under master caption In re Qudian Inc. Securities Litigation,Master File No. 1:17-cv-09741-RA (S.D.N.Y.) and appointing lead plaintiffs and lead counsel for the consolidated case. The consolidated case remainsat its preliminary stages.We and certain of our directors and officers were also named as defendants in Song v. Qudian Inc. et al., Case No. 18CIV01425 (Cal. Supr. Ct.,San Mateo Cty.), a putative securities class action filed in the Superior Court of California, County of San Mateo (the “California Action”). TheCalifornia Action — purportedly brought on behalf of a class of persons who allegedly suffered damages as a result of their purchase of our ADSspursuant and/or traceable to our IPO — alleges violations of Sections 11, 12(a)(2), and 15 of the United States Securities Act of 1933 in connectionwith our disclosure of business and regulatory risks. The California Action remains at its preliminary stages.For risks and uncertainties relating to the pending cases against us, please see “Item 3. Key Information — D. Risk Factors — Risks Related toOur ADSs — We have been named as a defendant in five putative shareholder class action lawsuits that could have a material adverse impact on ourbusiness, financial condition, results of operation, cash flows and reputation.” 153Source: Qudian Inc., 20-F, April 09, 2018Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Table of ContentsDividend PolicySince inception, we have not declared or paid any dividends on our shares. We do not have any present plan to pay any dividends on our Class Aordinary 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 andexpand our business.Any other future determination to pay dividends will be made at the discretion of our board of directors and may be based on a number of factors,including our future operations and earnings, capital requirements and surplus, general financial condition, contractual restrictions and other factorsthat the board of directors may deem relevant. If we pay any dividends, we will pay our ADS holders to the same extent as holders of our Class Aordinary shares, subject to the terms of the deposit agreement, including the fees and expenses payable thereunder. Cash dividends on our Class Aordinary shares, if any, will be paid in U.S. dollars.We are an exempted company incorporated in the Cayman Islands. In order for us to distribute any dividends to our shareholders and ADSholders, we may rely on dividends distributed by our PRC subsidiaries. Certain payments from our PRC subsidiaries to us may be subject to PRCwithholding income tax. In addition, regulations in the PRC currently permit payment of dividends of a PRC company only out of accumulateddistributable after-tax profits as determined in accordance with its articles of association and the accounting standards and regulations in China. Eachof our PRC subsidiaries is required to set aside at least 10% of its after-tax profit based on PRC accounting standards every year to a statutory commonreserve fund until the aggregate amount of such reserve fund reaches 50% of the registered capital of such subsidiary. Such statutory reserves are notdistributable as loans, advances or cash dividends. B.Significant ChangesWe have not experienced any other significant changes since the date of our audited consolidated financial statements included in this annualreport. ITEM 9.THE OFFER AND LISTING A.Offering and Listing DetailsOur ADSs, each representing one of our Class A ordinary share, have been listed on the New York Stock Exchange since October 18, 2017 underthe symbol “QD.” The table below provides the high and low market prices for our ADSs on the New York Stock Exchange since the date of our initialpublic offering. Market Price Per ADS High Low US$ US$ Yearly: 2017(from October 18, 2017) 35.45 11.33 Quarterly: Fourth quarter 2017 (from October 18, 2017) 35.45 11.33 First quarter 2018 17.80 11.33 Monthly: October 2017 (from October 18, 2017) 35.45 21.90 November 2017 29.30 12.03 December 2017 14.87 11.33 January 2018 14.78 11.80 February 2018 15.00 12.60 March 2018 17.80 11.33 B.Plan of DistributionNot Applicable. 154Source: Qudian Inc., 20-F, April 09, 2018Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Table of ContentsC.MarketsOur ADSs, each representing one of our Class A ordinary share, have been listed on the New York Stock Exchange since October 18, 2017 underthe symbol “QD.” D.Selling ShareholdersNot Applicable. E.DilutionNot Applicable. F.Expenses of the IssueNot Applicable. ITEM 10.ADDITIONAL INFORMATION A.Share CapitalNot Applicable. B.Memorandum and Articles of AssociationWe incorporate by reference into this annual report the description of our second amended and restated memorandum of association contained inour F-1 registration statement (File No. 333-220511), as amended, initially filed with the Securities and Exchange Commission on September 18, 2017.Our shareholders adopted our second amended and restated memorandum and articles of association by unanimous resolutions passed on May 3, 2017,and effective immediately prior to the completion of our initial public offering of common shares represented by our ADSs. C.Material ContractsWe have not entered into any material contracts other than in the ordinary course of business and other than those described in “Item 4.Information on the Company” or elsewhere in this annual report. D.Exchange ControlsSee “Item 4. Information on the Company — B. Business Overview — Regulation — Regulations Related to Foreign Exchange.” E.TaxationThe following is a general summary of the material Cayman Islands, People’s Republic of China and United States federal income taxconsequences relevant to an investment in our ADSs and Class A ordinary shares. The discussion is not intended to be, nor should it be construed as,legal or tax advice to any particular prospective purchaser. The discussion is based on laws and relevant interpretations thereof in effect as of the dateof this annual report, all of which are subject to change or different interpretations, possibly with retroactive effect. The discussion does not addressU.S. state or local tax laws, or tax laws of jurisdictions other than the Cayman Islands, the People’s Republic of China and the United States. Youshould consult your own tax advisors with respect to the consequences of acquisition, ownership and disposition of our ADSs and Class A ordinaryshares. 155Source: Qudian Inc., 20-F, April 09, 2018Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Table of ContentsCayman Islands TaxationThe Cayman Islands currently levies no taxes on individuals or corporations based upon profits, income, gains or appreciations and there is notaxation in the nature of inheritance tax or estate duty or withholding tax applicable to us or to any holder of our ADSs and Class A ordinary shares.There are no other taxes likely to be material to us levied by the Government of the Cayman Islands except for stamp duties which may be applicableon instruments executed in, or after execution brought within the jurisdiction of the Cayman Islands. No stamp duty is payable in the Cayman Islandson transfers of shares of Cayman Islands companies except those which hold interests in land in the Cayman Islands. The Cayman Islands is a party to adouble tax treaty entered with the United Kingdom in 2010 but is otherwise not party to any double tax treaties. There are no exchange controlregulations or currency restrictions in the Cayman Islands.Pursuant to Section 6 of the Tax Concessions Law (2011 Revision) of the Cayman Islands, we have obtained an undertaking from theGovernor-in-Cabinet: (1)that no law which is enacted in the Cayman Islands imposing any tax to be levied on profits or income or gains or appreciation shall applyto us or our operations; and (2)that the aforesaid tax or any tax in the nature of estate duty or inheritance tax shall not be payable on our shares, debentures or otherobligations.The undertaking for us is for a period of twenty years from November 29, 2016.People’s Republic of China TaxationIn March 2007, the National People’s Congress of China enacted the Enterprise Income Tax Law, which became effective on January 1, 2008.The Enterprise Income Tax Law provides that enterprises organized under the laws of jurisdictions outside China with their “de facto managementbodies” located within China may be considered PRC resident enterprises and therefore subject to PRC enterprise income tax at the rate of 25% ontheir worldwide income. The Implementing Rules of the Enterprise Income Tax Law further defines the term “de facto management body” as themanagement body that exercises substantial and overall management and control over the business, personnel, accounts and properties of anenterprise. While we do not currently consider our company or any of our overseas subsidiaries to be a PRC resident enterprise, there is a risk that thePRC tax authorities may deem our company or any of our overseas subsidiaries as a PRC resident enterprise since a substantial majority of the membersof our management team as well as the management team of some of our overseas subsidiaries are located in China, in which case we or the overseassubsidiaries, as the case may be, would be subject to the PRC enterprise income tax at the rate of 25% on worldwide income. If the PRC tax authoritiesdetermine that our Cayman Islands holding company is a “resident enterprise” for PRC enterprise income tax purposes, a number of unfavorable PRCtax consequences could follow. One example is a 10% withholding tax would be imposed on dividends we pay to our non-PRC enterprise shareholdersand with respect to gains derived by our non-PRC enterprise shareholders from transferring our shares or ADSs. It is unclear whether, if we areconsidered a PRC resident enterprise, holders of our shares or ADSs would be able to claim the benefit of income tax treaties or agreements entered intobetween China and other countries or areas.On April 30, 1984, China and the United States (each a “Contracting State”) entered into an agreement for the avoidance of double taxation andthe prevention of tax evasion with respect to taxes on income, or the Sino-US Treaty. The Sino-US Treaty provides that, among others, subject tocertain conditions and limitations, dividends paid by a company which is a resident enterprise of one Contracting State, to a resident (an individualcitizen or a resident enterprise) of the other Contracting State, or interest arising in one Contracting State and paid to a resident of the other ContractingState, may be taxed in that other Contracting State, such dividend or interest may also be taxed in the Contracting State where the company paying thedividends is a resident, or the interest arises, according to the laws of such Contracting State, but if the recipient of dividend or interest is the beneficialowner of the dividend or interest, the tax so charged shall not exceed 10% of the gross amount of the 156Source: Qudian Inc., 20-F, April 09, 2018Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Table of Contentsdividend or the interest. The Sino-US Treaty also provides several methods for the elimination of double taxation: (1) in China, (a) where a resident ofChina derives income from the United States, the amount of the United States income tax payable in respect of that income in accordance with theprovisions of the Sino-US Treaty shall be allowed as a credit against the Chinese tax imposed on that resident. The amount of credit, however, shall notexceed the amount of the Chinese tax computed with respect to that income in accordance with the taxation laws and regulations of China; (b) wherethe income derived from the United States is a dividend paid by a company which is a resident of the United States to a company which is a resident ofChina and which owns not less than 10% of the shares of the company paying the dividend, the credit shall take into account the United States incometax payable by the company paying the dividend in respect of the profits out of which the dividends are paid; (2) in the United States, in accordancewith the provisions of the law of the United States, the United States shall allow to a resident or citizen of the United States as a credit against theUnited States tax on income: (a) the income tax paid to China by or on behalf of such resident or citizen; and (b) in the case of a United States companyowning at least 10% of the voting rights in a company which is a resident of China and from which the United States company receives dividends, theincome tax paid to China by or on behalf of the distributing company with respect to the profits out of which the dividends are paid; and (3) incomederived by a resident of a Contracting State which may be taxed in the other Contracting State in accordance with the Sino-US Treaty shall be deemedto arise in that other Contracting State.Certain United States Federal Income Tax ConsiderationsThe following discussion describes certain United States federal income tax consequences of the purchase, ownership and disposition of ourADSs and Class A ordinary shares as of the date hereof. This discussion deals only with ADSs and Class A ordinary shares that are held as capital assetsby a United States Holder (as defined below).As used herein, the term “United States Holder” means a beneficial owner of our ADSs or Class A ordinary shares that is, for United States federalincome tax purposes, any of the following: • an individual citizen or resident of the United States; • a corporation (or other entity treated as a corporation for United States federal income tax purposes) created or organized in or under thelaws of the United States, any state thereof or the District of Columbia; • an estate the income of which is subject to United States federal income taxation regardless of its source; or • a trust if it (1) is subject to the primary supervision of a court within the United States and one or more United States persons have theauthority to control all substantial decisions of the trust or (2) has a valid election in effect under applicable United States Treasuryregulations to be treated as a United States person.This discussion is based upon provisions of the Internal Revenue Code of 1986, as amended (the “Code”), and regulations, rulings and judicialdecisions thereunder as of the date hereof. Those authorities may be changed, perhaps retroactively, so as to result in United States federal income taxconsequences different from those summarized below. In addition, this discussion is based, in part, upon representations made by the depositary to usand assumes that the deposit agreement, and all other related agreements, will be performed in accordance with their terms.This discussion does not represent a detailed description of the United States federal income tax consequences applicable to you if you aresubject to special treatment under the United States federal income tax laws, including if you are: • a dealer in securities or currencies; 157Source: Qudian Inc., 20-F, April 09, 2018Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Table of Contents • a financial institution; • a regulated investment company; • a real estate investment trust; • an insurance company; • a tax-exempt organization; • a person holding our ADSs or Class A ordinary shares as part of a hedging, integrated or conversion transaction, a constructive sale or astraddle; • a trader in securities that has elected the mark-to-market method of accounting for your securities; • a person liable for alternative minimum tax; • a person who owns or is deemed to own 10% or more of our stock (by vote or value); • a person required to accelerate the recognition of any item of gross income with respect to our ADSs or Class A ordinary shares as a result ofsuch income being recognized on an applicable financial statement; • a partnership or other pass-through entity for United States federal income tax purposes; or • a person whose “functional currency” is not the United States dollar.If a partnership (or other entity treated as a partnership for United States federal income tax purposes) holds our ADSs or Class A ordinary shares,the tax treatment of a partner will generally depend upon the status of the partner and the activities of the partnership. If you are a partner of apartnership holding our ADSs or Class A ordinary shares, you should consult your tax advisors.This discussion does not contain a detailed description of all the United States federal income tax consequences to you in light of your particularcircumstances and does not address the Medicare tax on net investment income or the effects of any state, local or non-United States tax laws. If youare considering the purchase of our ADSs or Class A ordinary shares, you should consult your own tax advisors concerning the particular UnitedStates federal income tax consequences to you of the purchase, ownership and disposition of our ADSs or Class A ordinary shares, as well as theconsequences to you arising under other United States federal tax laws and the laws of any other taxing jurisdiction.ADSsIf you hold ADSs, for United States federal income tax purposes, you generally will be treated as the owner of the underlying Class A ordinaryshares that are represented by such ADSs. Accordingly, deposits or withdrawals of Class A ordinary shares for ADSs will not be subject to United Statesfederal income tax.Taxation of DividendsSubject to the discussion under “— Passive Foreign Investment Company” below, the gross amount of distributions on the ADSs or Class Aordinary shares (including any amounts withheld to reflect potential PRC withholding taxes, as discussed above under “— People’s Republic of ChinaTaxation”) will be taxable as dividends to the extent paid out of our current or accumulated earnings and profits, as determined under United Statesfederal income tax principles. To the extent that the amount of any distribution exceeds our current and accumulated earnings and profits for a taxableyear, the distribution will first be treated as a tax-free return of capital, causing a reduction in the tax basis of the ADSs or Class A ordinary shares, andto the extent the amount of the distribution exceeds your tax basis, the excess will be taxed as capital gain recognized on a sale or exchange. We donot, however, expect to determine earnings and profits in accordance with United States federal income tax principles. Therefore, you should expectthat a distribution will generally be treated as a dividend. 158Source: Qudian Inc., 20-F, April 09, 2018Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Table of ContentsAny dividends that you receive (including any withheld taxes) will be includable in your gross income as ordinary income on the day actually orconstructively received by you, in the case of Class A ordinary shares, or by the depositary, in the case of ADSs. Such dividends will not be eligible forthe dividends received deduction allowed to corporations under the Code.With respect to non-corporate United States investors, certain dividends received from a qualified foreign corporation may be subject to reducedrates of taxation. A foreign corporation generally is treated as a qualified foreign corporation with respect to dividends received from that corporationon shares (or ADSs backed by such shares) that are readily tradable on an established securities market in the United States. United States TreasuryDepartment guidance indicates that our ADSs (which are listed on the NYSE) are readily tradable on an established securities market in the UnitedStates. Since we do not expect that our Class A ordinary shares will be listed on an established securities market in the United States, we do not believethat dividends that we pay on our common shares that are not represented by ADSs currently meet the conditions required for these reduced tax rates.There can be no assurance, however, that our ADSs will be considered readily tradable on an established securities market in later years. A qualifiedforeign corporation also generally includes a foreign corporation that is eligible for the benefits of certain income tax treaties with the United States. Inthe event that we are deemed to be a PRC resident enterprise under the Enterprise Income Tax Law, we may be eligible for the benefits of the incometax treaty between the United States and PRC, or the Treaty, and if we are eligible for such benefits, dividends we pay on our Class A ordinary shares,regardless of whether such shares are represented by ADSs, may be eligible for reduced rates of taxation. See “Taxation — People’s Republic of ChinaTaxation.” Non-corporate holders that do not meet a minimum holding period requirement during which they are not protected from the risk of loss orthat elect to treat the dividend income as “investment income” pursuant to Section 163(d)(4) of the Code will not be eligible for the reduced rates oftaxation regardless of our status as a qualified foreign corporation. In addition, the rate reduction will not apply to dividends if the recipient of adividend is obligated to make related payments with respect to positions in substantially similar or related property. This disallowance applies even ifthe minimum holding period has been met. You should consult your own tax advisors regarding the application of these rules given your particularcircumstances.In addition, notwithstanding the forgoing, non-corporate United States Holders will not be eligible for reduced rates of taxation on any dividendsreceived from us if we are a passive foreign investment company (a “PFIC”) in the taxable year in which such dividends are paid or in the precedingtaxable year. As discussed below under “— Passive Foreign Investment Company,” we believe that there is a significant risk that we will be classifiedas a PFIC for 2017, and we may be classified as a PFIC in future taxable years.Subject to certain conditions and limitations (including a minimum holding period requirement), any PRC withholding taxes on dividends maybe treated as foreign taxes eligible for credit against your United States federal income tax liability. For purposes of calculating the foreign tax credit,dividends paid on the ADSs or Class A ordinary shares will be treated as income from sources outside the United States and will generally constitutepassive category income. The rules governing the foreign tax credit are complex. You are urged to consult your tax advisors regarding the availabilityof the foreign tax credit under your particular circumstances.Distributions of ADSs, Class A ordinary shares or rights to subscribe for ADSs or Class A ordinary shares that are received as part of a pro ratadistribution to all of our shareholders generally will not be subject to United States federal income tax.Passive Foreign Investment CompanyIn general, we will be a PFIC for United States federal income tax purposes for any taxable year in which: • at least 75% of our gross income is passive income, or • at least 50% of the value (determined based on a quarterly average) of our assets is attributable to assets that produce or are held for theproduction of passive income. 159Source: Qudian Inc., 20-F, April 09, 2018Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Table of ContentsFor this purpose, passive income generally includes dividends, interest, royalties and rents (other than royalties and rents derived in the activeconduct of a trade or business and not derived from a related person). If we own at least 25% (by value) of the stock of another corporation, for purposesof determining whether we are a PFIC, we will be treated as owning our proportionate share of the other corporation’s assets and receiving ourproportionate share of the other corporation’s income. However, there is uncertainty as to the treatment of our corporate structure and ownership of ourconsolidated VIEs for United States federal income tax purposes. For United States federal income tax purposes, we consider ourselves to own the stockof our consolidated VIEs. If it is determined, contrary to our view, that we do not own the stock of our consolidated VIEs for United States federalincome tax purposes (for instance, because the relevant PRC authorities do not respect these arrangements), we may be treated as a PFIC.We consider ourselves as a service provider with the primary business purpose of focusing on our data technology. We aim to facilitate credit toborrowers that are funded by institutional funding partners rather than by using our own capital. As such, fees received from borrowers are recorded asfinancing income or loan facilitation income and others on our consolidated statements of operations. However, we have historically funded, and maycontinue to fund, credit drawdowns with our own capital. In such case, the fees received from borrowers may be treated as interest for purposes of thePFIC rules. Given the foregoing and based on the past and projected composition and classification of our income and assets, we believe that there is asignificant risk that we will be classified as a PFIC for 2017, and we may be classified as a PFIC in future taxable years. However, there are uncertaintiesin the application of the PFIC rules to a company with our particular business operations, in particular related to the classification of our income asactive or passive. The determination of whether we are a PFIC is made annually. Accordingly, it is possible that our PFIC status may change due tochanges in our asset or income composition. The calculation of the value of our assets will also be based, in part, on the quarterly market value of ourADSs, which is subject to change. Therefore, a decrease in the price of our ADSs may also result in our becoming a PFIC. If we are a PFIC for anytaxable year during which you hold our ADSs or Class A ordinary shares, you will be subject to special tax rules discussed below.If we are a PFIC for any taxable year during which you hold our ADSs or Class A ordinary shares and you do not make a timely mark-to-marketelection, as described below, you will be subject to special tax rules with respect to any “excess distribution” received and any gain realized from a saleor other disposition, including a pledge, of ADSs or Class A ordinary shares. Distributions received in a taxable year will be treated as excessdistributions to the extent that they are greater than 125% of the average annual distributions received during the shorter of the three preceding taxableyears or your holding period for the ADSs or Class A ordinary shares. Under these special tax rules: • the excess distribution or gain will be allocated ratably over your holding period for the ADSs or Class A ordinary shares, • the amount allocated to the current taxable year, and any taxable year prior to the first taxable year in which we were a PFIC, will be treatedas ordinary income, and • the amount allocated to each other year will be subject to tax at the highest tax rate in effect for that year and the interest charge generallyapplicable to underpayments of tax will be imposed on the resulting tax attributable to each such year.Although the determination of whether we are a PFIC is made annually, if we are a PFIC for any taxable year in which you hold our ADSs orClass A ordinary shares, you will generally be subject to the special tax rules described above for that year and for each subsequent year in which youhold the ADSs or Class A ordinary shares (even if we do not qualify as a PFIC in such subsequent years). However, if we cease to be a PFIC, you canavoid the continuing impact of the PFIC rules by making a special election to recognize gain as if your ADSs or Class A ordinary shares had been soldon the last day of the last taxable year during which we were a PFIC. You are urged to consult your own tax advisor about this election. 160Source: Qudian Inc., 20-F, April 09, 2018Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Table of ContentsIn lieu of being subject to the special tax rules discussed above, you may make a mark-to-market election with respect to your ADSs or Class Aordinary shares provided such ADSs or Class A ordinary shares are treated as “marketable stock.” The ADSs or Class A ordinary shares generally will betreated as marketable stock if the ADSs or Class A ordinary shares are regularly traded on a “qualified exchange or other market” (within the meaningof the applicable Treasury regulations). Under current law, the mark-to-market election may be available to holders of ADSs since the ADSs are listedon the NYSE which constitutes a qualified exchange, although there can be no assurance that the ADSs will be “regularly traded” for purposes of themark-to-market election. It should also be noted that it is intended that only the ADSs and not the Class A ordinary shares will be listed on the NYSE.Consequently, if you are a holder of Class A ordinary shares that are not represented by ADSs, you generally will not be eligible to make amark-to-market election.If you make an effective mark-to-market election, for each taxable year that we are a PFIC you will include as ordinary income the excess of thefair market value of your ADSs at the end of the year over your adjusted tax basis in the ADSs. You will be entitled to deduct as an ordinary loss in eachsuch year the excess of your adjusted tax basis in the ADSs over their fair market value at the end of the year, but only to the extent of the net amountpreviously included in income as a result of the mark-to-market election. Your adjusted tax basis in the ADSs will be increased by the amount of anyincome inclusion and decreased by the amount of any deductions under the mark-to-market rules. In addition, upon the sale or other disposition ofyour ADSs in a year that we are a PFIC, any gain will be treated as ordinary income and any loss will be treated as ordinary loss, but only to the extentof the net amount of previously included income as a result of the mark-to-market election.If you make a mark-to-market election, it will be effective for the taxable year for which the election is made and all subsequent taxable yearsunless the ADSs are no longer regularly traded on a qualified exchange or other market, or the Internal Revenue Service consents to the revocation ofthe election. You are urged to consult your tax advisor about the availability of the mark-to-market election, and whether making the election wouldbe advisable in your particular circumstances.Alternatively, you can sometimes avoid the special tax rules described above by electing to treat a PFIC as a “qualified electing fund” underSection 1295 of the Code. However, this option is not available to you because we do not intend to comply with the requirements necessary to permityou to make this election.If we are a PFIC for any taxable year during which you hold our ADSs or Class A ordinary shares and any of our non-United States subsidiaries isalso a PFIC, you will be treated as owning a proportionate amount (by value) of the shares of the lower-tier PFIC for purposes of the application of thePFIC rules. You are urged to consult your tax advisors about the application of the PFIC rules to any of our subsidiaries.You will generally be required to file Internal Revenue Service Form 8621 if you hold our ADSs or Class A ordinary shares in any year in whichwe are classified as a PFIC. You are urged to consult your tax advisors concerning the United States federal income tax consequences of holding ADSsor Class A ordinary shares if we are considered a PFIC in any taxable year.Taxation of Capital GainsFor United States federal income tax purposes, you will recognize taxable gain or loss on any sale or exchange of the ADSs or Class A ordinaryshares in an amount equal to the difference between the amount realized for the ADSs or Class A ordinary shares and your tax basis in the ADSs orClass A ordinary shares. Subject to the discussion under “— Passive Foreign Investment Company” above, such gain or loss will generally be capitalgain or loss and will generally be long-term capital gain or loss if you have held the ADSs or Class A ordinary shares for more than one year. Long-termcapital gains of non-corporate United States Holders (including individuals) are eligible for reduced rates of taxation. The deductibility of capitallosses is subject to limitations. Any gain or loss recognized by you will generally be treated as United States source gain or loss. However, if we aretreated as a PRC resident enterprise for PRC tax purposes and PRC tax were imposed on any 161Source: Qudian Inc., 20-F, April 09, 2018Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Table of Contentsgain, and if you are eligible for the benefits of the Treaty, you may elect to treat such gain as PRC source gain under the Treaty. If you are not eligiblefor the benefits of the Treaty or if you fail to make the election to treat any gain as PRC source, then you generally would not be able to use the foreigntax credit arising from any PRC tax imposed on the disposition of ADSs or Class A ordinary shares unless such credit can be applied (subject toapplicable limitations) against tax due on other income derived from foreign sources.Information Reporting and Backup WithholdingIn general, information reporting will apply to dividends in respect of our ADSs or Class A ordinary shares and the proceeds from the sale,exchange or other disposition of our ADSs or Class A ordinary shares that are paid to you within the United States (and in certain cases, outside theUnited States), unless you are an exempt recipient. A backup withholding tax may apply to such payments if you fail to provide a taxpayeridentification number or certification of exempt status or fail to report in full dividend and interest income.Backup withholding is not an additional tax and any amounts withheld under the backup withholding rules will be allowed as a refund or acredit against your United States federal income tax liability provided the required information is timely furnished to the Internal Revenue Service. F.Dividends and Paying AgentsNot Applicable. G.Statement by ExpertsNot Applicable. H.Documents on DisplayWe have filed this annual report on Form 20-F, including exhibits, with the SEC. As allowed by the SEC, in Item 19 of this annual report, weincorporate by reference certain information we filed with the SEC. This means that we can disclose important information to you by referring you toanother document filed separately with the SEC. The information incorporated by reference is considered to be part of this annual report.You may read and copy this annual report, including the exhibits incorporated by reference in this annual report, at the SEC’s Public ReferenceRoom at 100 F Street, N.E., Washington, D.C. 20549 and at the SEC’s regional offices in New York, New York and Chicago, Illinois. You also canrequest copies of this annual report, including the exhibits incorporated by reference in this annual report, upon payment of a duplicating fee, bywriting information on the operation of the SEC’s Public Reference Room.The SEC also maintains a website at www.sec.gov that contains reports, proxy statements and other information regarding registrants that fileelectronically with the SEC. Our annual report and some of the other information submitted by us to the SEC may be accessed through this web site.As a foreign private issuer, we are exempt from the rules under the Exchange Act prescribing the furnishing and content of quarterly reports andproxy statements, and officers, directors and principal shareholders are exempt from the reporting and short-swing profit recovery provisions containedin Section 16 of the Exchange Act.Our financial statements have been prepared in accordance with U.S. GAAP.We will furnish our shareholders with annual reports, which will include a review of operations and annual audited consolidated financialstatements prepared in conformity with U.S. GAAP. 162Source: Qudian Inc., 20-F, April 09, 2018Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Table of ContentsI.Subsidiary InformationNot applicable. ITEM 11.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKForeign Exchange RiskAll of our revenues and substantially all of our expenses are denominated in Renminbi. The functional currency of our company, QDTechnologies Limited and QD Data Limited is the U.S. dollar. The functional currency of our subsidiary in the PRC, the VIEs and the VIEs’subsidiaries is the Renminbi. We use Renminbi as our reporting currency. Monetary assets and liabilities denominated in currencies other than thefunctional currency are translated into the functional currency at the rates of exchange ruling at the balance sheet date. Transactions in currencies otherthan the functional currency during the year are converted into functional currency at the applicable rates of exchange prevailing when thetransactions occurred. Transaction gains and losses are recognized in the statements of operations. Due to foreign currency translation adjustments, wehad a foreign exchange loss, net, of RMB7.2 million (US$1.1 million) in 2017.We do not believe that we currently have any significant direct foreign exchange risk and have not used any derivative financial instruments tohedge exposure to such risk. Although in general our exposure to foreign exchange risks should be limited, the value of your investment in our ADSswill be affected by the exchange rate between U.S. dollar and RMB because the value of our business is effectively denominated in Renminbi, whileour ADSs will be traded in U.S. dollars.The conversion of Renminbi into foreign currencies, including U.S. dollars, is based on rates set by the PBOC. The PRC government allowed theRenminbi to appreciate by more than 20% against the U.S. dollar between July 2005 and July 2008. Between July 2008 and June 2010, the exchangerate between the Renminbi and the U.S. dollar had been stable and traded within a narrow band. In June 2010, the PRC government indicated that itwould make the foreign exchange rate of the Renminbi more flexible, which increases the possibility of sharp fluctuations of the Renminbi’s value inthe near future and the unpredictability associated with the Renminbi’s exchange rate. Since then, the Renminbi has fluctuated against the U.S. dollar,at times significantly and unpredictably. On November 30, 2015, the Executive Board of the International Monetary Fund (IMF) completed the regularfive-year review of the basket of currencies that make up the Special Drawing Right, or the SDR, and decided that with effect from October 1, 2016,Renminbi is determined to be a freely usable currency and will be included in the SDR basket as a fifth currency, along with the U.S. dollar, the Euro,the Japanese yen and the British pound. In the fourth quarter of 2016, the Renminbi has depreciated significantly in the backdrop of a surging U.S.dollar and persistent capital outflows of China. With the development of the foreign exchange market and progress towards interest rate liberalizationand Renminbi internationalization, the PRC government may in the future announce further changes to the exchange rate system, and we cannot assureyou that the Renminbi will not appreciate or depreciate significantly in value against the U.S. dollar in the future. It is difficult to predict how marketforces or PRC or U.S. government policy may impact the exchange rate between the Renminbi and the U.S. dollar in the future.To the extent that we need to convert U.S. dollars into Renminbi for our operations, appreciation of the Renminbi against the U.S. dollar wouldhave an adverse effect on the Renminbi amount we receive from the conversion. Conversely, if we decide to convert Renminbi into U.S. dollars for thepurpose of making payments for dividends on our ordinary shares or ADSs or for other business purposes, appreciation of the U.S. dollar against theRenminbi would have a negative effect on the U.S. dollar amounts available to us.Interest Rate RiskWe have not been exposed to material risks due to changes in market interest rates, and we have not used any derivative financial instruments tomanage our interest risk exposure. However, we cannot provide assurance that we will not be exposed to material risks due to changes in marketinterest rate in the future. 163Source: Qudian Inc., 20-F, April 09, 2018Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Table of ContentsAfter the completion of this annual report, we may invest the net proceeds we receive from the offering in interest-earning instruments.Investments in both fixed rate and floating rate interest earning instruments carry a degree of interest rate risk. Fixed rate securities may have their fairmarket value adversely impacted due to a rise in interest rates, while floating rate securities may produce less income than expected if interest rates fall.InflationSince inception, inflation in China has not materially affected our results of operations. According to the National Bureau of Statistics of China,the year-over-year percent changes in the consumer price index for December 2015, December 2016 and December 2017 were increases of 1.6%, 1.9%and 1.8% respectively. Although we have not been materially affected by inflation in the past, we may be affected if China experiences higher rates ofinflation in the future. ITEM 12.DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES A.Debt SecuritiesNot Applicable B.Warrants and RightsNot Applicable C.Other SecuritiesNot Applicable D.American Depositary SharesDepositary FeesUnder the terms of the deposit agreement for our ADSs, an ADS holder will be required to pay the following service fees to the depositary andcertain taxes and governmental charges (in addition to any applicable fees, expenses, taxes and other governmental charges payable on the depositedsecurities represented by any of ADSs): Service Fees•  To any person to which ADSs are issued or to any person to which a distribution is made in respect ofADS distributions pursuant to stock dividends or other free distributions of stock, bonusdistributions, stock splits or other distributions (except where converted to cash) •  Up to US$0.05 per ADS issued•  Cancelation of ADSs, including the case of termination of the deposit agreement •  Up to US$0.05 per ADS canceled•  Distribution of cash dividends •  Up to US$0.05 per ADS held•  Distribution of cash entitlements (other than cash dividends) and/or cash proceeds from the sale ofrights, securities and other entitlements •  Up to US$0.05 per ADS held•  Distribution of ADSs pursuant to exercise of rights. •  Up to US$0.05 per ADS held 164Source: Qudian Inc., 20-F, April 09, 2018Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Table of ContentsService Fees•  Distribution of securities other than ADSs or rights to purchase additional ADSs •  Up to US$0.05 per ADS held•  Depositary services •  Up to US$0.05 per ADS held on theapplicable record date(s) establishedby the depositaryDepositary ChargesAn ADS holder will also be responsible to pay certain fees and expenses incurred by the depositary and certain taxes and governmental charges(in addition to any applicable fees, expenses, taxes and other governmental charges payable on the deposited securities represented by any of ADSs)such as: • Fees for the transfer and registration of ordinary shares charged by the registrar and transfer agent for the ordinary shares in the CaymanIslands (i.e., upon deposit and withdrawal of ordinary shares). • Expenses incurred for converting foreign currency into U.S. dollars. • Expenses for cable, telex and fax transmissions and for delivery of securities. • Taxes and duties upon the transfer of securities, including any applicable stamp duties, any stock transfer charges or withholding taxes (i.e.,when ordinary shares are deposited or withdrawn from deposit). • Fees and expenses incurred in connection with the delivery or servicing of ordinary shares on deposit. • Fees and expenses incurred in connection with complying with exchange control regulations and other regulatory requirements applicableto ordinary shares, deposited securities, ADSs and ADRs. • Any applicable fees and penalties thereon.The depositary fees payable upon the issuance and cancelation of ADSs are typically paid to the depositary by the brokers (on behalf of theirclients) receiving the newly issued ADSs from the depositary and by the brokers (on behalf of their clients) delivering the ADSs to the depositary forcancelation. The brokers in turn charge these fees to their clients. Depositary fees payable in connection with distributions of cash or securities to ADSholders and the depositary services fee are charged by the depositary to the holders of record of ADSs as of the applicable ADS record date.The depositary fees payable for cash distributions are generally deducted from the cash being distributed or by selling a portion of distributableproperty to pay the fees. In the case of distributions other than cash (i.e., share dividends, rights), the depositary charges the applicable fee to the ADSrecord date holders concurrent with the distribution. In the case of ADSs registered in the name of the investor (whether certificated or uncertificated indirect registration), the depositary sends invoices to the applicable record date ADS holders. In the case of ADSs held in brokerage and custodianaccounts (via DTC), the depositary generally collects its fees through the systems provided by DTC (whose nominee is the registered holder of theADSs held in DTC) from the brokers and custodians holding ADSs in their DTC accounts. The brokers and custodians who hold their clients’ ADSs inDTC accounts in turn charge their clients’ accounts the amount of the fees paid to the depositary.In the event of refusal to pay the depositary fees, the depositary may, under the terms of the deposit agreement, refuse the requested service untilpayment is received or may set off the amount of the depositary fees from any distribution to be made to the ADS holder.The depositary has agreed to reimburse us for certain expenses we incur that are related to establishment and maintenance of the ADR programupon such terms and conditions as we and the depositary may agree from time to time. 165Source: Qudian Inc., 20-F, April 09, 2018Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Table of ContentsPayments by DepositaryAs of March 31, 2018, we did not receive any payment from Deutsche Bank Trust Company Americas, the depositary bank for our ADR program.PART II. ITEM 13.DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIESNone. ITEM 14.MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDSSee “Item 10. Additional Information” for a description of the rights of securities holders, which remain unchanged.”The following “Use of Proceeds” information relates to the registration statement on Form F-1, as amended (File No. 333-220511) in relation toour initial public offering, which was declared effective by the SEC on October 17, 2017. In October 2017, we completed our initial public offering inwhich we issued and sold an aggregate of 35,625,000 ADSs, representing 35,625,000 Class A ordinary shares, resulting in net proceeds to us ofapproximately US$799.6 million.As of December 31, 2017, we had used a portion of the net proceeds received from our initial public offering, which consisted of US$100 millionfor capital contribution to fund our Dabai Auto business and US$63.7 million to repurchase our outstanding ADSs. ITEM 15.CONTROLS AND PROCEDURESDisclosure Controls and ProceduresWe maintain disclosure controls and procedures designed to provide reasonable assurance that information required to be disclosed in reportsfiled under the Exchange Act is recorded, processed, summarized and reported within the specified time periods and accumulated and communicated toour management, including our principal executive officer and principal accounting officer, as appropriate, to allow timely decisions regardingrequired disclosure.Our management, under the supervision and with the participation of our principal executive officer and our principal accounting officer,evaluated the effectiveness of our disclosure controls and procedures, as defined in Rules 13a-15(e) or 15d-15(e) promulgated under the Exchange Act,as of December 31, 2017. Based on that evaluation, our principal executive officer and principal accounting officer have concluded that our disclosurecontrols and procedures are effective in ensuring that material information required to be disclosed in this annual report is recorded, processed,summarized and reported to them for assessment, and required disclosure is made within the time period specified in the rules and forms of theCommission.Management’s Annual Report on Internal Control over Financial Reporting.This annual report does not include a report of management’s assessment regarding internal control over financial reporting or an attestationreport of our registered public accounting firm due to a transition period established by rules of the Securities and Exchange Commission for newlypublic companies.Internal Control Over Financial Reporting.In the course of auditing our consolidated financial statements as of December 31, 2017, we and our independent registered public accountingfirm identified a material weakness in our internal control over 166Source: Qudian Inc., 20-F, April 09, 2018Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Table of Contentsfinancial reporting, as defined in the standards established by the Public Company Accounting Oversight Board of the United States. A materialweakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that amaterial misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. The material weakness relatedto our lack of sufficient number of financial reporting personnel with appropriate level of knowledge and experience in application of U.S. GAAP andSEC rules and regulations commensurate with our reporting requirements.We have taken initiatives to improve our internal control over financial reporting to address the material weakness that have been identified,including: hired a chief financial officer and an additional senior financial reporting manager with experience in U.S. GAAP accounting and SECreporting to lead accounting and financial reporting matters; designated more resources to improve the period-end closing procedures for financialstatements and relevant disclosures preparation; and established an audit committee with members who have an appropriate level of financial expertiseto oversee our accounting and financial reporting processes as well as our external and internal audits. We have also taken other steps to strengthen ourinternal control over financial reporting, including preparing a contracts tracking database, formalizing a set of comprehensive U.S. GAAP accountingmanuals, establishing an internal audit function, continuing to hire qualified professionals with sufficient U.S. GAAP accounting and SEC reportingexperience, providing relevant training to our accounting personnel and upgrading our financial reporting system to streamline monthlyand year-end closings and integrate financial and operating reporting systems.We and our independent registered public accounting firm were not required to perform an evaluation of our internal control over financialreporting as of December 31, 2017. Accordingly, we cannot assure you that we have identified all, or that we will not in the future have additional,material weaknesses. Material weaknesses may still exist when we report on the effectiveness of our internal control over financial reporting as requiredby reporting requirements under Section 404 of the Sarbanes-Oxley Act.Changes in Internal Control over Financial ReportingOther than as described above, there were no changes in our internal controls over financial reporting that occurred during the period covered bythis annual report on Form 20-F that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. ITEM 16A.AUDIT COMMITTEE FINANCIAL EXPERTOur Board of Directors has determined Yifan Li, who is an independent director, qualifies as an audit committee financial expert as defined inItem 16A of the instruction to Form 20-F. ITEM 16B.CODE OF ETHICSOur board of directors has adopted a code of ethics that applies to our directors, officers and employees. We have filed our code of businessconduct and ethics as an exhibit to our registration statement on Form F-1(File No. 333-220511), as amended, initially filed with the SEC onSeptember 18, 2017. We hereby undertake to provide to any person without charge, a copy of our code of business conduct and ethics within tenworking days after we receive such person’s written request. 167Source: Qudian Inc., 20-F, April 09, 2018Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Table of ContentsITEM 16C.PRINCIPAL ACCOUNTANT FEES AND SERVICESThe following table sets forth the aggregate fees by categories specified below in connection with certain professional services rendered byErnst & Young Hua Ming LLP, our independent public accountant for the periods indicated. We did not pay any other fees to our auditors during theperiods indicated below. For the Year EndedDecember 31, 2016 2017 (In thousands ofUS dollars) Audit Fees(1) 6,000 10,472 Tax Fees(2) 760 520 Total 6,760 10,992 (1)Audit fees include the aggregate fees billed in each of the fiscal period listed for professional services rendered by our independent publicaccountant for the audit of our annual financial statements, review of our quarterly financial statements and services related to our initial publicoffering.(2)Tax fees include the aggregated fees billed in each of the fiscal periods listed for professional services rendered by our independent publicaccountant for tax compliance, tax advice and tax planning.The policy of our audit committee or our board of directors is to pre-approve all audit and non-audit services provided by our independent publicaccountant, including audit services, audit-related services and other services as described above. All of the services of Ernst & Young Hua Ming LLPfor 2017 and 2016 described above were in accordance with the audit committee pre-approval policy. ITEM 16D.EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEESNone. ITEM 16E.PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERSThe following table sets forth information about our purchases of outstanding ADSs from November 21, 2017 to March 31, 2018: Period Total Number ofADSs Purchased Average Price Paidper ADS(1) Total Number ofADSs Purchasedas Part of PubliclyAnnounced Plansor Programs(2) ApproximateDollar Value ofADSs that MayYet Be PurchasedUnder theProgram(2) November 21, 2017 through November 30,2017 2,474,836 US$14.06 2,474,836 US$265.2 million December 2017 2,062,279 US$13.92 2,062,279 US$236.5 million January 2018 — — — — February 2018 — — — — March 2018 — — — — Total 4,537,115 US$14.00 4,537,115 US$236.5 million (1)Each of our ADSs represents one Class A ordinary share. The average price per ADS is calculated using the execution price for each repurchaseexcluding commissions paid to brokers.(2)We announced a share repurchase program approved by our board of directors in November 2017, under which we may repurchase up to US$300million worth of our outstanding ADSs over a period of twelve 168Source: Qudian Inc., 20-F, April 09, 2018Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Table of Contents months. The repurchases have been, and will be, through various means, including open market transactions, privately negotiated transactions,tender offers or any combination thereof. The repurchases have been, and will be, effected in compliance with Rule 10b5-1 under the SecuritiesExchange Act of 1934, as amended, and our insider trading policy. The number of ADSs repurchased and the timing of repurchases will dependon a number of factors, including, but not limited to, price, trading volume and general market conditions. ITEM 16F.CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANTNot Applicable. ITEM 16G.CORPORATE GOVERNANCEWe are a “foreign private issuer” (as such term is defined in Rule 3b-4 under the Exchange Act), and our ADSs, each representing one ordinaryshare, are listed on the New York Stock Exchange. Under Section 303A of the New York Stock Exchange Listed Company Manual, New York StockExchange listed companies that are foreign private issuers are permitted to follow home country practice in lieu of the corporate governance provisionsspecified by the New York Stock Exchange with limited exceptions. ITEM 16H.MINE SAFETY DISCLOSURENot Applicable. 169Source: Qudian Inc., 20-F, April 09, 2018Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Table of ContentsPART III. ITEM 17.FINANCIAL STATEMENTSWe have elected to provide financial statements pursuant to Item 18. ITEM 18.FINANCIAL STATEMENTSThe consolidated financial statements of Qudian Inc, its subsidiaries and its variable interest entities are included at the end of this annual report. ITEM 19.EXHIBITS ExhibitNumber Description of Document1.1 Second Amended and Restated Memorandum and Articles of Association of the Registrant (incorporated herein by reference toExhibit 3.3 to the registration statement on Form F-1 (File No. 333-220511), as amended, initially filed with the Securities andExchange Commission on September 18, 2017)2.1 Form of American Depositary Receipt evidencing American Depositary Shares (incorporated herein by reference to Exhibit (a) tothe registration statement on Form F-6 (File No. 333-220779) filed with the Securities and Exchange Commission on October 3,2017 with respect to American depositary shares representing our Class A ordinary shares)2.2 Specimen of Ordinary Share Certificate (incorporated herein by reference to Exhibit 4.1 to the registration statement on Form F-1(File No. 333-220511), as amended, initially filed with the Securities and Exchange Commission on September 18, 2017)2.3 Form of Deposit Agreement between the Registrant and Deutsche Bank Trust Company Americas, as depositary (incorporatedherein by reference to Exhibit (a) to the registration statement on Form F-6 (File No. 333-220779) filed with the Securities andExchange Commission on October 3, 2017 with respect to American depositary shares representing our Class A ordinary shares)4.1 Form of Indemnification Agreement between the Registrant and its directors and executive officers (incorporated herein byreference to Exhibit 10.1 to the registration statement on Form F-1 (File No. 333-220511), as amended, initially filed with theSecurities and Exchange Commission on September 18, 2017)4.2 Form of Employment Agreement between the Registrant and its executive officers (incorporated herein by reference to Exhibit10.2 to the registration statement on Form F-1 (File No. 333-220511), as amended, initially filed with the Securities andExchange Commission on September 18, 2017)4.3 Qudian Inc. 2016 Equity Incentive Plan (incorporated herein by reference to Exhibit 10.3 to the registration statement on FormF-1 (File No. 333-220511), as amended, initially filed with the Securities and Exchange Commission on September 18, 2017)4.4 Amendment No. 1 to Qudian Inc. 2016 Equity Incentive Plan (incorporated herein by reference to Exhibit 10.4 to the registrationstatement on Form F-1 (File No. 333-220511), as amended, initially filed with the Securities and Exchange Commission onSeptember 18, 2017)4.5 Amendment No. 2 to Qudian Inc. 2016 Equity Incentive Plan (incorporated herein by reference to Exhibit 10.5 to the registrationstatement on Form F-1 (File No. 333-220511), as amended, initially filed with the Securities and Exchange Commission onSeptember 18, 2017) 170Source: Qudian Inc., 20-F, April 09, 2018Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Table of ContentsExhibitNumber Description of Document 4.6 English Translation of Equity Interest Pledge Agreement concerning Beijing Happy Time, among Ganzhou Qufenqi, Mr. MinLuo, Tianjin Happy Share, Shanghai Yunxin Venture Capital Co., Ltd., Phoenix Auspicious Internet Investment L.P., TianjinBlue Run Xinhe Investment Center L.P., Jiaxing Blue Run Quchuan Investment L.P., Ningbo Yuanfeng Venture Capital L.P.,Shenzhen Huasheng Qianhai Investment Co., Ltd., Beijing Kunlun Tech Co., Ltd. and Beijing Happy Time, dated December 9,2016 (incorporated herein by reference to Exhibit 10.6 to the registration statement on Form F-1 (File No. 333-220511), asamended, initially filed with the Securities and Exchange Commission on September 18, 2017)4.7 English translation of Power of Attorney Agreement concerning Beijing Happy Time, between Ganzhou Qufenqi and TianjinHappy Share, dated December 9, 2016 (incorporated herein by reference to Exhibit 10.7 to the registration statement on FormF-1 (File No. 333-220511), as amended, initially filed with the Securities and Exchange Commission on September 18, 2017)4.8 English translation of Power of Attorney Agreement concerning Beijing Happy Time, between Ganzhou Qufenqi andShanghai Yunxin Venture Capital Co., Ltd., dated December 9, 2016 (incorporated herein by reference to Exhibit 10.8 to theregistration statement on Form F-1 (File No. 333-220511), as amended, initially filed with the Securities and ExchangeCommission on September 18, 2017)4.9 English translation of Power of Attorney Agreement concerning Beijing Happy Time, between Ganzhou Qufenqi and PhoenixAuspicious Internet Investment L.P., dated December 9, 2016 (incorporated herein by reference to Exhibit 10.9 to theregistration statement on Form F-1 (File No. 333-220511), as amended, initially filed with the Securities and ExchangeCommission on September 18, 2017)4.10 English translation of Power of Attorney Agreement concerning Beijing Happy Time, between Ganzhou Qufenqi and TianjinBlue Run Xinhe Investment Center L.P., dated December 9, 2016 (incorporated herein by reference to Exhibit 10.10 to theregistration statement on Form F-1 (File No. 333-220511), as amended, initially filed with the Securities and ExchangeCommission on September 18, 2017)4.11 English translation of Power of Attorney Agreement concerning Beijing Happy Time, between Ganzhou Qufenqi and JiaxingBlue Run Quchuan Investment L.P., dated December 9, 2016 (incorporated herein by reference to Exhibit 10.11 to theregistration statement on Form F-1 (File No. 333-220511), as amended, initially filed with the Securities and ExchangeCommission on September 18, 2017)4.12 English translation of Power of Attorney Agreement concerning Beijing Happy Time, between Ganzhou Qufenqi and NingboYuanfeng Venture Capital L.P., dated December 9, 2016 (incorporated herein by reference to Exhibit 10.12 to the registrationstatement on Form F-1 (File No. 333-220511), as amended, initially filed with the Securities and Exchange Commission onSeptember 18, 2017)4.13 English translation of Power of Attorney Agreement concerning Beijing Happy Time, between Ganzhou Qufenqi andShenzhen Huasheng Qianhai Investment Co., Ltd., dated December 9, 2016 (incorporated herein by reference to Exhibit 10.13to the registration statement on Form F-1 (File No. 333-220511), as amended, initially filed with the Securities and ExchangeCommission on September 18, 2017)4.14 English translation of Power of Attorney Agreement concerning Beijing Happy Time, between Ganzhou Qufenqi and BeijingKunlun Tech Co., Ltd., dated December 9, 2016 (incorporated herein by reference to Exhibit 10.14 to the registrationstatement on Form F-1 (File No. 333-220511), as amended, initially filed with the Securities and Exchange Commission onSeptember 18, 2017) 171Source: Qudian Inc., 20-F, April 09, 2018Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Table of ContentsExhibitNumber Description of Document 4.15 English translation of Power of Attorney Agreement concerning Beijing Happy Time, between Ganzhou Qufenqi and Mr. MinLuo, dated December 9, 2016 (incorporated herein by reference to Exhibit 10.15 to the registration statement on Form F-1 (FileNo. 333-220511), as amended, initially filed with the Securities and Exchange Commission on September 18, 2017)4.16 English translation of Exclusive Business Cooperation Agreement among Ganzhou Qufenqi, Beijing Happy Time, GanzhouNetwork, Ganzhou Happy Fenqi and Fuzhou Happy Time Technology Co., Ltd., dated December 9, 2016 (incorporated herein byreference to Exhibit 10.16 to the registration statement on Form F-1 (File No. 333-220511), as amended, initially filed with theSecurities and Exchange Commission on September 18, 2017)4.17 English translation of Exclusive Call Option Agreement concerning Beijing Happy Time, among Ganzhou Qufenqi, Mr. Min Luo,Tianjin Happy Share, Shanghai Yunxin Venture Capital Co., Ltd., Phoenix Auspicious Internet Investment L.P., Tianjin Blue RunXinhe Investment Center L.P., Jiaxing Blue Run Quchuan Investment L.P., Ningbo Yuanfeng Venture Capital L.P., ShenzhenHuasheng Qianhai Investment Co., Ltd., Beijing Kunlun Tech Co., Ltd. and Beijing Happy Time, dated December 9, 2016(incorporated herein by reference to Exhibit 10.17 to the registration statement on Form F-1 (File No. 333-220511), as amended,initially filed with the Securities and Exchange Commission on September 18, 2017)4.18 Financial Support Undertaking Letter issued by the Registrant to Beijing Happy Time, dated February 15, 2017 (incorporatedherein by reference to Exhibit 10.18 to the registration statement on Form F-1 (File No. 333-220511), as amended, initially filedwith the Securities and Exchange Commission on September 18, 2017)4.19 English translation of Equity Interest Pledge Agreement concerning Ganzhou Qudian, among Ganzhou Qufenqi, Mr. Min Luo,Mr. Lianzhu Lv and Ganzhou Qudian, dated May 1, 2017 (incorporated herein by reference to Exhibit 10.19 to the registrationstatement on Form F-1 (File No. 333-220511), as amended, initially filed with the Securities and Exchange Commission onSeptember 18, 2017)4.20 English translation of Power of Attorney Agreement concerning Ganzhou Qudian, between Mr. Min Luo and Ganzhou Qufenqi,dated May 1, 2017 (incorporated herein by reference to Exhibit 10.20 to the registration statement on Form F-1 (FileNo. 333-220511), as amended, initially filed with the Securities and Exchange Commission on September 18, 2017)4.21 English translation of Power of Attorney Agreement concerning Ganzhou Qudian, between Mr. Lianzhu Lv and Ganzhou Qufenqi,dated May 1, 2017 (incorporated herein by reference to Exhibit 10.21 to the registration statement on Form F-1 (FileNo. 333-220511), as amended, initially filed with the Securities and Exchange Commission on September 18, 2017)4.22 English translation of Exclusive Business Cooperation Agreement between Ganzhou Qufenqi and Ganzhou Qudian, dated May 1,2017 (incorporated herein by reference to Exhibit 10.22 to the registration statement on Form F-1 (File No. 333-220511), asamended, initially filed with the Securities and Exchange Commission on September 18, 2017)4.23 English translation of Exclusive Call Option Agreement concerning Ganzhou Qudian, among Ganzhou Qufenqi, Mr. Min Luo,Mr. Lianzhu Lv and Ganzhou Qudian, dated May 1, 2017 (incorporated herein by reference to Exhibit 10.23 to the registrationstatement on Form F-1 (File No. 333-220511), as amended, initially filed with the Securities and Exchange Commission onSeptember 18, 2017)4.24 Financial Support Undertaking Letter issued by the Registrant to Ganzhou Qudian, dated May 1, 2017 (incorporated herein byreference to Exhibit 10.24 to the registration statement on Form F-1 (File No. 333-220511), as amended, initially filed with theSecurities and Exchange Commission on September 18, 2017) 172Source: Qudian Inc., 20-F, April 09, 2018Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Table of ContentsExhibitNumber Description of Document 4.25 English translation of Equity Interest Pledge Agreement concerning Hunan Qudian, among Ganzhou Qufenqi, Mr. Min Luo,Mr. Hongjia He and Hunan Qudian, dated May 1, 2017 (incorporated herein by reference to Exhibit 10.25 to the registrationstatement on Form F-1 (File No. 333-220511), as amended, initially filed with the Securities and Exchange Commission onSeptember 18, 2017)4.26 English translation of Power of Attorney Agreement concerning Hunan Qudian, between Mr. Min Luo and Ganzhou Qufenqi,dated May 1, 2017 (incorporated herein by reference to Exhibit 10.26 to the registration statement on Form F-1 (FileNo. 333-220511), as amended, initially filed with the Securities and Exchange Commission on September 18, 2017)4.27 English translation of Power of Attorney Agreement concerning Hunan Qudian, between Mr. Hongjia He and Ganzhou Qufenqi,dated May 1, 2017 (incorporated herein by reference to Exhibit 10.27 to the registration statement on Form F-1 (FileNo. 333-220511), as amended, initially filed with the Securities and Exchange Commission on September 18, 2017)4.28 English translation of Exclusive Business Cooperation Agreement between Ganzhou Qufenqi and Hunan Qudian, dated May 1,2017 (incorporated herein by reference to Exhibit 10.28 to the registration statement on Form F-1 (File No. 333-220511), asamended, initially filed with the Securities and Exchange Commission on September 18, 2017)4.29 English translation of Exclusive Call Option Agreement concerning Hunan Qudian, among Ganzhou Qufenqi, Mr. Min Luo, Mr. Hongjia He and Hunan Qudian, dated May 1, 2017 (incorporated herein by reference to Exhibit 10.29 to the registration statementon Form F-1 (File No. 333-220511), as amended, initially filed with the Securities and Exchange Commission on September 18,2017)4.30 Financial Support Undertaking Letter issued by the Registrant to Hunan Qudian, dated May 1, 2017 (incorporated herein byreference to Exhibit 10.30 to the registration statement on Form F-1 (File No. 333-220511), as amended, initially filed with theSecurities and Exchange Commission on September 18, 2017)4.31 English translation of Online Personal Loan Cooperation Agreement between Ganzhou Microcredit and Chongqing Alibaba SmallLoans Co., Ltd., dated March 27, 2017 (incorporated herein by reference to Exhibit 10.31 to amendment No. 1 to the registrationstatement on Form F-1 (File No. 333-220511), as amended, filed with the Securities and Exchange Commission on September 25,2017)4.32 English translation of Amended and Restated Alipay APP Access Agreement among Beijing Happy Time, Ganzhou Microcredit,Fuzhou Microcredit, Ganzhou Network, Xinjiang Qudian Technology Co., Ltd., Xiamen Qudian and Alipay.com Co., Ltd., datedAugust 30, 2017 (incorporated herein by reference to Exhibit 10.32 to amendment No. 1 to the registration statement on Form F-1(File No. 333-220511), as amended, filed with the Securities and Exchange Commission on September 25, 2017)4.33 English translation of Zhima Credit Service Agreement between Ganzhou Network and Zhima Credit Management Co., Ltd., datedJune 29, 2016 (incorporated herein by reference to Exhibit 10.33 to amendment No. 1 to the registration statement on Form F-1(File No. 333-220511), as amended, filed with the Securities and Exchange Commission on September 25, 2017)4.34 English Translation of Zhima Credit Service Agreement between Beijing Happy Time and Zhima Credit Management Co., Ltd.,dated February 29, 2016 (incorporated herein by reference to Exhibit 10.34 to amendment No. 1 to the registration statement onForm F-1 (File No. 333-220511), as amended, filed with the Securities and Exchange Commission on September 25, 2017) 173Source: Qudian Inc., 20-F, April 09, 2018Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Table of ContentsExhibitNumber Description of Document 4.35 English Translation to Supplement Agreement to Zhima Credit Service Agreement and other agreements among Beijing HappyTime, Zhima Credit Management Co., Ltd. and Ganzhou Happy Fenqi, dated August 16, 2016 (incorporated herein by reference toExhibit 10.35 to amendment No. 1 to the registration statement on Form F-1 (File No. 333-220511), as amended, filed with theSecurities and Exchange Commission on September 25, 2017)4.36 English translation of Zhima Credit Service Agreement between Ganzhou Microcredit and Zhima Credit Management Co., Ltd.,dated March 20, 2017 (incorporated herein by reference to Exhibit 10.36 to amendment No. 1 to the registration statement onForm F-1 (File No. 333-220511), as amended, filed with the Securities and Exchange Commission on September 25, 2017)4.37 Trust Deed Constituting Qudian Inc. Equity Incentive Trust, dated December 30, 2016, between Qudian Inc. and Ark Trust (HongKong) Limited (incorporated herein by reference to Exhibit 10.37 to the registration statement on Form F-1 (FileNo. 333-220511), as amended, initially filed with the Securities and Exchange Commission on September 18, 2017)4.38 English translation of Equity Interest Pledge Agreement concerning Xiamen Qudian, among Ganzhou Qufenqi, Mr. Min Luo andXiamen Qudian, dated June 20, 2017 (incorporated herein by reference to Exhibit 10.38 to the registration statement on Form F-1(File No. 333-220511), as amended, initially filed with the Securities and Exchange Commission on September 18, 2017)4.39 English translation of Power of Attorney Agreement concerning Xiamen Qudian, between Ganzhou Qufenqi and Mr. Min Luo,dated June 20, 2017 (incorporated herein by reference to Exhibit 10.39 to the registration statement on Form F-1 (FileNo. 333-220511), as amended, initially filed with the Securities and Exchange Commission on September 18, 2017)4.40 English translation of Exclusive Business Cooperation Agreement between Ganzhou Qufenqi and Xiamen Qudian, dated June 20,2017 (incorporated herein by reference to Exhibit 10.40 to the registration statement on Form F-1 (File No. 333-220511), asamended, initially filed with the Securities and Exchange Commission on September 18, 2017)4.41 English translation of Exclusive Call Option Agreement concerning Xiamen Qudian, among Ganzhou Qufenqi, Mr. Min Luo andXiamen Qudian, dated June 20, 2017 (incorporated herein by reference to Exhibit 10.41 to the registration statement on Form F-1(File No. 333-220511), as amended, initially filed with the Securities and Exchange Commission on September 18, 2017)4.42 Financial Support Undertaking Letter issued by the Registrant to Xiamen Qudian, dated June 20, 2017 (incorporated herein byreference to Exhibit 10.42 to the registration statement on Form F-1 (File No. 333-220511), as amended, initially filed with theSecurities and Exchange Commission on September 18, 2017)4.43 Form of Alipay Merchant Service Agreement with Alipay.com Co., Ltd. relating to multiple payments service to Alipay accounts(“Multiple Payments Agreement”) (incorporated herein by reference to Exhibit 10.43 to amendment No. 1 to the registrationstatement on Form F-1 (File No. 333-220511), as amended, filed with the Securities and Exchange Commission on September 25,2017)4.44 Form of Supplemental Agreement to Multiple Payments Agreement (incorporated herein by reference to Exhibit 10.44 toamendment No. 1 to the registration statement on Form F-1 (File No. 333-220511), as amended, filed with the Securities andExchange Commission on September 25, 2017)4.45 Form of Alipay Merchant Service Agreement with Alipay.com Co., Ltd. relating to merchant withholding service (“MerchantWithholding Agreement”) (incorporated herein by reference to Exhibit 10.45 to amendment No. 1 to the registration statement onForm F-1 (File No. 333-220511), as amended, filed with the Securities and Exchange Commission on September 25, 2017) 174Source: Qudian Inc., 20-F, April 09, 2018Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Table of ContentsExhibitNumber Description of Document 4.46 Form of Supplemental Agreement to Merchant Withholding Agreement (incorporated herein by reference to Exhibit 10.46 toamendment No. 1 to the registration statement on Form F-1 (File No. 333-220511), as amended, filed with the Securities andExchange Commission on September 25, 2017)4.47 Form of Alipay Merchant Service Agreement with Alipay.com Co., Ltd. relating to wireless shortcut package service (“WirelessShortcut Agreement”) (incorporated herein by reference to Exhibit 10.47 to amendment No. 1 to the registration statement on FormF-1 (File No. 333-220511), as amended, filed with the Securities and Exchange Commission on September 25, 2017)4.48 Form of Supplemental Agreement to Wireless Shortcut Agreement (incorporated herein by reference to Exhibit 10.48 to amendmentNo. 1 to the registration statement on Form F-1 (File No. 333-220511), as amended, filed with the Securities and ExchangeCommission on September 25, 2017)4.49 Form of Alipay Merchant Service Agreement with Alipay.com Co., Ltd. relating to entrusted payment and collection service(incorporated herein by reference to Exhibit 10.49 to amendment No. 1 to the registration statement on Form F-1 (FileNo. 333-220511), as amended, filed with the Securities and Exchange Commission on September 25, 2017)4.50 Collection and Payment Agency Business Cooperation Agreement between Ganzhou Microcredit and Zhejiang E-Commerce BankCo., Ltd., dated March 7, 2017 (incorporated herein by reference to Exhibit 10.50 to amendment No. 1 to the registration statementon Form F-1 (File No. 333-220511), as amended, filed with the Securities and Exchange Commission on September 25, 2017)4.51 Collection and Payment Agency Service Agreement between Ganzhou Microcredit and Alipay.com Co., Ltd., dated March 17, 2017(incorporated herein by reference to Exhibit 10.51 to amendment No. 1 to the registration statement on Form F-1 (FileNo. 333-220511), as amended, filed with the Securities and Exchange Commission on September 25, 2017)8.1* List of Subsidiaries11.1 Code of Business Conduct and Ethics of the Registrant (incorporated herein by reference to Exhibit 99.1 to the registration statementon Form F-1 (File No. 333-220511), as amended, initially filed with the Securities and Exchange Commission on September 18,2017)12.1* Certification by Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 200212.2* Certification by Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 200213.1** Certification by Principal Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 200213.2** Certification by Principal Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 200215.1* Consent of Tian Yuan Law Firm101.INS* XBRL Instance Document101.SCH* XBRL Taxonomy Extension Schema Document101.CAL* XBRL Taxonomy Extension Calculation Linkbase Document 101.DEF* XBRL Taxonomy Extension Definition Linkbase Document 175Source: Qudian Inc., 20-F, April 09, 2018Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Table of ContentsExhibitNumber Description of Document101.LAB* XBRL Taxonomy Extension Label Linkbase Document101.PRE* XBRL Taxonomy Extension Presentation Linkbase Document *Filed herewith**Furnished herewith 176Source: Qudian Inc., 20-F, April 09, 2018Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Table of ContentsSIGNATURESThe registrant hereby certifies that it meets all of the requirements for filing its annual report on Form 20-F and that it has duly caused andauthorized the undersigned to sign this annual report on its behalf. QUDIAN INC.By /s/Min LuoName: Min LuoTitle: Chairman and Chief Executive OfficerDate: April 9, 2018 177Source: Qudian Inc., 20-F, April 09, 2018Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Table of ContentsQUDIAN INC. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS PAGE(S) Report of Independent Registered Public Accounting Firm F-2 Consolidated Balance Sheets as of December 31, 2016 and 2017 F-3 Consolidated Statements of Comprehensive (Loss)/Income for the Years Ended December 31, 2015, 2016 and 2017 F-9 Consolidated Statements of Shareholders’ Equity/(Deficit) for the Years Ended December 31, 2015, 2016 and 2017 F-11 Consolidated Statements of Cash Flows for the Years Ended December 31, 2015, 2016 and 2017 F-12 Notes to the Consolidated Financial Statements F-14 F-1Source: Qudian Inc., 20-F, April 09, 2018Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Table of ContentsREPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMTo the Shareholders and the Board of Directors of Qudian Inc.Opinion on the Financial StatementsWe have audited the accompanying consolidated balance sheets of Qudian Inc. (the “Company”) as of December 31, 2017 and 2016, the relatedconsolidated statements of comprehensive (loss)/income, shareholders’ equity/ (deficit), and cash flows for each of the three years in the period endedDecember 31, 2017 (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements presentfairly, in all material respects, the financial position of the Company at December 31, 2017 and 2016, and the results of its operations and its cash flowsfor each of the three years in the period ended December 31, 2017, in conformity with U.S generally accepted accounting principles.Basis for OpinionThese financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’sfinancial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (UnitedStates) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicablerules and regulations of the Securities and Exchange Commission and the PCAOB.We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtainreasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is notrequired to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtainan understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’sinternal control over financial reporting. Accordingly, we express no such opinion.Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, andperforming procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts anddisclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made bymanagement, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for ouropinion./s/ Ernst & Young Hua Ming LLPWe have served as the Company’s auditor since 2016.Shanghai, The People’s Republic of ChinaApril 9, 2018 F-2Source: Qudian Inc., 20-F, April 09, 2018Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Table of ContentsQUDIAN INC.CONSOLIDATED BALANCE SHEETSAS OF DECEMBER 31, 2016 AND 2017(Amounts in Renminbi (“RMB”) and US dollar (“US$”), except for number of shares and per share data) As of December 31, Note 2016 2017 RMB RMB US$ ASSETS: Current assets: Cash and cash equivalents (including RMB 431,482,823 and RMB434,976,983 (US$ 66,854,738 ) from consolidated trusts as of December 31,2016 and 2017, respectively) 785,769,977 6,832,306,121 1,050,106,223 Restricted cash 3 — 2,252,645,588 346,225,287 Short-term investments 4 430,200,000 300,000,000 46,109,156 Short-term loan principal and financing service fee receivables (net ofallowance of RMB 103,624,704 and RMB 519,254,006 (US$ 79,807,879);including net deferred origination costs of RMB 100,598 and RMB nil (US$nil) as of December 31, 2016 and 2017, respectively; including RMB1,003,015,844 and RMB 5,582,178,034 (US$ 857,965,054) fromconsolidated trusts as of December 31, 2016 and 2017, respectively) 5 4,826,790,951 8,758,544,694 1,346,163,672 Short-term finance lease receivables (net of allowance of RMB nil and RMB nil(US$ nil) as of December 31, 2016 and 2017, respectively; includingunearned revenue of RMB nil and RMB 604,504 (US$ 92,911) as ofDecember 31, 2016 and 2017, respectively) — 8,508,487 1,307,731 Short-term amounts due from related parties (including RMB 122,572,747 andRMB 476,431,262 (US$ 73,226,144) from consolidated trusts as ofDecember 31, 2016 and 2017, respectively) 17 585,905,707 551,214,823 84,720,167 Other current assets (net of allowance of RMB 11,822,819 and RMB11,822,819 (US$ 1,817,134); including RMB 826,849 and RMB 83,623,450(US$ 12,852,689) from consolidated trusts as of December 31, 2016 and2017, respectively) 6 300,276,624 482,350,979 74,135,986 Total current assets 6,928,943,259 19,185,570,692 2,948,768,222 The accompanying notes are an integral part of these consolidated financial statements. F-3Source: Qudian Inc., 20-F, April 09, 2018Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Table of ContentsQUDIAN INC.CONSOLIDATED BALANCE SHEETS - continuedAS OF DECEMBER 31, 2016 AND 2017(Amounts in Renminbi (“RMB”) and US dollar (“US$”), except for number of shares and per share data) As of December 31, Note 2016 2017 RMB RMB US$ Non-current assets: Long-term loan principal and service fee receivables (net of allowances of RMB1,489,035 and RMB nil (US$ nil) as of December 31 2016 and 2017,respectively) 5 87,822,067 — — Long-term finance lease receivables (net of allowance of RMB nil and RMB nil(US$ nil) as of December 31, 2016 and 2017, respectively; includingunearned revenue of RMB nil and RMB 6,006,018 (US$ 923,108) as ofDecember 31, 2016 and 2017, respectively) — 17,899,825 2,751,153 Investment in equity method investee 7 65,194,817 44,518,544 6,842,375 Property and equipment, net 4,885,886 4,613,368 709,062 Intangible assets 128,299 5,907,842 908,019 Deferred tax assets 14 17,787,699 115,460,611 17,745,971 Long-term amounts due from related parties 17 1,000,000 — — Other non-current assets 8 11,836,980 6,444,671 990,528 Total non-current assets 188,655,748 194,844,861 29,947,108 TOTAL ASSETS 7,117,599,007 19,380,415,553 2,978,715,330 The accompanying notes are an integral part of these consolidated financial statements. F-4Source: Qudian Inc., 20-F, April 09, 2018Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Table of ContentsQUDIAN INC.CONSOLIDATED BALANCE SHEETS - continuedAS OF DECEMBER 31, 2016 AND 2017(Amounts in Renminbi (“RMB”) and US dollar (“US$”), except for number of shares and per share data) As of December 31, Note 2016 2017 RMB RMB US$ LIABILITIES, MEZZANINE EQUITY AND SHAREHOLDERS’ EQUITY/(DEFICIT) Current liabilities: Short-term borrowings and interest payables (including short-term borrowings ofthe consolidated VIE without recourse to the Company of RMB 4,183,230,858and RMB 7,979,414,522 (US$ 1,226,413,556) as of December 31, 2016 and2017, respectively) 9 4,183,230,858 7,979,414,522 1,226,413,556 Accrued expenses and other current liabilities (including accrued expenses andother current liabilities of the consolidated VIE without recourse to theCompany of RMB 158,764,424 and RMB 293,946,084 (US$ 45,178,686) as ofDecember 31, 2016 and 2017, respectively) 10 215,664,919 315,692,795 48,521,095 Short-term amounts due to related parties (including short-term amounts due torelated parties of the consolidated VIE without recourse to the Company ofRMB 19,605,313 and RMB 815,262,682 (US$ 125,303,580) as ofDecember 31, 2016 and 2017, respectively) 17 20,473,187 719,563,038 110,594,814 Guarantee liabilities (including guarantee liabilities of the consolidated VIEwithout recourse to the Company of RMB 6,207,812 and RMB 46,981,325(US$ 7,220,897) as of December 31, 2016 and 2017, respectively) 11 6,207,812 46,981,325 7,220,897 Income tax payable (including income tax payable of the consolidated VIEwithout recourse to the Company of RMB 102,380,663 and RMB 268,797,914(US$ 41,313,483) as of December 31, 2016 and 2017, respectively) 102,380,663 268,373,167 41,248,201 Total current liabilities 4,527,957,439 9,330,024,847 1,433,998,563 The accompanying notes are an integral part of these consolidated financial statements. F-5Source: Qudian Inc., 20-F, April 09, 2018Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Table of ContentsQUDIAN INC.CONSOLIDATED BALANCE SHEETS - continuedAS OF DECEMBER 31, 2016 AND 2017(Amounts in Renminbi (“RMB”) and US dollar (“US$”), except for number of shares and per share data) As of December 31, Note 2016 2017 RMB RMB US$ Non-current liabilities: Long-term borrowings and interest payables (including long-term borrowings ofthe consolidated VIE without recourse to the Company RMB 76,052,124 andRMB 510,023,905 (US$ 78,389,239) as of December 31, 2016 and 2017,respectively) 9 76,052,124 510,023,905 78,389,239 Total non-current liabilities 76,052,124 510,023,905 78,389,239 Total liabilities 4,604,009,563 9,840,048,752 1,512,387,802 The accompanying notes are an integral part of these consolidated financial statements. F-6Source: Qudian Inc., 20-F, April 09, 2018Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Table of ContentsQUDIAN INC.CONSOLIDATED BALANCE SHEETS - continuedAS OF DECEMBER 31, 2016 AND 2017(Amounts in Renminbi (“RMB”) and US dollar (“US$”), except for number of shares and per share data) As of December 31, Note 2016 2017 RMB RMB US$ Commitments and contingencies 19 Mezzanine equity Convertible Preferred Shares 20 Series A-1 (US$0.0001 par value; 2,616,641 shares authorized, and outstanding as ofDecember 31, 2016) 69,914,696 — — Series A-2 (US$0.0001 par value; 4,779,796 shares authorized, and outstanding as ofDecember 31, 2016) 127,712,583 — — Series B-1 (US$0.0001 par value; 38,487,004 shares authorized, and outstanding as ofDecember 31, 2016) 1,028,344,036 — — Series B-2 (US$0.0001 par value; 5,233,281 shares authorized, and outstanding as ofDecember 31, 2016) 139,829,364 — — Series B-3 (US$0.0001 par value; 31,865,304 shares authorized, and outstanding as ofDecember 31, 2016) 851,417,151 — — Series C-1 (US$0.0001 par value; 37,720,709 shares authorized, and outstanding as ofDecember 31, 2016) 1,007,869,205 — — Series C-2 (US$0.0001 par value; 19,469,603 shares authorized, and outstanding as ofDecember 31, 2016) 520,213,268 — — Series C-3 (US$0.0001 par value; 13,391,793 shares authorized, and outstanding as ofDecember 31, 2016) 357,818,719 — — Series C-4 (US$0.0001 par value; 10,823,841 shares authorized, and outstanding as ofDecember 31, 2016) 289,204,957 — — Series C-5 (US$0.0001 par value; 58,072,514 shares authorized, and outstanding as ofDecember 31, 2016) 1,551,654,251 — — Total mezzanine equity 5,943,978,230 — — The accompanying notes are an integral part of these consolidated financial statements. F-7Source: Qudian Inc., 20-F, April 09, 2018Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Table of ContentsQUDIAN INC.CONSOLIDATED BALANCE SHEETS - continuedAS OF DECEMBER 31, 2016 AND 2017(Amounts in Renminbi (“RMB”) and US dollar (“US$”), except for number of shares and per share data) As of December 31, Note 2016 2017 RMB RMB US$ Shareholders’equity/ (deficit): Ordinary shares (US$0.0001 par value; 577,539,514 sharesauthorized, and 79,305,191 shares issued andoutstanding as of December 31, 2016) 22 54,754 — — Class A Ordinary shares (US$0.0001 par value; nil sharesauthorized, issued, and outstanding as of December 31,2016; 656,508,828 shares authorized, 262,347,283shares issued and outstanding, as of December 31, 2017) 22 — 177,140 27,226 Class B Ordinary shares (US$0.0001 par value; nil sharesauthorized, issued, and outstanding as of December 31,2016; 63,491,172 shares authorized, 63,491,172 sharesissued and outstanding, as of December 31, 2017) 22 — 43,836 6,737 Treasury shares 21 (421,164,802) (64,731,845) Additional paid-in capital 80,458,209 7,571,703,230 1,163,749,478 Accumulated other comprehensive loss — (77,947,461) (11,980,305) Accumulated (deficit)/ retained earnings (3,510,901,749) 2,467,554,858 379,256,237 Total shareholders’equity/ (deficit) (3,430,388,786) 9,540,366,801 1,466,327,528 TOTAL LIABILITIES, MEZZANINE EQUITY ANDSHAREHOLDERS’EQUITY/ (DEFICIT) 7,117,599,007 19,380,415,553 2,978,715,330 The accompanying notes are an integral part of these consolidated financial statements. F-8Source: Qudian Inc., 20-F, April 09, 2018Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Table of ContentsQUDIAN INC.CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS)/INCOMEFOR THE YEARS ENDED DECEMBER 31, 2015, 2016 AND 2017(Amounts in Renminbi (“RMB”) and US dollar (“US$”), except for number of shares and per share data) For the years ended December 31, Note 2015 2016 2017 RMB RMB RMB US$ Revenues: Financing income (including related party amounts of RMB133,380, RMB 90,539 and RMB 4,551 (US$ 699) for theyears ended December 31, 2015, 2016 and 2017,respectively) 153,554,326 1,271,455,857 3,642,183,767 559,793,395 Sales commission fee 62,181,657 126,693,335 797,167,074 122,522,336 Revenue from sales-type lease — — 26,083,472 4,008,956 Penalty fees 19,271,448 22,943,166 7,922,387 1,217,649 Loan facilitation income and others — 21,753,981 302,009,352 46,417,989 Total revenues 235,007,431 1,442,846,339 4,775,366,052 733,960,325 Operating cost and expenses: Cost of revenues (including related party amounts of RMB8,185,069, RMB 47,336,686 and RMB 221,009,227 (US$33,968,496) for the years ended December 31, 2015, 2016and 2017, respectively) 12 (148,416,681) (267,862,006) (880,845,857) (135,383,529) Sales and marketing (including related party amounts of RMBnil, RMB 36,149,807 and RMB 238,114,969 (US$36,597,600) for the years ended December 31, 2015, 2016and 2017, respectively) (192,602,650) (182,457,597) (431,749,549) (66,358,691) General and administrative (42,425,953) (108,786,166) (183,673,832) (28,230,151) Research and development (37,529,908) (52,275,077) (153,257,564) (23,555,256) Loss on guarantee liabilities — (860,989) (150,152,083) (23,077,953) Provision for loan principal, financing service fee receivables andother receivables (45,110,717) (132,176,545) (605,163,716) (93,011,960) Total operating cost and expenses (466,085,909) (744,418,380) (2,404,842,601) (369,617,540) Other operating income — 14,646,251 50,702,352 7,792,809 (Loss)/income from operations (231,078,478) 713,074,210 2,421,225,803 372,135,594 Interest and investment income, net 13 2,888,911 1,857,328 4,210,903 647,204 Foreign exchange gain/ (loss), net 752,253 (9,651,304) (7,176,838) (1,103,060) Other income 778,777 47,186 2,107,933 323,983 Other expenses (6,505,207) (1,834,352) (362,978) (55,789) Net (loss)/income before income taxes (233,163,744) 703,493,068 2,420,004,823 371,947,932 Income tax expenses 14 — (126,840,450) (255,546,003) (39,276,702) Net (loss)/income (233,163,744) 576,652,618 2,164,458,820 332,671,230 The accompanying notes are an integral part of these consolidated financial statements. F-9Source: Qudian Inc., 20-F, April 09, 2018Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Table of ContentsQUDIAN INC.CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS)/INCOME - continuedFOR THE YEARS ENDED DECEMBER 31, 2015, 2016 AND 2017(Amounts in Renminbi (“RMB”) and US dollar (“US$”), except for number of shares and per share data) For the years ended December 31, Note 2015 2016 2017 RMB RMB RMB US$ Net (loss)/income attributable toQudian Inc.’s shareholders (233,163,744) 576,652,618 2,164,458,820 332,671,230 (Loss)/earnings per share for Class A and Class B ordinary shares: Basic 15 (2.94) 7.27 17.13 2.63 Diluted 15 (2.94) 1.90 7.09 1.09 Earnings per ADS (1 Class A ordinary share equals 1 ADSs): Basic 15 17.13 2.63 Diluted 15 7.09 1.09 Weighted average number of Class A and Class B ordinary sharesoutstanding: Basic 15 79,305,191 79,305,191 126,390,196 126,390,196 Diluted 15 79,305,191 303,778,745 305,221,444 305,221,444 Other comprehensive loss Foreign currency translation adjustment — — (77,947,461) (11,980,305) Total comprehensive (loss)/income (233,163,744) 576,652,618 2,086,511,359 320,690,925 Total comprehensive (loss)/income attributable to Qudian Inc.’sshareholders (233,163,744) 576,652,618 2,086,511,359 320,690,925 The accompanying notes are an integral part of these consolidated financial statements. F-10Source: Qudian Inc., 20-F, April 09, 2018Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Table of ContentsQUDIAN INC.CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY/(DEFICIT)FOR THE YEARS ENDED DECEMBER 31, 2015, 2016 AND 2017(Amounts in Renminbi (“RMB”) and US dollar (“US$”), except for number of shares and per share data) Class A and BOrdinary shares Treasuryshares Additionalpaid-incapital Accumulatedothercomprehensiveloss Retainedearnings/ (loss) Totalshareholders’equity/ (deficit) Number ofshares Amount RMB RMB RMB RMB RMB RMB Balance at December 31, 2014 79,305,191 — — 2,717,419 — (5,984,753,262) (5,982,035,843) Capital contribution byshareholders — — — 422,679,605 — — 422,679,605 Share-based compensation (Note18) — — — 55,607,170 — — 55,607,170 Shareholder distribution — — — (422,679,605) — (415,754,972) (838,434,577) Net loss — — — — — (233,163,744) (233,163,744) Balance at December 31, 2015 79,305,191 — — 58,324,589 — (6,633,671,978) (6,575,347,389) Capital contribution byshareholders — — — 2,546,172,365 — — 2,546,172,365 Share-based compensation (Note18) — — — 22,133,620 — — 22,133,620 Change in capital contribution — 54,754 — (2,546,172,365) — 2,546,117,611 — Net income — — — — — 576,652,618 576,652,618 Balance at December 31, 2016 79,305,191 54,754 — 80,458,209 — (3,510,901,749) (3,430,388,786) Issuance of ordinary shares – Initial Public Offering (“IPO”) 35,625,000 23,601 — 5,297,362,243 — — 5,297,385,844 Canceled Shares (15,814,019) (10,895) — — — — (10,895) Conversion of convertible preferredshares to ordinary shares 222,460,486 147,380 — 2,129,833,063 — 3,813,997,787 5,943,978,230 Repurchase of ordinary shares (4,537,115) — (421,164,802) — — — (421,164,802) Share-based compensation (Note18) 8,798,912 6,136 — 64,049,715 — — 64,055,851 Foreign currency translationadjustment — — — — (77,947,461) — (77,947,461) Net income — — — — — 2,164,458,820 2,164,458,820 325,838,455 220,976 (421,164,802) 7,571,703,230 (77,947,461) 2,467,554,858 9,540,366,801 The accompanying notes are an integral part of these consolidated financial statements. F-11Source: Qudian Inc., 20-F, April 09, 2018Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Table of ContentsQUDIAN INC.CONSOLIDATED STATEMENTS OF CASH FLOWSFOR THE YEARS ENDED DECEMBER 31, 2015, 2016 AND 2017(Amounts in Renminbi (“RMB”) and US dollar (“US$”), except for number of shares and per share data) For the years ended December 31, 2015 2016 2017 RMB RMB RMB US$ Cash flows from operating activities: Net (loss)/income (233,163,744) 576,652,618 2,164,458,820 332,671,230 Adjustments to reconcile net (loss)/ income to net cash used in operatingactivities: Provision for loan principal, financing service fee receivables and otherreceivables 45,110,717 132,176,545 605,163,716 93,011,960 Depreciation and amortization 681,004 1,503,467 5,790,986 890,058 Amortization of deferred origination costs 17,559,933 24,602,131 100,598 15,462 Share-based compensation expense 55,607,170 22,133,620 64,055,851 9,845,204 Share of loss from equity method investment — 4,805,183 20,676,273 3,177,885 Investment income of short-term investments (764,538) — — — Foreign exchange loss, net — 9,651,304 7,176,838 1,103,060 Changes in operating assets and liabilities: Financing service fee receivables 718,823 (48,525,142) (78,970,874) (12,137,601) Restricted cash — — 278,331,247 42,778,729 Receivables from related parties 2,017,359 (180,927,010) 629,329 96,726 Deferred tax assets — (17,787,699) (97,672,912) (15,012,052) Other current and non-current assets (28,177,699) (39,046,338) (308,848,776) (47,469,191) Interest payables 6,174,213 17,598,338 121,442,961 18,665,441 Payables to related parties — 20,473,187 (16,496,440) (2,535,456) Guarantee liabilities — 6,357,074 165,571,647 25,447,896 Other current and non-current liabilities 31,917,006 264,395,861 144,730,768 22,244,712 Net cash (used in)/ provided by operating activities (102,319,756) 794,063,139 3,076,140,032 472,794,063 Cash flows from investing activities: Proceeds from redemption of short-term investments 828,237,006 4,529,102,112 1,285,350,000 197,554,678 Proceeds from collection of loan principal 2,437,826,998 27,075,216,252 50,042,116,060 7,691,332,410 Principal collection of finance lease receivables — — 70,773 10,878 Proceeds from collection of loan principal due from related parties 810,234 4,132,735 272,318 41,855 Realized investment income or loss of short-term investments 764,538 — — — Purchases of short-term investments (877,237,006) (4,910,302,112) (1,155,150,000) (177,543,304) Purchases of property and equipment and intangible assets (1,510,676) (4,607,296) (11,298,011) (1,736,472) Purchases of equity method investment — (70,000,000) — — Payments to originate loan principal (4,250,330,419) (30,218,978,369) (50,840,449,655) (7,814,034,037) Payments to originate finance lease receivables — — (26,479,085) (4,069,761) Payments to originate loan principal due from related parties (3,515,287) (2,700,000) — — Net cash used in investing activities (1,864,954,612) (3,598,136,678) (705,567,600) (108,443,753) The accompanying notes are an integral part of these consolidated financial statements. F-12Source: Qudian Inc., 20-F, April 09, 2018Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Table of ContentsQUDIAN INC.CONSOLIDATED STATEMENTS OF CASH FLOWS - continuedFOR THE YEARS ENDED DECEMBER 31, 2015, 2016 AND 2017(Amounts in Renminbi (“RMB”) and US dollar (“US$”), except for number of shares and per share data) For the years ended December 31, 2015 2016 2017 RMB RMB RMB US$ Cash flows from financing activities: Contribution from shareholders 422,679,605 2,546,172,365 — — Proceeds from issuance of ordinary shares — — 5,339,532,767 820,671,160 Proceeds from borrowings 3,162,152,632 9,487,194,896 8,731,138,213 1,341,951,372 Proceeds from related parties 665,321,624 — 850,500,000 130,719,457 Refund of guarantee deposits from Funding Partners 62,307,707 90,375,383 286,707,459 44,066,130 Payments to related parties — (777,326,275) (17,812,790) (2,737,776) Repayment of borrowings (1,983,951,370) (6,897,751,640) (10,814,431,453) (1,662,147,680) Distributions to shareholders — (838,434,577) — — Repurchase of ordinary shares — — (421,164,802) (64,731,845) Payments for IPO expenditure — (450,000) (39,461,883) (6,065,180) Payments of guarantee deposits to Funding Partners (153,050,653) (230,050,643) (161,096,338) (24,760,054) Net cash provided by financing activities 2,175,459,545 3,379,729,509 3,753,911,173 576,965,584 Effect of exchange rate changes — — (77,947,461) (11,980,305) Net increase in cash and cash equivalents 208,185,177 575,655,970 6,046,536,144 929,335,589 Cash and cash equivalents at beginning of the year 1,928,830 210,114,007 785,769,977 120,770,634 Cash and cash equivalents at end of the year 210,114,007 785,769,977 6,832,306,121 1,050,106,223 Supplemental disclosures of cash flow information: Income taxes paid — 54,370,824 231,132,984 35,524,489 Interest expense paid 116,668,440 193,351,692 442,572,058 68,022,080 The accompanying notes are an integral part of these consolidated financial statements. F-13Source: Qudian Inc., 20-F, April 09, 2018Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Table of ContentsQUDIAN INC.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFOR THE YEARS ENDED DECEMBER 31, 2015, 2016 AND 2017(Amounts in Renminbi (“RMB”) and US dollar (“US$”), except for number of shares and per share data) 1. OrganizationQudian Inc. (the “Company”, and where appropriate, the term “Company” also refers to its subsidiaries, variable interest entities and subsidiaries of thevariable interest entities as a whole) is a limited company incorporated in the Cayman Islands under the laws of the Cayman Islands on November 16,2016. The Company, through its subsidiaries, variable interest entities (“VIEs”) and subsidiaries of the VIEs, are principally engaged in the operationof online platforms to provide small consumer credit products in the People’s Republic of China (the “PRC”). The Company does not conduct anysubstantive operations of its own. As PRC law and regulations prohibit foreign control of companies involved in internet value-added business, theCompany conducts its primary business operations through its VIEs and the subsidiaries of the VIEs.As of December 31, 2017, the Company’s subsidiaries and VIEs are as follows: Entity Date of incorporation Place ofincorporation Percentage oflegalownership bytheCompany Principal activitiesSubsidiaries QD Data Limited (“Qudian HK”) December 2, 2016 Hong Kong (“HK”) 100% Investment holdingQD Technology Limited (“Qudian BVI”) November 23, 2016 British Virgin Islands(“BVI”) 100% Investment holdingQufenqi (Ganzhou) InformationTechnology Co., Ltd. (“QufenqiGanzhou”) September 5, 2016 PRC 100% Investment holding, research anddevelopmentQudian Inc. Equity Incentive Trust (“ShareBased Payment Trust”) December 30, 2016 HK Nil Employee benefitsQufenqi (HK) Limited (“Qufenqi HK”) April 28, 2014 HK 100% Investment holdingXiamen Qudian Financial Lease Ltd.(“Xiamen Financial Lease”) April 21, 2017 PRC 100% Financial leaseVIEs Beijing Happy Time TechnologyDevelopment Co., Ltd. (“Beijing HappyTime”) April 9, 2014 PRC Nil Technology development and service,sale of productsGanzhou Qudian Technology Co., Ltd.(“Ganzhou Qudian”) November 25, 2016 PRC Nil Technology development and service,sale of productsHunan Qudian Technology DevelopmentCo., Ltd.(“Hunan Qudian”) November 2, 2016 PRC Nil Technology development and service,sale of productsXiamen Qudian Technology Co., Ltd.(“Xiamen Qudian”) April 1, 2017 PRC Nil Technology development and service,sale of products F-14Source: Qudian Inc., 20-F, April 09, 2018Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Table of ContentsQUDIAN INC.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continuedFOR THE YEARS ENDED DECEMBER 31, 2015, 2016 AND 2017(Amounts in Renminbi (“RMB”) and US dollar (“US$”), except for number of shares and per share data) 1. Organization - continued Additionally, Beijing Happy Time, Ganzhou Qudian and Hunan Qudian have several subsidiaries incorporated in the PRC.On November 23, 2016, the Company set up a wholly-owned subsidiary, Qudian BVI in the BVI. On December 2, 2016, the Company set up anotherwholly-owned subsidiary, Qudian HK in Hong Kong. On December 5, 2016, the Company transferred all of its shares of Qudian HK to Qudian BVI. OnDecember 9, 2016, Qudian HK acquired all the equity interests of Qufenqi Ganzhou from Qufenqi HK, for a consideration of US$100,000. OnDecember 9, 2016, Beijing Happy Time signed a series of contractual agreements with Qufenqi Ganzhou and its shareholders. On May 1, 2017, HunanQudian and Ganzhou Qudian signed a series of contractual agreements with Qufenqi Ganzhou and their shareholders. On June 20, 2017, XiamenQudian signed a series of contractual agreements with Qufenqi Ganzhou and its shareholders (collectively, the “VIE Agreements”).The Company, through Qufenqi Ganzhou entered into power of attorney and an exclusive call option agreement with the nominee shareholders of theVIEs that gave Qufenqi Ganzhou the power to direct the activities that most significantly affect the economic performance of the VIEs and acquire theequity interests in the VIEs when permitted by the PRC laws, respectively. Certain exclusive agreements have been entered into with the VIEs throughQufenqi Ganzhou, which obligate Qufenqi Ganzhou to absorb a majority of the risk of loss from the VIEs’ activities and entitle Qufenqi Ganzhou toreceive a majority of their residual returns. In addition, the Company has entered into share pledge agreements for the equity interests in the VIEs heldby the nominee shareholders of the VIEs. The Company agreed to provide unlimited financial support to the VIEs for their operations. In addition,pursuant to the resolutions of all shareholders of the Company and the resolutions of the board of directors of the Company (the “Resolutions”), theboard of directors of the Company (the “Board of Directors”) or any officer authorized by the Board of Directors (the “Authorized Officer”) shall causeQufenqi Ganzhou to exercise the rights under the power of attorney entered into among Qufenqi Ganzhou, the VIEs and the nominee shareholders ofthe VIEs and Qufenqi Ganzhou’s rights under the exclusive call option agreement between Qufenqi Ganzhou and the VIEs. As a result of theResolutions and the provision of unlimited financial support from the Company to the VIEs, the Company has been determined to be most closelyassociated with the VIEs within the group of related parties and was considered to be the Primary Beneficiary.Despite the lack of technical majority ownership, the Company has effective control of the VIEs through the VIE Agreements and a parent-subsidiaryrelationship exists between the Company and the VIEs. Through the VIE Agreements, the shareholders of the VIEs effectively assigned all of theirvoting rights underlying their equity interest in the VIEs to the Company. In addition, through the other exclusive agreements, which consist ofexclusive option agreement, exclusive business cooperation agreement, and equity pledge agreement, the Company, through its wholly-ownedsubsidiaries in the PRC, have the right to receive economic benefits from the VIEs that potentially could be significant to the VIEs. Lastly, through thefinancial support undertaking letter, the Company has the obligation to absorb losses of the VIEs that could potentially be significant to the VIEs.Therefore, the Company is considered the primary beneficiary of the VIEs and consolidates the VIEs and its consolidated subsidiaries as required bySEC Regulation S-X Rule 3A-02 and ASC topic 810 (“ASC 810”), Consolidation. F-15Source: Qudian Inc., 20-F, April 09, 2018Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Table of ContentsQUDIAN INC.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continuedFOR THE YEARS ENDED DECEMBER 31, 2015, 2016 AND 2017(Amounts in Renminbi (“RMB”) and US dollar (“US$”), except for number of shares and per share data) 1. Organization - continued The following is a summary of the VIE Agreements:(1) Power of Attorney Agreements:Pursuant to the power of attorney agreements signed between the VIEs’ nominee shareholders and Qufenqi Ganzhou, each nominee shareholderirrevocably appointed Qufenqi Ganzhou as its attorney-in-fact to exercise on each shareholder’s behalf any and all rights that each shareholder has inrespect of its equity interest in the VIEs (including but not limited to executing the exclusive right to purchase agreements, the voting rights and theright to appoint directors and executive officers of the VIEs). The agreements are effective and irrevocable as long as the nominee shareholder remainsa shareholder of the VIEs.(2) Exclusive Call Option Agreements:Pursuant to the exclusive call option agreements entered into between the VIEs’ nominee shareholders and Qufenqi Ganzhou, the nomineeshareholders irrevocably granted Qufenqi Ganzhou a call option to request the nominee shareholders to transfer or sell any part or all of its equityinterests in the VIEs, or any or all of the assets of the VIEs, to Qufenqi Ganzhou, or their designees. The purchase price of the equity interests in theVIEs shall be equal to the minimum price required by PRC law. As for the assets of the VIEs, the purchase price should be equal to the book value ofthe assets or the minimum price as permitted by applicable PRC law, whichever is higher. Without Qufenqi Ganzhou’s prior written consent, the VIEsand their nominee shareholders shall not amend their articles of association, increase or decrease the registered capital, sell or otherwise dispose of theirassets or beneficial interests, create or allow any encumbrance on their assets or other beneficial interests and provide any loans or guarantees, etc. Thenominee shareholders cannot request any dividends or other form of assets. If dividends or other form of assets were distributed, the nomineeshareholders shall transfer all received distribution to Qufenqi Ganzhou or their designees. The agreements are not terminated until all of the equityinterests of the VIEs have been transferred to Qufenqi Ganzhou or the person(s) designated by Qufenqi Ganzhou. None of the nominee shareholdershave the right to terminate or revoke the agreements under any circumstance unless otherwise regulated by law.(3) Exclusive Business Cooperation Agreements:Pursuant to the exclusive business cooperation agreements entered into by Qufenqi Ganzhou and the VIEs and their subsidiaries, Qufenqi Ganzhouprovides exclusive technical support and consulting services in return for fees based on 100% of the VIEs’ profit before tax, which is adjustable at thesole discretion of Qufenqi Ganzhou. Without Qufenqi Ganzhou’s consent, the VIEs and their subsidiaries cannot procure services from any third partyor enter into similar service arrangements with any other third party, except for those from Qufenqi Ganzhou. In addition, the profitable consolidatedVIEs and their subsidiaries have granted Qufenqi Ganzhou an exclusive right to purchase any or all of the business or assets of each of the profitableconsolidated VIEs and their subsidiaries at the lowest price permitted under PRC law. The agreements are irrevocable or can only be unilaterallyrevoked/amended by Qufenqi Ganzhou. F-16Source: Qudian Inc., 20-F, April 09, 2018Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Table of ContentsQUDIAN INC.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continuedFOR THE YEARS ENDED DECEMBER 31, 2015, 2016 AND 2017(Amounts in Renminbi (“RMB”) and US dollar (“US$”), except for number of shares and per share data) 1. Organization - continuedThe following is a summary of the VIE Agreements: - continued (4) Equity Pledge Agreements:Pursuant to the equity interest pledge agreements, each nominee shareholder of the VIEs has pledged all of its respective equity interests in the VIEs toQufenqi Ganzhou as continuing first priority security interest to guarantee the performance of their and the VIEs’ obligations under the power ofattorney agreements, the exclusive call option agreements and the exclusive business cooperation agreements. Qufenqi Ganzhou is entitled to alldividends during the effective period of the share pledge except as it agrees otherwise in writing. If the VIEs or any of the nominee shareholderbreaches its contractual obligations, Qufenqi Ganzhou will be entitled to certain rights regarding the pledged equity interests, including receivingproceeds from the auction or sale of all or part of the pledged equity interests of the VIEs in accordance with PRC law. None of the nomineeshareholders shall, without the prior written consent of Qufenqi Ganzhou, assign or transfer to any third party, distribute dividends and create or causeany security interest and any liability in whatsoever form to be created on, all or any part of the equity interests it holds in the VIEs. The agreements arenot terminated until all of the technical support and consulting and service fees have been fully paid under the exclusive business cooperationagreements and all of VIEs’ obligations have been terminated under the other controlling agreements.In addition, the Company entered into following agreements:(1) Financial support undertaking lettersPursuant to the financial support undertaking letters, the Company is obligated and hereby undertakes to provide unlimited financial support to theVIEs, to the extent permissible under the applicable PRC laws and regulations, whether or not any such operational loss is actually incurred. TheCompany will not request repayment of the loans or borrowings if the VIEs or their shareholders do not have sufficient funds or are unable to repay.(2) Resolutions of all shareholders and resolution of the board of directors of Qudian Inc.The shareholders and the Board of Directors resolved that the Board of Directors or any officer authorized by the Board of Directors shall cause QufenqiGanzhou to exercise its rights under the power of attorney agreements and the exclusive call option agreements when the Board of Directors or theAuthorized Officer determines that such exercise is in the best interests of the Company and Qufenqi Ganzhou to do so.In the opinion of the Company’s legal counsel, (i) the ownership structure of the PRC subsidiaries and the VIEs, both currently does not violateapplicable PRC laws and regulations; (ii) each of the VIE Agreements is valid, binding and enforceable in accordance with its terms and applicablePRC laws or regulations and will not violate applicable PRC laws or regulations; (iii) the financial support letters issued by the Company to the VIEs,does not violate the PRC laws and regulations (iv) the resolutions are valid in accordance with the articles of association of the Company and CaymanIsland Law.However, uncertainties in the PRC legal system could cause the Company’s current ownership structure to be found in violation of existing and/orfuture PRC laws or regulations and could limit the Company’s ability to F-17Source: Qudian Inc., 20-F, April 09, 2018Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Table of ContentsQUDIAN INC.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continuedFOR THE YEARS ENDED DECEMBER 31, 2015, 2016 AND 2017(Amounts in Renminbi (“RMB”) and US dollar (“US$”), except for number of shares and per share data) 1. Organization - continuedIn addition, the Company entered into following agreements: - continued enforce its rights under these contractual arrangements. Furthermore, the nominee shareholders of the VIEs may have interests that are different thanthose of the Company, which could potentially increase the risk that they would seek to act contrary to the terms of the contractual agreements with theVIEs.In addition, if the current structure or any of the contractual arrangements were found to be in violation of any existing or future PRC laws orregulations, the Company could be subject to penalties, which could include, but not be limited to, revocation of business and operating licenses,discontinuing or restricting business operations, restricting the Company’s right to collect revenues, temporary or permanent blocking of theCompany’s internet financial services platforms, restructuring of the Company’s operations, imposition of additional conditions or requirements withwhich the Company may not be able to comply, or other regulatory or enforcement actions against the Company that could be harmful to its business.The imposition of any of these or other penalties could have a material adverse effect on the Company’s ability to conduct its business.Except for the deposits that were held by Peer-to-Peer lending platforms (“P2P platforms”), banks and other institutions, private financial assets tradingplatform, trust beneficiaries and other funding partners (collectively referred as the “Funding Partners”) as guarantee deposits, there was no otherpledge or collateralization of the VIEs’ assets. Creditors of the VIEs have no recourse to the general credit of the Company, who is the primarybeneficiary of the VIEs, through its 100% controlled subsidiary Qufenqi Ganzhou. The Company has not provided any financial or other support that itwas not previously contractually required to provide to the VIEs during the periods presented. The table sets forth the assets and liabilities of the VIEsincluded in the Company’s consolidated balance sheets: As of December 31, 2016 2017 RMB RMB US$ Short-term loan principal and financing service fee receivables 4,826,790,951 8,758,544,694 1,346,163,672 Other current assets 2,096,813,435 5,801,157,313 891,621,552 Total current assets 6,923,604,386 14,559,702,007 2,237,785,224 Total non-current assets 188,655,748 165,191,933 25,389,535 Total assets 7,112,260,134 14,724,893,940 2,263,174,759 Total current liabilities 4,470,189,070 9,403,402,527 1,445,276,505 Total non-current liabilities 76,052,124 510,023,905 78,389,239 Total liabilities 4,546,241,194 9,913,426,432 1,523,665,744 F-18Source: Qudian Inc., 20-F, April 09, 2018Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Table of ContentsQUDIAN INC.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continuedFOR THE YEARS ENDED DECEMBER 31, 2015, 2016 AND 2017(Amounts in Renminbi (“RMB”) and US dollar (“US$”), except for number of shares and per share data) 1. Organization - continuedIn addition, the Company entered into following agreements: - continued The following table sets forth the results of operations of the VIEs included in the Company’s consolidated statements of comprehensive (loss)/income: For the years ended December 31, 2015 2016 2017 RMB RMB RMB US$ Revenues 235,007,431 1,442,846,339 4,749,249,922 729,946,348 Net (loss)/ income (233,163,744) 650,872,408 2,222,086,399 341,528,426 The table sets forth the cash flows of the VIEs included in the Company’s consolidated statements of cash flows: For the years ended December 31, 2015 2016 2017 RMB RMB RMB US$ Net cash (used in)/ provided by operating activities (102,319,756) 793,604,997 3,060,570,502 470,401,073 Net cash used in investing activities (1,864,954,612) (3,598,136,678) (578,926,690) (88,979,403) Net cash provided by/ (used in) financing activities 2,175,459,545 3,380,179,509 (996,112,745) (153,099,726) As of December 31, 2016 and 2017, except for all assets of the consolidated trusts, the deposits that were held by the Funding Partners as guaranteedeposits, there was no pledge or collateralization of the VIEs’ assets. The amount of the net assets of the VIEs were RMB 2,566 million and RMB4,811 million (US$ 740 million) as of December 31, 2016 and 2017. The creditors of the VIEs’ third-party liabilities did not have recourse to thegeneral credit of the Primary Beneficiary in the normal course of business. The Company did not provide or intend to provide financial or othersupports not previously contractually required to the VIEs during the periods presented.Consolidated TrustsSince November 2016, the Company established several trusts to invest in loans through the Company’s platform using both funds from third partyand the Company. Such trusts are administered by third party trust companies as the trustees. The Company provides loan facilitation service andfinancial guarantee to the trusts.All assets of the consolidated trusts are collateral for the trusts’ obligations and can only be used to settle the trusts’ obligations.Share Based Payment TrustOn December 30, 2016, the board of the Company approved and set up Qudian Inc. Equity Incentive Trust (the “Share Based Payment Trust”) for thepurpose of holding options awarded to certain employees and the F-19Source: Qudian Inc., 20-F, April 09, 2018Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Table of ContentsQUDIAN INC.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continuedFOR THE YEARS ENDED DECEMBER 31, 2015, 2016 AND 2017(Amounts in Renminbi (“RMB”) and US dollar (“US$”), except for number of shares and per share data) 1. Organization - continuedShare Based Payment Trust - continued underlying shares before they are exercised as instructed by the employees. Upon the exercise of the options, the shares will be transferred to therelevant employees. As the Company has the power to govern the financial and operating policies of the Share Based Payment Trust and derivesbenefits from the contributions of the employees who have been awarded the options of the Company through their continued employment with theCompany, the assets and liabilities of the Share Based Payment Trust are included in the consolidated balance sheets.2. Summary of Significant Accounting PoliciesBasis of presentationThe consolidated financial statements of the Company have been prepared in accordance with United States generally accepted accounting principles(“U.S. GAAP”).Principles of consolidationThe consolidated financial statements include the financial statements of the Company, its subsidiaries, VIEs and the subsidiaries of the VIEs. All inter-company transactions and balances have been eliminated.Use of estimatesThe preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions thataffect the reported amounts of assets and liabilities, disclosures of contingent assets and liabilities at the date of the consolidated financial statementsand the reported amounts of revenues and expenses during the reporting period. Significant accounting estimates reflected in the Company’sconsolidated financial statements include, but are not limited to, allowance for loan principal and financing service fee receivables, allowance for otherreceivables, share-based compensation, valuation allowance for deferred tax assets, uncertain tax positions and fair value of investments and guaranteeliabilities. Actual results could differ from these estimates.Revenue recognitionCredit ServicesThe Company generates revenues primarily by providing borrowers with merchandise and cash installment credit financing. The Company recordsfinancing service fee relating to loan principal derived from these credit services over the life of the underlying loan principal using the effectiveinterest method on unpaid principal amounts. Incentives provided to certain borrowers and deferred origination costs are recorded as a reduction infinancing service fees using the effective interest method. Such financing service fees are recorded as financing income in the consolidated statementsof comprehensive (loss)/income.The incentives are provided to certain borrowers and can only be applied as a reduction to the borrower’s repayments and cannot be withdrawn by theborrowers in cash. F-20Source: Qudian Inc., 20-F, April 09, 2018Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Table of ContentsQUDIAN INC.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continuedFOR THE YEARS ENDED DECEMBER 31, 2015, 2016 AND 2017(Amounts in Renminbi (“RMB”) and US dollar (“US$”), except for number of shares and per share data) 2. Summary of Significant Accounting Policies - continuedRevenue recognition - continued The loan origination costs primarily include payments to vendors for individual credit assessments and commissions to individuals directly involvedin the successful loan origination.Financing incomeBorrowers can withdraw cash (“cash installment credit services”) or purchase products (e.g. personal consumer electronics) (“merchandise installmentcredit services”) up to their approved credit limit and elect the installment repayment period, mainly ranging from 1 to 12 installments (either weeklyor monthly) through the Company’s online website and application (collectively “financing platform”) or via borrowers’ Alipay accounts. TheCompany charges financing service fees for facilitating the financing, managing the financing platform and for acting as a guarantor for the financing.The financing service fees are recorded as financing income in the statement of comprehensive (loss)/ income in accordance with ASC 310.Penalty feesThe Company charges borrowers penalty fees for late repayment of credit services. The penalty fee is calculated based on the number of overdue daysof loan principals and the late payment rate. As collectability is not reasonably assured, the penalty fee is recorded on a cash basis. Penalty fees arerecorded in revenue in the consolidated statements of comprehensive (loss)/income.Sales commission feesIn addition to financing income, the Company earns a margin from its merchandise installment credit services on the products purchased from supplierson behalf of the borrowers. The margin earned is fixed based on the retail sales price without considering the financing terms chosen by the borrower.Sales commission fees is recorded net of the related cost on delivery date, as the Company does not assume inventory risk for the products and isconsidered to be an agent in accordance with ASC 605, Revenue Recognition (“ASC 605”). Additionally, the Company is not responsible forproviding any post-sale support to the borrowers nor does the Company make any changes to the products purchased by the borrowers. Accordingly,the Company recognizes the sales commission fees when persuasive evidence of an arrangement exists, delivery has occurred, the sales price is fixed ordeterminable and collection is probable.Sales-type leaseThe legal title of the leased assets is with the Company until the leasing period ends. The fair value of the leased assets at lease inception is greater thanits cost or carrying amount. Consequently, the Company has classified the leases as sales-type finance leases for financial accounting purposes. TheCompany reports the discounted present value of future minimum lease payments as a finance lease receivable on its balance sheet and accrues intereston the balance of the finance lease receivable based on the interest rate inherent in the applicable lease over the term of the lease. The interest earnedon finance lease receivables is recognized using the effective interest method. The Company recognized interest earned on finance leases receivablesas “financing income” in the amount of RMB 32,658 and in 2017. F-21Source: Qudian Inc., 20-F, April 09, 2018Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Table of ContentsQUDIAN INC.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continuedFOR THE YEARS ENDED DECEMBER 31, 2015, 2016 AND 2017(Amounts in Renminbi (“RMB”) and US dollar (“US$”), except for number of shares and per share data) 2. Summary of Significant Accounting Policies - continuedRevenue recognition - continued The Company recognized the sales price (the present value of the minimum lease payments) as “revenue from sales-type lease”.Multiple element revenue recognitionThe Company entered into the credit facilitation arrangement with financial institutions. The Company matches borrowers with the financialinstitutions which directly funds the credit drawdowns to the borrowers and provides post-origination services, for example, short messaging reminderservices throughout the term of the loans. For each successful match, the Company earns an initial intermediary fee and a recurring service feethroughout the term of the loans. Borrowers make repayments directly to the consumer finance company and the consumer finance company will thenremit the initial intermediary fees and recurring service fees to the Company on a periodic basis. The two deliverables provided by the Company areloan facilitation services and post origination services. In addition, the Company provides a guarantee to the financial institutions which requires theCompany to make payments to the financial institutions based on the overdue rate of the credit portfolio under this arrangement. The Companyconsiders the loan facilitation services and the post origination services as a multiple element revenue arrangement, and the financial institutions as thesole customer in the arrangement. The Company first allocates the consideration to the guarantee liability equaling to the fair value of the guaranteeliability. The remaining consideration is allocated to the loan facilitation services and post origination services. The Company does not have vendorspecific objective evidence, or VSOE, of selling price for the loan facilitation services and post origination services because the Company does notprovide loan facilitation services or post origination services on a standalone basis. There is also no third-party evidence of the prices charged by third-party service providers when such services are sold separately as the basis of revenue allocation. As a result, the Company uses the best estimate ofselling prices of loan facilitation services and post origination services as the basis of revenue allocation. Nevertheless, the amount allocated to thedelivered loan facilitation services is limited to the amount that is not contingent on the delivery of the undelivered post origination services inaccordance with ASC 605-25. The loan facilitation services and post origination services are recorded as loan facilitation income and others in theconsolidated statements of comprehensive (loss)/income.For loan facilitation services, post origination services and sales commission fees, the Company recognizes revenue when the following four revenuerecognition criteria are met: (i) persuasive evidence of an arrangement exists, (ii) services have been rendered, (iii) the fee is fixed or determinable, and(iv) collectability is reasonably assured, in accordance with ASC 605. As collectability is uncertain in relation to the remaining loan facilitationservices income due to the potential default by borrowers such that they are not considered to be fixed or determinable, the remaining loan facilitationservice income is recorded on a cash basis.Foreign currency translation and transactionsThe functional currency of the Company, Qudian BVI and Qudian HK is US$. The Company’s subsidiaries, VIEs and subsidiaries of the VIEs withoperations in the PRC adopted RMB as their functional currencies. The determination of the respective functional currency is based on the criteriastated in ASC 830, Foreign Currency Matters. The Company uses RMB as its reporting currency. The financial statements of the Company, Qudian F-22Source: Qudian Inc., 20-F, April 09, 2018Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Table of ContentsQUDIAN INC.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continuedFOR THE YEARS ENDED DECEMBER 31, 2015, 2016 AND 2017(Amounts in Renminbi (“RMB”) and US dollar (“US$”), except for number of shares and per share data) 2. Summary of Significant Accounting Policies - continuedForeign currency translation and transactions - continued BVI and Qudian HK are translated into RMB using the exchange rate as of the balance sheet date for assets and liabilities and average exchange ratefor the year for income and expense items. Translation gains and losses are recorded in accumulated other comprehensive (loss)/income, as acomponent of shareholders’ equity/ (deficit). Transactions in currencies other than the functional currency are measured and recorded in the functionalcurrency at the exchange rate prevailing on the transaction date.Monetary assets and liabilities denominated in currencies other than the functional currency are remeasured into the functional currency at the rates ofexchange prevailing at the balance sheet dates. Transaction gains and losses are recognized in the consolidated statements of comprehensive(loss)/income during the period or year in which they occur.Cash and cash equivalentsCash and cash equivalents primarily consist of cash and demand deposits which are highly liquid. The Company considers highly liquid investmentsthat are readily convertible to known amounts of cash and with original maturities from the date of purchase of three months or less to be cashequivalents. All cash and cash equivalents are unrestricted as to withdrawal and use.Guarantee depositsIn the ordinary course of business, the loan principal advanced by the Company to borrowers are transferred to certain Funding Partners. The Companyis required to guarantee the recoverability of the loan principal and interest. As a result, the Company may provide a cash deposit to the respectiveFunding Partners. The cash deposits are released only after the loan principal and interest are settled. Guarantee deposits represent cash that cannot bewithdrawn without the permission of the Funding Partners. These guarantee deposits qualify as compensating balance arrangements under SECRegulation S-X Rule 5-02, and are classified as current or non-current assets in the consolidated balance sheets based on the terms of the underlyingborrowing arrangements.Loan principal and financing service fee receivablesLoan principal and financing service fee receivables represent payments due from borrowers that utilize the Company’s credit services. Loan principaland financing service fee receivables are recorded at amortized cost (i.e. unpaid principal and deferred origination costs), net of allowance for loanprincipal. Deferred origination costs are netted against revenue and amortized over the financing term using the effective interest method.Allowance for loan principal and financing service fee receivablesThe Company considers the loans to be homogenous as they are all unsecured consumer loans of similar principal amounts. The profile of theborrowers are also similar i.e. age, credit histories and employment status. Therefore, the Company applies a consistent credit risk managementframework to the entire portfolio of loans in accordance with ASC 450-20, Loss Contingencies. F-23Source: Qudian Inc., 20-F, April 09, 2018Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Table of ContentsQUDIAN INC.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continuedFOR THE YEARS ENDED DECEMBER 31, 2015, 2016 AND 2017(Amounts in Renminbi (“RMB”) and US dollar (“US$”), except for number of shares and per share data) 2. Summary of Significant Accounting Policies - continuedAllowance for loan principal and financing service fee receivables - continued The allowance for loan principal and financing service fee receivables losses is calculated based on historical loss experience using a roll rate-basedmodel. The roll rate-based model stratifies the loan principal and financing service fee receivables by delinquency stages (i.e., current, 1-30 days pastdue, and 31-60 days past due etc.) and projected forward in one-month increments using historical roll rates. In each month of the simulation, losses onthe loan principal and financing service fee receivables types are captured, and the ending delinquency stratification serves as the beginning point ofthe next iteration. This process is repeated on a monthly rolling basis. The loss rate calculated for each delinquency stage is then applied to therespective loan principal and service fees balance. The Company adjusts the allowance that is determined by the roll rate-based model for variousChinese macroeconomic factors i.e. gross-domestic product rates, per capita disposable income, interest rates and consumer price indexes. Each of thesemacroeconomic factors are equally weighted, and a score is applied to each factor based on year-on-year increases and decreases in that respectivefactor.Loan principal and financing service fee receivables are charged off when a settlement is reached for an amount that is less than the outstandingbalance or when the Company has determined the balance is uncollectable. In general, the Company considers loan principal and financing service feereceivables meeting any of the following conditions as uncollectable and charged-off: (i) death of the borrower; (ii) identification of fraud, and thefraud is officially reported to and filed with relevant law enforcement departments or (iii) the amount remained outstanding 180 days past due andtherefore deemed uncollectible.For the year ended December 31, 2016, the Company considered loan principal and financing service fee receivables meeting any of the followingconditions as uncollectible and charged off: (1) death of the borrower; (ii) identification of fraud, and the fraud is officially reported to and filed withrelevant law enforcement departments or (iii) the amount remained outstanding 180 days past due and after the Company concludes that it hasexhausted its collection efforts.In order to align the Company’s charge-off policy with ASC 310-10-35-41, the Company revised its charge-off policy such that all loans that are 180days past due are therefore deemed uncollectible and charged-off.The change in the charge-off policy had no impact the Company’s provision for loan losses for the year ended December 31, 2016 as the balance ofloans 180 days past due was fully offset by the allowance before charge-off and only results in a net off of the loan principal and financing service feereceivables and its allowance balance. The change in the charge-off policy as a result of the correction of an error did not have a material impact on theCompany’s 2016 audited consolidated financial statements.Nonaccrual loan principalThe Company does not accrue financing service fee on loan principals that are considered impaired or are more than 90 days past due. A correspondingallowance is determined under ASC 450-20 and allocated accordingly. After an impaired financing service fee receivable has been placed onnonaccrual status, financing service fee will be recognized when cash is received on a cash basis cost recovery method by applying first to reduceprincipal and then to financing income thereafter. Financing service fee accrued but not received is generally F-24Source: Qudian Inc., 20-F, April 09, 2018Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Table of ContentsQUDIAN INC.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continuedFOR THE YEARS ENDED DECEMBER 31, 2015, 2016 AND 2017(Amounts in Renminbi (“RMB”) and US dollar (“US$”), except for number of shares and per share data) 2. Summary of Significant Accounting Policies - continuedNonaccrual loan principal - continued reversed against financing income. Financing service fee receivables may be returned to accrual status after all of the borrower’s delinquent balances ofloan principal and financing service fee have been settled and the borrower remains current for an appropriate period.Finance lease receivablesFinance lease receivables represent the discounted present value of future minimum lease payments. Finance lease receivables are recorded atamortized cost, including the gross amount of minimum lease payments receivable, net of allowance and unearned revenue.BorrowingsThe Company facilitates credit to borrowers and then transfers certain loan principals to certain Funding Partners. The payment terms with the FundingPartners range from 14 days to 34 months at varying annual interest rates. Although the loan principals are transferred to the Funding Partners, the loanprincipals are not derecognized upon transfer, as they are not legally isolated in accordance with ASC 860, Transfers and Servicing. In accordance withPRC law, the Company should give a notice regarding the loan transfer to the borrower, otherwise the transfer will not be effective for the borrower. Asthe Company did not provide such notice to the borrower, the transfer of the loan cannot be effective for the borrower. Therefore, the borrower is stillobligated to repay the loan to the Company. Additionally, the terms of the transfer require the Company to guarantee the principal and interest, in caseof default by the borrowers. As a result, the transfer of the loan principal is not accounted for as a sale, and the loan principal remains on the Company’sconsolidated balance sheets, whilst the funds received from the Funding Partners are recorded as Borrowings in the Company’s consolidated balancesheets. Borrowings are initially recognized at fair value which is the cash received from Funding Partners, and measured subsequently at amortized costusing the effective interest method.The Company’s consolidated trust’s payable to the third party beneficiary is initially recognized equaling to the cash received from the beneficiaryand measured subsequently at amortized cost using the effective interest method.Guarantee liabilitiesAs part of the Company’s cooperation with various financial institutions, the Company provides guarantee on the principal and accrued interestrepayment of the defaulted loans to the financial institutions, even in the event the loans are subsequently sold by the financial institutions.The financial guarantee is accounted for as a credit derivative under ASC 815 because the scope exemption in ASC 815-10-15-58(c) is not met. Theguarantee liabilities are remeasured at each reporting period. The change in fair value of the guarantee liabilities is recorded as loss on guaranteeliabilities in the consolidated statements of comprehensive (loss)/income. When the Company settles the guarantee liabilities through performance ofthe guarantee by making requisite payments on the respective defaulted loans, the Company records a corresponding deduction to the guaranteeliabilities. Subsequent collection from the borrower through the financial institutions will be recognized as a reversal of the deduction to guaranteeliabilities. F-25Source: Qudian Inc., 20-F, April 09, 2018Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Table of ContentsQUDIAN INC.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continuedFOR THE YEARS ENDED DECEMBER 31, 2015, 2016 AND 2017(Amounts in Renminbi (“RMB”) and US dollar (“US$”), except for number of shares and per share data) 2. Summary of Significant Accounting Policies - continued Treasury sharesThe Company accounts for treasury shares using the cost method. Under this method, the cost incurred to purchase the shares is recorded in the treasuryshares account on the consolidated balance sheets. At retirement, the ordinary shares account is charged only for the aggregate par value of the shares.The excess of the acquisition cost of treasury shares over the aggregate par value is allocated between additional paid-in capital (up to the amountcredited to the additional paid-in capital upon original issuance of the shares) and retained earnings.Fair value measurements of financial instrumentsFinancial instruments include guarantee deposits, short-term investments, loan principal and financing service fee receivables, finance leasereceivables, amounts due to related parties, short-term and long-term borrowings, and guarantee liabilities. The carrying amount of the financialinstruments, except for long-term loan principal and financing service fee receivables, long term finance lease receivables and long-term borrowings,approximate fair value because of their short maturities. The short-term investments are carried at fair value. The Company’s short-term investmentscomprise of monetary wealth management products which are classified as held for trading. The fair value of such monetary wealth managementproducts are determined based on the quoted subscription/ redemption price published by the investment manager of the products. The carryingamount of the long-term loan principal and financing service fee receivables and long-term borrowings, approximate their fair values due to the factthat the related interest rates approximate rates currently offered by financial institutions for similar debt instruments of comparable maturities.Fair value of guarantee liabilitiesThe fair value of the guarantee liabilities recorded at the inception of the loan was estimated using a discounted cash flow model based on expectedpayouts from the arrangement with the financial institutions. The Company estimates its expected future payouts based on estimates of expecteddelinquency rate and a discount rate for time value.Property and equipment, netProperty and equipment are stated at cost less accumulated depreciation. Depreciation is provided using the straight-line method with the residualvalue based on the estimated useful lives of the class of asset, which range as follows: Category: EstimatedUseful Life EstimatedResidual Office and electronic equipment 3-5 years Nil%-5% Leasehold improvements Over the shorter of the expectedlife of leasehold improvementsor the lease term Nil% F-26Source: Qudian Inc., 20-F, April 09, 2018Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Table of ContentsQUDIAN INC.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continuedFOR THE YEARS ENDED DECEMBER 31, 2015, 2016 AND 2017(Amounts in Renminbi (“RMB”) and US dollar (“US$”), except for number of shares and per share data) 2. Summary of Significant Accounting Policies - continuedProperty and equipment, net - continued Costs associated with the repair and maintenance of property and equipment are expensed as incurred.Intangible assetsIntangible assets represent purchased computer software. These intangible assets are amortized on a straight line basis over their estimated useful livesof the respective assets, which varies from 1-10 years.Research and developmentResearch and development expenses are primarily incurred in the development of new services, new features and general improvement of theCompany’s technology infrastructure to support its business operations. Research and development costs are expensed as incurred unless such costsqualify for capitalization as software development costs. In order to qualify for capitalization, (i) the preliminary project should be completed,(ii) management has committed to funding the project and it is probable that the project will be completed and the software will be used to perform thefunction intended, and (iii) it will result in significant additional functionality in the Company’s services. No research and development costs werecapitalized during any year presented as the Company has not met all of the necessary capitalization requirements.Impairment of long-lived assets and intangible assets with definite livesLong-lived assets including intangible assets with definite lives, are assessed for impairment, whenever events or changes in circumstances indicate thecarrying value of an asset may not be recoverable in accordance with ASC 360 Property, Plant and Equipment. The Company measures the carryingamount of long-lived assets against the estimated undiscounted future cash flows associated with it. Impairment exists when the estimatedundiscounted future cash flows are less than the carrying value of the asset being evaluated. Impairment loss is calculated as the amount by which thecarrying value of the asset exceeds its fair value. No impairment loss was recognized, for the years ended December 31, 2015, 2016 and 2017,respectively.Employee defined contribution planFull time employees of the Company in the PRC participate in a government mandated multi-employer defined contribution plan pursuant to whichcertain pension benefits, medical care, unemployment insurance, employee housing fund and other welfare benefits are provided to employees.Chinese labor regulations require that the Company make contributions to the government for these benefits based on a certain percentage of theemployee’s salaries. The Company has no legal obligation for the benefits beyond the contributions. The total amount that was expensed as incurred,was RMB 14,510,236, RMB 16,070,410 and RMB 35,004,467 (US$ 5,380,088) for the years ended December 31, 2015, 2016 and 2017, respectively.Advertising costsAdvertising costs are expensed as incurred in accordance with ASC 720-35, Other Expense-Advertising costs. Advertising costs were RMB 56,366,748,RMB 67,258,213 and RMB 43,470,301 (US$ 6,681,263) for the years F-27Source: Qudian Inc., 20-F, April 09, 2018Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Table of ContentsQUDIAN INC.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continuedFOR THE YEARS ENDED DECEMBER 31, 2015, 2016 AND 2017(Amounts in Renminbi (“RMB”) and US dollar (“US$”), except for number of shares and per share data) 2. Summary of Significant Accounting Policies - continuedAdvertising costs - continued ended December 31, 2015, 2016 and 2017, respectively. Advertising costs are included in sales and marketing expense in the consolidated statementsof comprehensive (loss)/income.Government grantsGovernment grants include cash subsidies received by the Company’s entities in the PRC from local governments as incentives for investing in certainlocal districts, and are typically granted based on the amount of investment made by the Company in form of registered capital or taxable incomegenerated by the Company in these local districts. Such grants allow the Company full discretion in utilizing the funds and are used by the Companyfor general corporate purposes. The local governments have final discretion as to whether the Company met all of the criteria to be entitled to thesubsidies. The Company does not in all instances receive written confirmation from local governments indicating the approval of the cash subsidiesbefore cash is received. Cash subsidies of RMB730,000, RMB nil and RMB 127,800 (US$ 19,643) are included in other non-operating income for theyears ended December 31, 2015, 2016 and 2017, respectively. Refunds for the value-added taxes paid of RMB nil, RMB 14,646,251 and RMB50,702,352 (US$ 7,792,809) are included in other operating income. Refunds for the corporate income taxes paid of RMB nil, RMB 12,123,338 andRMB 32,929,930 (US$ 5,061,237) are recognized as deduction of income tax expense. Cash subsidies are recognized as other non-operating incomewhen received and all the conditions for their receipt have been satisfied.Value added taxesSince its inception, Beijing Happy Time was certified as a small-scale VAT taxpayer whose applicable tax rate was 3%. In February 2015, it changed itsstatus to a general VAT taxpayer (applicable tax rate: 6%), as approved by Chaoyang District Bureau of State Taxation. Beijing Happy Fenqi, asubsidiary of Beijing Happy Time, is a small-scale VAT taxpayer with an applicable VAT rate of 3%. The other subsidiaries of the VIEs are all generalVAT taxpayers. VAT is reported as a deduction to revenue when incurred and amounted to RMB 16,750,495, RMB 107,065,470 and RMB280,586,358 (US$ 43,125,334) for the years ended December 31, 2015, 2016 and 2017, respectively. Entities that are VAT general taxpayers areallowed to offset qualified input VAT paid to suppliers against their output VAT liabilities. Net VAT balance between input VAT and output VAT isrecorded in accrued expenses and other current liabilities on the consolidated balance sheets.Income taxesThe Company accounts for income taxes using the liability approach and recognizes deferred tax assets and liabilities for the expected futureconsequences of events that have been recognized in the consolidated financial statements or in the Company’s tax returns. Deferred tax assets andliabilities are recognized on the basis of the temporary differences that exist between the tax basis of assets and liabilities and their reported amounts inthe consolidated financial statements using enacted tax rates in effect for the year in which the differences are expected to reverse. Changes in deferredtax assets and liabilities are recorded in earnings. Deferred tax assets are reduced by a valuation allowance through a charge to income tax expensewhen, in the opinion of management, it is more-likely-than-not that a portion of or all of the deferred tax assets will not be realized. Potential for F-28Source: Qudian Inc., 20-F, April 09, 2018Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Table of ContentsQUDIAN INC.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continuedFOR THE YEARS ENDED DECEMBER 31, 2015, 2016 AND 2017(Amounts in Renminbi (“RMB”) and US dollar (“US$”), except for number of shares and per share data) 2. Summary of Significant Accounting Policies - continuedIncome taxes - continued recovery of deferred tax assets is evaluated by estimating the future taxable profits expected and considering prudent and feasible tax planningstrategies. The components of the deferred tax assets and liabilities are classified as non-current.The Company accounts for uncertainty in income taxes recognized in the consolidated financial statements by applying a two-step process todetermine the amount of the benefit to be recognized. First, the tax position must be evaluated to determine the likelihood that it will be sustainedupon external examination by the taxing authorities. If the tax position is deemed more-likely-than-not to be sustained (defined as a likelihood of morethan fifty percent of being sustained upon an audit, based on the technical merits of the tax position), the tax position is then assessed to determine theamount of benefits to recognize in the consolidated financial statements. The amount of the benefits that may be recognized is the largest amount thathas a greater than 50% likelihood of being realized upon ultimate settlement. Interest and penalties on income taxes will be classified as a componentof the provisions for income taxes. The Company did not recognize any income tax due to uncertain tax position or incur any interest and penaltiesrelated to potential underpaid income tax expenses for the years ended December 31, 2015, 2016 and 2017.Segment informationThe Company historically had only one single reportable segment because the Company’s chief operating decision maker (“CODM”) formerly reliedon the consolidated results of operations when making decisions on allocating resources and assessing performance of the Company. Beginning in thequarter ended December 31, 2017, the Company changed its reportable segments due to expansion of leasing operations. The Company’s chiefexecutive officer, who has been identified as the CODM, now reviews the operating results of two different service lines in order to allocate resourcesand assess the Company’s performance. Accordingly, the financial statements include segment information which reflects the current composition ofthe reportable segments in accordance with ASC topic 280 (“ASC 280”), Segment Reporting.As the Company generates substantially all of its revenues in the PRC, no geographical segments are presented.Operating LeasesLeases where substantially all the rewards and risks of ownership of assets remain with the lessor are accounted for as operating leases. Rentalsapplicable to such operating leases are recognized on a straight-line basis over the lease term. Certain of the operating lease agreements contain rentholidays. Rent holidays are considered in determining the straight-line rent expense to be recorded over the lease term.Fair value measurementsFair value is the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants atthe measurement date. When determining the fair value measurements for assets and liabilities required or permitted to be recorded at fair value, theCompany considers the principal or F-29Source: Qudian Inc., 20-F, April 09, 2018Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Table of ContentsQUDIAN INC.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continuedFOR THE YEARS ENDED DECEMBER 31, 2015, 2016 AND 2017(Amounts in Renminbi (“RMB”) and US dollar (“US$”), except for number of shares and per share data) 2. Summary of Significant Accounting Policies - continuedFair value measurements - continued most advantageous market in which it would transact and the market-based risk measurement or assumptions that market participants would use whenpricing the asset or liability.Fair value is estimated by applying the following hierarchy, which prioritizes the inputs used to measure fair value into three levels and bases thecategorization within the hierarchy upon the lowest level of input that is available and significant to the fair value measurement: • Level 1 Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets • Level 2 Include observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in activemarkets, quoted prices for identical or similar assets and liabilities in markets that are not active, or other inputs that are observable or can becorroborated by observable market data. • Level 3 Unobservable inputs which are supported by little or no market activityShare-based paymentsShare-based payment transactions with employees and independent directors, such as share options are measured based on the grant date fair value ofthe equity instrument. The Company recognizes the compensation costs net of estimated forfeitures using the straight-line method, over the applicablevesting period for each separately vesting portion of the award. The estimate of forfeitures will be adjusted over the requisite service period to theextent that actual forfeitures differ, or are expected to differ, from such estimates. Changes in estimated forfeitures will be recognized through acumulative catch-up adjustment in the period of change and will also impact the amount of share-based compensation expense to be recognized infuture periods.A change in any of the terms or conditions of share options is accounted for as a modification of share options. The Company calculates theincremental compensation cost of a modification as the excess of the fair value of the modified option over the fair value of the original optionimmediately before its terms are modified, measured based on the share price and other pertinent factors at the modification date. For vested options,the Company recognizes incremental compensation cost in the period the modification occurred. For unvested options, the Company recognizes, overthe remaining requisite service period, the sum of the incremental compensation cost and the remaining unrecognized compensation cost for theoriginal award on the modification date.The Company accounts for share options issued to non-employees in accordance with the provisions of ASC 505-50, Equity: Equity-based Paymentsto Non-Employees. The Company uses the Black-Scholes-Merton option pricing model method to measure the value of options granted tonon-employees at each vesting date to determine the appropriate charge to share-based compensation. ASC 718 requires share-based compensation tobe presented in the same manner as cash compensation rather than as a separate line item. F-30Source: Qudian Inc., 20-F, April 09, 2018Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Table of ContentsQUDIAN INC.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continuedFOR THE YEARS ENDED DECEMBER 31, 2015, 2016 AND 2017(Amounts in Renminbi (“RMB”) and US dollar (“US$”), except for number of shares and per share data) 2. Summary of Significant Accounting Policies - continued Earnings (loss) per shareBasic earnings (loss) per share is computed by dividing net income (loss) attributable to ordinary shareholders by the weighted average number ofordinary shares outstanding during the period and year presented.Diluted earnings (loss) per ordinary share reflect the potential dilution that could occur if securities were exercised or converted into ordinary shares.Convenience translation for financial statements presentationTranslations of amounts from RMB into US$ for the convenience of the reader have been calculated at the exchange rate of RMB6.5063 per US$1.00on December 29, 2017, as published on the website of the United States Federal Reserve Board. No representation is made that the RMB amountscould have been, or could be converted into US$ at such rate.Investment in equity method investeeThe Company uses the equity method to account for an equity investment over which it has significant influence but does not own a majority equityinterest or otherwise control, generally accompanying a shareholding of between 20% and 50% of the voting rights. The share of earnings or losses ofthe investee are recognized in the consolidated statements of comprehensive (loss)/income. Equity method adjustments include the company’sproportionate share of investee income or loss and other adjustments required by the equity method.The Company assesses its equity investment for other-than-temporary impairment by considering factors as well as relevant and available informationincluding, but not limited to, current economic and market conditions, the operating performance of the investees including current earning trends, thegeneral market conditions in the investee’s industry or geographic area, factors related to the investee’s ability to remain in business, such as theinvestee’s liquidity, debt ratios, and cash burn rate and other company-specific information.Significant risks and uncertaintiesCurrency convertibility riskSubstantially all of the Company’s businesses are transacted in RMB, which is not freely convertible into foreign currencies. All foreign exchangetransactions take place either through the People’s Bank of China (“PBOC”) or other authorized financial institution at exchange rates quoted byPBOC. Approval of foreign currency payments by the PBOC or other regulatory institutions requires submitting a payment application form togetherwith suppliers’ invoices and signed contracts.Concentration of credit riskFinancial assets that potentially expose the Company to concentrations of credit risk consist primarily of cash and cash equivalents, guaranteedeposits, short-term investment, loan principal and financing service fee receivables, finance lease receivables and other receivables. F-31Source: Qudian Inc., 20-F, April 09, 2018Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Table of ContentsQUDIAN INC.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continuedFOR THE YEARS ENDED DECEMBER 31, 2015, 2016 AND 2017(Amounts in Renminbi (“RMB”) and US dollar (“US$”), except for number of shares and per share data) 2. Summary of Significant Accounting Policies - continuedSignificant risks and uncertainties - continued The Company places its cash and cash equivalents and short-term investments, with reputable financial institutions that have high-credit ratings andquality. There has been no recent history of default in relation to these financial institutions.The Company manages credit risk of loan principal and financing service fee receivables by performing credit assessments on its borrowers and itsongoing monitoring of the outstanding balances.No borrower represented 10% or more of total revenues and loan receivable and financing service fee receivable for the years ended December 31,2015, 2016 and 2017.Credit DerivativesThe Company enters into guarantee arrangements with financial institutions classified as a credit derivative contract to facilitate borrowingtransactions, under which the Company provides the financial institutions protection against the risk of default on a set of loans invested by them. TheCompany will have to perform the guarantee obligation if a default event as defined under the contract occurs. The contractual or notional amounts ofthese credit derivatives represent the maximum potential amounts of future payments without consideration of possible recoveries under recourseprovisions.The Company manages current payment/performance risk of the credit derivatives through self-developed risk management model. The rating scale ofrisk management model takes into account factors such as identity characteristics, credit history, payment overdue history, payment capacity,behavioral characteristics and online social network activity.Interest rate riskThe Company is exposed to interest rate risk on its interest-bearing assets and liabilities. As part of its asset and liability risk management, theCompany reviews and takes appropriate steps to manage its interest rate exposures on its interest-bearing assets and liabilities. The Company has notbeen exposed to material risks due to changes in market interest rates, and not used any derivative financial instruments to manage the interest riskexposure during the years presented. F-32Source: Qudian Inc., 20-F, April 09, 2018Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Table of ContentsQUDIAN INC.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continuedFOR THE YEARS ENDED DECEMBER 31, 2015, 2016 AND 2017(Amounts in Renminbi (“RMB”) and US dollar (“US$”), except for number of shares and per share data) 2. Summary of Significant Accounting Policies - continuedSignificant risks and uncertainties - continued Business and economic riskThe Company believes that changes in any of the following areas could have a material adverse effect on the Company’s future financial position,results of operations or cash flows: changes in the overall demand for services; competitive pressures due to new entrants; advances and new trends innew technologies and industry standards; changes in certain strategic relationships; regulatory considerations and risks associated with the Company’sability to attract employees necessary to support its growth. The Company’s operations could also be adversely affected by significant political,regulatory, economic and social uncertainties in the PRC.Recent accounting pronouncementsIn May 2014, the Financial Accounting Standard Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, Revenue from Contractswith Customers (Topic 606). The guidance substantially converges final standards on revenue recognition between the FASB and the InternationalAccounting Standards Board providing a framework on addressing revenue recognition issues and, upon its effective date, replaces almost all exitingrevenue recognition guidance, including industry-specific guidance, in current U.S. GAAP.The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in anamount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve that core principle,an entity should apply the following steps:Step 1: Identify the contract(s) with a customer.Step 2: Identify the performance obligations in the contract.Step 3: Determine the transaction price.Step 4: Allocate the transaction price to the performance obligations in the contract.Step 5: Recognize revenue when (or as) the entity satisfies a performance obligation.In August 2015, FASB issued its final standard formally amending the effective date of the new revenue recognition guidance. The amendments in thisASU are effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. Earlierapplication is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within thatreporting period.The standard will be effective for the Company beginning January 1, 2018. The Company is in the process of evaluating the impact of adoption of thisguidance on its consolidated financial statements. The most significant impact of the standard relates to the accounting for loan facilitation incomeand others. Specifically, under the standard the Company expect to recognize the revenue of the loan facilitation services predominantly at the time ofbilling rather than on a cash basis. F-33Source: Qudian Inc., 20-F, April 09, 2018Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Table of ContentsQUDIAN INC.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continuedFOR THE YEARS ENDED DECEMBER 31, 2015, 2016 AND 2017(Amounts in Renminbi (“RMB”) and US dollar (“US$”), except for number of shares and per share data) 2. Summary of Significant Accounting Policies - continuedRecent accounting pronouncements - continued The Company will adopt the new standard effective January 1, 2018, using the modified retrospective transition method. The revenue would have beenapproximately RMB118 million (US$ 18 million) higher in the year 2017 under the new standard primarily due to the net change in loan facilitationservices revenue recognition.In January 2016, the FASB issued ASU No. 2016-01, Financial Instruments – Overall (Subtopic 825-10). The amendments require all equityinvestments to be measured at fair value with changes in the fair value recognized through net income (other than those accounted for under equitymethod of accounting or those that result in consolidation of the investee). The amendments also require an entity to present separately in othercomprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instruments-specific credit risk whenthe entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments. In addition, theamendments eliminate the requirement to disclose the fair value of financial instruments measured at amortized cost for entities that are not publicbusiness entities and the requirement for to disclose the method(s) and significant assumptions used to estimate the fair value that is required to bedisclosed for financial instruments measured at amortized cost on the balance sheet for public business entities. This updated guidance is effective forthe annual period beginning after December 15, 2017, including interim periods within the year. Early adoption is permitted. The Company does notbelieve this standard will have a material impact on the results of operations or financial condition.In February 2016, the FASB issued ASU No. 2016-02, Leases, which requires lessees to recognize assets and liabilities related to lease arrangementslonger than 12 months on the balance sheet. This standard also requires additional disclosures by lessees and contains targeted changes to accountingby lessors. The updated guidance is effective for interim and annual periods beginning after December 15, 2018, and early adoption is permitted. Therecognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee have not significantly changed from previousGAAP. The Company is in the process of evaluating the impact of adoption of this guidance on its consolidated financial statements.In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on FinancialInstruments. This ASU is intended to improve financial reporting by requiring timelier recording of credit losses on loans and other financialinstruments held by financial institutions and other organizations. This ASU requires the measurement of all expected credit losses for financial assetsheld at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. This ASU requires enhanceddisclosures to help investors and other financial statement users better understand significant estimates and judgments used in estimating credit losses,as well as the credit quality and underwriting standards of the Company’s portfolio. These disclosures include qualitative and quantitativerequirements that provide additional information about the amounts recorded in the financial statements. All entities may adopt the amendments inthis Update earlier as of the fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The Company is in theprocess of evaluating the impact of adoption of this guidance on its consolidated financial statements.In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments.This ASU is intended to improve financial reporting by requiring F-34Source: Qudian Inc., 20-F, April 09, 2018Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Table of ContentsQUDIAN INC.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continuedFOR THE YEARS ENDED DECEMBER 31, 2015, 2016 AND 2017(Amounts in Renminbi (“RMB”) and US dollar (“US$”), except for number of shares and per share data) 2. Summary of Significant Accounting Policies - continuedRecent accounting pronouncements - continued timelier recording of credit losses on loans and other financial instruments held by financial institutions and other organizations. This ASU requires themeasurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, andreasonable and supportable forecasts. This ASU requires enhanced disclosures to help investors and other financial statement users better understandsignificant estimates and judgments used in estimating credit losses, as well as the credit quality and underwriting standards of the Company’sportfolio. These disclosures include qualitative and quantitative requirements that provide additional information about the amounts recorded in thefinancial statements. All entities may adopt the amendments in this Update earlier as of the fiscal years beginning after December 15, 2018, includinginterim periods within those fiscal years. The Company is in the process of evaluating the impact of adoption of this guidance on its consolidatedfinancial statements.In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash. This ASU requires that a statement ofcash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restrictedcash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cashequivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. This ASU do not providea definition of restricted cash or restricted cash equivalents. This ASU is effective for public business entities for fiscal years beginning afterDecember 15, 2017, and interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. The Companyis in the process of evaluating the impact of adoption of this guidance on its consolidated financial statements.In January 2017, the FASB issued ASU No. 2017-01, Business Combinations (Topic 805): Clarifying Definition of a Business. This ASU clarifies theframework for determining whether an integrated set of assets and activities meets the definition of a business. The revised framework establishes ascreen for determining whether an integrated set of assets and activities is a business and narrows the definition of a business, which is expected toresult in fewer transactions being accounted for as business combinations. Acquisitions of integrated sets of assets and activities that do not meet thedefinition of a business are accounted for as asset acquisitions. This update is effective for fiscal years, and for interim periods within those fiscal years,beginning after December 15, 2018. The Company does not believe this standard will have a material impact on its consolidated financial statements.In January 2017, the FASB issued ASU No. 2017-04, Simplifying the Test for Goodwill Impairment, which simplifies the accounting for goodwillimpairment by eliminating Step two from the goodwill impairment test. If the carrying amount of a reporting unit exceeds its fair value, an impairmentloss shall be recognized in an amount equal to that excess, as opposed to determining an implied fair value in Step two to measure the impairment loss.The guidance is effective for annual and interim impairment tests performed in periods beginning after December 15, 2019. Early adoption is permittedfor all entities for annual and interim goodwill impairment testing dates on or after January 1, 2017. The guidance should be applied on a prospectivebasis. The Company does not believe this standard will have a material impact on its consolidated financial statements. F-35Source: Qudian Inc., 20-F, April 09, 2018Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Table of ContentsQUDIAN INC.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continuedFOR THE YEARS ENDED DECEMBER 31, 2015, 2016 AND 2017(Amounts in Renminbi (“RMB”) and US dollar (“US$”), except for number of shares and per share data) 2. Summary of Significant Accounting Policies - continuedRecent accounting pronouncements - continued In February 2017, the FASB issued ASU No. 2017-05, Other income – Gains and Losses from the Derecognition of Nonfinancial assets, which clarifiesthat a financial asset is within the scope of Subtopic 610-20 if it meets the definition of an in substance nonfinancial asset. The amendments in thisupdate also clarify that nonfinancial assets within the scope of Subtopic 610-20 may include nonfinancial assets transferred within a legal entity to acounterparty. This update is effective for fiscal years beginning after December 15, 2018, including interim reporting periods within that reportingperiod. The Company is in the process of evaluating the impact of adoption of this guidance on its consolidated financial statements.3. Restricted cashRestricted cash mainly represents (i) cash held by the consolidated trusts through segregated bank accounts; (ii) security deposits held in designatedbank accounts for issuance of bank acceptance and letter of guarantee and (iii) time deposits that are pledged for short-term bank loans. Such restrictedcash is not available to fund the general liquidity needs of the Company.4. Short-term investmentsShort-term investments consists of wealth management products issued by China Merchants Bank and China CITIC Bank which are redeemable by theCompany at any time. The wealth management products are primarily invested in debt securities issued by the PRC government, corporate debtsecurities and central bank bills. The Company valued the short-term investments based on the quoted subscription/redemption price published byChina Merchants Bank and China CITIC Bank. As of December 31, 2016 and 2017, the net adjustment to unrealized holding gains/losses on short-term investments is nil, respectively. F-36Source: Qudian Inc., 20-F, April 09, 2018Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Table of ContentsQUDIAN INC.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continuedFOR THE YEARS ENDED DECEMBER 31, 2015, 2016 AND 2017(Amounts in Renminbi (“RMB”) and US dollar (“US$”), except for number of shares and per share data) 5. Loan principal and financing service fee receivables5.1 Loan principal and financing service fee receivables consists of the following: As of December 31, 2016 2017 RMB RMB US$ Short-term loan principal and financing service fee receivables: Loan principal and financing service fee receivables 4,930,315,057 9,277,798,700 1,425,971,551 Deferred origination costs 100,598 — — Less: allowance for loan principal and financing service fee receivables (103,624,704) (519,254,006) (79,807,879) Short-term loan principal and financing service fee receivables, net 4,826,790,951 8,758,544,694 1,346,163,672 Long-term loan principal and financing service fee receivables: Loan principal and financing service fee receivables 89,311,102 — — Less: allowance for loan principal and financing service fee receivables (1,489,035) — — Long-term loan principal and financing service fee receivables, net 87,822,067 — — As of December 31, 2016 and 2017, RMB 3,733,945,521 and RMB 2,334,820,237 (US$ 358,855,300), respectively, have been transferred to certainFunding Partners, but were not derecognized upon transfer, as the loan principal and financing service fee receivables are not legally isolated inaccordance with ASC 860, Transfers and Servicing.5.2 The following table presents nonaccrual loan principal as of December 31, 2016 and 2017, respectively. As of December 31, 2016 2017 RMB RMB US$ Nonaccrual loan principal 29,770,427 181,193,812 27,848,979 Less: allowance for nonaccrual loan principal (25,312,490) (147,790,782) (22,715,027) Nonaccrual loan principal, net 4,457,937 33,403,030 5,133,952 F-37Source: Qudian Inc., 20-F, April 09, 2018Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Table of ContentsQUDIAN INC.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continuedFOR THE YEARS ENDED DECEMBER 31, 2015, 2016 AND 2017(Amounts in Renminbi (“RMB”) and US dollar (“US$”), except for number of shares and per share data) 5. Loan principal and financing service fee receivables - continued 5.3 The following table presents the aging of past-due loan principal and financing service fee receivables as of December 31, 2016: 1-30 days 31-60 days 61-90 days 91-120 days 121-150 days 151-180 days Total past due Current Total RMB RMB RMB RMB RMB RMB RMB RMB RMB Domestic consumerloans(uncollateralized) – Loan principal 74,833,461 19,548,573 14,677,810 11,429,365 9,186,682 9,154,380 138,830,271 4,831,016,428 4,969,846,699 – Financingservice feereceivables 1,850,790 756,907 679,930 — — — 3,287,627 46,491,833 49,779,460 76,684,251 20,305,480 15,357,740 11,429,365 9,186,682 9,154,380 142,117,898 4,877,508,261 5,019,626,159 The following table presents the aging of past-due loan principal and financing service fee receivables as of December 31, 2017: 1-30 days 31-60 days 61-90 days 91-120 days 121-150 days 151-180 days Total past due Current Total Total RMB RMB RMB RMB RMB RMB RMB RMB RMB US$ Domestic consumerloans(uncollateralized) – Loanprincipal 401,975,318 124,456,568 98,289,049 81,133,077 60,811,562 39,249,173 805,914,747 8,343,133,619 9,149,048,366 1,406,182,987 – Financingservice feereceivables 11,110,556 5,410,177 5,375,791 — — — 21,896,524 106,853,810 128,750,334 19,788,564 413,085,874 129,866,745 103,664,840 81,133,077 60,811,562 39,249,173 827,811,271 8,449,987,429 9,277,798,700 1,425,971,551 As of December 31, 2016 and 2017, all loans which are past due 90 days or more are nonaccrual. F-38Source: Qudian Inc., 20-F, April 09, 2018Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Table of ContentsQUDIAN INC.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continuedFOR THE YEARS ENDED DECEMBER 31, 2015, 2016 AND 2017(Amounts in Renminbi (“RMB”) and US dollar (“US$”), except for number of shares and per share data) 5. Loan principal and financing service fee receivables - continued 5.4 Movement of allowance for loan principal and financing service fee receivables is as follows: As of December 31, 2016 2017 Loan principal Financingsevice feereceivables Total Loan principal Financingservice feereceivables Total RMB RMB RMB RMB RMB RMB US$ Balance at the beginning of theyear 33,803,140 384,345 34,187,485 103,111,134 2,002,605 105,113,739 16,155,686 Additions 118,735,466 1,618,260 120,353,726 594,209,005 10,954,711 605,163,716 93,011,960 Charge-offs (49,427,472) — (49,427,472) (191,023,449) — (191,023,449) (29,359,767) Balance at the end of the year 103,111,134 2,002,605 105,113,739 506,296,690 12,957,316 519,254,006 79,807,879 Evaluated for impairment on aportfolio basis 103,111,134 2,002,605 105,113,739 506,296,690 12,957,316 519,254,006 79,807,879 6. Other current assetsOther current assets consist of the following: As of December 31, 2016 2017 RMB RMB US$ Prepaid expenses 14,387,545 52,989,718 8,144,371 Prepayments for vehicles 6.1 — 141,082,860 21,684,038 Deposits in trust protection fund 6.2 — 72,490,890 11,141,646 Guarantee deposits held by Funding Partners 241,669,750 121,731,691 18,709,818 Others 56,042,148 105,878,639 16,273,247 Total 312,099,443 494,173,798 75,953,120 Less: Allowance for the receivables from suppliers (11,822,819) (11,822,819) (1,817,134) 300,276,624 482,350,979 74,135,986 6.1 The Company prepaid vehicle vendors for its finance lease operations.6.2 According to the relevant regulations, the consolidated trusts are required to deposit 1% of the trust’s capital to the trust protection fund, which willbe released at the trust’s expiration date. F-39Source: Qudian Inc., 20-F, April 09, 2018Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Table of ContentsQUDIAN INC.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continuedFOR THE YEARS ENDED DECEMBER 31, 2015, 2016 AND 2017(Amounts in Renminbi (“RMB”) and US dollar (“US$”), except for number of shares and per share data) 7. Investment in equity method investeeOn October 17, 2016, the Company made a commitment to invest RMB 190 million in cash for 45.9% of the equity interest in Ganzhou QuCampusTechnology Co., Ltd (“Ganzhou QuCampus”) which mainly operates computer services, advisory, and online merchandise services. As ofDecember 31, 2017, the Company contributed RMB 70 million in Ganzhou QuCampus and held a 45.9% equity interest in Ganzhou QuCampus. Asthe Company has significant influence over Ganzhou QuCampus, Ganzhou QuCampus was accounted for as an equity method investment. The cost ofthe investment over the proportional fair value of the assets and liabilities of the investee is reflected in the Company’s memo accounts as “equitymethod goodwill”. The equity method goodwill is not subsequently amortized and is not tested for impairment under ASC 350. Equity methodinvestments shall continue to be reviewed for impairment in accordance with paragraph ASC 323-10-35-32. The Company’s share of loss in GanzhouQuCampus for the years ended December 31, 2016 and 2017 was RMB 4,805,183 and RMB 20,676,273 (US$ 3,177,885), respectively, which wasrecognized in the consolidated statements of comprehensive income. Due to the short operating history of Ganzhou QuCampus, the Companydetermined that the investment is not impaired as of December 31, 2016 and 2017.8. Other non-current assetsOther non-current assets consist of the following: As of December 31, 2016 2017 RMB RMB US$ Guarantee deposits held by Funding Partners 5,675,452 2,390 367 Prepaid expenses 2,466,199 3,048,127 468,489 Others 3,695,329 3,394,154 521,672 11,836,980 6,444,671 990,528 9. Short-term and long-term borrowingsIn the ordinary course of business, the Company transfers loan principals to certain Funding Partners. However, in accordance with ASC 860 Transfersand Servicing the loan principals are not derecognized upon transfer as they are not legally isolated. Hence, the Company continues to report thetransferred loan principal in the consolidated balance sheets and account for the proceeds from the transfer as a secured borrowing with pledge ofcollateral. F-40Source: Qudian Inc., 20-F, April 09, 2018Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Table of ContentsQUDIAN INC.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continuedFOR THE YEARS ENDED DECEMBER 31, 2015, 2016 AND 2017(Amounts in Renminbi (“RMB”) and US dollar (“US$”), except for number of shares and per share data) 9. Short-term and long-term borrowings - continued The following table presents short-term borrowings from the Funding Partners as of December 31, 2016 and 2017. Short-term borrowings includesborrowings with terms shorter than one year, the current portion of the long-term borrowings and long-term borrowings with early repayment optionsthat are exercisable by the Funding Partners on demand: As of December 31, Funding Partners Fixed annual rate (%) Term* 2016 2017 RMB RMB US$ P2P platforms 6% to 12% 28 days to 27 months 3,141,161,270 79,410,422 12,205,158 Other institutions 5.5% to 12% 27 to 698 days 177,019,905 1,227,347,947 188,639,925 Trust beneficiaries 6% to 16% 12 to 24 months 506,719,178 5,389,958,760 828,421,494 Private financial assets tradingplatform 7.8% to 12% 14 to 365 days 358,330,505 1,087,388,643 167,128,574 Bank 5.70% 1 year — 195,308,750 30,018,405 4,183,230,858 7,979,414,522 1,226,413,556 *Includes current portion of borrowings greater than 1 year.The following table presents long-term borrowings from Funding Partners as of December 31, 2016 and 2017: As of December 31, Funding Partners Fixed annual rate (%) Term 2016 2017 RMB RMB US$ P2P platforms 6% to 12% 13 to 34 months 76,052,124 23,905 3,674 Trust beneficiaries 7.4% to 7.5% 18 months — 510,000,000 78,385,565 76,052,124 510,023,905 78,389,239 The weighted average interest rate for the outstanding borrowings was approximately 9.15% and 9.40% as of December 31, 2016 and 2017,respectively. F-41Source: Qudian Inc., 20-F, April 09, 2018Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Table of ContentsQUDIAN INC.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continuedFOR THE YEARS ENDED DECEMBER 31, 2015, 2016 AND 2017(Amounts in Renminbi (“RMB”) and US dollar (“US$”), except for number of shares and per share data) 9. Short-term and long-term borrowings - continued The following table sets forth the contractual obligations which has not included impact of discount of time value as of December 31, 2016 and 2017: Payment due by period Less than1 year 1 – 2 years Greater than2 years Total As of December 31, 2016Long-term borrowings and interest payables (RMB) 217,633,327 78,081,207 — 295,714,534 As of December 31, 2017Long-term borrowings and interest payables (RMB) 38,017,759 520,336,141 1,959 558,355,859 As of December 31, 2017Long-term borrowings and interest payables (US$) 5,843,223 79,974,200 301 85,817,724 10. Accrued expenses and other current liabilitiesAccrued expenses and other current liabilities consist of the following: As of December 31, 2016 2017 RMB RMB US$ Accrued payroll and welfare 16,033,703 81,623,990 12,545,378 Tax payables 90,478,748 32,262,859 4,958,711 Payable to suppliers 75,160,792 85,772,102 13,182,931 Payable to external service providers 16,347,014 45,122,393 6,935,185 Others 17,644,662 70,911,451 10,898,890 215,664,919 315,692,795 48,521,095 F-42Source: Qudian Inc., 20-F, April 09, 2018Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Table of ContentsQUDIAN INC.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continuedFOR THE YEARS ENDED DECEMBER 31, 2015, 2016 AND 2017(Amounts in Renminbi (“RMB”) and US dollar (“US$”), except for number of shares and per share data) 11. Guarantee liabilitiesThe movement of guarantee liabilities is as follows: For the years ended December 31, 2016 2017 RMB RMB US$ Balance at beginning of the year — 6,207,812 954,123 Fair value of guarantee liabilities upon the inception of new loans 5,496,085 119,683,496 18,395,017 Performed guarantee (149,262) (124,798,134) (19,181,122) Change in fair value of guarantee liabilities 860,989 45,888,151 7,052,879 Balance at end of the year 6,207,812 46,981,325 7,220,897 As of December 31, 2016 and 2017, the maximum potential undiscounted future payment the Company would be required to make was RMB1,373million and RMB2,082 million (US$ 320 million), respectively. The term of the guarantee is the same as the term of loans facilitated under thearrangements with the financial institutions, which ranges from 7 days to 1 year, as of December 31, 2017.12. Cost of revenuesCost of revenues consists of the following: For the years ended December 31, 2015 2016 2017 RMB RMB RMB US$ Interest expenses on borrowings 122,705,588 210,950,030 686,889,761 105,573,023 Sales-type lease — — 23,895,186 3,672,623 Other lending related costs 25,711,093 56,911,976 170,060,910 26,137,883 148,416,681 267,862,006 880,845,857 135,383,529 13. Interest and investment income, netInterest and investment income, net consists of the following: For the years ended December 31, 2015 2016 2017 RMB RMB RMB US$ Share of loss from equity method investment — (4,805,183) (20,676,273) (3,177,885) Investment income of short-term investments 764,538 3,406,166 3,526,506 542,014 Interest income 2,124,373 3,256,345 21,360,670 3,283,075 2,888,911 1,857,328 4,210,903 647,204 F-43Source: Qudian Inc., 20-F, April 09, 2018Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Table of ContentsQUDIAN INC.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continuedFOR THE YEARS ENDED DECEMBER 31, 2015, 2016 AND 2017(Amounts in Renminbi (“RMB”) and US dollar (“US$”), except for number of shares and per share data) 14. Income taxesThe Company was incorporated in the Cayman Islands. It is tax-exempted under the tax laws of the Cayman Islands. Qudian BVI is domiciled in theBritish Virgin Islands, which is also tax-exempted. Qudian HK is domiciled in Hong Kong, and is subject to 16.5% statutory income tax rate in theperiods presented.The VIEs and their subsidiaries domiciled in the PRC were subject to 25% statutory income tax rate in the years presented. As stipulated by theTaxation Law of PRC, the subsidiaries in Ganzhou are qualified enterprises engaged in industry under the Western Development Strategy and aretherefore entitled to preferential tax rate of 15%, and the subsidiary in Xinjiang is qualified enterprise engaged in industry as a company established inthe special economic development zone and is therefore entitled to an exemption from income tax for first five years and 50% reduction for the nextfive years from its first profitable year.The Enterprise Income Tax Law (the “EIT Law”) of the PRC includes a provision specifying that legal entities organized outside PRC will beconsidered residents for Chinese income tax purposes if their place of effective management or control is within PRC. If legal entities organizedoutside PRC were considered residents for Chinese income tax purpose, they would become subject to the EIT Law on their worldwide income. Thiswould cause any income from legal entities organized outside PRC earned to be subject to PRC’s 25% EIT. The Implementation Rules to the EIT Lawprovides that non-resident legal entities will be considered as PRC residents if substantial and overall management and control over the manufacturingand business operations, personnel, accounting, and properties, etc. reside within PRC.Despite the present uncertainties resulting from the limited PRC tax guidance on the issue, the Company does not believe that the legal entitiesorganized outside PRC should be characterized as PRC residents for EIT Law purposes.The current and deferred component of income tax expenses which were substantially attributable to the Company’s PRC subsidiaries, VIEs andsubsidiaries of the VIEs, are as follows: For the years ended December 31, 2015 2016 2017 RMB RMB RMB US$ Current income tax expenses — 144,628,149 353,218,915 54,288,754 Deferred income tax expenses — (17,787,699) (97,672,912) (15,012,052) Total income tax expenses — 126,840,450 255,546,003 39,276,702 F-44Source: Qudian Inc., 20-F, April 09, 2018Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Table of ContentsQUDIAN INC.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continuedFOR THE YEARS ENDED DECEMBER 31, 2015, 2016 AND 2017(Amounts in Renminbi (“RMB”) and US dollar (“US$”), except for number of shares and per share data) 14. Income taxes - continued The principal components of the deferred tax assets and liabilities are as follows: As of December 31, 2016 2017 RMB RMB US$ Non-current deferred tax assets Allowance for loan principal and financing service fee receivables 33,430,952 138,683,016 21,315,189 Allowance for other receivables 2,082,694 2,300,135 353,524 Guarantee liabilities 931,172 3,700,872 568,814 Share-based compensation 18,087,929 26,240,241 4,033,051 Investment loss under equity method 1,201,296 6,370,364 979,107 Net operating loss carry forwards 55,764,192 80,539,001 12,378,618 Less: valuation allowance (93,710,536) (142,373,018) (21,882,332) Non-current deferred tax assets, net 17,787,699 115,460,611 17,745,971 Non-current deferred tax liabilities — — — The Company operates through its subsidiaries, VIEs and subsidiaries of the VIEs. The valuation allowance is considered on an individual entity basis.As of December 31, 2016 and 2017, the Company had deferred tax assets related to net operating loss carry forwards of RMB 55,764,192 and RMB80,539,001 (US$ 12,378,618), respectively, from its subsidiaries, VIEs and subsidiaries of the VIEs registered in the PRC, which can be carried forwardto offset taxable income. The net operating loss will expire in years 2018 to 2022 if not utilized. The Company assessed the available evidence toestimate if sufficient future taxable income would be generated to use the existing deferred tax assets.Reconciliation between the income taxes expense computed by applying the PRC tax rate to loss before income taxes and the actual provision forincome taxes is as follows: For the years ended December 31, 2015 2016 2017 RMB RMB RMB US$ (Loss)/ income before income tax (233,163,744) 703,493,068 2,420,004,823 371,947,932 PRC statutory income tax rate 25% 25% 25% 25% Income tax at statutory tax rate (58,290,936) 175,873,268 605,001,206 92,986,983 Effect of different tax rates — (72,661,772) (367,422,131) (56,471,748) Exempt Income — — (2,064,183) (317,259) Expenses not deductible for tax purposes 10,341,003 183,808 4,298,559 660,677 Income tax refund — (12,123,338) (32,929,930) (5,061,237) Changes in valuation allowance 47,949,933 35,568,484 48,662,482 7,479,286 Income tax expenses — 126,840,450 255,546,003 39,276,702 The Company did not incur any interest and penalties related to potential underpaid income tax expenses. F-45Source: Qudian Inc., 20-F, April 09, 2018Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Table of ContentsQUDIAN INC.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continuedFOR THE YEARS ENDED DECEMBER 31, 2015, 2016 AND 2017(Amounts in Renminbi (“RMB”) and US dollar (“US$”), except for number of shares and per share data) 14. Income taxes - continued The relevant tax authorities have not conducted a tax examination on PRC entities. In accordance with relevant PRC tax administration laws, the taxfor the years ended December 31, 2015, 2016 and 2017 of the Company’s PRC subsidiaries, VIEs and subsidiaries of the VIEs remain subject to taxaudits by the relevant tax authorities as of December 31, 2017.Management has asserted to indefinitely reinvest the undistributed earnings of the subsidiaries located in the PRC. The cumulative amount of thetemporary differences in respect of investments in foreign subsidiaries is RMB 3,033 million (US$ 466 million) as of December 31, 2017. Uponrepatriation of the foreign subsidiaries and the VIEs’ earnings, in the form of dividends or otherwise, the Company would be subject to various PRCincome taxes including withholding income tax. The related unrecognized deferred tax liabilities were approximately RMB 1,213 million (US$ 186million).15. (Loss)/earnings per shareThe following table sets forth the computation of basic and diluted net (loss)/income per share for the years ended December 31, 2015, 2016 and 2017: For the years ended December 31, 2015 2016 2017 RMB RMB RMB US$ RMB US$ Ordinary share Ordinary share Class A Class A Class B Class B (Loss)/earnings per share – basic: Numerator: Allocation of net (loss)/income attributableto Qudian Inc. for basic computation (233,163,744) 576,652,618 1,077,159,077 165,556,319 1,087,299,743 167,114,911 Millions of Shares (denominator): Weighted average number of ordinary shareoutstanding – basic 79.31 79.31 62.90 62.90 63.49 63.49 Denominator used for basic (loss)/earningsper share 79.31 79.31 62.90 62.90 63.49 63.49 (Loss)/earnings per share – basic (2.94) 7.27 17.13 2.63 17.13 2.63 F-46Source: Qudian Inc., 20-F, April 09, 2018Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Table of ContentsQUDIAN INC.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continuedFOR THE YEARS ENDED DECEMBER 31, 2015, 2016 AND 2017(Amounts in Renminbi (“RMB”) and US dollar (“US$”), except for number of shares and per share data) 15. (Loss)/earnings per share - continued For the years ended December 31, 2015 2016 2017 RMB RMB RMB US$ RMB US$ Ordinary share Ordinary share Class A Class A Class B Class B (Loss)/earnings per share – diluted: Numerator: Allocation of net (loss)/income attributableto Qudian Inc. for diluted computation (233,163,744) 576,652,618 1,714,215,136 263,470,043 450,243,684 69,201,187 Reallocation of net income attributable toQudian Inc. as a result of conversion ofClass B to Class A shares — — 450,243,684 69,201,187 — — Allocation of net (loss)/income attributableto Qudian Inc. (233,163,744) 576,652,618 2,164,548,820 332,671,230 450,243,684 69,201,187 Millions of Shares (denominator): Weighted average number of ordinary shareoutstanding – basic 79.31 79.31 62.90 62.90 63.49 63.49 Dilutive effect of preferred shares — 222.46 177.36 177.36 — — Conversion of Class B to Class A ordinaryshares — — 63.49 63.49 — — Adjustments for dilutive share options — 2.01 1.47 1.47 — — Denominator used for diluted(loss)/earnings per share 79.31 303.78 305.22 305.22 63.49 63.49 (Loss)/earnings per share – diluted (2.94) 1.90 7.09 1.09 7.09 1.09 Earnings per share – ADS: Denominator used for earnings per ADS –basic 41.44 41.44 F-47Source: Qudian Inc., 20-F, April 09, 2018Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Table of ContentsQUDIAN INC.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continuedFOR THE YEARS ENDED DECEMBER 31, 2015, 2016 AND 2017(Amounts in Renminbi (“RMB”) and US dollar (“US$”), except for number of shares and per share data) 15. (Loss)/earnings per share - continued For the years ended December 31, 2015 2016 2017 RMB RMB RMB US$ RMB US$ Ordinary share Ordinary share Class A Class A Class B Class B Denominator used for earnings per ADS –diluted 41.44 41.44 Earnings per ADS – basic 17.13 2.63 Earnings per ADS – diluted 7.09 1.09 16. Fair value measurementsAssets and liabilities disclosed at fair valueThe Company measures its cash and cash equivalents, restricted cash, loan principal and financing service fee receivables, finance lease receivablesand borrowings at amortized cost. The carrying value of loan principal and financing service fee receivables approximate their fair value due to theirshort-term nature and are considered a level 3 measurement. The fair value was estimated by discounting the scheduled cash flows through to estimatedmaturity using estimated discount rates based on current offering rates of comparable institutions with similar services. The carrying value of theCompany’s debt obligations approximate fair value as the borrowing rates are similar to the market rates that are currently available to the Companyfor financing obligations with similar terms and credit risks and represent a level 2 measurement. The guarantee liabilities are presented as a level 3measurement, with fair value estimated by discounting expected future payouts, net charge off rates, expected collection rates and a discount rate fortime value.Assets measured at fair value on a nonrecurring basisThe Company measured its property and equipment, intangible assets and equity method investment at fair value on a nonrecurring basis wheneverevents or changes in circumstances indicate that the carrying value may no longer be recoverable.Assets and liabilities measured at fair value on a recurring basisThe Company measured its short-term investments at fair value on a recurring basis. The short-term investments were wealth management productsissued by China Merchants Bank and China CITIC Bank that are redeemable at any time. The Company valued the short-term investments based onthe quoted subscription/redemption price published by China Merchants Bank and China CITIC Bank.The Company measured its guarantee liabilities at fair value on a recurring basis. As the Company’s guarantee liabilities are not traded in an activemarket with readily observable prices, the Company uses significant unobservable inputs to measure the fair value of guarantee liabilities. Guaranteeliabilities are categorized in the Level 3 valuation hierarchy based on the significance of unobservable factors in the overall fair value F-48Source: Qudian Inc., 20-F, April 09, 2018Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Table of ContentsQUDIAN INC.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continuedFOR THE YEARS ENDED DECEMBER 31, 2015, 2016 AND 2017(Amounts in Renminbi (“RMB”) and US dollar (“US$”), except for number of shares and per share data) 16. Fair value measurements - continuedAssets and liabilities measured at fair value on a recurring basis - continued measurement. The Company did not transfer any assets or liabilities in or out of level 3 during the years ended December 31, 2016 and 2017.The following table summarizes the Company’s financial assets and liabilities measured and recorded at fair value on recurring basis as ofDecember 31, 2016 and 2017: As of December 31, 2016 Active market(Level 1) Observableinput (Level 2) Non-observableinput (Level 3) Total RMB RMB RMB RMB Assets: Short-term investments Monetary wealth managementproducts 430,200,000 — 430,200,000 Liabilities: Guarantee liabilities — — 6,207,812 6,207,812 The following table summarizes the Company’s financial assets and liabilities measured and recorded at fair value on recurring basis as ofDecember 31, 2016 and 2017: - continued As of December 31, 2017 Active market(Level 1) Observable input(Level 2) Non-observable input(Level 3) Total RMB RMB RMB RMB Assets: Short-term investments Monetary wealth management products — 300,000,000 — 300,000,000 Liabilities: Guarantee liabilities — — 46,981,325 46,981,325 As of December 31, 2017 Active market(Level 1) Observable input(Level 2) Non-observable input(Level 3) Total US$ US$ US$ US$ Assets: Short-term investments Monetary wealth management products — 46,109,156 — 46,109,156 Liabilities: Guarantee liabilities — — 7,220,897 7,220,897 F-49Source: Qudian Inc., 20-F, April 09, 2018Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Table of ContentsQUDIAN INC.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continuedFOR THE YEARS ENDED DECEMBER 31, 2015, 2016 AND 2017(Amounts in Renminbi (“RMB”) and US dollar (“US$”), except for number of shares and per share data) 16. Fair value measurements - continuedAssets and liabilities measured at fair value on a recurring basis - continued At December 31, 2016 and 2017, the discounted cash flow methodology is used to estimate the fair value of guarantee liabilities. The significantunobservable inputs used in the fair value measurement of guarantee liabilities include the discount rate and expected delinquency rates applied in thevaluation models. These inputs in isolation can cause significant increases or decreases in fair value. Specifically, when a discounted cash flow modelis used to determine fair value, the significant input used in the valuation model is the discount rate applied to present value the projected cash flows.Increases in the discount rate can significantly lower the fair value of guarantee liabilities; conversely a decrease in the discount rate can significantlyincrease the fair value of the guarantee liabilities. The discount rate is determined based on the market rates. Increase in the expected delinquency ratescan significantly increase the fair value of guarantee liabilities; conversely a decrease in the expected delinquency rates can significantly decrease thefair value of guarantee liabilities.Significant Unobservable Inputs Range of InputsWeighted - AverageAs of December 31, Financial Liabilities Unobservable Input 2016 2017 Guarantee liabilities Discount rates 5.20% 5.87% Expected delinquency rates 0.25%-0.51% 0.70%-6.24% Refer to Note 11 for additional information about Level 3 guarantee liabilities measured at fair value on a recurring basis for the years endedDecember 31, 2016 and 2017.17. Related party balances and transactions Name of related parties Relationship with the CompanyLuo Min Founder, chief executive officer and controlling shareholder of the CompanyQufenqi Inc. Ultimate legal holding company of Beijing Happy Time prior to December 31, 2015Qufenqi (HK) Limited Holding company of Beijing Happy Time prior to December 17, 2015, and a subsidiary of theCompany since April 27, 2017Alipay.com Co., Ltd. Subsidiary of shareholder of the CompanyGanzhou Qu Campus The Company’s equity method investeeGanzhou Happy ShareCapital Management LLP Company controlled by FounderZhima CreditManagement Co., Ltd. Subsidiary of shareholder of the CompanyChongqing Alibaba SmallLoan Co., Ltd. Subsidiary of shareholder of the CompanyGuosheng FinancialHolding Inc. Company controlled by DirectorGuosheng Securities Asset ManagementCo., Ltd. Company controlled by DirectorAlibaba Cloud ComputingCo. Ltd. Company controlled by the ultimate controlling individual of shareholder F-50Source: Qudian Inc., 20-F, April 09, 2018Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Table of ContentsQUDIAN INC.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continuedFOR THE YEARS ENDED DECEMBER 31, 2015, 2016 AND 2017(Amounts in Renminbi (“RMB”) and US dollar (“US$”), except for number of shares and per share data) 17. Related party balances and transactions - continued Name of related parties Relationship with the CompanyKey management andtheir immediate families The Company’s key management and their immediate families17.1 Amounts due to related parties As of December 31, Note 2016 2017 RMB RMB US$ Qufenqi Inc. (i) 867,874 813,326 125,006 Guosheng Financial Holding Inc. (ii) — 631,746,787 97,097,703 Guosheng Securities Asset Management Co., Ltd. (ii) — 83,475,455 12,829,943 Alipay.com Co., Ltd. — 418,597 64,337 Zhima Credit Management Co., Ltd. (iii) 19,605,313 3,108,873 477,825 Total 20,473,187 719,563,038 110,594,814 (i)The balance represents the transactions from daily operations, which is interest free and payable on demand.(ii)The balance represents the borrowings and interests payable arising from consolidated trusts.(iii)The balance represents the credit assessment and advertising platform service fee payables.17.2 Amounts due from related parties As of December 31, Note 2016 2017 RMB RMB US$ Short-term amounts due from related parties Qufenqi Inc. 180,000,000 27,475 4,223 Qufenqi (HK) Limited 4,860 — — Ganzhou Qu Campus 157,673 23,714 3,645 Ganzhou Happy Share Capital Management LLP 770 770 118 Alipay.com Co., Ltd. (i) 404,631,249 549,842,011 84,509,170 Zhima Credit Management Co., Ltd. 778,837 — — Alibaba Cloud Computing Co. Ltd. — 320,853 49,314 Key management and their immediate families Employee advances 60,000 — — Loan principal and financing service fee receivables (ii) 272,318 1,000,000 153,697 Total short-term amounts due from related parties 585,905,707 551,214,823 84,720,167 Long-term amounts due from related parties Key management and their immediate families Loan principal and financing service fee receivables (ii) 1,000,000 — — Total long-term amounts due from related parties 1,000,000 — — Total amounts due from related parties 586,905,707 551,214,823 84,720,167 F-51Source: Qudian Inc., 20-F, April 09, 2018Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Table of ContentsQUDIAN INC.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continuedFOR THE YEARS ENDED DECEMBER 31, 2015, 2016 AND 2017(Amounts in Renminbi (“RMB”) and US dollar (“US$”), except for number of shares and per share data) 17. Related party balances and transactions - continued17.2 Amounts due from related parties - continued (i)The balance represents the amount deposited in the Company’s Alipay account. Such amount is unrestricted as to withdrawal and use and readilyavailable to the Company on demand.(ii)Key management and their immediate families borrowed funds through the Company’s financing platform.The movement of the loan principal and financing service fee receivables due from key management and their immediate families is as follows: As of December 31, 2016 2017 RMB RMB US$ Balance at beginning of the year 2,705,053 1,272,318 195,552 Loan principal and financing service fee receivables 2,700,000 — — Payments (4,132,735) (272,318) (41,855) Balance at end of the year 1,272,318 1,000,000 153,697 As of December 31, 2016 and 2017, the total outstanding balance, which was due on demand, interest free and uncollateralized due from these relatedparties, was RMB1,000,000 and RMB1,000,000 (US$153,697), respectively. The remaining interest free loans will be repaid in full by May 2018.The Company intends to settle the interest free loans extended to related parties and does not plan to enter into similar transactions with related partiesin the future. F-52Source: Qudian Inc., 20-F, April 09, 2018Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Table of ContentsQUDIAN INC.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continuedFOR THE YEARS ENDED DECEMBER 31, 2015, 2016 AND 2017(Amounts in Renminbi (“RMB”) and US dollar (“US$”), except for number of shares and per share data) 17. Related party balances and transactions - continued 17.3 Transactions with related parties For the years ended December 31, 2015 2016 2017 RMB RMB RMB US$ Service income Key management and their immediate families 133,380 90,539 4,551 699 Cost of revenue Alipay.com Co., Ltd. 8,185,069 41,186,645 114,175,547 17,548,460 Zhima Credit Management Co., Ltd. — 6,150,041 21,435,176 3,294,526 Alibaba Cloud Computing Co. Ltd. — — 23,173,116 3,561,643 Chongqing Alibaba Small Loan Co., Ltd. — — 3,151,324 484,350 Guosheng Financial Holding Inc. — — 56,746,787 8,721,821 Guosheng Securities Asset Management Co., Ltd. — — 2,327,277 357,696 8,185,069 47,336,686 221,009,227 33,968,496 Sales and marketing Zhima Credit Management Co., Ltd. — 36,149,807 16,033,107 2,464,243 Alipay.com Co., Ltd. — — 222,081,862 34,133,357 — 36,149,807 238,114,969 36,597,600 18. Share-based compensationStock optionsOn August 29, 2014, the Board of Directors of the former holding company of Beijing Happy Time approved the 2014 Share Plan (the “2014 Plan”) forthe purpose of providing incentives and rewards to employees and executives who contribute to the success of the Company’s operations, andapproved 20,824,447 of share options under the 2014 Plan. These share options do not have an exercise price and vest over four years. 25% of theshare options could be vested on the first anniversary, while the remaining could be vested 1/3 yearly when the participant completes each 1-yearperiod of continuous service thereafter. The share options expire 10 years from the date of grant. Upon execution of the share options, shares owned byMr. Luo Min will be transferred to the option holders.On December 26, 2015, the 2014 Plan was terminated. On the same day, the Board of Directors of Beijing Happy Time approved the 2015 Share Plan(the “2015 Plan”) which replaced the 2014 Plan. Under the 2015 Plan, Beijing Happy Time was entitled to grant a total of 15,814,019 share options invirtual shares of Tianjin Happy Share to employees, officers, directors and individuals. Tianjin Happy Share is a limited partnership established underthe laws of PRC, which owns 5.24% of the equity interest in Beijing Happy Time as of December 26, 2015. Beijing Happy Time divided thepartnership interest in Tianjin Happy Share into 15,814,019 virtual shares and awarded the share options to purchase the virtual shares to grantees ofthe 2015 Plan. Beijing Happy Time granted 13,373,019 share options under the 2015 Plan to the employees as replacement awards for the 2014 planand all the share options granted were immediately vested on December 26, 2015. The 2015 Plan expires 10 years from the date of the grant. F-53Source: Qudian Inc., 20-F, April 09, 2018Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Table of ContentsQUDIAN INC.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continuedFOR THE YEARS ENDED DECEMBER 31, 2015, 2016 AND 2017(Amounts in Renminbi (“RMB”) and US dollar (“US$”), except for number of shares and per share data) 18. Share-based compensation - continuedStock options - continued As part of the restructuring in 2016, Tianjin Happy Share entered into a share entrustment agreement with Qufenqi Holding Limited, pursuant to whichQufenqi Holding Limited holds 15,814,019 ordinary shares of Qudian Inc. as the nominal shareholder on behalf of Tianjin Happy Share. As such,grantees of the 2015 Share Incentive Plan enjoy the pecuniary interests of the 15,814,019 shares, representing 5.24% of the equity interest of QudianInc. in proportion to their relevant numbers of options to purchase virtual shares of Tianjin Happy Share.On May 1, 2016, the Board of Directors of Beijing Happy Time approved the 2015 Incentive Plan Supplementary Agreement (“Supplemental 2015Incentive Plan”), which canceled 1,080,000 share options granted under the 2015 Plan. In addition, the Company will issue share options to certainmanagement and employees equivalent to the numbers of shares canceled within the next three years (with the first performance review in January2017) based on the periodic performance reviews of those individuals.As part of the restructuring, the Board of Directors of Qudian Inc. approved the cancelation of the 2015 Plan and the Supplemental 2015 Incentive Planas well as the adoption of the 2016 Equity Incentive Plan (the “2016 Plan”) on December 9 2016. During the year ended December 31 2016, theCompany granted a total of 15,299,019 of share options for the ordinary shares of Qudian Inc. under 2016 Plan. The Company granted 12,364,319share options under the 2016 Plan to the employees as replacement awards for the 2015 plan. All the share options granted under 2016 Plan werevested over 3 to 5 years. The 2016 Plan expires 10 years from the date of the grant.The Company has set up the Share Based Payment Trust for the purpose of holding options awarded to certain employees and underlying shares beforethey are exercised as instructed by the employees. As of December 31, 2016, 13,865,219 options are held by the trustee of the Share Based PaymentTrust.On May 3, 2017, the Company granted 494,904 options under the 2016 Plan.On August 17, 2017, the Company granted 200,000 options under the 2016 Plan. 20,000 of the options were granted to two independent non-executive directors. 25% of the options will vest upon each subsequent anniversary of the Company’s IPO. F-54Source: Qudian Inc., 20-F, April 09, 2018Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Table of ContentsQUDIAN INC.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continuedFOR THE YEARS ENDED DECEMBER 31, 2015, 2016 AND 2017(Amounts in Renminbi (“RMB”) and US dollar (“US$”), except for number of shares and per share data) 18. Share-based compensation - continuedStock options - continued The Company calculated the estimated fair value of the options on the respective grant dates using the binomial option pricing model with assistancefrom an independent valuation firm. Assumptions used to determine the fair value of share options granted during 2015, 2016 and 2017 aresummarized in the following table: For the years ended December 31, 2015 2016 2017 Risk-free interest rate (%) 2.00 to 2.43 2.47 1.56 to 2.33 Volatility (%) 46.6 to 50.3 49.8 to 49.9 50.9 to 52.4 Expected exercise multiple 2.2 to 2.8 2.2 to 2.8 2.2 to 2.8 Dividend yield Nil Nil Nil Expected life (in years) 10 10 10 Exercise price Nil Nil Nil Fair value of ordinary shares (RMB) 3.82 to 12.63 25.89 to 26.04 81.94 to 94.22 The Company recognized compensation cost for the share options on a graded vesting basis. The total fair value of the vested share options were RMB55,607,170, RMB 22,133,620 and RMB 64,055,851 (US$ 9,845,204) for the years ended December 31, 2015, 2016 and 2017, respectively.A summary of share option activity under the 2014 Plan is as follows: Number of shares Weighted averageexercise price Weighted averagegrant date fair value RMB RMB Balance, April 9, 2014 (date of inception) — — — Granted 18,373,219 — 1.30 Exercised — — — Forfeited — — — Balance, December 31, 2014 18,373,219 — 1.30 Granted 2,449,800 — 3.63 Exercised — — — Canceled (13,373,019) — 2.08 Forfeited (7,450,000) — 0.68 Balance, December 31, 2015 — — — Exercisable, December 31, 2015 — — — Expected to vest, December 31, 2015 — — — F-55Source: Qudian Inc., 20-F, April 09, 2018Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Table of ContentsQUDIAN INC.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continuedFOR THE YEARS ENDED DECEMBER 31, 2015, 2016 AND 2017(Amounts in Renminbi (“RMB”) and US dollar (“US$”), except for number of shares and per share data) 18. Share-based compensation - continuedStock options - continued A summary of share option activity under the 2015 Plan is as follows: Number of shares Weighted averageexercise price Weighted averagegrant date fair value RMB RMB Balance, December 31, 2014 — — — Granted 15,814,019 — 12.62 Exercised — — — Surrendered (3,000) — 12.62 Balance, December 31, 2015 15,811,019 — 12.62 Exercised and forfeited (3,446,700) — 12.62 Exercised and replaced (12,364,319) — 12.62 Balance, December 31, 2016 — — — Exercisable, December 31, 2016 — — — Expected to vest, December 31, 2016 — — — A summary of share option activity under the 2016 Plan is as follows: Number of shares Weighted averageexercise price Weighted averagegrant date fair value RMB RMB Balance, December 31, 2015 — — — Granted 15,299,019 — 25.89 Exercised — — — Forfeited — — — Balance, December 31, 2016 15,299,019 — 25.89 Granted 694,904 — 88.33 Exercised — — — Forfeited (241,650) — 34.38 Balance, December 31, 2017 15,752,273 — 28.51 Exercisable, December 31, 2017 9,551,437 — 24.52 Expected to vest, December 31, 2017 6,200,836 — 34.66 As of December 31, 2017, total unrecognized compensation expense relating to unvested share options was RMB 63,890,517 (US$ 9,819,793). Theexpense is expected to be recognized over a weighted-average period of 2.33 years. F-56Source: Qudian Inc., 20-F, April 09, 2018Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Table of ContentsQUDIAN INC.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continuedFOR THE YEARS ENDED DECEMBER 31, 2015, 2016 AND 2017(Amounts in Renminbi (“RMB”) and US dollar (“US$”), except for number of shares and per share data) 18. Share-based compensation - continuedStock options - continued For the years ended December 31, 2015, 2016 and 2017, the Company allocated share-based compensation expense as follows: For the years ended December 31, 2015 2016 2017 RMB RMB RMB US$ Sales and marketing 23,690,916 690,486 1,890,690 290,594 General and administrative 11,424,573 18,986,103 42,848,932 6,585,760 Research and development 20,491,681 2,457,031 19,316,229 2,968,850 55,607,170 22,133,620 64,055,851 9,845,204 19. Commitments and contingenciesOperating lease commitmentsThe Company leases certain office premises under non-cancelable leases. Rental expenses under operating leases for the years ended December 31,2015, 2016 and 2017 were RMB 7,332,721, RMB 11,253,841 and RMB 15,931,076 (US$ 2,448,561), respectively.Future minimum lease payments under non-cancelable operating leases agreements consist of the following as of December 31, 2017: RMB US$ Year ending December 31: 2018 43,905,311 6,748,123 2019 40,490,584 6,223,289 2020 and after 8,789,893 1,350,982 Total 93,185,788 14,322,394 The Company’s operating lease commitments have no renewal options, rent escalation clauses and restriction or contingent rents. F-57Source: Qudian Inc., 20-F, April 09, 2018Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Table of ContentsQUDIAN INC.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continuedFOR THE YEARS ENDED DECEMBER 31, 2015, 2016 AND 2017(Amounts in Renminbi (“RMB”) and US dollar (“US$”), except for number of shares and per share data) 20. Convertible Preferred SharesThe Company’s preferred shares activities for the years ended December 31, 2015, 2016 and 2017 are summarized below: Series A-1 and A-2preferred shares Series B-1, B-2 and B-3preferred shares Series C-1, C-2, C-3, C-4and C-5 preferred shares Number ofshares Amount Number ofshares Amount Number ofshares Amount RMB RMB RMB Balance as of December 31, 2015 and2016 7,396,437 197,627,279 75,585,589 2,019,590,551 139,478,460 3,726,760,400 Conversion to Class A ordinary shares (7,396,437) (197,627,279) (75,585,589) (2,019,590,551) (139,478,460) (3,726,760,400) Balance as of December 31, 2017 — — — — — — The Company issued Series A, Series B and Series C preferred shares (collectively, the “Preferred Shares”) to the same group of third party shareholdersof the VIE on the restructuring date i.e. December 9, 2016. The Preferred Shares are recorded at fair value on the issue date and are presented on aretroactive basis. The conversion ratio was one Preferred Share convertible into one ordinary share.Upon completion of the IPO in October 18, 2017, each convertible preferred share automatically converted into one Class A ordinary share. Thenumber of Class A ordinary shares that have been issued upon conversion of all convertible preferred shares was 222,460,486. Therefore, theredeemable convertible preferred shares balance as of December 31, 2017 was nil.The following is a summary of the significant terms of the Preferred Shares:Conversion rightsThe holders of the Preferred Shares are entitled to convert, at the option of the holder thereof, at any time the date of the first issuance of the respectivePreferred Shares applicable to such Preferred Share, into such number of fully paid and non-assessable ordinary shares as is determined by dividing thedeemed issue price (“Adjusted Issue Price”) applicable to such series of Preferred Shares by the conversion price applicable to such series of PreferredShares (the “Conversion Price”), in effect on the date the certificate is surrendered for conversion. The initial Conversion Price shall initially equal theAdjusted Issue Price applicable to such Preferred Share, and shall be adjusted from time to time. The initial conversion ratio for Preferred Shares toOrdinary Shares shall be 1:1. As of December 31, 2016 and October 17, 2017, this conversion ratio was one Preferred Share convertible into oneordinary share. F-58Source: Qudian Inc., 20-F, April 09, 2018Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Table of ContentsQUDIAN INC.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continuedFOR THE YEARS ENDED DECEMBER 31, 2015, 2016 AND 2017(Amounts in Renminbi (“RMB”) and US dollar (“US$”), except for number of shares and per share data) 20. Convertible Preferred Shares - continuedConversion rights - continued The conversion ratio for any series of Preferred Shares shall be subject to adjustment only as provided in accordance with items (a), (b), (c), (d), (e) and(f) below in order to adjust the number of ordinary shares into which such series of the Preferred Shares is convertible. (a)Adjustments for share splits and combinations (b)Adjustments to ordinary shares dividends and distributions (c)Adjustments for other dividends (d)Reorganizations, mergers, consolidations, reclassifications, exchanges and substitutions (e)Sale of shares below the conversion price (f)Deemed issuance of additional stockAutomatic ConversionEach Preferred Share or such series of Preferred Shares, as applicable, shall automatically be converted into ordinary shares at the then-effectiveconversion ratio applicable to such Preferred Share upon either (a) the closing of a firm commitment underwritten public offering pursuant to aneffective registration statement under the United States Securities Act of 1933 covering the offer and sale of ordinary shares for the account of theCompany to the public at a public offering price per share corresponding to a pre-money, at-IPO valuation of the Company of at leastUS$1,000,000,000 with net proceeds to the Company in excess of US$30 million (after deduction for underwriting discounts, commissions andexpenses) (the “Qualified IPO”); or (b) with respect to Series A Shares at the election of the holders of eighty percent (80%) of Series A Shareholders;with respect to Series B Shares at the election of the holders of seventy-five percent (75%) of the Series B Shares (voting together as a separate class);and with respect to Series C Shares at the election of fifty percent (50%) of Series C Shareholders.DividendsThe holders of Preferred Shares shall be entitled to receive non-cumulative dividends at an annual rate of 8% as and when declared by the Board ofDirectors, prior and in preference to any declaration or payment of any dividend on the ordinary shares and all other classes of shares of the Company.No dividends have been declared for the Preferred Shares for the periods presented.After the preferential dividends relating to the Preferred Shares above have been paid in full or declared and set apart in any fiscal year of the Company,any additional dividends available may be declared in that fiscal year for the ordinary shares. Such additional dividends shall be declared pro rata onthe ordinary shares and Preferred Shares on an as-converted basis. F-59Source: Qudian Inc., 20-F, April 09, 2018Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Table of ContentsQUDIAN INC.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continuedFOR THE YEARS ENDED DECEMBER 31, 2015, 2016 AND 2017(Amounts in Renminbi (“RMB”) and US dollar (“US$”), except for number of shares and per share data) 20. Convertible Preferred Shares - continued Voting rightsThe holders of each Preferred Shares are entitled to the number of votes equal to the number of ordinary shares into which such Preferred Shares couldbe converted at the voting date.RedemptionThe Preferred Shares are redeemable by the holders at any time after the earlier of the occurrence of the following event: (i) the Company fails tocomplete a Qualified IPO before September 30, 2020, (ii) any material adverse change in the regulatory environment, (iii) any material breach of thePreferred Share Purchase Agreement, at an amount equal to the sum of the Adjusted Issue Price, plus an amount accruing daily at 8% per annum and alldeclared but unpaid dividends.Liquidation PreferenceIn the event of liquidation, dissolution or winding up of the Company, the assets of the Company available for distribution shall be made as follows: • The holders of Series C Preferred Shares are entitled to receive an amount equal to issue price plus all declared but unpaid dividends anddistributions, in preference to any distribution to the holders of the Series B Shares, the Series A Shares and the ordinary shareholders of theCompany; • After the payment to the holders of Series C Preferred Shares, the holders of Series B Preferred Shares are entitled to receive an amountequal to issue price plus all declared but unpaid dividends and distributions, in preference to any distribution to the holders of the Series APreferred Shares and the ordinary shareholders of the Company; • After the payment to the holders of Series C and Series B Preferred Shares, the holders of Series A Preferred Shares are entitled to receive anamount equal to issue price plus all declared but unpaid dividends and distributions, in preference to any distribution to the holders of theordinary shareholders of the Company.After payment has been made to the holders of the Preferred Shares in accordance with the above, the remaining assets of the Company available fordistribution to shareholders shall be distributed ratably among the holders of ordinary shares and Preferred Shares based on the number of ordinaryshares into which such Preferred Shares are convertible.Initial Measurement and Subsequent Accounting for Preferred SharesThe Preferred Shares do not meet the criteria of mandatorily redeemable financial instruments specified in ASC 480-10-S99, and have been classified asmezzanine equity in the consolidated balance sheets. The Preferred Shares were initially measured at fair value. Beneficial conversion features existwhen the conversion price of the convertible preferred shares is lower than the fair value of the ordinary shares at the commitment date, which is F-60Source: Qudian Inc., 20-F, April 09, 2018Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Table of ContentsQUDIAN INC.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continuedFOR THE YEARS ENDED DECEMBER 31, 2015, 2016 AND 2017(Amounts in Renminbi (“RMB”) and US dollar (“US$”), except for number of shares and per share data) 20. Convertible Preferred Shares - continuedInitial Measurement and Subsequent Accounting for Preferred Shares - continued the issuance date in the Company’s case. When a beneficial conversion feature exists as of the commitment date, its intrinsic value is bifurcated fromthe carrying value of the convertible preferred shares as a contribution to additional paid-in capital. On the commitment date, the most favorableconversion price used to measure the beneficial conversion feature of the Preferred Shares was higher than the fair value per ordinary share andtherefore no bifurcation of beneficial conversion feature was recognized. The Company determined the fair value of ordinary shares with the assistanceof an independent third party valuation firm.The Company has elected to recognize the changes in redemption value immediately as they occur and adjust the carrying amount of the PreferredShares to equal the redemption value at each reporting period. The changes in redemption value including cumulative dividends shall be recorded as areduction of income available to ordinary shareholders in accordance with ASC 480-10-S99 3A.The Company concluded that there is no accretion to be recognized because the carrying amount of the Preferred Shares is greater than the redemptionvalue. Therefore, no adjustment will be made to the initial carrying amount of the Preferred Shares until the redemption amount exceeds the carryingamount of the Preferred Shares.21. Treasury sharesOn November 11, 2017, the Board of Directors of the Company authorized a share repurchase program (“Share Repurchase Program”), pursuant towhich the Company was authorized to repurchase its own issued and outstanding American depositary shares (“ADSs”) up to an aggregate value ofUS$100 million from the open market, in negotiated transactions off the market, or through other legally permissible means in accordance withapplicable securities laws from time to time.On November 25, 2017, the Board of Directors of the Company authorized an amendment to the Share Repurchase Program by increasing themaximum amount from US$100 million to US$300 million.As of December 31, 2017, the Company had repurchased under the Share Repurchase Program an aggregate of 4,537,115 ADSs, representing 4,537,115Class A ordinary shares, at an average price of $14.00 per ADS, for US$63,658,143 (RMB 421,164,802). These shares were recorded at their purchasecost on the consolidated balance sheets and have not been canceled as of December 31, 2017.22. Ordinary sharesOn December 9, 2016, the Company’s shareholders approved an Amended and Restated Memorandum and Articles of Associations, pursuant to which577,539,514 shares were authorized as ordinary shares, and 222,460,486 shares were authorized and re-designated into convertible preferred shareswith a nominal or par value of US$0.0001 each share. As of December 31, 2016, there were 79,305,191 shares legally outstanding as of December 31,2016.On April 28, 2017, the Company’s shareholders and the Board of Directors resolved that the Company accepted from Qufenqi Holding Limited thesurrender of 15,814,019 of the said issued ordinary shares (the “Surrendered Shares”) at no consideration and all the Surrendered Shares was canceled. F-61Source: Qudian Inc., 20-F, April 09, 2018Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Table of ContentsQUDIAN INC.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continuedFOR THE YEARS ENDED DECEMBER 31, 2015, 2016 AND 2017(Amounts in Renminbi (“RMB”) and US dollar (“US$”), except for number of shares and per share data) 22. Ordinary shares - continued Upon completion of the IPO in October 18, 2017, 222,460,486 Class A ordinary shares were issued upon conversion of all convertible preferred shares.Meanwhile, 266,559,398 Class A ordinary shares and 63,491,172 Class B ordinary shares were issued and outstanding. In addition, immediatelyfollowing the closing of the IPO, the Memorandum and Articles of Association was amended and restated such that the authorized share capitalincreased to 800,000,000 ordinary shares at a par value of US$0.0001 per share, of which 656,508,828 shares as Class A ordinary shares and63,491,172 as Class B ordinary shares. The rights of the holders of Class A and Class B ordinary shares are identical, except with respect to voting andconversion rights. Each share of Class A ordinary shares is entitled to one vote per share and is not convertible into Class B ordinary shares under anycircumstances. Each share of Class B ordinary shares is entitled to ten votes per share and is convertible into one Class A ordinary share at any time bythe holder thereof. Upon any transfer of Class B ordinary shares by the holder thereof to any person or entity which is not an affiliate of such holder,such Class B ordinary shares would be automatically converted into equal number of Class A ordinary shares.As at December 31, 2017 there were 262,347,283 and 63,491,172 Class A and Class B ordinary shares outstanding respectively.23. Segment reportingThe operations of the Company are organized into two segments, consisting of installment credit services and automobile leasing services. Installmentcredit services represents traditional online installment credit business, including cash installment credit services and merchandise installment creditservices. Automobile leasing services represents the business of automobile leasing started in November 2017.The Company derives the results of the segments directly from its internal management reporting system. The CODM measures the performance of eachsegment based on metrics of revenue and earnings from operations and uses these results to evaluate the performance of, and to allocate resources to,each of the segments. The Company does not allocate any share-based compensation expenses to its segments as the CODM does not use thisinformation to measure the performance of the operating segments. Because substantially all of the Company’s long-lived assets and revenues arelocated in and derived from the PRC, geographical segments are not presented. F-62Source: Qudian Inc., 20-F, April 09, 2018Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Table of ContentsQUDIAN INC.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continuedFOR THE YEARS ENDED DECEMBER 31, 2015, 2016 AND 2017(Amounts in Renminbi (“RMB”) and US dollar (“US$”), except for number of shares and per share data) 23. Segment reporting - continued The table below provides a summary of the Comany’s operating segment results for the years ended December 31, 2015, 2016 and 2017. For the years ended December 31, 2015 2016 2017 RMB RMB RMB US$ Revenues: Installment credit services 235,007,431 1,442,846,339 4,749,249,922 729,946,349 Automobile leasing services — — 26,116,130 4,013,976 Total consolidated revenues 235,007,431 1,442,846,339 4,775,366,052 733,960,325 (Loss)/income from operations: Installment credit services (231,078,478) 713,074,210 2,454,048,135 377,180,292 Automobile leasing services — — (32,396,552) (4,979,259) Total segment (loss)/income from operations (231,078,478) 713,074,210 2,421,651,583 372,201,033 Unallocated expenses — — (425,780) (65,439) Total consolidated (loss)/income from operations (231,078,478) 713,074,210 2,421,225,803 372,135,594 Total other expense (2,085,266) (9,581,142) (1,220,980) (187,662) Net (loss)/income before income taxes (233,163,744) 703,493,068 2,420,004,823 371,947,932 24. Restricted net assetsThe Company’s ability to pay dividends is primarily dependent on the Company receiving distributions of funds from its subsidiaries. Relevant PRCstatutory laws and regulations permit payments of dividends by the VIEs and subsidiaries of the VIEs incorporated in PRC only out of their retainedearnings, if any, as determined in accordance with PRC accounting standards and regulations. The consolidated results of operations reflected in theconsolidated financial statements prepared in accordance with U.S. GAAP differ from those reflected in the statutory financial statements of theCompany’s subsidiaries.Under PRC law, the Company’s subsidiaries, VIEs and the subsidiaries of the VIEs located in the PRC (collectively referred as the “PRC entities”) arerequired to provide for certain statutory reserves, namely a general reserve, an enterprise expansion fund and a staff welfare and bonus fund. The PRCentities are required to allocate at least 10% of their after tax profits on an individual company basis as determined under PRC accounting standards tothe statutory reserve and has the right to discontinue allocations to the statutory reserve if such reserve has reached 50% of registered capital on anindividual company basis. In addition, the registered capital of the PRC entities is also restricted.Under PRC regulations, the subsidiaries of the VIEs in the PRC with microloan license are required to provide a statutory reserve, which is appropriatedfrom net income as reported in the Company’s statutory accounts. The F-63Source: Qudian Inc., 20-F, April 09, 2018Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Table of ContentsQUDIAN INC.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continuedFOR THE YEARS ENDED DECEMBER 31, 2015, 2016 AND 2017(Amounts in Renminbi (“RMB”) and US dollar (“US$”), except for number of shares and per share data) 24. Restricted net assets - continued Company is required to allocate 1.5% of its balance of loan principal to the statutory reserve. The statutory reserves can only be used for specificpurposes and not distributable as cash dividends.Appropriations to the enterprise expansion fund and staff welfare and bonus fund are at the discretion of the Board of Directors of the subsidiaries. ThePRC entities are also subject to similar statutory reserve requirements. These reserves can only be used for specific purposes and are not transferable tothe Company in the form of loans, advances or cash dividends.Amounts restricted that include paid-in capital and statutory reserve funds, as determined pursuant to PRC GAAP, were RMB 3,371 million and RMB4,666 million (US$ 717 million) as of December 31, 2016 and 2017.25. Condensed financial information of the parent companyThe following is the condensed financial information of the Company on a parent company only basis.Condensed balance sheets As of December 31, 2016 2017 RMB RMB US$ ASSETS: Current assets: Cash and cash equivalents — 2,511,803,710 386,057,161 Short-term amounts due from related parties — 2,277,228,227 350,003,570 Other current assets — 4,564,046 701,481 Total current assets — 4,793,595,983 736,762,212 Non-current assets: Investments in subsidiaries, VIEs and VIEs’ subsidiaries 2,513,589,444 4,585,078,902 704,713,724 Total non-current assets 2,513,589,444 4,585,078,902 704,713,724 TOTAL ASSETS 2,513,589,444 9,378,674,885 1,441,475,936 LIABILITIES, MEZZANINE EQUITY AND SHAREHOLDERS’ (DEFICIT)/EQUITY Current liabilities: Accrued expenses and other current liabilities — 1,378,058 211,804 Short-term amounts due to related parties — 4,971,082 764,041 Total current liabilities — 6,349,140 975,845 TOTAL LIABILITIES — 6,349,140 975,845 F-64Source: Qudian Inc., 20-F, April 09, 2018Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Table of ContentsQUDIAN INC.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continuedFOR THE YEARS ENDED DECEMBER 31, 2015, 2016 AND 2017(Amounts in Renminbi (“RMB”) and US dollar (“US$”), except for number of shares and per share data) 25. Condensed financial information of the parent company - continuedCondensed balance sheets - continued As of December 31, 2016 2017 RMB RMB US$ Mezzanine equity Convertible Preferred Shares Series A-1 (US$0.0001 par value; 2,616,641 shares authorized, and outstanding as ofDecember 31, 2016) 69,914,696 — — Series A-2 (US$0.0001 par value; 4,779,796 shares authorized, and outstanding as ofDecember 31, 2016) 127,712,583 — — Series B-1 (US$0.0001 par value; 38,487,004 shares authorized, and outstanding as ofDecember 31, 2016) 1,028,344,036 — — Series B-2 (US$0.0001 par value; 5,233,281 shares authorized, and outstanding as ofDecember 31, 2016) 139,829,364 — — Series B-3 (US$0.0001 par value; 31,865,304 shares authorized, and outstanding as ofDecember 31, 2016) 851,417,151 — — Series C-1 (US$0.0001 par value; 37,720,709 shares authorized, and outstanding as ofDecember 31, 2016) 1,007,869,205 — — Series C-2 (US$0.0001 par value; 19,469,603 shares authorized, and outstanding as ofDecember 31, 2016) 520,213,268 — — Series C-3 (US$0.0001 par value; 13,391,793 shares authorized, and outstanding as ofDecember 31, 2016) 357,818,719 — — Series C-4 (US$0.0001 par value; 10,823,841 shares authorized, and outstanding as ofDecember 31, 2016) 289,204,957 — — Series C-5 (US$0.0001 par value; 58,072,514 shares authorized, and outstanding as ofDecember 31, 2016) 1,551,654,251 — — Total mezzanine equity 5,943,978,230 — — F-65Source: Qudian Inc., 20-F, April 09, 2018Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Table of ContentsQUDIAN INC.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continuedFOR THE YEARS ENDED DECEMBER 31, 2015, 2016 AND 2017(Amounts in Renminbi (“RMB”) and US dollar (“US$”), except for number of shares and per share data) 25. Condensed financial information of the parent company - continuedCondensed balance sheets - continued As of December 31, 2016 2017 RMB RMB US$ Shareholders’ (deficit)/ equity Ordinary shares (US$0.0001 par value; 577,539,514 shares authorized, and79,305,191 shares issued outstanding as of December 31, 2016) 54,754 — — Class A Ordinary shares (US$0.0001 par value; nil shares authorized, issued, andoutstanding as of December 31, 2016; 656,508,828 shares authorized, 262,347,283shares issued and outstanding, as of December 31, 2017) — 177,140 27,226 Class B Ordinary shares (US$0.0001 par value; nil shares authorized, issued, andoutstanding as of December 31, 2016; 63,491,172 shares authorized, 63,491,172shares issued and outstanding, as of December 31, 2017) — 43,836 6,737 Treasury stock — (421,164,802) (64,731,845) Additional paid-in capital 80,458,209 5,441,668,033 836,369,063 Accumulated other comprehensive loss — (329,387,410) (50,625,918) Accumulated (deficit)/ retained earnings (3,510,901,749) 4,680,988,948 719,454,828 Total shareholders’ (deficit)/ equity (3,430,388,786) 9,372,325,745 1,440,500,091 TOTAL LIABILITIES, MEZZANINE EQUITY AND SHAREHOLDERS’(DEFICIT)/ EQUITY 2,513,589,444 9,378,674,885 1,441,475,936 Condensed statements of comprehensive income For the years ended December 31, 2015 2016 2017 RMB RMB RMB US$ Share-based compensation expense (55,607,170) (22,133,620) (66,522,766) (10,224,362) Cost of revenue — — (61,028) (9,380) General and administrative — — (7,202,222) (1,106,961) Interest and investment income, net — — 6,189,009 951,233 Share of (loss)/profit in subsidiaries, VIEs and VIEs’ subsidiaries (177,556,574) 598,786,238 2,315,454,720 355,878,874 Net (loss)/income before income taxes (233,163,744) 576,652,618 2,247,857,713 345,489,404 Income tax expense — — — — Net (loss)/income and comprehensive (loss)/income (233,163,744) 576,652,618 2,247,857,713 345,489,404 F-66Source: Qudian Inc., 20-F, April 09, 2018Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Table of ContentsQUDIAN INC.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continuedFOR THE YEARS ENDED DECEMBER 31, 2015, 2016 AND 2017(Amounts in Renminbi (“RMB”) and US dollar (“US$”), except for number of shares and per share data) 25. Condensed financial information of the parent company - continued Condensed statements of cash flows For the years ended December 31, 2015 2016 2017 RMB RMB RMB US$ Cash Flows from Operating Activities: Net (loss)/income (233,163,744) 576,652,618 2,247,857,713 345,489,404 Adjustments to reconcile net (loss)/income to net cash used inoperating activities: Share of loss/ (profit) in subsidiaries, VIEs andVIEs’ subsidiaries 177,556,574 (598,786,238) (2,315,454,720) (355,878,874) Share-based compensation expense 55,607,170 22,133,620 66,522,766 10,224,362 Changes in operating assets and liabilities: Receivables from related party — — (22,577) (3,470) Other current receivables — — (4,564,046) (701,482) Other current payables — — 1,378,058 211,804 Net cash used in operating activities — — (4,282,807) (658,256) Net cash used in investing activities — — (2,033,240,388) (312,503,326) Net cash provided by financing activities — — 4,881,181,230 750,223,819 Effect of exchange rate changes on cash and cash equivalents — — (331,854,326) (51,005,076) Net increase in cash and cash equivalents — — 2,511,803,710 386,057,161 Cash and cash equivalents at beginning of the year — — — — Cash and cash equivalents at end of the year — — 2,511,803,710 386,057,161 Basis of presentationCondensed financial information is used for the presentation of the Company, or the parent company. The condensed financial information of theparent company has been prepared using the same accounting policies as set out in the Company’s consolidated financial statements except that theparent company used the equity method to account for investment in its subsidiaries and VIEs.The parent company records its investment in its subsidiaries and VIEs under the equity method of accounting as prescribed in ASC 323, Investments-Equity Method and Joint Ventures. Such investments are presented on the condensed balance sheets as “Investment in subsidiaries and VIEs” and theirrespective profit or loss as “Equity in profits of subsidiaries and VIEs” on the condensed statements of comprehensive income. Equity methodaccounting ceases when the carrying amount of the investment, including any additional financial support, in a subsidiary and VIEs is reduced to zerounless the parent company has guaranteed obligations of the subsidiary and VIEs or is otherwise committed to provide further financial support. If thesubsidiary and VIEs subsequently F-67Source: Qudian Inc., 20-F, April 09, 2018Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Table of ContentsQUDIAN INC.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continuedFOR THE YEARS ENDED DECEMBER 31, 2015, 2016 AND 2017(Amounts in Renminbi (“RMB”) and US dollar (“US$”), except for number of shares and per share data) 25. Condensed financial information of the parent company - continuedBasis of presentation - continued reports net income, the parent company shall resume applying the equity method only after its share of that net income equals the share of net lossesnot recognized during the period the equity method was suspended.The parent company’s condensed financial statements should be read in conjunction with the Company’s consolidated financial statements. F-68Source: Qudian Inc., 20-F, April 09, 2018Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Exhibit 8.1LIST OF SUBSIDIARIES AND CONSOLIDATED VARIABLE INTEREST ENTITIES OFQUDIAN INC. Subsidiaries Jurisdiction of IncorporationQD Technologies Limited British Virgin IslandsQD Data Limited Hong KongQufenqi (HK) Limited Hong KongQufenqi (Ganzhou) Information Technology Co., Ltd.* 趣分期(赣州)信息技术有限公司 PRCXiamen Qudian Financial Lease Co., Ltd.* 厦门趣店融资租赁有限公司 PRCJinan Qudian Car Leasing Co., Ltd.* 济南趣店汽车租赁有限公司 PRCWenzhou Qudian Car Leasing Co., Ltd.* 温州趣店汽车租赁有限公司 PRCNanchang Qudian Car Leasing Co., Ltd.* 南昌趣店汽车租赁有限公司 PRCNingxia Qudian Car Leasing Co., Ltd.* 宁夏趣店汽车租赁有限公司 PRCFuzhou Qudian Car Leasing Co., Ltd.* 抚州趣店汽车租赁有限公司 PRCShijiazhuang Qudian Car Leasing Co., Ltd.* 石家庄趣店汽车租赁有限公司 PRCGansu Qudian Car Leasing Co., Ltd.* 甘肃趣店汽车租赁有限公司 PRCShenyang Qudian Car Leasing Co., Ltd.* 沈阳趣店汽车租赁有限公司 PRCChongqing Qudian Car Leasing Co., Ltd.* 重庆趣店汽车租赁有限公司 PRCSuzhou Qudian Car Leasing Co., Ltd.* 苏州趣店汽车租赁有限公司 PRCTaiyuan Qudian Car Leasing Co., Ltd.* 太原趣店汽车租赁有限公司 PRCXiamen Qudian Car Sale & Service Co., Ltd.* 厦门趣店汽车销售服务有限公司 PRCZhengzhou Qudian Car Leasing Co., Ltd.* 郑州趣店汽车租赁有限公司 PRCGuiyang Qudian Car Leasing Co., Ltd.* 贵阳趣店汽车租赁有限公司 PRCChengdu Qudian Car Leasing Co., Ltd.* 成都趣店汽车租赁有限公司 PRCNanjing Qudian Car Leasing Co., Ltd.* 南京趣店汽车租赁有限公司 PRCChangsha Qudian Car Leasing Co., Ltd.* 长沙趣店汽车租赁有限公司 PRC Consolidated Variable Interest Entities (“VIEs”) Jurisdiction of IncorporationBeijing Happy Time Technology Development Co., Ltd.* 北京快乐时代科技发展有限公司 PRCGanzhou Qudian Technology Co., Ltd.* 赣州趣店科技有限公司 PRCHunan Qudian Technology Development Co., Ltd.* 湖南趣店科技发展有限公司 PRCXiamen Qudian Technology Co., Ltd.* 厦门趣店科技有限公司 PRC Subsidiaries of Consolidated VIEs Jurisdiction of IncorporationTianjin Happy Time Technology Development Co., Ltd.* 天津快乐时代科技发展有限公司 PRCTianjin Qufenqi Technology Co., Ltd.* 天津趣分期科技有限公司 PRCBeijing Happy Fenqi Technology Development Co., Ltd.* 北京快乐分期科技发展有限公司 PRCTianjin Happy Fenqi Technology Development Co., Ltd.* 天津快乐分期科技发展有限公司 PRCQufenqi (Beijing) Information Technology Co., Ltd.* 趣分期(北京)信息技术有限公司 PRCGanzhou Happy Fenqi Technology Development Co., Ltd.* 赣州快乐分期科技发展有限公司 PRCGanzhou Happy Fenqi Network Service Co., Ltd.* 赣州快乐分期网络服务有限公司 PRCFuzhou High-tech Zone Microcredit Co., Ltd.* 抚州高新区趣分期小额贷款有限公司 PRCSource: Qudian Inc., 20-F, April 09, 2018Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Fuzhou Happy Time Technology Development Co., Ltd.* 抚州快乐时代科技有限公司 PRCGanzhou Happy Time E-Commerce Co., Ltd.* 赣州快乐时代电子商务有限公司 PRCHunan Happy Time Technology Development Co., Ltd.* 湖南快乐时代科技发展有限公司 PRCGanzhou Happy Life Network Microcredit Co., Ltd.* 赣州快乐生活网络小额贷款有限公司 PRCYihuang Qudian Technology Development Co., Ltd.* 宜黄县趣店科技发展有限公司 PRCJiangxi Chunmian Technology Development Co., Ltd.* 江西春眠科技发展有限公司 PRCXiamen Qudian Commercial Factoring Co., Ltd.* 厦门趣店商业保理有限公司 PRCGanzhou Laifenqi Technology Development Co., Ltd.* 赣州来分期科技发展有限公司 PRCXinjiang Qudian Technology Co., Ltd. * 新疆趣店科技有限公司 PRCGanzhou Qudian Commerce Development Co., Ltd.* 赣州趣店商贸发展有限公司 PRCXiamen Junda Network Technology Co., Ltd.* 厦门均达网络科技有限公司 PRC *The English name of this subsidiary, consolidated VIE or subsidiary of consolidated VIE, as applicable, has been translated from its Chinese name. 2Source: Qudian Inc., 20-F, April 09, 2018Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Exhibit 12.1Certification by the Chief Executive OfficerPursuant to Section 302 of the Sarbanes-Oxley Act of 2002I, Min Luo, certify that: 1.I have reviewed this annual report on Form 20-F of Qudian Inc. (the “Company”); 2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by thisreport; 3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respectsthe financial condition, results of operations and cash flows of the Company as of, and for, the periods presented in this report; 4.The Company’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as definedin Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and15d-15(f)) for the company and have: (a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under oursupervision, to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to us byothers within those entities, particularly during the period in which this report is being prepared; (b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under oursupervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statementsfor external purposes in accordance with generally accepted accounting principles; (c)Evaluated the effectiveness of the Company’s disclosure controls and procedures and presented in this report our conclusions about theeffectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d)Disclosed in this report any change in the Company’s internal control over financial reporting that occurred during the period coveredby the annual report that has materially affected, or is reasonably likely to materially affect, the company’s internal control over financialreporting; and 5.The Company’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, tothe Company’s auditors and the audit committee of the Company’s board of directors (or persons performing the equivalent functions): (a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which arereasonably likely to adversely affect the company’s ability to record, process, summarize and report financial information; and (b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the Company’s internalcontrol over financial reporting.Source: Qudian Inc., 20-F, April 09, 2018Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Date: April 9, 2018By: /s/ Min LuoName: Min LuoTitle: Chairman and Chief Executive Officer 2Source: Qudian Inc., 20-F, April 09, 2018Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Exhibit 12.2Certification by the Chief Financial OfficerPursuant to Section 302 of the Sarbanes-Oxley Act of 2002I, Carl Yeung, certify that: 1.I have reviewed this annual report on Form 20-F of Qudian Inc. (the “Company”); 2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by thisreport; 3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respectsthe financial condition, results of operations and cash flows of the Company as of, and for, the periods presented in this report; 4.The Company’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as definedin Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and15d-15(f)) for the company and have: (a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under oursupervision, to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to us byothers within those entities, particularly during the period in which this report is being prepared; (b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under oursupervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statementsfor external purposes in accordance with generally accepted accounting principles; (c)Evaluated the effectiveness of the Company’s disclosure controls and procedures and presented in this report our conclusions about theeffectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d)Disclosed in this report any change in the Company’s internal control over financial reporting that occurred during the period coveredby the annual report that has materially affected, or is reasonably likely to materially affect, the company’s internal control over financialreporting; and 5.The Company’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, tothe Company’s auditors and the audit committee of the Company’s board of directors (or persons performing the equivalent functions): (a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which arereasonably likely to adversely affect the company’s ability to record, process, summarize and report financial information; and (b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the Company’s internalcontrol over financial reporting.Source: Qudian Inc., 20-F, April 09, 2018Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Date: April 9, 2018By: /s/ Carl YeungName: Carl YeungTitle: Chief Financial OfficerSource: Qudian Inc., 20-F, April 09, 2018Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Exhibit 13.1Certification by the Chief Executive OfficerPursuant to Section 906 of the Sarbanes-Oxley Act of 2002In connection with the annual report of Qudian Inc. (the “Company”) on Form 20-F for the year ended December 31, 2017 as filed with the Securitiesand Exchange Commission on the date hereof (the “Report”), I, Min Luo, Chairman and Chief Executive Officer of the Company, certify, pursuant to 18U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.Date: April 9, 2018 By: /s/ Min LuoName: Min LuoTitle: Chairman and Chief Executive OfficerSource: Qudian Inc., 20-F, April 09, 2018Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Exhibit 13.2Certification by the Chief Financial OfficerPursuant to Section 906 of the Sarbanes-Oxley Act of 2002In connection with the annual report of Qudian Inc. (the “Company”) on Form 20-F for the year ended December 31, 2017 as filed with the Securitiesand Exchange Commission on the date hereof (the “Report”), I, Carl Yeung, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C.Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.Date: April 9, 2018 By: /s/ Carl YeungName: Carl YeungTitle: Chief Financial OfficerSource: Qudian Inc., 20-F, April 09, 2018Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Exhibit 15.1 10/F, Tower B, CPIC Plaza, No. 28 Fengsheng Lane, Xicheng District, Beijing 100032, ChinaTel: 86 10 5776 3888 Fax: 86 10 5776 3777April 9, 2018Qudian Inc.15/F Lvge Industrial Building1 Datun, Chaoyang DistrictBeijing 100012, Chinaas the “Company”Dear Sirs,We consent to the references to our firm under the heading “Item 3. Key Information—D. Risk Factors—Risks Related to Our Corporate Structure— Ifthe PRC government deems that the contractual arrangements in relation to our consolidated VIEs do not comply with PRC regulatory restrictions on foreigninvestment in the relevant industries, or if these regulations or the interpretation of existing regulations change in the future, we could be subject to severepenalties or be forced to relinquish our interests in those operations.” and “Item 4. Information on the Company—C. Organizational Structure—OurContractual Arrangements with Consolidated VIEs and Their Shareholders” in Qudian Inc.’s Annual Report on Form 20-F for the year ended December 31,2017 (the “Annual Report”), which is filed with the Securities and Exchange Commission (the “SEC”) on April 9, 2018. We also consent to the filing withthe SEC of this consent letter as an exhibit to the Annual Report.In giving such consent, we do not thereby admit that we come within the category of persons whose consent is required under Section 7 of theSecurities Act of 1933, or under the Securities Exchange Act of 1934, in each case, as amended, or the regulations promulgated thereunder.Yours faithfully,/s/ Tian Yuan Law FirmTian Yuan Law FirmSource: Qudian Inc., 20-F, April 09, 2018Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Source: Qudian Inc., 20-F, April 09, 2018Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.

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