Qudian Inc. Annual Report 2018

Plain-text annual report

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, 2018OR☐☐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)Tower A, AVIC Zijin PlazaSiming District, XiamenFujian Province 361000,People’s Republic of China(Address of principal executive offices)Carl Yeung, Chief Financial OfficerTelephone: telephone: +86-592-5911580Email: 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:None(Title of Class) Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report.232,952,916 Class A ordinary shares63,491,172 Class B ordinary sharesIndicate 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 Actof 1934.☐ 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 every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).☒ 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 “largeaccelerated 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 with any newor 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 markwhich 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 to thedistribution 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 Table of Contents Table of Contents PageCONVENTIONS 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 53 ITEM 4A.UNRESOLVED STAFF COMMENTS 95 ITEM 5.OPERATING AND FINANCIAL REVIEW AND PROSPECTS 95 ITEM 6.DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES 123 ITEM 7.MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS 134 ITEM 8.FINANCIAL INFORMATION 136 ITEM 9.THE OFFER AND LISTING 138 ITEM 10.ADDITIONAL INFORMATION 138 ITEM 11.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 146 ITEM 12.DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES 147 PART II. 150 ITEM 13.DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES 150 ITEM 14.MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS 150 ITEM 15.CONTROLS AND PROCEDURES 150 ITEM 16A.AUDIT COMMITTEE FINANCIAL EXPERT 151 ITEM 16B.CODE OF ETHICS 151 ITEM 16C.PRINCIPAL ACCOUNTANT FEES AND SERVICES 151 ITEM 16D.EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES 152 ITEM 16E.PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS 152 ITEM 16F.CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT 153 ITEM 16G.CORPORATE GOVERNANCE 153 ITEM 16H.MINE SAFETY DISCLOSURE 153 PART III. 154 ITEM 17.FINANCIAL STATEMENTS 154 ITEM 18.FINANCIAL STATEMENTS 154 ITEM 19.EXHIBITS 154 SIGNATURES 160 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS F-1 iTable of Contents CONVENTIONS 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; •“outstanding borrowers” are to borrowers who have outstanding loans as of a particular date; •“ADSs” are to our American depositary shares, each of which represents one Class A ordinary share, and “ADRs” are to the American depositaryreceipts 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 a percentage ofthe 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, whichare comprised of (i) credit drawdowns that are funded by us, including those that are subsequently transferred to our institutional partners, 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 its affiliates;API (Hong Kong) Investment Limited, which is wholly owned by Ant Financial, is one of our principal shareholders; •“China” and the “PRC” are to the People’s Republic of China, excluding, for the purposes of this annual report only, Taiwan, the Hong KongSpecial 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 a period,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; •“M1+ delinquency rate by vintage” are to the total balance of outstanding principal of a vintage for which any installment payment is over 30calendar days past due as of a particular date (adjusted to reflect total amount of recovered past due payments for principal, before charge-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 made atleast 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 drawdowns thatare funded by us, including those that are subsequently transferred to our institutional partners, and (ii) credit drawdowns that are funded directlyby 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, which arecomprised of (i) credit drawdowns that are funded by us, including those that are subsequently transferred to our institutional partners, and (ii)credit drawdowns that are funded directly by our institutional 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 of on-balance sheet transactions at the period end; •“provision ratio” are to the amount of provision for loan principal and financing service fee receivables incurred during a period as a percentageof the total amount of on-balance sheet transactions facilitated during such period;iiTable of Contents •“P2P platforms” are to financial information intermediaries that are engaged in lending information business and directly provide peers, whichcan 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’ registration withus 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 the contextrequires.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 RMB6.8755 to US$1.00,the exchange rates set forth in the H.10 statistical release of the Federal Reserve Board on December 31, 2018. We make no representation that the Renminbior U.S. dollar amounts referred to in this annual report could have been or could be converted into U.S. dollars or Renminbi, as the case may be, at anyparticular rate or at all. On March 29, 2019, the noon buying rate for Renminbi was RMB6.7112 to US$1.00. iiiTable of Contents FORWARD-LOOKING INFORMATIONThis annual report on Form 20-F contains statements of a forward-looking nature. All statements other than statements of historical facts are forward-looking statements. These forward-looking statements are made under the “safe harbor” provision under Section 21E of the Securities Exchange Act of 1934,as amended, or the Exchange Act, and as defined in the Private Securities Litigation Reform Act of 1995. These statements involve known and unknownrisks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from those expressed or impliedby the forward-looking statements. In some cases, these forward-looking statements can be identified by words or phrases such as “may,” “will,” “expect,”“anticipate,” “aim,” “estimate,” “intend,” “plan,” “believe,” “potential,” “continue,” “is/are likely to” or other similar expressions. These forward-lookingstatements 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, merchandise suppliersand 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 that webelieve 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 of such riskson our business or the extent to which any risk, or combination of risks, may cause actual results to differ materially from those contained in any forward-looking statements. The forward-looking statements made in this annual report relate only to events or information as of the date on which the statements aremade in this annual report. Except as required by law, we undertake no obligation to update any forward- looking statements to reflect events orcircumstances after the date on which the statements are made or to reflect the occurrence of unanticipated events. You should read this annual report and thedocuments that we have referred to in this annual report, completely and with the understanding that our actual future results may be materially different fromwhat we expect. ivTable of Contents PART I.ITEM 1.IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERSNot Applicable.ITEM 2.OFFER STATISTICS AND EXPECTED TIMETABLENot Applicable.ITEM 3.KEY INFORMATIONA.Selected Financial DataThe following selected consolidated statements of operations for the years ended December 31, 2016, 2017 and 2018 and selected consolidatedbalance sheets as of December 31, 2017 and 2018 have been derived from our audited consolidated financial statements included elsewhere in this annualreport. The following selected consolidated statements of operations in the period from April 9 to December 31, 2014 and for the year ended December 31,2015 and selected consolidated balance sheets as of December 31, 2015 and 2016 have been derived from our audited consolidated financial statements notincluded in this annual report.You should read the selected consolidated financial data in conjunction with the financial statements and the related notes included elsewhere in thisannual report and “Item 5. Operating and Financial Review and Prospects.” Our consolidated financial statements are prepared and presented in accordancewith 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 2018 RMB 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 3,535,276 514,185 Sales commission fee 2,926 62,182 126,693 797,167 307,492 44,723 Sales income — — — 26,083 2,174,789 316,310 Penalty fees 114 19,271 22,943 7,922 28,013 4,074 Loan facilitation income and others — — 21,754 302,010 1,646,773 239,513 Total revenues 24,133 235,007 1,442,846 4,775,366 7,692,343 1,118,805 Cost of revenues Cost of goods sold — — — (23,895) (2,003,642) (291,418)Cost of other revenues (9,014) (148,417) (267,862) (856,951) (731,786) (106,434)Total cost of revenues (9,014) (148,417) (267,862) (880,846) (2,735,428) (397,852)Operating expenses(1) Sales and marketing (46,368) (192,603) (182,458) (431,749) (540,551) (78,620)General and administrative (3,503) (42,426) (108,786) (183,674) (255,867) (37,214)Research and development (4,360) (37,530) (52,275) (153,258) (199,560) (29,025)Loss on guarantee liabilities — — (861) (150,152) (116,593) (16,958)Provision for receivables (1,667) (45,111) (132,176) (605,164) (1,178,723) (171,438)Total operating expenses (55,898) (317,670) (476,556) (1,523,997) (2,291,294) (333,255)Other operating income. — — 14,646 50,703 23,748 3,454 Income/ (loss) from operations (40,778) (231,078) 713,074 2,421,226 2,689,369 391,152 Interest and investment income, net 8 2,889 1,857 4,211 35,740 5,198 Foreign exchange (loss) /gain, net — 752 (9,651) (7,177) (90,771) (13,202)Other income — 779 47 2,108 15,231 2,215 Other expenses (5) (6,505) (1,834) (363) (522) (76)Net income/ (loss) before income taxes (40,775) (233,164) 703,493 2,420,005 2,649,047 385,287 1Table of Contents Period fromApril 9, 2014(inception)throughDecember 31,2014 Year Ended December 31 2014 2015 2016 2017 2018 RMB RMB RMB RMB RMB US$ (in thousands, except for share and per share data) Income tax expenses — — (126,840) (255,546) (157,731) (22,941)Net income /(loss) (40,775) (233,164) 576,653 2,164,459 2,491,316 362,346 Net Income/(loss) attributable to Qudian Inc.’s shareholders (40,775) (233,164) 576,653 2,164,459 2,491,316 362,346 Earnings/(loss) per share for Class A and Class B ordinary shares — Basic (0.51) (2.94) 7.27 17.13 7.82 1.14 Earnings/(loss) per share for Class A and Class B ordinary shares — Diluted (0.51) (2.94) 1.90 7.09 7.74 1.13 Earnings per ADS (1 Class A ordinary share equals 1 ADSs) — Basic 17.13 7.82 1.14 Earnings per ADS (1 Class A ordinary share equals 1 ADSs) — Diluted 7.09 7.74 1.13 Weighted average number of Class A and Class B ordinary shares outstanding — Basic 79,305,191 79,305,191 79,305,191 126,390,196 318,685,836 318,685,836 Weighted average number of Class A and Class B ordinary shares outstanding — Diluted 79,305,191 79,305,191 303,778,745 305,221,444 321,955,142 321,955,142 Other comprehensive loss: Foreign currency translation adjustment — — — (77,947) 33,089 4,813 Total comprehensive income/(loss) (40,775) (233,164) 576,653 2,086,512 2,524,405 367,159 Total comprehensive income/(loss) attributable to Qudian Inc.’s shareholders (40,775) (233,164) 576,653 2,086,512 2,524,405 367,159 (1)Share-based compensation expenses are allocated in operating expenses as follows: Period fromApril 9, 2014(inception)throughDecember 31,2014 For the year ended December 31, 2014 2015 2016 2017 2018 RMB RMB RMB RMB RMB US$ (in thousands) Sales and marketing 952 23,691 690 1,891 5,641 821 General and administrative 742 11,425 18,986 42,849 38,587 5,612 Research and development 1,024 20,492 2,457 19,316 13,753 2,000 Total share based compensation expenses 2,717 55,607 22,134 64,056 57,981 8,4332Table of Contents As of December 31, 2015 2016 2017 2018 RMB RMB RMB RMB US$ Summary Consolidated Balance Sheets: (in thousands) Cash and cash equivalents 210,114 785,770 6,832,306 2,501,188 363,783 Restricted cash — — 2,252,646 339,827 49,426 Short-term amounts due from related parties(1) 34,930 585,906 551,215 2 — Short-term loan principal and financing service fee receivables, net 2,060,768 4,826,791 8,758,545 8,417,821 1,224,321 Short-term finance lease receivables, net — — 8,508 508,647 73,980 Long-term loan principal and financing service fee receivables 177,582 87,822 — 665,653 96,815 Long-term finance lease receivables, net — — 17,900 649,243 94,428 Total assets 2,675,596 7,117,599 19,380,416 16,253,375 2,363,955 Short-term borrowings and interest payables 1,562,883 4,183,231 7,979,415 3,860,441 561,478 Long-term borrowings and interest payables 89,358 76,052 510,024 413,400 60,127 Total liabilities 3,306,965 4,604,010 9,840,049 5,432,762 790,162 Total mezzanine equity 5,943,978 5,943,978 — — — Total shareholders’ equity / (deficit) (6,575,347) (3,430,389) 9,540,367 10,820,613 1,573,793 (1)Includes RMB404.6 million and RMB549.8 million deposited in our Alipay accounts as of December 31, 2016 and 2017. Such amount isunrestricted as to withdrawal and use and readily available to us on demand.Non-GAAP MeasureAdjusted Net Income/(Loss)We use adjusted net income/(loss), a non-GAAP financial measure, in evaluating our operating results and for financial and operational decision-making purposes. We believe that adjusted net income/(loss) help identify underlying trends in our business by excluding the impact of share-basedcompensation expenses, which are non-cash charges. We believe that adjusted net income/(loss) provide useful information about our operating results,enhance the overall understanding of our past performance and future prospects and allow for greater visibility with respect to key metrics used by ourmanagement in its financial and operational decision-making. Period fromApril 9, 2014(inception)throughDecember 31,2014 For the year ended December 31, 2014 2015 2016 2017 2018 RMB RMB RMB RMB RMB US$ (in thousands) Adjusted net income/(loss)(1) (38,058) (177,557) 598,787 2,228,515 2,549,297 370,779 (1)Adjusted net income/(loss) is defined as net income/(loss) excluding share-based compensation expenses.Adjusted net income/(loss) is not defined under U.S. GAAP and are not presented in accordance with U.S. GAAP. This non-GAAP financial measurehas limitations as analytical tools, and when assessing our operating performance, cash flows or our liquidity, investors should not consider them in isolation,or as a substitute for net income/(loss), cash flows provided by operating activities or other consolidated statements of operation and cash flow data preparedin accordance with U.S. GAAP.We mitigate these limitations by reconciling the non-GAAP financial measure to the most comparable U.S. GAAP performance measure, all of whichshould be considered when evaluating our performance.3Table of Contents The following table reconciles our adjusted net income/(loss) in the years presented to the most directly comparable financial measure calculated andpresented in accordance with U.S. GAAP, which is net income/(loss): Period fromApril 9, 2014(inception)throughDecember 31,2014 For the year ended December 31, 2014 2015 2016 2017 2018 RMB RMB RMB RMB RMB US$ (in thousands) Net income/(loss) (40,775) (233,164) 576,653 2,164,459 2,491,316 362,346 Add: share-based compensation expenses 2,717 55,607 22,134 64,056 57,981 8,433 Adjusted net income/(loss) (38,058) (177,557) 598,787 2,228,515 2,549,297 370,779 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 translations fromRenminbi to U.S. dollars and from U.S. dollars to Renminbi in this annual report were made at a rate of RMB6.8755 to US$1.00, the exchange rate set forth inthe H.10 statistical release of the Federal Reserve Board on December 31, 2018. We make no representation that the Renminbi or U.S. dollar amounts referredto in this annual report could have been or could be converted into U.S. dollars or Renminbi, as the case may be, at any particular rate or at all. The PRCgovernment imposes control over its foreign currency reserves in part through direct regulation of the conversion of Renminbi into foreign exchange andthrough restrictions on foreign trade.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 also evolvingand may remain uncertain for the foreseeable future. See “— The laws and regulations governing the online consumer finance industry in the PRC are still ata nascent stage and subject to further change and interpretation. If our business practices or the business practices of our institutional funding partners aredeemed to violate any PRC laws or regulations, our business, financial condition, results of operations and prospects would be materially and adverselyaffected.” Prospective borrowers may not be familiar with this market and may have difficulty distinguishing our credit products from those of ourcompetitors, both online and offline. Convincing prospective borrowers of the value of our credit products is critical to increasing the amount of transactionsto 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, suchas credit product offerings, data-driven credit assessment and the development of long-term relationships with borrowers, institutional funding partners andmerchandise suppliers.4Table of Contents In 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 offer twoprincipal types of online credit products in China, which are cash credit products and merchandise credit products. We evaluate and approve prospectiveborrowers’ credit applications submitted online, and we currently rely on institutional funding partners and trusts established in collaboration with trustcompanies to fund such credit drawdowns. We also have limited experience in providing auto financing products, as we launched Dabai Auto in November2017. In the fourth quarter of 2018, we launched an open platform for loan recommendations and referrals. As our business develops or in response tocompetition, we may continue to introduce new credit products, make adjustments to our existing credit products and our proprietary credit assessmentmodel, make adjustments to our business operation in general, or look for other business opportunities in the market. For example, we may implement morestringent borrower qualifications to reduce the delinquency rates of transactions facilitated by us, which may negatively affect the growth of our business. Wewill also seek to expand the base of prospective borrowers that we serve, which may result in higher delinquency rates of transactions facilitated by us. Inaddition, we rely on our institutional funding partners to fund the credit that we facilitate. Our ability to continuously attract low-cost funding sources is alsocritical to our business. Any significant change to our business model not achieving expected results may have a material and adverse impact on our financialcondition and results of operations. It is therefore difficult to effectively assess 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; •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, data providers and financialservice providers that participate on our open platform; •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, our businessand results of operations may be adversely affected.The amount of transactions that we have facilitated for borrowers has grown rapidly since inception. To maintain and increase the amount oftransactions facilitated to borrowers, we must continue to increase the amount of transactions facilitated for existing borrowers and attract additionalprospective 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 prospective borrowers, our ability to convert registered users to borrowers,5Table of Contents utilization of the credit we approve, the effectiveness of our credit assessment model and risk management system, our ability to secure sufficient and cost-efficient funding, borrower experience, the PRC regulatory environment governing our industry and the macroeconomic environment. In connection with theintroduction of new products or in response to general economic conditions, we may also impose more stringent borrower qualifications to ensure the qualityof the transactions we facilitate, which may negatively affect the growth of transactions facilitated to borrowers. Furthermore, we engage a majority of activeborrowers through our own mobile applications. If we are unable to attract borrowers through our own mobile applications or other third-party channels thatwe may collaborate with, we may not be able to engage new borrowers in an efficient manner to convert prospective borrowers into active borrowers, and mayeven lose existing borrowers to our competitors. In particular, we rely on application marketplaces to drive downloads of our mobile applications. If theoperators of application marketplaces make changes to their marketplaces which hinder or impede access to our mobile applications, our ability to engagenew borrowers will be adversely affected. If we are unable to attract quality borrowers or if borrowers do not continue to utilize our credit products, we mightbe unable to increase the amount of transactions facilitated to borrowers and our total revenues as expected, and our business and results of operations may beadversely affected.We rely on our proprietary credit assessment model and risk management system in the determination of credit approval and credit limit assignment. If ourproprietary credit assessment model and risk management system fail to perform effectively, such failure may materially and adversely impact ouroperating results.Credit limits for our borrowers are determined and approved based on risk assessment conducted by our proprietary credit assessment model and riskmanagement system. Such model and system use big data-enabled technologies, such as artificial intelligence and machine learning, that takes into accounttransactions that we have processed as well as credit analysis and data from multiple external sources. While we rely on big data analytics to refine our modeland system, there can be no assurance that our application of such technology will continue to deliver the expected benefits. In addition, as we have a limitedoperating history, we may not have accumulated sufficient credit analysis and data to optimize our model and system. Even if we have sufficient creditanalysis and data and our credit assessment model and risk management system has been tailored for prospective borrowers on the Alipay consumer interfacefor our current operation, such data and credit assessment model and risk management system might not be effective as we continue to increase the amount oftransactions, expand the borrower base and broaden our borrower engagement efforts through different channels in the future. If our system containsprogramming or other errors, if our model and system is ineffective or if the credit analysis and data we obtained are incorrect or outdated, our creditassessment abilities could be negatively affected, resulting in incorrect approvals or denials of credit applications or mispriced credit products. If we areunable to effectively and accurately assess the credit profiles of borrowers or price credit products appropriately, we may either be unable to offer attractivefinancing service fee and credit limits to borrowers, or be unable to maintain low delinquency rates of transactions facilitated by us. Our risk and creditassessment may not be able to provide more predictive assessments of future borrower behavior and result in better evaluation of our borrower base whencompared to our competitors. If our proprietary credit assessment model and risk management system fail to perform effectively, our business and results ofoperations 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 affected byeconomic downturns or general economic conditions beyond our control and beyond the control of individual borrowers. We shifted our focus of targetborrower base from college students to young consumers in general starting from November 2015, and we may not be able to accurately assess the creditprofiles of our current target borrower base. Increase in credit utilization by borrowers from existing levels, including increase in the use of our credit productsfrom users that were approved for credit but have not previously drawn down on their credit, may also potentially have a material adverse effect as to thedelinquency rates for transactions facilitated by us. Introduction of new credit products or the wider utilization by borrowers of certain of our existing creditproducts that has longer durations, including merchandise credit products, may also have a material adverse impact as to the delinquency rates fortransactions facilitated by us. Furthermore, although certain credit facilitated by us are funded directly or indirectly by institutional funding partners ortransferred to institutional funding partners, if borrowers default on their payment obligations, we are generally obligated to repay our6Table of Contents institutional funding partners all or a percentage of loan principals and fees payable in respect of such credit drawdowns. As of December 31, 2018, our totaloutstanding loan principal was 19,005.4 million (US$2,764.3 million), of which RMB3,732.8 million (US$542.9 million) represented credit drawdowns thatwere transferred to or indirectly funded by institutional funding partners, which were recorded as short-term and long-term borrowings and interest payableson our balance sheets. As of December 31, 2018, outstanding principal of off-balance sheet transactions, which represent credit drawdowns directly funded byinstitutional funding partners, was RMB9,353.2 million (US$1,360.4 million). As such, if we were to experience a significant increase in delinquency rate,we may not have sufficient capital resources to pay defaulted principals and fees to our institutional funding partners, and if this were to occur, our results ofoperations, financial position and liquidity will be materially and adversely affected. Furthermore, we broaden our prospective borrower base from time totime as we enhance our credit assessment model to include those with different credit profiles than borrowers that we currently provide credit to as well asprospective borrowers that we have not reached out to previously. For example, in July 2017, we increased the approval rate for applicants who seek to drawdown small amounts for one-week duration and selectively approve credit to applicants who were turned down in the past. We expect to experience higherdelinquency rates for new borrower groups as we test and refine our credit assessment model. As a result of such changes, we may be unable to maintain lowdelinquency 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 loss rates,while also taking into consideration macroeconomic conditions in order to calculate the pooled allowance. Accordingly, any increase in the delinquencyrates of on-balance sheet transactions would increase our allowance for loan principal and financing service fee receivables and could have a material adverseeffect on our business, results of operations and financial positions. Furthermore, if the actual delinquency rates for on-balance sheet transactions were higherthan predicted, our cash flow would be reduced and our allowance for loan principal and financing service fee receivables may not be able to cover the actuallosses as expected, which could have a material adverse effect on our working capital, financial condition, results of operations and business operations. As ofDecember 31, 2016, 2017 and 2018, our M1+ delinquency coverage ratio, defined as the balance of allowance for loan principal and financing service feereceivables at the end of a period, divided by the total balance of outstanding principal for on-balance sheet transactions for which any installment paymentwas more than 30 calendar days past due as of the end of such period, was 1.6x, 1.3x and 1.1x, respectively. With respect to on-balance sheet transactions,principal for which any installment payment was more than 30 calendar days past due accounted for 1.29%, 4.42% and 5.35% of total on-balance sheetoutstanding principal as of December 31, 2016, 2017 and 2018, respectively. As of December 31, 2016, 2017 and 2018, our loan principal and financingservice fee receivables for on-balance sheet transactions for which any installment payment was more than 90 calendar days past due were approximatelyRMB29.8 million and RMB181.2 million and RMB298.1 million (US$43.4 million), respectively. As of December 31, 2016, 2017 and 2018, our allowancefor loan principal and financing service fee receivables were approximately RMB105.1 million, RMB519.3 million and RMB585.3 million (US$85.1million), respectively.We do not accrue financing income on principal that is considered impaired or on credit drawdowns for which any installment payment is more than90 calendar days past due. Financing income previously accrued but subsequently placed on nonaccrual status will be netted from our financing income forthe current period. Therefore, an increase in delinquency rates of on-balance sheet transactions will lead to an increase in such adjustments of financingincome.We have entered into off-balance sheet funding arrangements with certain institutional funding partners, which directly fund credit drawdowns byborrowers for credit products and budget auto financing products. Borrowers directly repay principal and financing service fees to the relevant institutionalfunding partners, who will in turn deduct the principal and fees due to them from the repayments and remit the remainder to us as our loan facilitation fees. Atthe inception of each off-balance sheet transaction, we record the fair value of guarantee liabilities, which represent the present value of our expected payoutbased on the estimated delinquency rate and the applicable discount rate for time value. Revenues from loan facilitation services are recognized when wematch borrowers with funding partners and the funds are transferred to the borrowers. Additionally, revenues from post-origination services are recognizedevenly over the term of the loans as the services are performed. Accordingly, an increase in the expected delinquency rates of off-balance sheet transactionswould result in an increase in the fair value of guarantee liabilities, which are recognized as loss on guarantee liabilities and could have7Table of Contents a material adverse impact on our results of operations. Furthermore, if the actual delinquency rates for off-balance sheet transactions were higher thanexpected, 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 guarantee liabilities were RMB302.6 million (US$44.0 million) as of December 31,2018, and we paid the relevant institutional funding partners RMB387.2 million (US$56.3 million) as a result of borrowers’ default for off-balance sheettransactions in 2018.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 the collectionsprocess commences. Our collection team will also make phone calls to borrowers following the first missed payment and periodically thereafter. For amountsmore than 90 calendar days past due, we may continue to contact the relevant borrowers by phone. For larger amounts past due, we may also conduct in-person visits. During 2016, 2017 and 2018, we recovered RMB7.4 million, RMB22.4 million and RMB156.6 million (US$22.8 million), respectively, ofprincipal and 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 of loanprincipals and fees payable in respect of credit funded by them. Therefore, our failure to collect payment on the transactions will have a material adverseeffect on our business operations and financial positions. In addition, we aim to control bad debts by utilizing and enhancing our credit assessment systemrather than relying on collection efforts to maintain healthy credit performances. As such, our collection team may not possess adequate resources andmanpower to collect payment on and service the transactions we facilitated. If we fail to adequately collect amounts owed, then payments of principals andfinancing service fees to us may be delayed or reduced and our results of operations will be adversely affected. As the amount of transactions facilitated by usincreases in the future, we may devote additional resources into our collection efforts. However, there can be no assurance that we would be able to utilizesuch 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 in aggressivepractices, we cannot assure you that such personnel will not engage in any misconduct as part of their collection efforts. Any such misconduct by ourcollection personnel or the perception that our collection practices are considered to be aggressive and not compliant with the relevant laws and regulationsin 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 inthe willingness of prospective borrowers to apply for and utilize our credit or fines and penalties imposed by the relevant regulatory authorities, any of whichmay 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 partners includebanks and other institutions. For credit drawdowns currently funded by institutional funding partners, such credit drawdowns are typically either facilitatedto borrowers directly from institutional funding partners or indirectly from institutional funding partners through trusts we established in collaboration withtrust companies. Our amount of transactions has increased from approximately RMB578.2 million in 2014 to RMB57,941.0 million (US$8,427.2 million) in2018. 66.8% of our amount of transactions in 2018 was funded by our institutional funding partners. As the demand for credit facilitated by us havesignificantly increased since inception, our funding arrangements have also changed significantly. For example, we historically transferred a significantamount of credit drawdowns to P2P platforms, and we have subsequently ceased transferring credit drawdowns to P2P platforms in April 2017. We expect thatour funding arrangements will continue to evolve as we explore additional or new sources of funding as well as new risk sharing or transfer mechanisms.There can be no assurance that our cooperation with new institutional funding partners will meet our expectations or the expectations of borrowers.8Table of Contents 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. Ourability to cooperate with new institutional funding partners may be subject to regulatory or other limitations. In addition, regardless of our risk managementefforts, credit facilitated by us may nevertheless be considered riskier and have a higher delinquency rate than loans provided by traditional financialinstitutions. In the event there is a sudden or unexpected shortage of funds from our institutional funding partners or if our institutional funding partners havedetermined not to continue to collaborate with us, we may not be able to maintain necessary levels of funding without incurring high costs of capital, or atall. Furthermore, we had historically relied on one institutional funding partner to fund a substantial portion of credit facilitated by us. While we have sincemanaged to diversify our funding sources, there can be no assurance that our funding sources will remain or become increasingly diversified in the future. Ifwe become dependent on a small number of institutional funding partners and any such institutional funding partner determines not to collaborate with us orlimits the funding that is available, our business, financial condition, results of operations and cash flow may be materially and adversely affected. Sinceinception, we have from time to time experienced, and may continue to experience, constraints as to the availability of funds from our institutional fundingpartners. Such constraints have affected and may continue to affect user experience, including by limiting our ability to approve new credit applications orresulting in us having to curtail the amount that can be drawn down by borrowers under their existing credit limits. Such limitations have in turn restrained,and may continue to restrain, the growth of our business. Any prolonged constraint as to the availability of funds from our institutional funding partners mayalso harm our reputation or result in negative perception of the credit products we offer, thereby decreasing the willingness of prospective or existingborrowers to seek credit products from us or to draw down on their existing credit.We rely on the Alipay consumer interface to engage a portion of our active borrowers.We have been collaborating with Ant Financial, one of our principal shareholders, in multiple areas of our business. In particular, we have engaged aportion of our active borrowers through different channels on the Alipay consumer interface since 2016, although from December 2017 onward, we haveencouraged our repeat borrowers to directly engage us through our mobile applications. We continue to promote our products and launch campaigns throughthe public service window on the Alipay consumer interface, a borrower engagement channel which is free of charge and generally available to third parties.If such channel becomes unavailable in the future, the growth of our borrower base may slow down, and we may have to incur additional borrowerengagement costs.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 trusts in collaboration with trust companies starting in December 2016. Such trustsare funded by funds from institutional funding partners and our own capital. Since the trust companies administering such trusts have been licensed byfinancial regulatory authorities to lend, credit drawdowns funded under this arrangement are not private lending transactions within the meaning of thePrivate Lending Judicial Interpretation issued by the Supreme People’s Court of the PRC in August 2015. In 2018, the amount of transactions facilitatedthrough trusts was RMB23,557.3 million (US$3,426.3 million), representing approximately 40.7% of the total amount of transactions facilitated during suchperiod. We currently fund a majority of credit drawdowns initially disbursed by us through banks or trusts. We historically funded credit drawdowns throughonline small credit companies established by us.We disbursed funds to borrowers without utilizing online small credit companies or trusts in the past, which may be considered to involve the use ofour 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 wemay become subject to supervision and restrictions on lending under applicable laws and regulations. For example, the Measures for the Banning of IllegalFinancial Institutions and Illegal Financial Business Operations, promulgated by the PRC State Council, or the State Council, in July 1998 and revised in2011, prohibits financial business activity, including fund raising and facilitating loans to the public, to be conducted without the approval of the People’sBank of China, or the PBOC. The General Rules on Loans issued by the PBOC in June 1996 provides that a financial institution shall conduct the businesswith the approval of the PBOC. Otherwise, it will be subject to a fine from one time to five times of the illegal revenues, and the PBOC has the authority toorder such business to suspend its operations. Such existing PRC laws and regulations with respect to the supervision and restrictions on lending to thepublic were9Table of Contents primarily aimed to regulate traditional banking and financial institutions at the time of their respective promulgations, and the regulatory environment in thePRC has evolved since then. With the rapid development and evolving nature of the consumer finance industry and other new forms of Internet financebusiness in China, there are uncertainties as to the interpretation of the laws and regulations mentioned above as well as whether such laws and regulationsare applicable to our business. In the event that we are considered by the relevant authorities to be subject to such PRC laws and regulations, and our pastbusiness operations are deemed to be in violation of such laws and regulations, we may be exposed to certain administrative penalties, including theconfiscation of illegal revenue and fines up to five times the amount of the illegal revenue as mentioned above. Furthermore, our financing service feesreceived from borrowers might be fully or partially deemed as interest, such fees may be subject to the restrictions on interest rate as specified in applicablerules on private lending. For example, in accordance with the Provisions on Several Issues Concerning Laws Applicable to Trials of Private Lending Casesissued by the Supreme People’s Court of the PRC on August 6, 2015, or the Private Lending Judicial Interpretations, which came into effect on September 1,2015, 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. See “Item 4. Informationon the Company — B. Business Overview — Regulations — Regulations related to Loans and Intermediation.”In August 2015, the Legislative Affairs Office of the State Counsel of the PRC published a consultation paper seeking public comments on theRegulations on Non-Deposit-Taking Lending Organizations (Draft for Comment), or the Draft Regulations on Non-Deposit-Taking Lending, with a Note onthe Draft Regulations on Non-Deposit-Taking Lending published by the PBOC, or the PBOC Note on the Draft Regulations on Non-Deposit-TakingLending. According to the PBOC Note on the Draft Regulations on Non-Deposit-Taking Lending, rather than generally categorizing activities like lendingto public without the approval of PBOC as illegal, PBOC recognizes that, with the continuous development of the financial industry, the credit market in thePRC has developed into multiple segments, in addition to the traditional lending by financial institutions, and non-deposit-taking lending organizations ofvarious 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 onNon-Deposit-Taking Lending seeks to regulate small credit companies and other non-deposit-taking lending organizations that are not covered by thecurrent regulatory framework in the PRC, which we believe may include companies 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 whether thepromulgated version would be substantially revised. Therefore, substantial uncertainty remains regarding the final framework, scope and applicability to usof the Draft Regulations on Non-Deposit Lending-Taking to us. We cannot assure you that our past or existing practices would not be deemed to violate anyexisting or future laws, regulations and governmental policies. If the Draft Regulations on Non-Deposit Lending-Taking is enacted as proposed, we may haveto obtain the requisite business permit and operate in accordance with relevant requirements provided therein.The laws and regulations governing the online consumer finance industry in the PRC are still at a nascent stage and subject to further change andinterpretation. If our business practices or the business practices of our institutional funding partners are deemed to violate any PRC laws or regulations,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 different governmentauthorities. As of December 31, 2018, we have not been subject to any material fines or other penalties under any PRC laws or regulations as to our businessoperations. However, if the PRC government adopts a stringent regulatory framework for the online consumer finance industry in the future, and subjectmarket participants such as our company to specific requirements (including without limitation, capital requirements, reserve requirements and licensingrequirements), our business, financial condition and prospects would be materially and adversely affected. The existing and future rules, laws and regulationscan be costly to comply with and if our practice is deemed to violate any existing or future rules, laws and regulations, we may face injunctions, includingorders to cease illegal activities, and may be exposed to other penalties as determined by the relevant government authorities as well.10Table of Contents In July 2015, the Guidelines on Promoting the Healthy Development of Internet Finance, or the Internet Finance Guidelines, were jointly released byten PRC regulatory agencies. The Internet Finance Guidelines set out the regulatory framework and some basic principles on regulating the online consumerfinance business in the PRC. The Internet Finance Guidelines specify that the China Banking Regulatory Commission, or the CBRC, will have primaryregulatory responsibility for the online consumer finance businesses in China, which as currently used in the Internet Finance Guidelines is interpreted asbusinesses conducted via the Internet by consumer finance companies. Pursuant to the Pilot Measures for the Administration of Consumer FinanceCompanies released by the CBRC in November 2013, or the Pilot Consumer Finance Measures, consumer finance companies in the PRC refer to non-bankingfinancial institutions as approved by the CBRC that do not engage in taking public deposits from individual lenders and provide individual borrowers withconsumer loans pursuant to the principles that such loans be small amount in nature and widely dispersed to various borrowers. However, the Internet FinanceGuidelines and the Pilot Consumer Finance Measures do not explicitly provide guidance or requirements on other forms of online consumer finance businessconducted by participants other than the CBRC-approved consumer finance companies as defined in the Pilot Consumer Finance Measures, including, forexample, our business. Therefore, it is currently uncertain whether our business practice is subject to the relevant rules regarding online consumer financecompanies provided under the Internet Finance Guidelines and consumer finance companies provided under the Pilot Consumer Finance Measures. Giventhe evolving regulatory environment of the consumer finance industry, we cannot rule out the possibility that the CBRC or other government authorities willissue new regulatory requirements to institute a new licensing regime covering our industry. If such a license regime is introduced or new regulatory rules arepromulgated, we cannot assure you that we would be able to obtain any new licenses or other regulatory approvals in a timely manner, or at all, which wouldmaterially and adversely affect 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 of Chinaand the Office for Cyberspace Affairs jointly promulgated the Interim Measures for Administration of the Business Activities of Online Lending InformationIntermediary Institutions, or the Interim Online Lending Information Intermediary Measures, which set out certain rules to regulate the business activities ofonline lending information intermediary institutions. The Interim Online Lending Information Intermediary Measures define “online lending” as directlending between 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 with lendinginformation services, such as information collection and publication, credit rating, information interaction and loan facilitation between borrowers andlenders for them to form direct peer-to-peer lending relationships. The Interim Online Lending Information Intermediary Measures are only applicable toprivate lending transactions according to relevant interpretations by the China Banking Regulatory Commission. Loans funded by financial institutionswhich are licensed by financial regulatory authorities are not private lending transactions within the meaning of the Private Lending Judicial Interpretationissued by the Supreme People’s Court of the PRC in August 2015. Therefore, facilitation of loans funded directly by such licensed financial institutions isnot 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 institutional fundingpartners, such companies are financial institutions licensed by financial regulatory authorities to lend. As such, we do not consider ourselves as an “onlineinformation intermediary institution” regulated under the Interim Online Lending Information Intermediary Measures. However, we cannot assure you thatthe CBRC or other PRC governmental agencies would not expand the applicability of the Interim Online Lending Information Intermediary Measures and/orotherwise regard us as an online lending information intermediary institution. As a provider of online credit products, our business share certain similaritieswith those of P2P platforms. In March 2017, Beijing Happy Time received a rectification notice from the Beijing Branch of the Office of Leading Group onSpecial Rectification of Risks in the Internet Finance Sector, which was also the Office of Leading Group on Special Rectification of Risks in the OnlineLending of Beijing, or the Beijing Rectification Office, the regulator of the Internet finance and online lending industry in Beijing. The rectification noticerequired Beijing Happy Time to conduct certain improvements and corrections to its business operation to be in compliance with the Interim Online LendingInformation Intermediary Measures and the Implementing Scheme of Special Rectification of Risks in the Internet Finance Sector. We do not believe we aresubject to the Interim Online Lending Information Intermediary Measures and have discussed with the Beijing Rectification Office about the differencebetween our business and those of “online information intermediary institution” as defined in the Interim11Table of Contents Online Lending Information Intermediary Measures and that certain correction requirements in the notice were not actually related to our business.Nevertheless, the Beijing Rectification Office still required us to comply with certain requirements under the Interim Online Lending InformationIntermediary Measures regardless of whether we are a P2P platform due to the fact that some of our institutional funding partners are P2P platforms, which areidentified as online lending information intermediary institutions in accordance with the Interim Online Lending Information Intermediary Measures andother PRC laws and regulations. As such, we were deemed to be participating in a certain part of the “online lending” process as defined in the Interim OnlineLending Information Intermediary Measures. We have since carried out certain improvements and corrections as required by the Beijing Rectification Officeand are maintaining an ongoing dialogue with the Beijing Rectification Office. As of the date of this annual report, we have not received final clearance fromthe Beijing Rectification Office that our rectification efforts were sufficient, and there can be no assurance that we will be able to receive such final clearance.We also cannot assure you that the Beijing Rectification Office will agree with our position that we are not an “online information intermediary institution.”In the event that we are deemed as an online lending information intermediary institution by the PRC regulatory authorities in the future, we may have toregister with local financial regulatory authorities and apply for telecommunication business operation licenses if required by the competent authorities, andour current business practices may be considered to be in violation of the Interim Online Lending Information Intermediary Measures. Accordingly, we mayface administrative 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.We 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 by suchinstitutional funding partners. In addition, we have ceased transferring credit drawdowns to P2P platforms in April 2017. Nonetheless, we cannot assure youthat the business operations of our institutional funding partners currently are or will be in compliance with the relevant laws and regulations, and in theevent that our institutional funding partners do not operate their businesses in accordance with the relevant laws and regulations or are engaged in illegalactivities, 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 and supervisionon the nationwide Internet finance and online lending, or the National Rectification Office, issued an Notice on the Conduction of Check and Rectificationof Cash Loan Business Activities and a supplementary notice, or the Notice on Cash Loan. The Notice on Cash Loan requires the local counterparts of theNational Rectification Office to conduct a full-scale and comprehensive inspection of cash loan business conducted by online platforms and require suchplatforms to conduct necessary improvements and corrections within a designated period to comply with the relevant requirements under the Private LendingJudicial Interpretation issued by the Supreme People’s Court of the PRC in August 2015, the Measures for the Banning of Illegal Financial Institutions andIllegal Financial Business Operations, the Guiding Opinions on Small Credit Companies, the Interim Online Lending Information Intermediary Measures andthe Implementing Scheme of Special Rectification of Risks in the Internet Finance Sector. The Notice on Cash Loan focuses on preventing maliciousfraudulent activities, loans that are offered at extortionate interest rates and violence in the loan collection processes in the cash loan business operation ofonline platforms. The National Rectification Office issued a list of cash loan business that are to be examined, which includes Laifenqi, one of the brands inwhich we use to market our credit products. In light of the Notice on Cash Loan, we have taken measures, including re-evaluating and adjusting the amountof financing service fees we charge on all credit drawdowns in an effort to comply with applicable regulations. Due to the uncertainties with respect to theinterpretation and application of the laws and regulations as stated in the Notice on Cash Loan, we cannot assure you our business practice will be deemed tobe in full compliance with all such laws and regulations, and we may face injunctions, including orders to change our current business activities, and may beexposed to other penalties as determined by the relevant government authorities after such examination according to the Notice on Cash Loan. Furthermore,we may be required to conduct certain other improvements or corrections which could be costly, and our business, financial condition, results of operationsand prospects would be materially and 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 to Circular141, a12Table of Contents bank may not outsource its core business functions, such as credit assessment and risk management, to third parties. Circular 141 also prohibits a bankparticipating in loan facilitation transactions from accepting credit enhancement services from a third party which has not obtained any license or approval toprovide guarantees, including credit enhancement service in the form of a commitment to assume default risks. As Circular 141 is relatively new, it remainsuncertain how the regulatory authorities will interpret and enforce the requirements. We have entered into arrangements with several banks which directlyfund credit drawdowns to borrowers. We refer to such banks qualified credit applications from borrowers, including our assessment of their credit profiles andour suggested credit limits. They will then review the credit applications and approve credit for drawdown. When a borrower defaults, we are obligated torepay the full overdue amount to the relevant bank. One of our wholly-owned subsidiaries, Xiamen Xincheng Youda Financing Guarantee Ltd., or XiamenXincheng, has obtained a license to provide financing guarantee service. We plan to provide guarantees for credit drawdowns through Xiamen Xincheng.Nonetheless, we may also provide guarantees through alternative arrangements, such as cooperation with third parties with financing guarantee licenses. Ifour arrangement to provide guarantees through the alternative arrangements are deemed to be in violation of Circular 141, we could be subject to penaltiesand/or be required to change our business model. As a result, our business, financial condition, results of operations and prospects could be materially andadversely affected.We focus on complying with relevant laws, regulations and government policies applicable to our business practice in the PRC and haveimplemented various measures. We have established trusts in collaboration with trust companies starting in December 2016. In addition, we continuouslyseek to work with additional institutional funding partners, including more traditional banking institutions, in light of the regulatory uncertainties faced bycertain of our institutional funding partners, such as P2P platforms. In April 2017, we ceased transferring credit drawdowns to P2P platforms and certain otherinstitutional funding partners. However, due to the lack of clarity in the potential interpretation of the relevant rules and the fact that the rules, laws andregulations are expected to continue to evolve in this newly emerging industry in which we operate, we cannot assure you that our measures wouldeffectively prevent us from violating any existing or future rules, laws and regulations. In addition, although the relevant regulations on P2P platforms do notdirectly apply to us, any regulatory restrictions may cause borrowers with lower credit qualities to seek for our service, which may have negative effect on ourdelinquency rates. Furthermore, such changes in regulations may also affect market sentiment and have a negative impact on our partnership withinstitutional funding partners.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 equity offerings. Thecurrent PRC regulatory framework does not impose many restrictions and obligations on us as the credit originator of any potential asset-backed securitiesoffering. Pursuant to the relevant PRC laws and regulations, an institution, such as our online small credit companies, is entitled to establish an asset-backedsecurities scheme as a credit originator for such scheme on the condition that it has legitimate ownership to the underlying transferred assets that are able togenerate independent and predictable cash flow in compliance with relevant laws and regulations. However, the initiators of any potential asset-backedsecurities scheme with whom we work with are required to be financial institutions and they are subject to a variety of laws and regulations in the PRC, suchas Administrative Provisions on the Asset Securitization Business of Securities Companies and the Subsidiaries of Fund Management Companies andMeasures for the Supervision and Administration of Pilot Projects of Credit Asset Securitization of Financial Institutions. Since we will not operate as aninitiator of any asset-backed securities scheme, we will not be subject to these laws and regulations governing financial institutions as initiators. However, asthe laws and regulations applicable to asset-backed securities are still developing, it remains uncertain as to the application and interpretation of such lawsand regulations, particularly relating to the new and rapidly evolving online consumer finance industry in which we operate.13Table of Contents 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 such potentialissuances will be subject to the requirements in Regulation AB under the Securities Act and the related rules. Nonetheless, if we issue asset- backed securitiesin 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 theissuance 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 our business,financial condition and results of operations.We generate a substantial majority of our total revenues from financing service fees we charge borrowers. In 2018, financing income, which werecognize for our on-balance sheet transactions, comprised 46.0% of our total revenues. In addition, we recognize revenues from loan facilitation serviceswhen we match borrowers with funding partners and the funds are transferred to the borrowers. Additionally, revenues from post-origination services arerecognized evenly over the term of the loans as the services are performed. As such, the amount of financing service fees charged under such arrangementsmay affect the amount of loan facilitation fees that we collect. Any material decrease in our financing service fees would have a substantial impact on ourmargin. In the 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 condition andresults of operations will be harmed. To compete effectively, the financing service fees we charge borrowers could be affected by a variety of factors,including the creditworthiness and ability to repay of the borrowers, the competitive landscape of our industry, our access to capital and regulatoryrequirements. Our financing service fees may also be affected by a change over time in the mix of the types of products we offer and a change to our borrowerengagement initiatives. Our competitors may also offer more attractive fees, which may require us to reduce our financing service fees to compete effectively.Certain consumer financing solutions offered by traditional financial institutions may provide lower fees than our financing service fees. Although we do notbelieve such consumer financing solutions currently compete with our products or target the same unserved or underserved consumers in China, suchtraditional financial institutions may decide to do so in the future, which may have a material adverse effect as to the financing service fees that we will beable to charge. Furthermore, as our borrowers establish their credit profile over time, they may qualify for and seek out other consumer financing solutionswith lower fees, including those offered by traditional financial institutions offline, and we may need to adjust our financing service fees to retain suchborrowers.In addition, our financing service fees are sensitive to many macroeconomic factors beyond our control, such as inflation, recession, the state of thecredit markets, changes in market interest rates, global economic disruptions, unemployment and fiscal and monetary policies. Our financing service fees, tothe extent they are fully or partially deemed as interest, may also be subject to the restrictions on interest rate as specified in applicable rules on privatelending. Circular 141 provides that overall capital cost charged on a borrower, comprised of interests and fees, should be in compliance with the judicialinterpretations by the 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 the courts. The annualizedfee rates charged by us on a significant number of transactions facilitated were in excess of 36% historically. Among the number of transactions we facilitatedin 2016, 59.5% of their annualized fee rates exceeded 36%. Had all such credit drawdowns reduced their annualized fee rates to 36%, our revenue would havebeen 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 that theannualized fee rates charged on all credit drawdowns do not exceed 36%. As financing service fees historically accounted for a substantial majority of ourrevenue, if the cap on annualized fee rates is reduced from 36%, or if there is any material reduction in the amount of financing service fees we chargeborrowers, our business, results of operations and financial condition could be materially and adversely affected. See “The laws and regulations governingthe online consumer finance industry in the PRC are still at a nascent stage and subject to further change and interpretation. If our business practices or thebusiness practices of our institutional funding partners are deemed to violate any PRC laws or regulations, our business, financial condition, results ofoperations and prospects would be materially and adversely affected.” In addition, as some of our institutional funding partners are prohibited from chargingfees at annualized rates in excess of 24%, we cooperate with various14Table of Contents insurance and asset management companies to charge additional fees from the relevant borrowers so that the overall fee rates applicable to such borrowerswould still be within the limit of 36% on an annualized basis. If such arrangements were found by the regulatory authorities to be in violation of theapplicable laws and regulations, our business, results of operations and financial condition could be materially and 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” referto companies legally established and operating financing guarantee business. According to the Financing Guarantee Rules, the establishment of financingguarantee companies shall be subject to the approval by the competent government department, and unless otherwise stipulated by the state, no entity mayoperate financing guarantee business without such approval. If any entity violates these regulations and operates financing guarantee business withoutapproval, the entity may be subject to penalties including ban or suspension of business, fines of RMB500,000 to RMB1,000,000, confiscation of illegalgains 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 and theborrowers are required to repay the principal and financing service fees directly to them. However, when borrowers under arrangements with banks fail torepay, we are obligated to repay the relevant bank the full overdue amount. In addition, pursuant to our agreement with the consumer finance company, wewill make cash payments to the consumer finance company based on the delinquency rate on the portfolio of loans that we have facilitated in which theconsumer finance company originates pursuant to a pre-agreed formula. For year 2018, such transactions, which are off-balance sheet transactions,represented 36.1% of the total amount of transactions facilitated. We have also entered into arrangements with various institutional funding partners to fundon-balance sheet transactions, and we are also obligated to compensate such institutional funding partners for borrower default. For year 2018, such on-balance sheet transactions represented 30.7% of the total amount of transactions facilitated. As such, transactions funded by institutional funding partnersrepresented 66.8% of the total amount of transactions facilitated for year 2018.Due to the lack of further interpretations, the exact definition and scope of “operating financing guarantee business” under the Financing GuaranteeRules is unclear. It is uncertain whether we would be deemed to operate financing guarantee business because of our current arrangements with institutionalfunding partners. Furthermore, pursuant to Circular 141, a bank participating in loan facilitation transactions may not accept credit enhancement service froma third party which has not obtained any license or approval to provide guarantees, including credit enhancement service in the form of a commitment toassume default risks. One of our wholly-owned subsidiaries, Xiamen Xincheng, obtained a license to provide financing guarantee service in March 2019. Weplan to provide guarantees for credit drawdowns through Xiamen Xincheng. Under the Financing Guarantee Rules, the outstanding guarantee liabilities of afinancing guarantee company shall not exceed ten times of its net assets. As of March 31, 2019, the net asset of Xiamen Xincheng was RMB300.0 million(US$43.6 million), and it was therefore permitted to incur guarantee liabilities up to RMB3,000.0 million (US$436.3 million). Nonetheless, we may alsoprovide guarantees through alternative arrangements, such as cooperation with third parties with financing guarantee licenses. If such alternativearrangements are deemed to be in violation of Circular 141, we could be subject to penalties and/or be required to change our business model. As a result, 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 andvehicle sales with guarantee. In the case of sales-type finance leases, we purchase cars on our inventory and lease them to creditworthy car buyers. Each carbuyer is required to make a down payment and pay installments throughout the term of the lease. The legal title of the car is transferred to the car buyer uponfull repayment. In the case of vehicle sales with guarantee, we sell vehicles to buyers and provide loan facilitation services to funding partners who providefinancing to the vehicle buyers. The buyer obtains control of the vehicle when the borrower physically possesses the vehicle and when we receive cashconsideration for the vehicle from the buyer. We will receive recurring service fees from the financial institution for our loan facilitation15Table of Contents services and post-origination services throughout the term of the loan. In addition, we provide a guarantee on the principal and accrued interest repaymentsof the defaulted loans to the financial institution. Risks and uncertainties associated with our 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.We scaled back operations of our budget auto financing business in 2018, in response to the slowdown of the economic growth and concerns overthe trajectory of industry development. If we were unable to successfully operate our budget auto financing business, our business, results of operations andfinancial condition may be materially and adversely affected.We may not be able to successfully operate our open platform for loan recommendations and referrals.In the fourth quarter of 2018, we launched an open platform for loan recommendations and referrals. The platform offers our large user base with morechoices to satisfy their financial needs, while incurring no material cost of operations and no credit risk for us. For users that do not meet our creditrequirements, we provide recommendations of financial products that are offered by financial service providers that participate on our platform. The relevantfinancial service providers perform independent credit assessment of users and make the ultimate credit decisions. We typically charge such financial serviceproviders for lead generation on a cost-per-click basis. On the other hand, for users with better credit profiles that are applying for large loan amounts thatexceed the limit permitted under our policy, we refer their applications to our institutional funding partners. We do not bear credit risk and receivecommissions from our institutional funding partners for such referrals.The success of the open platform depends on our ability to attract more users and financial service providers. However, both users and financialservice providers may become dissatisfied with our platform and users may consequently be reluctant to continue to use our platform and financial serviceproviders may be hesitant to continue to partner with us. As a result, our business, reputation, results of operations and financial condition will be materiallyand adversely affected.Furthermore, we have limited control over the products of financial service providers. The regulatory framework for online consumer finance marketin China is both complex and constantly evolving. If any product we recommended on our platform is found to violate the relevant laws and regulations, wemay suffer significant reputational damage, and our business, results of operations and financial condition would be materially 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 loan lossesif 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. Estimated credit loss relating to on-balance sheettransactions is recorded as allowance for loan principal and financing service fee receivables. If we experience higher delinquency rates, such allowancewould also increase. See “Item 5. Operating and Financial Review and Prospects — B. Liquidity and Capital Resources.” We have established an evaluationprocess designed to determine the adequacy of our allowance for loan principal and financing service fee receivables. While this evaluation process useshistorical and other objective information, it is also dependent on our subjective assessment based upon our experience and judgment. Actual losses aredifficult to forecast, especially if such losses stem from factors beyond our historical experience. We have limited experience managing our16Table of Contents allowance for loan principal and financing service fee receivables, especially given the fact that we only commenced our business in early 2014. Furthermore,we shifted our focus of target borrower base from college students to young consumers in general starting from November 2015, and we may not be able toaccurately forecast delinquencies of our current target borrower base. Given these challenges, it is possible that we will underestimate or overestimate theallowance for loan principal and financing service fee receivables. In addition, we are not subject to periodic review by bank regulatory agencies of ourallowance for loan principal and financing service fee receivables. As a result, if we underestimate the allowance for loan principal and financing service feereceivables, there can be no assurance that our allowance for loan principal and financing service fee receivables will be sufficient to absorb losses or preventa material adverse effect on our business, financial condition and results of operations. Conversely, if we overestimate the allowance for loan principal andfinancing service fee receivables, we will record higher provision for loan principal and financing service fee receivables, which will adversely affect ourresults 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, 360 Finance, WeBank, Huabei and Jiebei, as well as traditional financial institutions, such asbanks and 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 such as 4Sdealers as well as online auto retail platforms. Our competitors may operate different business models, have different cost structures or participate selectivelyin different market segments. They may ultimately prove more successful or more adaptable to consumer demand and new regulatory, technological andother developments. Some of our current and potential competitors have significantly more financial, technical, marketing and other resources than we doand may be able to devote greater resources to the development, promotion, sale and support of their offerings. Our competitors may also have longeroperating history, more extensive borrower bases or funding sources, greater brand recognition and brand loyalty and broader relationships with fundingpartners or merchandise suppliers than us. Additionally, a current or potential competitor may acquire, or form a strategic alliance with, one or more of ourcompetitors. Our competitors may be better at developing new products, offering more attractive fees, responding more quickly to new technologies andundertaking more extensive and effective marketing campaigns. Furthermore, in light of the low barriers to entry in the online consumer finance industry,more players may enter this market and increase the level of competition. We anticipate that more established Internet, technology and financial servicescompanies that possess large, existing user bases, substantial financial resources and established distribution channels may also enter the market in the future.In response to competition and in order to grow or maintain the amount of transactions facilitated to borrowers, we may have to offer lower amount offinancing service fees, which could materially and adversely affect our business and results of operations. If we are unable to compete with such companiesand meet the need for innovation in our industry, the demand for our credit products could stagnate or substantially decline, which could harm our businessand results of operations.With respect to institutional funding partners, we compete with other investment products and asset classes, such as equities, bonds, investment trustproducts, insurance products, bank savings accounts and real estate. If a substantial number of our institutional funding partners choose other investmentalternatives, our business, financial condition and results of operations could be materially and adversely affected.We may be required to obtain additional value-added telecommunication business licenses.PRC regulations impose sanctions for engaging in Internet information services of a commercial nature without having obtained an Internet contentprovider license, or the ICP license, and sanctions for engaging in the operation of online data processing and transaction processing without havingobtained a VATS license for online data processing and transaction processing, or ODPTP license (ICP and ODPTP are both sub-sets of value-addedtelecommunication business). These sanctions include corrective orders and warnings from the PRC communication administration authority, fines andconfiscation of illegal gains and, in the case of significant infringements, the websites and mobile apps may be ordered to cease operation. Nevertheless, theinterpretation of such regulations and PRC regulatory authorities’ enforcement of such regulations in the context of online consumer finance industryremains uncertain, it is unclear whether online consumer finance service provider like us are required to obtain ICP17Table of Contents license or ODPTP license, or any other kind of value-added telecommunication business licenses. Beijing Happy Time, Qufenqi Beijing and Xiamen QudianCulture and Technology have obtained ICP licenses. We have not obtained any ODPTP license to date. Given the evolving regulatory environment of theconsumer finance industry and value-added telecommunication business, we cannot rule out the possibility that the PRC communication administrationauthority or other government authorities will explicitly require any of our consolidated VIEs or subsidiaries of our consolidated VIEs to obtain ICP licenses,ODPTP licenses or other value-added telecommunication business licenses, or issue new regulatory requirements to institute a new licensing regime for ourindustry. If such value-added telecommunication business licenses are clearly required in the future, or a new license regime is introduced or new regulatoryrules are promulgated, 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 adversely affect ourbusiness 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 Finance LeaseEnterprises, pursuant to which the risk assets of a finance lease enterprise may not exceed ten times of its total net assets. According to the Measures for theAdministration 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.We currently provide budget auto financing products in the form of finance leases and vehicle sales with guarantee through our subsidiary XiamenQudian 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 the amount of finance lease receivables of such subsidiary. When the amount of finance lease receivables exceeds ten times of XiamenFinancial Lease’s total net assets, we may be required to increase the total net assets of Xiamen Financial Lease by means of, among others, increasing thepaid-up capital contribution. However, we cannot assure you that we will be able to make such capital contribution timely, or at all. Our inability to makesuch capital contribution 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 conversion mayrestrict or prevent us from using the proceeds of our initial public offering to make loans to our PRC subsidiaries and our consolidated VIEs, or to makeadditional 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 to providefunding to our PRC subsidiaries, which are treated as foreign- invested enterprises under PRC laws, through loans or capital contributions. However, loans byus to our PRC subsidiaries 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 Comprehensive ManagementInformation 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 Exchange Settlement ofCapital of Foreign-invested Enterprises, or Circular 19, effective on June 1, 2015, in replacement of the Circular on the Relevant Operating Issues Concerningthe Improvement of the Administration of the Payment and Settlement of Foreign Currency Capital of Foreign- Invested Enterprises, or SAFE Circular 142,the Notice from the State Administration of Foreign Exchange on Relevant Issues Concerning Strengthening the Administration of Foreign ExchangeBusinesses, or Circular 59, and the Circular on Further Clarification and Regulation of the Issues Concerning the Administration of Certain Capital AccountForeign Exchange Businesses, or Circular 45. According to Circular 19, the flow and use of the RMB capital converted from foreign currency-denominatedregistered capital of a foreign-invested company is regulated such that RMB capital may not be used for the issuance of RMB entrusted loans, the repaymentof inter-enterprise loans or the repayment of banks loans that have been transferred to a third party. Although Circular 19 allows RMB capital converted from18Table of Contents foreign currency-denominated registered capital of a foreign- invested enterprise to be used for equity investments within the PRC, it also reiterates theprinciple that RMB converted from the foreign currency-denominated capital of a foreign-invested company may not be directly or indirectly used forpurposes beyond its business scope. Thus, it is unclear whether SAFE will permit such capital to be used for equity investments in the PRC in actual practice.SAFE promulgated the Notice of the State Administration of Foreign Exchange on Reforming and Standardizing the Foreign Exchange SettlementManagement Policy of Capital Account, or Circular 16, effective on June 9, 2016, which reiterates some of the rules set forth in Circular 19, but changes theprohibition against using RMB capital converted from foreign currency-denominated registered capital of a foreign-invested company to issue RMBentrusted loans to a prohibition against using such capital to issue loans to non-associated enterprises. Violations of SAFE Circular 19 and Circular 16 couldresult in administrative penalties. Circular 19 and Circular 16 may significantly limit our ability to transfer any foreign currency we hold, including the netproceeds from our initial public offering, to our PRC subsidiaries, which may adversely affect our liquidity and our ability to fund and expand our business inthe PRC.Due to the restrictions imposed on loans in foreign currencies extended to any PRC domestic companies, we are not likely to make such loans to anyof our consolidated VIEs and their subsidiaries, each a PRC domestic company. Meanwhile, we are not likely to finance the activities of our consolidatedVIEs and their subsidiaries by means of capital contributions given the restrictions on foreign investment in the businesses that are currently conducted byour 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 holding companies,we cannot assure you that we will be able to complete the necessary government registrations or obtain the necessary government approvals on a timelybasis, if at all, with respect to future loans to our PRC subsidiaries or any consolidated variable interest entity or future capital contributions by us to our PRCsubsidiaries. As a result, uncertainties exist as to our ability to provide prompt financial support to our PRC subsidiaries or consolidated VIEs and theirsubsidiaries when needed. If we fail to complete such registrations or obtain such approvals, our ability to use foreign currency, including the proceeds wereceived from our initial public offering, and to capitalize or otherwise fund our PRC operations may be negatively affected, which could materially andadversely affect our liquidity and our ability to fund and expand our business.We may need additional capital to pursue business objectives and respond to business opportunities, challenges or unforeseen circumstances, 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 support thegrowth of our business, we may require additional capital to pursue our business objectives and respond to business opportunities, challenges or unforeseencircumstances, including developing new products and services, further enhancing our risk management capabilities, increasing our marketing expendituresto improve brand awareness and diversify our borrower engagement channels by collaborating with other leading Internet companies, enhancing ouroperating infrastructure and acquiring complementary businesses and technologies. Accordingly, we may need to engage in equity or debt financings tosecure additional funds. However, additional funds may not be available when we need them, on terms that are acceptable to us, or at all. Repayment of thedebts may divert a substantial portion of cash flow to pay principal and interest on such debt, which would reduce the funds available for expenses, capitalexpenditures, acquisitions and other general corporate purposes; and we may suffer default and foreclosure on our assets if our operating cash flow isinsufficient to repay debt obligations, which could in turn result in acceleration of obligations to repay the indebtedness 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 through furtherissuances of equity or convertible debt securities, our existing stockholders could suffer significant dilution, and any new equity securities we issue couldhave rights, preferences and privileges superior to those of holders of our Class A ordinary shares. If we are unable to obtain adequate financing or financingon terms satisfactory to us when we require it, our ability to continue to pursue our business objectives and to respond to business opportunities, challengesor unforeseen circumstances could be significantly limited, and our business, operating results, financial condition and prospects could be adversely affected.19Table of Contents Any harm to our brands or reputation or any damage to the reputation of the online consumer finance industry may materially and adversely affect ourbusiness 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, includingour management, business, compliance with law, financial condition, prospects or our historical business operations on campuses, whether with merit or not,could severely hurt our reputation and harm our business and results of operations. In addition, certain factors that may adversely affect our reputation arebeyond our control. Negative publicity about parties that we collaborate with institutional funding partners, financial service providers that participate onour open platform or other business partners, including negative publicity about any failure by them to adequately protect the information of their users, tocomply with 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 failures of otherconsumer finance service providers, and especially a large number of such bankruptcies or failures, or negative perception of the industry as a whole, such asthat arises from any failure of other consumer finance platforms to detect or prevent money laundering or other illegal activities, even if factually incorrect orbased on isolated incidents, could compromise our image, undermine the trust and credibility we have established and impose a negative impact on ourability to attract new borrowers and to collaborate with and retain institutional funding partners. Negative developments in our industry, such as widespreadborrower default, fraudulent behavior and/or the closure of other online consumer finance service providers, may also lead to tightened regulatory scrutiny ofthe sector and limit the scope of permissible business activities that may be conducted. If any of the foregoing takes place, our business and results ofoperations could be materially and 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. We hadaccumulated deficits of RMB5,984.8 million and RMB6,633.7 million as of December 31, 2014 and December 31, 2015, respectively. Although we had netincome of RMB576.7 million in 2016, RMB2,164.5 million in 2017 and RMB2,491.3 million (US$362.3 million) in 2018, we cannot assure you that wewill be able to continue to generate net income in the future. We anticipate that our cost of revenues and operating expenses will increase in the foreseeablefuture as we continue to grow our business, attract borrowers, institutional funding partners and merchandise suppliers and further enhance and develop ourcredit products, enhance our risk management capabilities and increase brand recognition. These efforts may prove more costly than we currently anticipate,and we may not succeed in increasing our revenue sufficiently to offset these higher expenses. There are other factors that could negatively affect ourfinancial condition. 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 share incentiveplans in the past and may adopt new share incentive plans in the future, which have caused, and will result in, significant share-based compensation expensesto us. We generate a substantial majority of our total revenues from financing service fees we charge borrowers. Any material decrease in our financing servicefees would have a substantial impact on our margin. As a result of the foregoing and other factors, our net income margins may decline or we may incuradditional net losses in the future and may not be able to maintain profitability on a quarterly or annual basis.20Table of Contents If our credit products do not achieve sufficient market acceptance or if we are unable to manage the growth of our credit products, our financial condition,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 and offeredother types of credit products to users in China which were discontinued due to limited demand in the market. While we intend to eventually broaden thescope of products that we offer, there can be no assurance that we will be successful. New products must achieve high levels of market acceptance in order forus to balance the default risks associated with such products and to recoup our investment in developing and bringing them to market. Our existing or newproducts 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 comply withPRC 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 in materialadverse change to our results of operations. For example, borrowers may increase their preference and utilization of our merchandise credit products, whichare typically larger in amount with longer terms, over our cash credit products. As small credit products enjoy favorable risk characteristics compared to largercredit products, an increase in the utilization of merchandise credit products over cash credit products by borrowers may result in an increase in delinquencyrate for the transactions facilitated by us. Credit products with longer durations may also lead to reduced frequency of transactions by borrowers, which mayhave a material adverse effect as to the volume and comprehensiveness of the data we collect and analyze 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 not accuratelyreflect 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, withtheir authorization, from external parties, and assess applicants’ creditworthiness based on such information. Such external party’s credit assessment systemmay still be at a development stage and therefore have limitations in measuring borrowers’ creditworthiness. We have experienced instances where creditanalysis information provided by an external party was not fully predictive of actual delinquency rates. Therefore, we do not rely on inputs from one or onlya few external parties. Instead, we use inputs from many external parties for our credit assessment model to enhance our risk management capabilities. As thecredit assessment methodologies of external parties are not disclosed to us, we may not have adequate21Table of Contents knowledge of the assumptions behind their credit analysis, which could cause our model to produce inaccurate results. In addition, if there is an adversechange in the economic condition, credit analysis information provided by external parties may not be a reliable reference to assess an applicant’screditworthiness, which may compromise our risk management capabilities. As a result, our assessment of a borrower’s credit profile may not reflect thatparticular borrower’s actual creditworthiness because assessment may be based on outdated, incomplete or inaccurate information. In addition, thecompleteness and reliability of information on borrower’s credit risk available in the PRC is relatively limited. The PBOC has developed and put into use anational personal and corporate credit information database which remains relatively underdeveloped. The information available to us and external partiesfrom whom we obtain information for our credit assessment model is limited. We also currently do not have a comprehensive way to determine whetherprospective borrowers have obtained loans through other consumer finance platforms, creating the risk whereby a borrower may utilize our credit products inorder to pay off loans from other sources. Additionally, we allow a borrower to make multiple drawdowns under his or her credit, and such borrower may useproceeds from one drawdown to repay a separate credit 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 and adverselyaffect the effectiveness of our control over our delinquency rates. We may not be able to recoup funds underlying transactions made in connection withinaccurate or incomplete borrower credit information, in which case our results of operations will be harmed.We are subject to risks associated with other parties with which we collaborate. If such other parties fail to perform or provide reliable or satisfactoryservices, 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 our institutional funding partners,third-party financial service providers that participate on our open platform, other institutions from which we obtain information for our credit assessmentmodel and risk management system, our cloud computing service provider and merchandise suppliers. These parties may not be able to provide accurate dataanalyses, sufficiently or timely fund credit that we facilitate or provide satisfactory merchandise and services to us and/or borrowers on commerciallyacceptable terms or at all. Any failure by these parties to continue with good business operations, comply with applicable laws and regulations or anynegative publicity on these parties could damage our reputation, expose us to significant penalties and decrease our total revenues and profitability. Also, ifwe fail to retain existing or attract new quality parties to collaborate with, our ability to retain existing borrowers, engage prospective borrowers may beseverely limited, which may have a material and adverse effect on our business, financial condition and results of operations. In addition, certain of theseother parties that we collaborate with have access to our user data to a limited extent in order to provide their services. If these other parties engage inactivities that are negligent, illegal or otherwise harmful to the trustworthiness and security of our products or system, including the leak or negligent use ofdata, or users are otherwise dissatisfied with their service quality, we could suffer reputational harm, even if these activities are not related to, attributable toor caused 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 to determinewhether prospective borrowers have obtained loans through other consumer finance platforms, creating the risk whereby a borrower may borrow moneythrough 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 mayre-apply by using fraudulent information. We may fail to22Table of Contents identify such behavior, despite our measures to verify personal identification information provided by borrowers. Furthermore, we may not be able to recoupfunds underlying transactions made in connection with fraudulent activities. A significant increase in fraudulent activities could negatively impact ourbrands and reputation, discourage institutional funding partners from collaborating with us, reduce the amount of transactions facilitated to borrowers andlead us to take additional steps to reduce fraud risk, which could increase our costs. High profile fraudulent activity could even lead to regulatoryintervention, and may divert our management’s attention and cause us to incur additional expenses and costs. Although we have not experienced anymaterial business or reputational harm as a result of fraudulent activities in the past, we cannot rule out the possibility that fraudulent activities maymaterially 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 and Intermediation.”Therefore, if we fail to provide material information to institutional funding partners, or if we fail to identify false information received from borrowers orothers and in turn provide such information to institutional funding partners, and in either case if we are also found to be at fault, due to failure or deemedfailure to exercise proper care, such as to conduct adequate information verification or supervision of our employees, or to accurately detect and prevent frauddue to ineffectiveness of our fraud detection tools, we could be held liable for damages caused to institutional funding partners as an intermediary pursuant tothe PRC Contract Law. In addition, if we fail to complete our obligations under the agreements with institutional funding partners and borrowers, we couldalso be held liable for damages caused to borrowers or institutional funding partners pursuant to the PRC Contract Law. On the other hand, we do not assumeany liability solely on the basis of failure to correctly assign a credit limit to a particular borrower in the process of facilitating transactions, as long as we donot conceal any material fact intentionally or provide false information, and are not found to be at fault otherwise. However, due to the lack of detailedregulations and guidance in the area of online consumer finance platforms and the possibility that the PRC government authority may promulgate new lawsand regulations regulating online consumer finance platforms in the future, there are substantial uncertainties regarding the interpretation and application ofcurrent or future PRC laws and regulations for the online consumer finance industry, and there can be no assurance that the PRC government authority willultimately 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, whichmay force us to increase the financing service fees we charge. If our borrowers decide not to utilize our credit products because of such an increase infinancing service fees, our ability to retain existing borrowers, attract or engage prospective borrowers as well as our competitive position may be severelylimited. We cannot assure you that we will be able to effectively manage such interest risk at all times or pass on any increase in interest rate to our borrowers.If we are unable to effectively manage such an increase, our business, profitability, results of operations and financial condition could be materially andadversely affected. If prevailing market interest rates decrease and we fail to adjust the amount of financing service fees we charge accordingly, prospectiveborrowers may take advantage of the lower funding cost offered by other parties. As a result, any fluctuation in the interest rate environment may discourageborrowers from making credit applications from us or utilize their approved credit, which may adversely affect 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 of factors.These factors include our ability to continue to offer credit products at competitive amount of financing service fees and adequate credit limits, reliable anduser-friendly website interface23Table of Contents and mobile apps for borrowers to browse, apply for credit, and purchase merchandise, and further improve our online credit approval process, sourcemerchandise sold on our marketplace to respond to borrower’s demands and preferences. If borrowers are not satisfied with our credit products, themerchandise sold on our marketplace or our services, or our system is severely interrupted or otherwise fail to meet the borrowers’ requests, our reputation andborrower 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, cost of revenues and operating expenses, net income/(loss) and otherkey metrics, 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 of ouroperating results may not be meaningful, especially given our limited operating history. Accordingly, the results for any one quarter are not necessarily anindication of future performance. Fluctuations in quarterly results may adversely affect the price of our ADSs. Factors that may cause fluctuations in ourquarterly 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 cost of revenues and operating expenses related to acquiring borrowers and the maintenance and expansion of ourbusiness, 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; •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 the firstquarter tend 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 offering lower amount of financing service fees, which may also increase the number ofborrowers who utilize our credit products and thus increase our total revenues for the relevant periods. On the other hand, lower financing service fee amountmay decrease our margin for the relevant periods. Due to our limited operating history, the seasonal trends that we have experienced in the past may notapply to, or be indicative of, our future operating results.Furthermore, we have commenced construction of our innovation park in Xiamen, Fujian Province, and the construction is expected to be completedin 2021. If the costs and expenses incurred for the construction exceed our planned limits, our financial results may be negatively affected.24Table of Contents Uncertainties relating to the growth of the retail industry in China in general, and the online retail industry in particular, could adversely affect revenuesfrom 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 retail industry,and in particular the online retail industry, in China. The long-term viability and prospects of various online retail business models in China remainrelatively untested. As such, demand for our credit products and our future results of operations will depend on numerous factors affecting the development ofthe 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 in borrower 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 our marketplaceand improve the online shopping experience of our users in response to trends and user requirements, may adversely affect our results of operations andbusiness prospects.Our success and future growth depend significantly on our successful marketing efforts, and if we are unable to promote and maintain our brands in aneffective 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 the success ofthe 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 maynot result in increased revenue in the immediate future or at all and, even if they do, any increases in revenue may not offset the expenses incurred. If we failto successfully promote and maintain our brands while incurring substantial expenses, our results of operations and financial condition would be adverselyaffected, 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 adversely affected.Our business and internal systems rely on software that is highly technical and complex. In addition, our business and internal systems depend on theability of such software to store, retrieve, process and manage large amounts of data. The software on which we rely has contained, and may now or in thefuture contain, undetected errors or bugs. Some errors may only be discovered after the code has been released for external or internal use. Errors or otherdesign defects within the software on which we rely may result in a negative experience for users, delay introductions of new features or enhancements, resultin 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 defectsdiscovered in the software on which we rely could result in harm to our reputation, loss of users, liability for damages, any of which could adversely affect ourbusiness, financial condition and results of operations.25Table of Contents Any 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, user service,reputation and our ability to attract new and retain existing borrowers and institutional funding partners. Our information technology systems infrastructure iscurrently deployed and our data is currently maintained on customized cloud computing services in China. Our operations depend on the service provider’sability to protect its and our systems in its facilities against damage or interruption from natural disasters, power or telecommunications failures, air qualityissues, environmental conditions, computer viruses or attempts to harm our systems, criminal acts and similar events. Since the launch of our business, we hadexperienced one system outage during the holiday seasons in China due to competition for available cloud computing services provided by our serviceprovider and we cannot assure you that such incidents will not occur in the future. Moreover, if our arrangement with this service provider is terminated or ifthere is a lapse of service or damage to their facilities, we could experience interruptions in our service as well as delays and additional expense in arrangingnew 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, whether accidentalor willful, could harm our relationships with borrowers and institutional funding partners and our reputation. Additionally, in the event of damage orinterruption, our insurance policies may not adequately compensate us for any losses that we may incur. We also may not have sufficient capacity to recoverall data and services in the event of an outage. These factors could prevent us from processing credit applications and other business operations, damage ourbrands and reputation, divert our employees’ attention, reduce our revenue, subject us to liability and cause borrowers and institutional funding partners toabandon our credit products, any of which could adversely affect our business, financial condition and results of operations.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 collaborate with.Our business depends on our employees and/or business partners to interact with users, process large numbers of transactions, deliver merchandise purchasedby borrowers, providing user and after-sale product services and support the collection process, all of which involve the use and disclosure of personalinformation. We could be materially and adversely affected if transactions were redirected, misappropriated or otherwise improperly executed, if personalinformation was disclosed to unintended recipients or if an operational breakdown or failure in the processing of transactions occurred, whether as a result ofhuman error, purposeful sabotage or fraudulent manipulation of our operations or systems. It is not always possible to identify and deter misconduct or errorsby employees or business partners, and the precautions we take to detect and prevent this activity may not be effective in controlling unknown or unmanagedrisks or losses. If any of our employees or business partners take, convert or misuse funds, documents or data or fail to follow our rules and procedures wheninteracting with users, we could be liable for damages and subject to regulatory actions and penalties. There have been media reports alleging that formeremployees of our company have misappropriated and sold borrower data. We are not aware of any former employee who has been identified by lawenforcement authorities to have engaged in such misconduct, and we do not believe such allegations have had a material impact on our business. However,future allegations of employee misconduct, whether perceived or actual, could materially and adversely affect our reputation and business. We could also beperceived to have facilitated or participated in the illegal misappropriation of funds, documents or data, or the failure to follow our rules and procedures, andtherefore be subject to civil or criminal liability. Any of these occurrences could result in our diminished ability to operate our business, potential liability tousers, inability to attract users, reputational damage, regulatory intervention and financial harm, which could negatively impact our business, financialcondition and results of operations.26Table of Contents If we are unable to protect the confidential information of our users and adapt to the relevant regulatory framework as to protection of such information,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 potentially vulnerableto cyber-attacks, computer viruses, physical or electronic break-ins or similar disruptions. While we have taken steps to protect the confidential informationthat we have access to, our security measures could be breached. Because techniques used to sabotage or obtain unauthorized access to systems changefrequently and generally are not recognized until they are launched against a target, we may be unable to anticipate these techniques or to implementadequate preventative measures. Any accidental or willful security breaches or other unauthorized access to our system could cause confidential userinformation to be stolen and used for criminal purposes. Security breaches or unauthorized access to confidential information could also expose us toliability related to the loss of the information, time-consuming and expensive litigation and negative publicity. If security measures are breached because ofthird-party action, employee error, malfeasance or otherwise, or if design flaws in our technology infrastructure are exposed and exploited, our relationshipswith users could be severely damaged, we could incur significant liability and our business and 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, to clearlyindicate the purposes, methods and scope of any information collection and usage, and to obtain the consent of users, as well as to establish user informationprotection system with appropriate remedial measures. We have obtained the consents from our users to use their personal information within the scope ofauthorization and we have taken technical measures to ensure the security of such personal information and prevent the personal information from beingdivulged, damaged or lost. However, there is uncertainty as to the interpretation and application of such laws which may be interpreted and applied in amanner inconsistent with our current policies and practices or require changes to the features of our system. We cannot assure you that our existing userinformation protection system and technical measures will be considered sufficient under applicable laws and regulations. If we are unable to address anyinformation protection concerns, or to comply with the then applicable laws and regulations, we may incur additional 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. The Sarbanes-Oxley Act requires, among other things, that we maintain effective disclosure controls and procedures and internal controls over financial reporting.Commencing with our fiscal year ending December 31, 2018, we must perform system and process evaluation and testing of our internal controls overfinancial reporting to allow management to report on the effectiveness of our internal controls over financial reporting in our Form 20-F filing for that year, asrequired by Section 404 of the Sarbanes-Oxley Act. In addition, beginning at the same time, our independent registered public accounting firm must attest toand report on the effectiveness of our internal control over financial reporting.As of December 31, 2018, our management has concluded that our internal control over financial reporting is effective. See “Item 15. Controls andProcedures Management’s Annual Report on Internal Control over Financial Reporting.” Our independent registered public accounting firm has issued areport, which has concluded that we maintained, in all material respects, effective internal control over financial reporting as of December 31, 2018.However, our internal control over financial reporting may 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 or that allcontrol issues and instances of fraud will be detected.27Table of Contents If we are unable to maintain proper and effective internal controls, we may not be able to produce timely and accurate financial statements. If thatwere to happen, the market price of our ADSs could decline and we could be subject to sanctions or investigations by the NYSE, SEC or other regulatoryauthorities.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 our success,and we rely on trademark and trade secret law and confidentiality, invention assignment and non-compete agreements with our employees and others toprotect our proprietary rights. See “Item 4. Information on the Company — B. Business Overview — Regulation — Regulations Related to IntellectualProperty Rights.” However, we cannot assure you that any of our intellectual property rights would not be challenged, invalidated or circumvented, or suchintellectual property will be sufficient to provide us with competitive advantages. In addition, other parties may misappropriate our intellectual propertyrights, 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 ofour proprietary technologies and similar intellectual property will be patented in a timely or cost-effective manner, or at all. Furthermore, parts of our businessrely on technologies developed or licensed by other parties, or co-developed with other parties, and we may not be able to obtain or continue to obtainlicenses 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, inventionassignment and non-compete agreements may be breached by counterparties, and there may not be adequate remedies available to us for any such breach.Accordingly, we may not be able to effectively protect our intellectual property rights or to enforce our contractual rights in China. Preventing anyunauthorized use of our intellectual property is difficult and costly and the steps we take may be inadequate to prevent the misappropriation of ourintellectual property. In the event that we resort to litigation to enforce our intellectual property rights, such litigation could result in substantial costs and adiversion of our managerial and financial resources. We can provide no assurance that we will prevail in such litigation. In addition, our trade secrets may beleaked or otherwise become available to, or be independently discovered by, our competitors. To the extent that our employees or consultants useintellectual property owned by others in their work for us, disputes may arise as to the rights in related know-how and inventions. Any failure in protecting orenforcing our intellectual property rights could have a material adverse effect on our business, financial condition 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 future subject to legalproceedings and claims relating to the intellectual property rights of others. In addition, there may be other parties’ trademarks, copyrights, know-how,proprietary technologies 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 other jurisdictions.If any infringement claims are brought against us, we may be forced to divert management’s time and other resources from our business and operations todefend 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 granting trademarks,copyrights, know-how, proprietary technologies or other intellectual property rights in China are still evolving and are uncertain, and we cannot assure youthat PRC courts or regulatory authorities would agree with our analysis. If we were found to have violated the intellectual property rights of others, we may besubject to liability for our infringement activities or may be prohibited from using such intellectual property, and we may incur licensing fees or be forced todevelop alternatives of our own. As a result, our business and results of operations may be materially and adversely affected.28Table of Contents We may incur liability for merchandise sold on our marketplace that are without or have yet to receive proper authorization, infringe on other parties’intellectual property rights, or fail to comply with related permits or filing requirements.We currently collaborate with more than 428 merchandise suppliers, including leading brands and their authorized distributors for our merchandisecredit product business. Although we have adopted measures to verify the authenticity and authorization of merchandise offered on our marketplace andavoid potential infringement of any rights of other parties in the course of sourcing these merchandise, we may not always be successful. In the event thatcounterfeit, unauthorized or infringing merchandise is sold on our mobile apps or infringing content is posted on our websites, we could face claims that weshould be held liable. We had in the past received a few claims alleging that merchandise sold on our marketplace infringed on other parties’ rights and hadworked with the relevant merchandise suppliers for product return and exchange of such merchandise. Although these claims have been immaterial to ourbusiness, results of operations and financial condition, if any material claim occurs in the future, irrespective of the validity of such claims, we may incursignificant costs and efforts in either defending against or settling such claims. If there is a successful claim against us, we might be required to paysubstantial damages or refrain from further sale of the relevant merchandise. Potential liability under PRC law if we negligently participated or assisted ininfringement activities associated with counterfeit goods includes injunctions to cease infringing activities, rectification, compensation, administrativepenalties and even criminal liability. Moreover, such claims or administrative penalties could result in negative publicity and our reputation could beseverely damaged. Any of these events could have a material and adverse effect 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 Sector adopted inApril 2016, online finance institutions are required to segregate assets of the institutional funding partners and borrowers in a custodian bank from their ownassets. However, there is uncertainty as to the implementation of such regulations, and the scope of online finance institutions which are subject to suchassets segregation liabilities remains unclear. In addition, commercial banks in the PRC currently only provide custodian services to online lendinginformation intermediary institutions as defined under the Interim Online Lending Information Intermediary Measures. We do not consider ourselves as anonline lending information intermediary institution as defined under the Interim Online Lending Information Intermediary Measures, and we currently do notengage commercial banks in the PRC to provide such custodian services to us. We use our best efforts to separate our own assets from those assets of theinstitutional funding partners to whom we transfer credit drawdowns by setting up separate bank accounts to monitor the assets of such institutional fundingpartners. However, since such bank accounts are still under our names and all the assets are therefore considered be owned by us from a PRC legalperspective, if any person enforces a judgment against our assets, the assets of the institutional funding partners and borrowers will be enforced against aswell. In addition, if we are deemed as an online lending information intermediary institution by the applicable regulatory authorities under the Interim OnlineLending Information Intermediary Measures in the future, we may be subject to regulatory measures, such as warnings, fines and other measures permittedunder 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-terrorist financing lawsand 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 laws andregulations, including internal controls and “know-your-customer” procedures, for preventing money laundering and terrorist financing. In addition, we relyon our institutional funding partners and payment processors, in particular online payment companies that handle the transfer of funds from institutionalfunding partners to us and the borrowers, to have their own appropriate anti- money laundering policies and procedures. Certain of our institutional fundingpartners and online payment companies are subject to anti-money laundering obligations under applicable anti-money laundering laws and regulations andare regulated in that respect by the PBOC. We have adopted commercially reasonable procedures for monitoring our institutional funding partners andpayment processors.29Table of Contents We have not been subject to fines or other penalties, or suffered business or other reputational harm, as a result of actual or alleged money launderingor terrorist financing activities in the past. However, our policies and procedures may not be completely effective in preventing other parties from using us,any of our institutional funding partners, or payment processors as a conduit for money laundering (including illegal cash operations) or terrorist financingwithout our knowledge. If we were to be associated with money laundering (including illegal cash operations) or terrorist financing, our reputation couldsuffer and we could become subject to regulatory fines, sanctions, or legal enforcement, including being added to any “blacklists” that would prohibit certainparties from engaging in transactions with us, all of which could have a material adverse effect on our financial condition and results of operations. Even ifwe, our institutional funding partners and payment processors comply with the applicable anti-money laundering laws and regulations, we, institutionalfunding partners and payment processors may not be able to fully eliminate money laundering and other illegal or improper activities in light of thecomplexity and the secrecy of these activities. Any negative perception of the industry, such as that arises from any failure of other online consumer financeservice providers to detect or prevent money laundering activities, even if factually incorrect or based on isolated incidents, could compromise our image,undermine the trust and credibility we have established, and negatively 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, thepreservation of customer information and transaction records, and the provision of assistance to the public security department and judicial authority ininvestigations and proceedings in relation to anti-money laundering matters. The PBOC will formulate implementing rules to further specify the anti-moneylaundering obligations of Internet finance service providers. We cannot assure you that the anti-money laundering policies and procedures we have adoptedwill 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 products andbetter serve borrowers and enhance our competitive position.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 be unable toobtain 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;30Table of Contents •regulatory risks, including remaining in good standing with existing regulatory bodies or receiving any necessary pre-closing or post-closingapprovals, 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 of laws,commercial disputes, tax liabilities and other known and unknown liabilities; and •unexpected costs and unknown risks and liabilities associated with strategic investments or acquisitions.We may not make any investments or acquisitions, or any future investments or acquisitions may not be successful, may not benefit our businessstrategy, may not generate sufficient revenues to offset the associated acquisition costs or may not otherwise result in the intended benefits.From time to time we may also make financial investments, such as investments in equity securities of other companies, and there can be assurancethat we will be able to realize profits from such investments.Our business depends on the continued efforts of our senior management. If one or more of our key executives were unable or unwilling to continue in theirpresent 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 annual report.In particular, Mr. Min Luo, our founder, chairman and chief executive officer, is critical to the management of our business and operations and thedevelopment of our strategic direction. While we have provided different incentives to our management, we cannot assure you that we can continue to retaintheir 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 easilyor at all, our future growth may be constrained, our business may be severely disrupted and our financial condition and results of operations may bematerially and 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 not join ourcompetitors or form a competing business. If any dispute arises between our current or former officers and us, we may have to incur substantial costs andexpenses 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 our business.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 qualified andskilled employees. Competition for highly skilled technical, risk management, operation management and financial personnel is extremely intense. We maynot be able to hire and retain these personnel at compensation levels consistent with our existing compensation and salary structure. Some of the companieswith which we compete for experienced employees have greater resources than we have and may be able to offer more attractive terms of employment.In addition, we invest significant time and expenses in training our employees, which increases their value to competitors who may seek to recruitthem. If we fail to retain our employees, we could incur significant expenses in hiring and training their replacements, and the quality of our services and ourability to serve borrowers and investors could diminish, resulting in a material adverse effect to our business.Increases 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 expected tocontinue to increase. In addition, we are required by PRC laws and regulations to pay various statutory employee benefits, including pension, housing fund,medical insurance,31Table of Contents work-related injury insurance, unemployment insurance and maternity insurance to designated government agencies for the benefit of our employees. Therelevant government agencies may examine whether an employer has made adequate payments to the statutory employee benefits, and those employers whofail to make adequate payments may be subject to late payment fees, fines and/or other penalties. We expect that our labor costs, including wages andemployee benefits, will continue to increase. Unless we are able to control our labor costs or pass on these increased labor costs, our financial condition andresults 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 people areharmed 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 the operatoris not the supplier of the product or service purchased by the consumer. As a result, sales of defective merchandise could expose us to product liability claimsrelating to personal injury or property damage or other actions. In addition, if we do not take appropriate remedial action against merchandise suppliers foractions they engage in that we know, or should have known, would infringe upon the rights and interests of consumers, we may be held jointly liable with themerchandise suppliers for such infringement. Moreover, applicable consumer protection laws in China provide that trading platforms will be held liable forfailing to meet any undertakings that the platforms make to consumers with regard to merchandise listed on their websites or mobile apps. Furthermore, weare required to report to the State Administration of Industry and Commerce, or the SAIC, or its local branches any violation of applicable laws, regulations orSAIC rules by merchandise suppliers or service providers, such as sales of goods without proper license or authorization, and to take appropriate remedialmeasures, including ceasing to provide services to the relevant merchandise suppliers. We may also be held jointly liable with merchandise suppliers who donot possess the proper licenses or authorizations to sell goods or sell goods that do not meet product standards. In addition, we may face activist litigation inChina by plaintiffs claiming damages based on consumer protection laws, which may result in increased costs in defending such suits and damages should wenot prevail, which could materially and adversely affect our reputation and brands and our results of operations. We do not maintain product liabilityinsurance for merchandise offered on our marketplace, and our rights of indemnity from our merchandise suppliers may not adequately cover us for anyliability we may incur. Even unsuccessful claims could result in the expenditure of funds and management time and resources and could materially reduceour 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 to anymerchandise offered by these merchandise suppliers. However, not all of our agreements with merchandise suppliers include such terms, and for thoseagreements that include such terms, we may not be able to successfully enforce our contractual rights and may need to initiate costly and lengthy legalproceedings 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, encouragesteamwork and embraces changes and development. As we develop the infrastructure of a public company and continue to grow, we may find it difficult tomaintain these valuable aspects of our corporate culture. Any failure to preserve our culture could negatively impact our future success, including our abilityto attract and retain employees, encourage innovation and teamwork and effectively focus on and pursue our corporate objectives.We 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 of insuring forthese risks and the difficulties associated with acquiring such insurance on commercially reasonable terms make it impractical for us to have such insurance.Any uninsured business disruptions may result in our incurring substantial costs and the diversion of resources, which could have an adverse effect on ourresults of operations and financial condition.32Table of Contents 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 and unemploymentrates, may affect borrowers’ willingness to seek credit and institutional funding partners’ ability and desire to fund credit drawdowns facilitated by us.Economic conditions in China are sensitive to global economic conditions. The global financial markets have experienced significant disruptions since2008 and the United States, Europe and other economies have experienced periods of recession. The recovery from the lows of 2008 and 2009 has beenuneven and there are new challenges, including the escalation of the European sovereign debt crisis from 2011 and the slowdown of China’s economicgrowth since 2012, which may continue. There is considerable uncertainty over the long- term effects of the expansionary monetary and fiscal policiesadopted by the central banks and financial authorities of some of the world’s leading economies, including the United States and China. There have alsobeen concerns over unrest in North Korea, Ukraine, the Middle East and Africa, which have resulted in volatility in financial and other markets. There havealso been concerns over the expected withdrawal of the United Kingdom from the European Union as well as the outcome of the United States presidentialelection in November 2016. There have also been concerns about the economic effect of the tensions in the relationship between China and surroundingAsian countries. If present Chinese and global economic uncertainties persist, we may have difficulty in obtaining funding sources to fund the credit utilizedby borrowers. Adverse economic conditions could also reduce the number of quality borrowers seeking credit from us, as well as their ability to makepayments. Should any of these situations occur, the amount of transactions facilitated to borrowers and our revenue will decline, and our business andfinancial condition will be negatively impacted. Additionally, continued turbulence in the international markets may adversely affect our ability to accessthe 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 not control.Our credit products are offered through mobile apps. As new mobile devices and platforms are released, it is difficult to predict the problems we mayencounter in developing applications for these new devices and platforms, and we may need to devote significant resources to the development, support andmaintenance of such applications. In addition, our future growth and our results of operations could suffer if we experience difficulties in the future inintegrating our credit products into mobile devices or if problems arise with our relationships with providers of mobile operating systems or mobile appstores, or if we face increased costs to distribute or have users utilize our credit products on mobile devices. We are further dependent on the interoperabilityof providing our credit products on popular mobile operating systems that we do not control, such as iOS and Android, and any changes in such systems thatdegrade the accessibility of our credit products or give preferential treatment to competing products could adversely affect the usability of our credit productson mobile devices. In the event that it is more difficult for our users to access and utilize our credit products on their mobile devices, or if our users choose notto access or utilize our credit products on their mobile devices or to use mobile operating systems that do not offer access to our credit products, our usergrowth could be harmed and our business, financial condition and operating results may be adversely affected.Our 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 cloud computingservices. Our cloud computing service provider may rely on a limited number of telecommunication service providers to provide it with data communicationscapacity through local telecommunications lines and Internet data centers to host its servers. Such service provider may have limited access to alternativenetworks or services in the event of disruptions, failures or other problems with China’s Internet infrastructure or the fixed telecommunications networksprovided by telecommunication service providers. With the expansion of our business, we may be required to upgrade our technology and infrastructure tokeep up with increasing traffic. We cannot assure you that our cloud computing service provider and the underlying Internet infrastructure and the fixedtelecommunications networks in China will be able to support the demands associated with the continued growth in Internet usage.33Table of Contents In addition, we have no control over the costs of the services provided by telecommunication service providers which in turn, may affect our costs ofutilizing customized cloud computing services. If the prices we pay for customized cloud computing services rise significantly, our results of operations maybe adversely affected. Furthermore, if Internet access fees or other charges to Internet users increase, our user traffic may decline and our business may beharmed.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 could cause the loss orcorruption 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, H1N1flu, H7N9 flu, avian flu, SARS or other epidemic, since it could require our employees to be quarantined and/or our offices to be disinfected. In addition, ourresults 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 regulatory restrictions onforeign investment in the relevant industries, or if these regulations or the interpretation of existing regulations change in the future, we could be subject tosevere 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 and regulations,and our wholly-owned PRC subsidiary, Ganzhou Qufenqi, is a foreign-invested enterprise, or an FIE. To comply with PRC laws and regulations, we conductour business in China through our consolidated VIEs and their affiliates. Ganzhou Qufenqi has entered into a series of contractual arrangements with ourconsolidated VIEs and their shareholders. In addition, pursuant to the resolutions of all shareholders of Qudian Inc. and the resolutions of the board ofdirectors of Qudian Inc., the board of directors of Qudian Inc. or any officer authorized by such board shall cause Ganzhou Qufenqi to exercise GanzhouQufenqi’s rights under the power of attorney agreements entered into among Ganzhou Qufenqi, each of our consolidated VIEs and the nominee shareholdersof each of our consolidated VIEs and Ganzhou Qufenqi’s rights under the exclusive call option agreement between Ganzhou Qufenqi and each of ourconsolidated VIEs. As a result of these resolutions and the provision of unlimited financial support from the Company to each of our consolidated VIEs,Qudian Inc. has been determined to be most closely associated with each of our consolidated VIEs within the group of related parties and was considered tobe the primary beneficiary of each of our consolidated VIEs and its subsidiaries.We believe that our corporate structure and contractual arrangements comply with the current applicable PRC laws and regulations. Our PRC legalcounsel, based on its understanding of the relevant laws and regulations, is of the opinion that each of the contracts among our wholly-owned PRCsubsidiary, our consolidated VIEs and their shareholders is valid, binding and enforceable in accordance with its terms. However, as there are substantialuncertainties regarding the interpretation and application of PRC laws and regulations, including the Regulations on Mergers and Acquisitions of DomesticEnterprises by Foreign Investors, or the M&A Rules and the34Table of Contents Telecommunications Regulations and the relevant regulatory measures concerning the telecommunications industry, there can be no assurance that the PRCgovernment authorities, such as the Ministry of Commerce, or the MOFCOM, or the MIIT, or other authorities that regulate online consumer financeplatforms and other participants in the telecommunications industry, would agree that our corporate structure or any of the above contractual arrangementscomply with PRC licensing, registration or other regulatory requirements, with existing policies or with requirements or policies that may be adopted in thefuture. PRC laws and regulations governing the validity of these contractual arrangements are uncertain and the relevant government authorities have broaddiscretion in interpreting these laws and regulations.If our corporate structure and contractual arrangements are deemed by the MIIT or the MOFCOM or other regulators having competent authority tobe illegal, either in whole or in part, we may lose control of our consolidated VIEs and have to modify such structure to comply with regulatory requirements.However, there can be no assurance that we can achieve this without material disruption to our business. Further, if our corporate structure and contractualarrangements are found to be in violation of any existing or future PRC laws or regulations, the relevant regulatory authorities would have broad discretion indealing 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 exist with respect to how the 2019 Law of Foreign Investment may affect our currentcorporate structure, corporate governance and 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 our corporatestructure causes us to lose the rights to direct the activities of our consolidated VIEs or our right to receive their economic benefits, we would no longer beable to consolidate the financial results of such VIEs in our consolidated financial statements. However, we do not believe that such actions would result inthe liquidation or dissolution of our company, our wholly-owned subsidiaries in China or our consolidated VIEs or their subsidiaries. See “Item 4.Information on the Company — B. Business Overview — Overview — Our Contractual Arrangements with Consolidated VIEs 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 our consolidatedVIEs were not made on an arm’s length basis and adjust our income and expenses for PRC tax purposes by requiring a transfer pricing adjustment. A transferpricing adjustment could adversely affect us by (i) increasing the tax liabilities of our consolidated VIEs without reducing the tax 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 ourconsolidated VIEs to obtain or maintain preferential tax treatments and other financial incentives.35Table of Contents We rely on contractual arrangements with our consolidated VIEs and their shareholders to operate our business, which may not be as effective as directownership 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 these contractualarrangements, see “Item 4. Information on the Company — B. Business Overview — Overview — Our Contractual Arrangements with Consolidated VIEs andTheir Shareholders.” All of our revenue are attributed to our consolidated VIEs. These contractual arrangements may not be as effective as direct ownership inproviding us with control over our consolidated VIEs. If our consolidated VIEs or their shareholders fail to perform their respective obligations under thesecontractual arrangements, our recourse to the assets held by our consolidated VIEs is indirect and we may have to incur substantial costs and expendsignificant resources to enforce such arrangements in reliance on legal remedies under PRC law. These remedies may not always be effective, particularly inlight of uncertainties in the PRC legal system. Furthermore, in connection with litigation, arbitration or other judicial or dispute resolution proceedings,assets under the name of any of record holder of equity interest in our consolidated VIEs, including such equity interest, may be put under court custody. As aconsequence, we cannot be certain that the equity interest will be disposed pursuant to the contractual arrangement or ownership by the record holder of theequity 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 the PRClegal system could limit our ability to enforce these contractual arrangements. In the event that we are unable to enforce these contractual arrangements, or ifwe suffer significant time delays or other obstacles in the process of enforcing these contractual arrangements, it would be very difficult to exert effectivecontrol over our consolidated VIEs, and our ability to conduct our business and our financial condition and results of operations may be materially andadversely affected. See “ — Risks Relating to Doing Business in China — There are uncertainties regarding the interpretation and enforcement of PRC laws,rules and regulations.”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. Xiamen Weipujia Technology Co., Ltd., or Xiamen Weipujia, alsobecame our consolidated VIE in 2018. Min Luo, our founder, chairman and chief executive officer, and Mr. Lianzhu Lv, our director and head of userexperience department, are the only shareholders of Ganzhou Qudian, and Mr. Min Luo and Mr. Hongjia He, our vice president, are the only shareholders ofHunan Qudian. Mr. Min Luo is the only shareholder of Xiamen Qudian. Mr. Min Luo and Mr. Hongjia He are the only shareholders of Xiamen Weipujia. 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 and wouldonly need to enforce against such shareholder(s) in the event of a breach. However, there can be no assurance that the shareholding structure of the newconsolidated VIEs will deliver the expected benefits. If any of the shareholders of the new consolidated VIEs breaches his obligations under the applicablecontractual 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 business andfinancial condition.In connection with our operations in China, we rely on the shareholders of our consolidated VIEs to abide by the obligations under such contractualarrangements. The interests of these shareholders in their individual capacities as the shareholders of our consolidated VIEs may differ from the interests ofour company as a whole, as what is in the best interests of our consolidated VIEs, including matters such as whether to distribute dividends or to make otherdistributions to fund our offshore requirement, may not be in the best interests of our company. There can be no assurance that 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 be resolved in our favor. In addition, theseindividuals may breach or cause our consolidated VIEs and their subsidiaries to breach or refuse to renew the existing contractual arrangements with us.36Table of Contents Currently, we do not have arrangements to address potential conflicts of interest the shareholders of our consolidated VIEs may encounter, on onehand, and as a beneficial owner of our company, on the other hand. We, however, could, at all times, exercise our option under the exclusive call optionagreement to cause them to transfer all of their equity ownership in our consolidated VIEs to a PRC entity or individual designated by us as permitted by thethen applicable PRC laws. In addition, if such conflicts of interest arise, we could also, in the capacity of attorney-in-fact of the then existing shareholders ofour consolidated VIEs as provided under the power of attorney agreements, directly appoint new directors of our consolidated VIEs. We rely on theshareholders of our consolidated VIEs to comply with PRC laws and regulations, which protect contracts and provide that directors and executive officersowe a duty of loyalty to our company and require them to avoid conflicts of interest and not to take advantage of their positions for personal gains, and thelaws of the Cayman Islands, which provide that directors have a duty of care and a duty of loyalty to act honestly in good faith with a view to our bestinterests. However, the legal frameworks of China and the Cayman Islands do not provide guidance on resolving conflicts in the event of a conflict withanother corporate governance regime. If we cannot resolve any conflicts of interest or disputes between us and the shareholders of our consolidated VIEs, wewould have to rely on legal proceedings, which could result in disruption of our business and subject us to substantial uncertainty as to the outcome of anysuch legal proceedings.Our corporate actions will be substantially controlled by our founder, chairman and chief executive officer, Mr. Min Luo, who will have the ability tocontrol or exert significant influence over important corporate matters that require approval of shareholders, which may deprive you of an opportunity toreceive 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 73.1% of our aggregate voting power as of March 31, 2019. As a result, Mr. Min Luo has the ability to control or exert significantinfluence over important corporate matters, investors may be prevented from affecting important corporate matters involving our company that requireapproval of shareholders, including: •the composition of our board of directors and, through it, any determinations with respect to our operations, business direction and policies,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, this concentration ofownership may also discourage, delay or prevent a change in control of our company, which could have the dual effect of depriving our shareholders of anopportunity to receive a premium for their shares as part of a sale of our company and reducing the price of the ADSs. As a result of the foregoing, the value ofyour 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 is registered andfiled with the relevant local branch of the SAIC. We generally execute legal documents by affixing chops or seals, rather than having the designated legalrepresentatives 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 contract chopsfor executing leases and commercial contracts. We use finance chops generally for making and collecting payments, including issuing invoices. Use of37Table of Contents corporate chops and contract chops must be approved by our legal department and administrative department, and use of finance chops must be approved byour finance department. The chops of our subsidiaries and consolidated VIEs are generally held by the relevant entities so that documents can be executedlocally. Although we usually utilize chops to execute contracts, the registered legal representatives of our subsidiaries and consolidated VIEs have theapparent 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 wehave approval procedures in place and monitor our key employees, including the designated legal representatives of our subsidiaries and consolidated VIEs,the procedures may not be sufficient to prevent all instances of abuse or negligence. There is a risk that our key employees or designated legal representativescould abuse their authority, for example, by binding our subsidiaries and consolidated VIEs with contracts against our interests, as we would be obligated tohonor these contracts if the other contracting party acts in good faith in reliance on the apparent authority of our chops or signatures of our legalrepresentatives. If any designated legal representative obtains control of the chop in an effort to obtain control over the relevant entity, we would need tohave a shareholder or board resolution to designate a new legal representative and to take legal action to seek the return of the chop, apply for a new chopwith the relevant authorities, or otherwise seek legal remedies for the legal representative’s misconduct. If any of the designated legal representatives obtainsand misuses or misappropriates our chops and seals or other controlling intangible assets for whatever reason, we could experience disruption to our normalbusiness operations. We may have to take corporate or legal action, which could involve significant time and resources to resolve while distractingmanagement from our operations, and our business and operations may be materially and adversely affected.Substantial uncertainties exist with respect to how the 2019 Law of Foreign Investment may affect our current corporate structure, corporate governanceand business and financial condition.On March 15, 2019, the Standing Committee of the National People’s Congress promulgated the 2019 Law of Foreign Investment (“The 2019 Law ofForeign Investment”), which will become effective on January 1, 2020. The 2019 Law of Foreign Investment will replace the trio of existing laws regulatingforeign investment in China, namely, the Sino-foreign Equity Joint Venture Enterprise Law, the Sino-foreign Cooperative Joint Venture Enterprise Law andthe Wholly Foreign-invested Enterprise Law, together with their implementation rules and ancillary regulations.The 2019 Law of Foreign Investment stipulates four forms of foreign investment, namely, (1) a foreign investor, individually or collectively withother investors, establishes a foreign-invested enterprise within China; (2) a foreign investor acquires stock shares, equity shares, interests in assets, or otherlike rights and interests of an enterprise within China; (3) a foreign investor, individually or collectively with other investors, invests in a new project withinChina; and (4) foreign investments in other forms as provided by law, administrative regulations, or by the State Council.The contractual arrangements have been adopted by many PRC-based companies, including us, to obtain necessary licenses and permits in theindustries that are currently subject to foreign investment restrictions in China. As mentioned above, the 2019 Law of Foreign Investment does not mentionconcepts including “de facto control” and “controlling through contractual arrangements,” nor does it specify the regulation on controlling throughcontractual arrangements. Specifically, it does not incorporate contractual arrangements as a form of foreign investment, the contractual arrangements as awhole and each of the arrangements comprising the contractual arrangements will not be materially affected and will continue to be legal, valid and bindingon the parties.However, the 2019 Law of Foreign Investment stipulates that “foreign investment includes foreign investors invest in China through any othermethods under laws, administrative regulations, or provisions prescribed by the State Council,” which means there are possibilities that future laws,administrative regulations or provisions of State Council may stipulate contractual arrangements as a way of foreign investment and our contractualarrangements would be regarded as foreign investment correspondingly. If that is the case, whether our contractual arrangements will be deemed to be inviolation of the foreign investment access requirements and how our contractual arrangements will be handled are subject to uncertainties.38Table of Contents Therefore, there is no guarantee that the contractual arrangements and the business of our Consolidated VIEs will not be materially and adverselyaffected in the future due to changes in PRC laws and regulations. If future laws, administrative regulations or provisions prescribed by the State Councilmandate further actions to be completed by companies with existing contractual arrangements, we may face substantial uncertainties as to whether we cancomplete such actions timely, or at all.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 and results ofoperations 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, levelof development, growth rate, and control of foreign exchange and allocation of resources. Although the PRC government has implemented measuresemphasizing the utilization of market forces for economic reform, the reduction of state ownership of productive assets, and the establishment of improvedcorporate governance in business enterprises, a substantial portion of productive assets in China is still owned by the government. In addition, the PRCgovernment continues to play a significant role in regulating industry development by imposing industrial policies. The PRC government also exercisessignificant control over China’s economic growth by allocating resources, controlling payment of foreign currency-denominated obligations, settingmonetary policy, regulating financial services and institutions and providing preferential treatment to particular industries 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 results ofoperations could be materially and adversely affected by government control over capital investments or changes in tax regulations that are applicable to us.In addition, the PRC government has implemented in the past certain measures to control the pace of economic growth. These measures may cause decreasedeconomic activity, which in turn could lead to a reduction in demand for our services and consequently have a material adverse effect on our businesses,financial condition and results of operations.There 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 system based onwritten 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 in general.The overall effect of legislation over the past three decades has significantly enhanced the protections afforded to various forms of foreign investment inChina. However, China has not developed a fully integrated legal system, and recently enacted laws, rules and regulations may not sufficiently cover allaspects of economic activities in China or may be subject to significant degrees of interpretation by PRC regulatory agencies. In particular, because theselaws, rules and regulations are relatively new, and because of the limited number of published decisions and the nonbinding nature of such decisions, andbecause the laws, rules and regulations often give the relevant regulator significant discretion in how to enforce them, the interpretation and enforcement ofthese laws, rules and regulations involve uncertainties and can be inconsistent and unpredictable. In addition, the PRC legal system is based in part ongovernment policies and internal rules, some of which are not published on a timely basis or at all, and which may have a retroactive effect. As a result, wemay not be aware of our violation of these policies and rules until after the occurrence of the violation.39Table of Contents 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 maybe more difficult to evaluate the outcome of administrative and court proceedings and the level of legal protection we enjoy than in more developed legalsystems. These uncertainties may impede our ability to enforce the contracts we have entered into and could materially and adversely affect 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 PRC subsidiariesto liability or penalties, limit our ability to inject capital into our PRC subsidiaries or limit our PRC subsidiaries’ ability to increase their registeredcapital 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 circular commonlyknown as “SAFE Circular 75” promulgated by the SAFE on October 21, 2005. SAFE Circular 37 requires PRC residents to register with local branches of theSAFE in connection with their direct establishment or indirect control of an offshore entity, for the purpose of overseas investment and financing, with suchPRC residents’ legally owned assets or equity interests in domestic enterprises or offshore assets or interests, referred to in SAFE Circular 37 as a “specialpurpose vehicle.” SAFE Circular 37 further requires amendment to the registration in the event of any significant changes with respect to the special purposevehicle, such as increase or decrease of capital contributed by PRC individuals, share transfer or exchange, merger, division or other material event. In theevent that a PRC shareholder holding interests in a special purpose vehicle fails to fulfill the required SAFE registration, the PRC subsidiaries of that specialpurpose vehicle may be prohibited from making profit distributions to the offshore parent and from carrying out subsequent cross-border foreign exchangeactivities, and the special purpose vehicle may be restricted in its ability to contribute additional capital into its PRC subsidiary. Moreover, failure to complywith the various SAFE registration requirements described above could result in liability under PRC law for evasion of foreign exchange controls. Accordingto the Notice on Further Simplifying and Improving Policies for the Foreign Exchange Administration of Direct Investment released on February 13, 2015 bythe SAFE, local banks will examine and handle foreign exchange registration for overseas direct investment, including the initial foreign exchangeregistration and amendment registration, under SAFE Circular 37 from June 1, 2015.Mr. Min Luo has completed the SAFE registration pursuant to SAFE Circular 75 in 2014. We have notified substantial beneficial owners of ordinaryshares who we know are PRC residents of their filing obligation. Nevertheless, we may not be aware of the identities of all of our beneficial owners who arePRC residents. We do not have control over our beneficial owners and there can be no assurance that all of our PRC-resident beneficial owners will complywith SAFE Circular 37 and subsequent implementation rules, and there is no assurance that the registration under SAFE Circular 37 and any amendment willbe completed in a timely manner, or will be completed at all. The failure of our beneficial owners who are PRC residents to register or amend their foreignexchange registrations in a timely manner pursuant to SAFE Circular 37 and subsequent implementation rules, or the failure of future beneficial owners of ourcompany who are PRC residents to comply with the registration procedures set forth in SAFE Circular 37 and subsequent implementation rules, may subjectsuch beneficial owners or our PRC subsidiaries to fines and legal sanctions. Failure to register or comply with relevant requirements may also limit our abilityto contribute additional capital to our PRC subsidiaries and limit our PRC subsidiaries’ ability to distribute dividends to our company. These risks may havea 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 and otherlegal or administrative sanctions.Pursuant to SAFE Circular 37, PRC residents who participate in share incentive plans in overseas non-publicly-listed companies due to their positionas director, senior management or employees of the PRC subsidiaries of the overseas companies may submit applications to SAFE or its local branches for theforeign exchange registration with respect to offshore special purpose companies. Our directors, executive officers and other employees who are PRCresidents and who have been granted options may follow SAFE Circular 37 to apply for the foreign exchange registration before our company becomes anoverseas listed company. After our company becomes an overseas listed company upon completion of our initial public offering, we and our directors,executive40Table of Contents officers and other employees who are PRC residents and who have been granted options have been subject to the Notice on Issues Concerning the ForeignExchange Administration for Domestic Individuals Participating in Stock Incentive Plan of Overseas Publicly Listed Company, issued by SAFE in February2012, according to which, employees, directors, supervisors and other management members participating in any stock incentive plan of an overseas publiclylisted company who are PRC residents are required to register with SAFE through a domestic qualified agent, which could be a PRC subsidiary of suchoverseas listed company, and complete certain other procedures. We will make efforts to comply with these requirements upon completion of our initialpublic offering. However, there can be no assurance that they can successfully register with SAFE in full compliance with the rules. Failure to complete theSAFE registrations may subject them to fines and legal sanctions and may also limit the ability to make payment under our share incentive plans or receivedividends or sales proceeds related thereto, or our ability to contribute additional capital into our wholly-foreign owned enterprises in China and limit ourwholly-foreign owned enterprises’ ability to distribute dividends to us. We also face regulatory uncertainties that could restrict our ability to adopt additionalshare incentive plans for our directors and 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 pay dividendsand other cash distributions to our shareholders, fund inter-company loans, service any debt we may incur outside of China and pay our expenses. When ourprincipal operating subsidiaries or the consolidated VIEs incur additional debt, the instruments governing the debt may restrict their ability to pay dividendsor make other distributions or remittances to us. Furthermore, the laws, rules and regulations applicable to our PRC subsidiaries and certain other subsidiariespermit payments of dividends only out of their retained earnings, if any, determined in accordance with applicable accounting standards and regulations.Under PRC laws, rules and regulations, each of our subsidiaries incorporated in China is required to set aside at least 10% of its net income each yearto fund certain statutory reserves until the cumulative amount of such reserves reaches 50% of its registered capital. These reserves, together with theregistered capital, are not distributable as cash dividends. As a result of these laws, rules and regulations, our subsidiaries incorporated in China are restrictedin their ability to transfer a portion of their respective net assets to their shareholders as dividends, loans or advances. Certain of our subsidiaries did not haveany retained earnings available for distribution in the form of dividends as of December 31, 2018. In addition, registered share capital and capital reserveaccounts are also restricted from withdrawal in the PRC, up to the amount of net assets held in each operating subsidiary.Limitations on the ability of our consolidated VIEs to make remittance to the wholly-foreign owned enterprise and on the ability of our subsidiariesto pay dividends to us could limit our ability to access cash generated by the operations of those entities, including to make investments or acquisitions thatcould 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 to PRCincome 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 China with“de facto management bodies” located in China may be considered PRC tax resident enterprises for tax purposes and may be subject to the PRC enterpriseincome tax at the rate of 25% on their global income. “De facto management body” refers to a managing body that exercises substantive and overallmanagement and control over the production and business, personnel, accounting books and assets of an enterprise. The State Administration of Taxationissued the Notice Regarding the Determination of Chinese- Controlled Offshore-Incorporated Enterprises as PRC Tax Resident Enterprises on the Basis of DeFacto Management Bodies, or Circular 82, on April 22, 2009. Circular 82 provides certain specific criteria for determining whether the “de facto managementbody” of a Chinese-controlled offshore-incorporated enterprise is located in China. Although Circular 82 only applies to offshore enterprises controlled byPRC enterprises, not those controlled by foreign enterprises or individuals, the determining criteria set forth in Circular 82 may reflect the StateAdministration of Taxation’s general position on how the “de facto management body” test should be applied in determining the tax resident41Table of Contents status of offshore enterprises, regardless of whether they are controlled by PRC enterprises. If we were to be considered a PRC resident enterprise, we would besubject to PRC enterprise income tax at the rate of 25% on our global income. In such case, our profitability and cash flow may be materially reduced as aresult of our global income being taxed under the Enterprise Income Tax Law. We believe that none of our entities outside of China is a PRC residententerprise for PRC tax purposes. However, the tax resident status of an enterprise is subject to determination by the PRC tax authorities and uncertaintiesremain 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 subject toPRC tax.Under the Enterprise Income Tax Law and its implementation regulations issued by the State Council, a 10% PRC withholding tax is applicable todividends payable to investors that are non-resident enterprises, which do not have an establishment or place of business in the PRC or which have suchestablishment or place of business but the dividends are not effectively connected with such establishment or place of business, to the extent such dividendsare derived from sources within the PRC. Similarly, any gain realized on the transfer of ADSs or Class A ordinary shares by such investors is also subject toPRC tax at a current rate of 10%, subject to any reduction or exemption set forth in applicable tax treaties or under applicable tax arrangements betweenjurisdictions, if such gain is regarded as income derived from sources within the PRC. If we are deemed a PRC resident enterprise, dividends paid on our ClassA 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 sourceswithin the PRC and would as a result be subject to PRC taxation. Furthermore, if we are deemed a PRC resident enterprise, dividends payable to individualinvestors who are non-PRC residents and any gain realized on the transfer of ADSs or Class A ordinary shares by such investors may be subject to PRC tax ata current rate of 20%, subject to any reduction or exemption set forth in applicable tax treaties or under applicable tax arrangements between jurisdictions. Ifwe 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 ordinaryshares would be able to claim the benefit of income tax treaties or agreements entered into between China and other countries or areas. If dividends payableto our non-PRC investors, or gains from the transfer of our ADSs or Class A ordinary shares by such investors, are deemed as income derived from sourceswithin the PRC and thus are subject to PRC tax, the value of your investment in our 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 attributed to aChinese 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 Indirect Transfers ofAssets by Non-PRC Resident Enterprises, or Bulletin 7, which partially replaced and supplemented previous rules under the Notice on StrengtheningAdministration of Enterprise Income Tax for Share Transfers by Non-PRC Resident Enterprises, or SAT Circular 698, issued by the State Administration ofTaxation, on December 10, 2009. Pursuant to Bulletin 7, an “indirect transfer” of assets, including equity interests in a PRC resident enterprise, by non-PRCresident enterprises may be re-characterized and treated as a direct transfer of PRC taxable assets, if such arrangement does not have a reasonable commercialpurpose and was established for the purpose of avoiding payment of PRC enterprise income tax. As a result, gains derived from such indirect transfer may besubject to PRC enterprise income tax. According to Bulletin 7, “PRC taxable assets” include assets attributed to an establishment in China, immovableproperties located in China, and equity investments in PRC resident enterprises, in respect of which gains from their transfer by a direct holder, being a non-PRC resident enterprise, would be subject to PRC enterprise income taxes. When determining whether there is a “reasonable commercial purpose” of thetransaction arrangement, features to be taken into consideration include: whether the main value of the equity interest of the relevant offshore enterprisederives from PRC taxable assets; whether the assets of the relevant offshore enterprise mainly consists of direct or indirect investment in China or if itsincome mainly derives from China; whether the offshore enterprise and its subsidiaries directly or indirectly holding PRC taxable assets have real commercialnature which is evidenced by their actual function and risk exposure; the duration of existence of the business model and organizational structure; thereplicability of the transaction by direct transfer of PRC taxable assets; and the tax situation of such indirect transfer and applicable tax treaties or similararrangements. In respect of an indirect offshore transfer of assets of a PRC establishment, the resulting gain is to be42Table of Contents included with the enterprise income tax filing of the PRC establishment or place of business being transferred, and would consequently be subject to PRCenterprise income tax at a rate of 25%. Where the underlying transfer relates to the immovable properties located in China or to equity investments in a PRCresident enterprise, which is not related to a PRC establishment or place of business of a non-resident enterprise, a PRC enterprise income tax of 10% wouldapply, subject to available preferential tax treatment under applicable tax treaties or similar arrangements, and the party who is obligated to make the transferpayments has the withholding obligation. Where the payor fails to withhold any or sufficient tax, the transferor is required to declare and pay such tax to thetax authority by itself within the statutory time limit. Late payment of applicable tax will subject the transferor to default interest. Bulletin 7 does not applyto transactions of sale of shares by investors through a public stock exchange where such shares were acquired from a transaction through a public stockexchange. 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 Bulletin 7.According to SAT Circular 37, the amount of taxable income equals the remainder after deducting the net equity value from the equity transfer income.Equity transfer income means the consideration collected by the transferor from the equity transfer, including income in 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 the capital contribution costs actually paid bythe equity transferor to a PRC resident enterprise at the time of the investment and equity participation, or the equity transfer costs actually paid at the time ofacquisition of such equity to the original transferor of such 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 subsidiaries orinvestments. Our company may be subject to filing obligations or taxed if our company is transferor in such transactions, and may be subject to withholdingobligations if our company is transferee in such transactions, under SAT Circular 37 and Bulletin 7. For transfer of shares in our company by investors that arenon-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 berequired to expend valuable resources to comply with SAT Circular 37 and Bulletin 7 or to request the relevant transferors from whom we purchase taxableassets to comply with these circulars, or to establish that our company should not be taxed under these circulars, which may have a material adverse effect onour 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 includes dividends,trade and service-related foreign exchange transactions, but not under the “capital account,” which includes foreign direct investment and loans, includingloans we may secure from our onshore subsidiaries or consolidated VIEs. Currently, certain of our PRC subsidiaries, may purchase foreign currency forsettlement of “current account transactions,” including payment of dividends to us, without the approval of the SAFE by complying with certain proceduralrequirements. However, the relevant PRC governmental authorities may limit or eliminate our ability to purchase foreign currencies in the future for currentaccount transactions. Foreign exchange transactions under the capital account remain subject to limitations and require approvals from, or registration with,the SAFE and other relevant PRC governmental authorities. Since a significant amount of our future net income and cash flow will be denominated inRenminbi, any existing and future restrictions on currency exchange may limit our ability to utilize cash generated in Renminbi to fund our businessactivities outside of the PRC or pay dividends in foreign currencies to our shareholders, including holders of our ADSs, and may limit our ability to obtainforeign 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 political andeconomic conditions and the monetary or fiscal policies adopted by the PRC government. On July 21, 2005, the PRC government changed its policy ofpegging 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 the43Table of Contents Renminbi and the U.S. dollar had been stable and traded within a narrow band. In June 2010, the PRC government indicated that it would make the foreignexchange rate of the Renminbi more flexible, which increases the possibility of sharp fluctuations of the Renminbi’s value in the near future and theunpredictability associated with the Renminbi’s exchange rate. Since then, the Renminbi has fluctuated against the U.S. dollar, at times significantly andunpredictably. 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 a freelyusable 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 thefourth quarter of 2016, the Renminbi has depreciated significantly in the backdrop of a surging U.S. dollar and persistent capital outflows of China. In 2017,however, the RMB appreciated approximately 6.7% against the U.S. dollar; and in 2018, the RMB depreciated approximately 5.7% against the U.S. dollar.With the development of the foreign exchange market and progress towards interest rate liberalization and Renminbi internationalization, the PRCgovernment may in the future announce further changes to the exchange rate system, and we cannot assure you that the Renminbi will not appreciate ordepreciate significantly in value against the U.S. dollar in the future. It is difficult to predict how market forces or PRC or U.S. government policy may impactthe 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 by ouroperating subsidiaries in China for our cash needs. Any significant revaluation of Renminbi may materially and adversely affect our results of operations andfinancial position reported in Renminbi when translated into U.S. dollars, and the value of, and any dividends payable on, the ADSs in U.S. dollars. To theextent that we need to convert U.S. dollars we receive from our initial public offering into Renminbi for our operations, appreciation of the Renminbi againstthe U.S. dollar would have an adverse effect on the Renminbi amount we would receive. Conversely, if we decide to convert our Renminbi into U.S. dollarsfor the purpose of making payments for dividends on our ordinary shares or ADSs or for other business purposes, appreciation of the U.S. dollar against theRenminbi 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 to pursuegrowth 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 Ministry ofCommerce be notified in advance of any change-of-control transaction in which a foreign investor takes control of a PRC domestic enterprise. On February 3,2011, the General Office of the State Council promulgated the Notice on Launching the Security Review System for Mergers and Acquisitions of DomesticEnterprises by Foreign Investors, or the M&A Security Review Notice, which became effective on March 6, 2011. The M&A Security Review Notice providesfor certain circumstances under which foreign investors’ acquisition of domestic enterprises shall be subject to the security review of the PRC governments.The security review assesses such acquisition’s impact on national security, stable operation of national economy, basic living of the people, and R&Dcapacity for key technologies related to national security. On August 25, 2011, the Ministry of Commerce of PRC promulgated the Regulation of Ministry ofCommerce on Implementation of the Security Review System for Mergers and Acquisitions of Domestic Enterprises by Foreign Investors, or the M&ASecurity Review Regulation, which became effective on September 1, 2011. The M&A Security Review Regulation stipulates the requirements ofapplication documents and security review procedures of the Ministry of Commerce. In the future, we may grow our business in part by acquiringcomplementary businesses. Complying with the requirements of the M&A Rules, the M&A Security Review Notice and the M&A Security ReviewRegulation to complete such transactions could be time-consuming, and any required approval processes, including obtaining approval from the Ministry ofCommerce or its provincial affiliates, may delay or inhibit our ability to complete such transactions, which could affect our ability to expand our business ormaintain our market share.44Table of Contents The enforcement of the laws on Employment Contracts and other labor-related regulations in the PRC may adversely affect our business and our results ofoperations.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 costs foremployers to dismiss employees, including specific provisions related to fixed-term employment contracts, temporary employment, probation, consultationwith the labor union and employee assembly, employment without a contract, dismissal of employees, compensation upon termination and overtime work,and collective bargaining. According to the Employment Contract Law, an employer is obliged to sign a labor contract with an unlimited term with anemployee if the employer continues to hire the employee after the expiration of two consecutive fixed-term labor contracts subject to certain conditions orafter the employee has worked for the employer for ten consecutive years. The employer also has to pay compensation to an employee if the employerterminates an unlimited-term labor contract. Such compensation is also required when the employer refuses to renew a labor contract that has expired, unlessit is the employee who refuses to extend the expired contract or resign. In addition, under the Regulations on Paid Annual Leave for Employees, whichbecame effective on January 1, 2008 and its Implementation Rules on Paid Annual Leave for Employees, which became effective on September 18, 2008,employees who have served more than one year for an employer are entitled to a paid vacation ranging from 5 to 15 days, depending on their accumulativetotal length of service. Employers who fail to allow for such vacation time must compensate their employees three times their regular salaries for eachvacation day disallowed, unless such employers can provide evidence, such as a copy of a written notice provided to their employees, that suggests theemployers made 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 Board and, assuch, 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 the PCAOB, isrequired by the laws of the United States to undergo regular inspections by the PCAOB to assess its compliance with the laws of the United States andprofessional standards. Because our auditors are located in the People’s Republic of China, a jurisdiction where the PCAOB is currently unable to conductinspections without the approval of the Chinese authorities, our auditors are not currently inspected by the PCAOB. On December 7, 2018, the SEC and thePCAOB issued a joint statement highlighting continued challenges faced by the U.S. regulators overseeing financial statement audits of U.S.-listedcompanies with significant operations in China. The joint statement reflects a heightened interest in this issue that has vexed U.S. regulators in recent years.However, it remains unclear whether the SEC and PCAOB will take any further actions or what kind of actions will they take to address this issue.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 the benefits ofPCAOB inspections.The inability of the PCAOB to conduct inspections of auditors in China makes it more difficult to evaluate the effectiveness of our auditor’s auditprocedures or quality control procedures as compared to auditors outside of China that are subject to PCAOB inspections. Investors may lose confidence inour reported financial information and procedures and the quality of our consolidated financial statements.45Table of Contents If additional remedial measures are imposed on the “big four” PRC-based accounting firms, including our independent registered public accounting firm,in administrative proceedings brought by the SEC alleging such firms’ failure to meet specific criteria set by the SEC with respect to requests for theproduction of documents, we could be unable to timely file future financial statements in compliance with the requirements of the Exchange Act.Starting in 2011, the Chinese affiliates of the “big four” accounting firms, including our independent registered public accounting firm, were affectedby a conflict between U.S. and Chinese law. Specifically, for certain U.S. listed companies operating and audited in mainland China, the SEC and the PCAOBsought to obtain from the Chinese accounting firms access to their audit work papers and related documents. The firms were, however, advised and directedthat under Chinese law they could not respond directly to the U.S. regulators on those requests, and that requests by foreign regulators for access to suchpapers 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 theSEC. The accounting firms filed a petition for review of the initial decision. On February 6, 2015, before a review by the commissioners of the SEC had takenplace, the firms reached a settlement with the SEC. Under the settlement, the SEC accepts that future requests by the SEC for the production of documentswill normally be made to the CSRC. The firms will receive matching Section 106 requests, and are required to abide by a detailed set of procedures withrespect to such requests, which in substance require them to facilitate production via the CSRC. If they fail to meet specified criteria, the SEC retainsauthority to impose a variety of additional remedial measures on the firms depending on the nature of the failure. Remedies for any future noncompliancecould include, as appropriate, an automatic six-month bar on a single firm’s performance of certain audit work, commencement of a new proceeding against afirm, 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 with majorPRC operations may find it difficult or impossible to retain auditors in respect of their operations in the PRC, which could result in financial statements beingdetermined to not be in compliance with the requirements of the Exchange Act, including possible delisting. Moreover, any negative news about any suchfuture proceedings against these audit firms may cause investor uncertainty regarding China-based, United States-listed companies and the market price ofour 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 consolidated financialstatements could be determined not to be in compliance with the requirements of the Exchange Act. Such a determination could ultimately lead to thedelisting of our ADSs from the NYSE or deregistration from the SEC, or both, which would substantially reduce or effectively terminate the trading of ourADSs in the United States.Privacy concerns relating to our products and services and the use of user information could damage our reputation, deter current and potential users andcustomers from using our products.We may collect personal data while providing products, services and solutions to our customers. Our reputation may be damaged due to thecollection, use, disclosure or security of personal information or other privacy-related matters, even if unfounded, which will cause us to lose users and othercustomers and adversely affect our operations. We strive to comply with applicable laws and regulations on data protection, as well as our privacy policiesand data protection obligations in accordance with our terms of use and other obligations we may have. However, any non-compliance or perceived non-compliance with these laws, regulations or policies may lead to investigations and other lawsuits against us by government agencies or other individuals.This will have a negative impact on our reputation and brand image, may cause us to lose users and customers, and have a negative impact on our business. Inaddition, any system failure or breach of our privacy policy by our current or former employees that may compromise of our security and result in anunauthorized access to or release of our users’ or other customers’ data could greatly limit the user engagement of our products and services, harm ourreputation and brand image, as well as affect our business operations.46Table of Contents PRC government authorities have promulgated laws and regulations to protect personal information from any abuse or unauthorized disclosure.Pursuant to the Order for the Protection of Telecommunication and Internet User Personal Information issued by the Ministry of Industry and InformationTechnology in July 2013, any collection and use of user personal information must be subject to the consent of the user, abide by the principles of legality,rationality and necessity and be within the specified purposes, methods and scopes. Furthermore, Personal Information Protection Act has been listed into thelegislative plan, which will strengthen the supervision of the collection of personal information. Furthermore, the draft of Information Security Technology-Personal Information Security Specification was issued by National Information Security Standardization Technical Committee on February 1, 2019.Pursuant to the draft of the Specification, product and service providers should take technical and other necessary measures to ensure the safety of personalinformation, clearly demonstrate the purpose, approaches and scope of processing the personal information to the individual and acquire the authorization.Our practices may be inconsistent with new laws or regulations on data protection, or the interpretation and application of existing consumer anddata protection laws or regulations, which are often uncertain and constantly changing. In addition to the potential fines, such non-compliances could resultin an order requiring us to change our practices, which may adversely affect our business and operation.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 significant volatilitysince their initial public offerings, including, in some cases, substantial price declines in the trading prices of their securities. The trading performances ofother Chinese companies’ securities after their offerings, including Internet companies, online retail and mobile commerce platforms and consumer financeservice providers, may affect the attitudes of investors toward Chinese companies listed in the United States, which consequently may impact the tradingperformance of our ADSs, regardless of our actual operating performance. In addition, any negative news or perceptions about inadequate corporategovernance practices or fraudulent accounting, corporate structure or matters of other Chinese companies may also negatively affect the attitudes of investorstowards Chinese companies in general, including us, regardless of whether we have conducted any inappropriate activities. Furthermore, securities marketsmay from time to time experience significant price and volume fluctuations that are not related to our operating performance, such as the large decline inshare prices in the United States, China and other jurisdictions in late 2008, early 2009, the second half of 2011 and in 2015, which may have a material andadverse effect on the trading price of our ADSs.In addition to the above factors, the price and trading volume of our ADSs may be highly volatile due to multiple factors, including the following: •regulatory developments affecting us or our industry; •announcements of studies and reports relating to the quality of our credit offerings or those of our competitors; •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;47Table of Contents •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 our ADSsand trading volume could decline.The trading market for our ADSs will depend in part on the research and reports that securities or industry analysts publish about us or our business. Ifresearch analysts do not establish and maintain adequate research coverage or if one or more of the analysts who covers us downgrades our ADSs or publishesinaccurate or unfavorable research about our business, the market price for our ADSs would likely decline. If one or more of these analysts cease coverage ofour company or fail to publish reports on us regularly, we could lose visibility in the financial markets, which, in turn, could cause the market price or tradingvolume 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 aresult, we do not expect to pay any cash dividends in the foreseeable future. Therefore, you should not rely on an investment in our ADSs as a source for anyfuture 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, ourcapital requirements and surplus, the amount of distributions, if any, received by us from our subsidiaries, our financial condition, contractual restrictions andother factors deemed relevant by our board of directors. Accordingly, the return on your investment in our ADSs will likely depend entirely upon any futureprice appreciation of our ADSs. There is no guarantee that our ADSs will appreciate in value or even maintain the price at which you purchased the ADSs.You may not realize a return on your investment in our ADSs and you may even lose your entire investment in our ADSs.Substantial future sales or perceived potential sales of our ADSs in the public market could cause the price of our ADSs to decline.Sales of our ADSs in the public market, 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, 2019 was 297,368,195, comprising 233,877,023 Class A ordinary shares and63,491,172 Class B ordinary shares. All ADSs representing our Class A ordinary shares sold in our initial public offering will be freely transferable by personsother than our “affiliates” without restriction or additional registration under the U.S. Securities Act of 1933, as amended, or the Securities Act. All of theother ordinary shares outstanding are available for sale, subject to volume and other restrictions as applicable under Rules 144 and 701 under the SecuritiesAct. We cannot predict what effect, if any, market sales of securities held by our significant shareholders or any other shareholder or the availability of thesesecurities for future sale will have on the market price of our ADSs.In addition, certain major holders of our ordinary shares have the right to cause us to register under the Securities Act the sale of their shares, subjectto the applicable 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 ofthese registered shares in the form of ADSs in the public market could cause the price of our ADSs to decline significantly.48Table of Contents We have been named as a defendant in seven 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 and Administrative Proceedings.” We are currently unable to estimate the possible loss or possiblerange of loss, if any, associated with the resolution of these lawsuits. There can be no assurance that we will prevail in defense of these lawsuits. Any adverseoutcome of 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 ofwhich could harm our business. We also may be subject to claims for indemnification related to these matters, and we cannot predict the impact thatindemnification 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, the minimumnotice period required to convene a general meeting will be 10 days. When a general meeting is convened, you may not receive sufficient notice of ashareholders’ meeting to permit you to withdraw your Class A ordinary shares to allow you to cast your vote with respect to any specific matter. 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 timely manner. We will make allreasonable efforts to cause the depositary to extend voting rights to you in a timely manner, but there can be no assurance that you will receive the votingmaterials in time to ensure that you can instruct the depositary to vote your ADSs. Furthermore, the depositary and its agents will not be responsible for anyfailure to carry out any instructions to vote, for the manner in which any vote is cast or for the effect of any such vote. As a result, you may not be able toexercise 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 willnot 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 rights availableto you in the United States unless we register both the rights and the securities to which the rights relate under the Securities Act or an exemption from theregistration requirements is available. Under the deposit agreement, the depositary will not make rights available to you unless both the rights and theunderlying securities to be distributed to ADS holders are either registered under the Securities Act or exempt from registration under the Securities Act. Weare under no obligation to file a registration statement with respect to any such rights or securities or to endeavor to cause such a registration statement to bedeclared effective and we may not be able to establish a necessary exemption from registration under the Securities Act. Accordingly, you may be unable toparticipate in our rights offerings in 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 or otherdeposited 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 our ADSs hasagreed to pay to you the cash dividends or other distributions it or the custodian receives on our Class A ordinary shares or other deposited securities afterdeducting its fees and expenses. You will receive these distributions in proportion to the number of Class A ordinary shares your ADSs represent. However,the depositary may, at its discretion, decide that it is inequitable or impractical to make a distribution available to any holders of ADSs. For example, thedepositary may determine that it is not practicable to distribute certain property through the mail, or that the value of certain distributions may be less thanthe cost of mailing them. In these cases, the depositary may decide not to distribute such property to you.49Table of Contents You may be subject to limitations on transfer of your ADSs.Your ADSs are transferable on the books of the depositary. However, the depositary may close its transfer books at any time or from time to time whenit deems expedient in connection with the performance of its duties. In addition, the depositary may refuse to deliver, transfer or register transfers of ADSsgenerally when our books or the books of the depositary are closed, or at any time if we or the depositary deems it advisable to do so because of anyrequirement 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 experts namedin this annual report reside outside the United States, and most of their assets are located outside the United States. As a result, it may be difficult orimpossible 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 been infringed underthe U.S. federal securities laws or otherwise. Even if you are successful in bringing an action of this kind, the laws of the Cayman Islands, China or otherrelevant 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 a sum ofmoney 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 a fine or otherpenalty), or, in certain circumstances, an in personam judgment for non-monetary relief, and would give a judgment based thereon provided that (i) suchcourts had proper jurisdiction over the parties subject to such judgment; (ii) such courts did not contravene the rules of natural justice of the Cayman Islands;(iii) such judgment was not obtained by fraud; (iv) the enforcement of the judgment would not be contrary to the public policy of the Cayman Islands; (v) nonew admissible evidence relevant to the action is submitted prior to the rendering of the judgment by the courts of the Cayman Islands; and (vi) there is duecompliance with the correct procedures under the laws of the Cayman Islands. There is uncertainty as to whether a judgment obtained from the United Statescourts under the 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 the courts ofthe Cayman Islands have yet to rule on whether such judgments are penal or punitive in nature, it is uncertain whether they would be enforceable in theCayman Islands.The recognition and enforcement of foreign judgments are provided for under the PRC Civil Procedure Law. PRC courts may recognize and enforceforeign judgments in accordance with the requirements of the PRC Civil Procedure Law based either on treaties between China and the country where thejudgment is made or on principles of reciprocity between jurisdictions. Under PRC law, a foreign judgment, which does not otherwise violate basic legalprinciples, state sovereignty, safety or social public interest, may be recognized and enforced by a PRC court, based either on treaties between China and thecountry where the judgment is made or on principles of reciprocity between jurisdictions. As there existed no treaty or other form of reciprocity betweenChina and the United States governing the recognition and enforcement of judgments as of the date of this annual report, including those predicated uponthe liability provisions of the United States federal securities laws, there is uncertainty whether and on what basis a PRC court would enforce judgmentsrendered 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 the commonlaw of the Cayman Islands. The rights of shareholders to take action against the directors, actions by minority shareholders and the fiduciary duties of ourdirectors to us under Cayman Islands law are to a large extent governed by the common law of the Cayman Islands.50Table of Contents The common law of the Cayman Islands is derived in part from comparatively limited judicial precedent in the Cayman Islands as well as from the commonlaw 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 ourshareholders and the fiduciary duties of our directors under Cayman Islands law are not as clearly established as they would be under statutes or judicialprecedent in some jurisdictions 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,Cayman Islands companies may not have standing to initiate a shareholder derivative action in a federal court of the United States.Shareholders of Cayman Islands exempted companies like us have no general rights under Cayman Islands law to inspect corporate records or toobtain copies of lists of shareholders of these companies. Our directors have discretion under the second amended and restated memorandum and articles ofassociation to determine whether or not, and under what conditions, our corporate records may be inspected by our shareholders, but are not obliged to makethem available to our shareholders. This may make it more difficult for you to obtain the information needed to establish any facts necessary for a shareholderresolution 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 the UnitedStates. The Companies Law is modeled after that of England and Wales but does not follow recent statutory enactments in England. In addition, theCompanies Law differs from laws applicable to United States corporations and their shareholders.Our second amended and restated memorandum and articles of association contain anti-takeover provisions that could discourage a third party fromacquiring us, which could limit our shareholders’ opportunity to sell their shares, including Class A ordinary shares represented by our ADSs, at apremium.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 premium overprevailing market prices by discouraging third parties from seeking to obtain control of our company in a tender offer or similar transaction. For example, ourboard of directors has the authority, without further action by our shareholders, to issue preferred shares in one or more series and to fix their designations,powers, preferences, privileges, and relative participating, optional or special rights and the qualifications, limitations or restrictions, including dividendrights, conversion rights, voting rights, terms of redemption and liquidation preferences, any or all of which may be greater than the rights associated with ourClass A ordinary shares, in the form of ADS or otherwise. Preferred shares could be issued quickly with terms calculated to delay or prevent a change incontrol of our company or make removal of management more difficult. If our board of directors decides to issue preferred shares, the price of our ADSs mayfall and the voting and other rights of the holders of our Class A ordinary shares and ADSs may be materially and adversely affected. In addition, our secondamended and restated memorandum and articles of association contain other provisions that could limit the ability of third parties to acquire control of ourcompany 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 inrespect 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 market pricesby discouraging third parties from seeking to obtain control of our company in a tender offer or similar transaction.51Table of Contents We are a foreign private issuer within the meaning of the rules under the Exchange Act, and as such we are exempt from certain provisions applicable toU.S. domestic public companies.Because we qualify as a foreign private issuer under the Exchange Act, we are exempt from certain provisions of the securities rules and regulationsin 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 our resultson a quarterly basis as press releases, distributed pursuant to the rules and regulations of the NYSE. Press releases relating to financial results and materialevents will also be furnished to the SEC on Form 6-K. However, the information we are required to file with or furnish to the SEC will be less extensive andless timely compared to that required to be filed with the SEC by U.S. domestic issuers. As a result, you may not be afforded the same protections orinformation that would be made available to you were you investing in a U.S. domestic issuer.As a company incorporated in the Cayman Islands, we are permitted to adopt certain home country practices in relation to corporate governance mattersthat differ significantly from the NYSE corporate governance listing standards; these practices may afford less protection to shareholders than they wouldenjoy 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 NYSE marketrules permit a foreign private issuer like us to follow the corporate governance practices of its home country. Certain corporate governance practices in theCayman 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 States taxconsequences 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 from timeto 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 of our grossincome in that taxable year is passive income or (ii) the average percentage of our assets (which includes cash) by value in that taxable year which 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 the quarterly market valueof our ADSs, which is subject to change. See “Item 10. Additional Information — E. Taxation — Certain United States Federal Income Tax Considerations —Passive Foreign Investment Company.”52Table of Contents In addition, there is uncertainty as to the treatment of our corporate structure and ownership of our consolidated VIEs for United States federal incometax purposes. For United States federal income tax purposes, we consider ourselves to own the stock of our consolidated VIEs. If it is determined, contrary toour view, that we do not own the stock of our consolidated VIEs for United States federal income tax purposes (for instance, because the relevant PRCauthorities 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 the PFICrules. Given the foregoing and based on the past and projected composition and classification of our income and assets, we believe that there is a significantrisk that we will be classified as a PFIC for United States federal income tax purposes for 2018, and we may be classified as a PFIC in future taxable years. Ifwe are a PFIC for any taxable year during which you hold our ADSs or Class A ordinary shares, our PFIC status could result in adverse United States federalincome tax consequences to you if you are a United States Holder, as defined under “Item 10. Additional Information — E. Taxation — Certain United StatesFederal Income Tax Considerations.” For example, if we are or become a PFIC, you may become subject to increased tax liabilities under United Statesfederal income tax laws and regulations, and will become subject to burdensome reporting requirements. See “Item 10. Additional Information — E. Taxation— Certain United States Federal Income Tax Considerations — Passive Foreign Investment Company.” There can be no assurance that we will not be a PFICfor 2018 or any future taxable year.We will continue to incur increased costs as a result of being a public company.As a U.S. public company, we incur significant legal, accounting and other expenses that we did not incur as a private company. The Sarbanes-OxleyAct of 2002, as well as rules subsequently implemented by the SEC and the New York Stock Exchange, impose various requirements on the corporategovernance practices of public companies. These rules and regulations increase our legal and financial compliance costs and make some corporate activitiesmore time-consuming and costly. We expect to continue to incur significant expenses and devote substantial management effort toward ensuring compliancewith the requirements of Section 404 of the Sarbanes-Oxley Act of 2002 and the other rules and regulations of the SEC. For example, as a result of becominga public company, we have increased the number of independent directors and adopted policies regarding internal controls and disclosure controls andprocedures. We also expect that operating as a public company will continue to make it more difficult and more expensive for us to obtain director andofficer liability insurance, and we may be required to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same orsimilar coverage. In addition, we incur additional costs associated with our public company reporting requirements. It may also be more difficult for us to findqualified persons to serve on our board of directors or as executive officers.ITEM 4.INFORMATION ON THE COMPANYA.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 Happy Time.We initially operated our business by facilitating merchandise credit and cash credit to college students on campuses across China. Starting from November2015, we shifted our focus to a broader base of young consumers in China, and we have terminated our on-campus business. Since July 2016, we have engageall borrowers as to our cash and merchandise credit products through online channels. In November 2017, we launched budget auto financing products underthe “Dabai Auto” brand, and we have established a nationwide network of showrooms to engage prospective car buyers.53Table of Contents In September 2016, Qufengqi (Ganzhou) Information Technology Co., Ltd., or Ganzhou Qufenqi, was incorporated as a wholly foreign owned entityin China. In November 2016, we incorporated Qudian Inc. under the laws of the Cayman Islands as our offshore holding company, and subsequently, weestablished a wholly- owned subsidiary in the British Virgin Islands, QD Technologies Limited, in November 2016, and a wholly- owned subsidiary in HongKong, QD Data Limited, to be our intermediate holding company in December 2016, to facilitate our initial public offering in the United States. The entireequity interest of Ganzhou Qufenqi was transferred from its former holding company to QD Data Limited. As a result of the restructuring in 2016, we holdequity interest in Ganzhou Qufenqi through our current offshore structure. At the same time, Ganzhou Qufenqi entered into a series of contractualarrangements with Beijing Happy Time and its shareholders. In addition, pursuant to the resolutions of all shareholders of Qudian Inc. and the resolutions ofthe board of directors of Qudian Inc., the board of directors of Qudian Inc. or any officer authorized by such board will cause Ganzhou Qufenqi to exercise itsrights under such contractual arrangements. As a result of these resolutions and the provision of unlimited financial support from the Company to BeijingHappy Time, Qudian Inc. has been determined to be most closely associated with Beijing Happy Time within the group of related parties and was consideredto 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. Xiamen Weipujia also became our consolidated VIEs in 2018. Wehave entered into a series of contractual arrangements with each new consolidated VIE and its shareholders, which allows us to exercise effective control overeach new consolidated VIE and realize substantially all of the economic risks and benefits arising from such new consolidated VIE. The contractualarrangements for each consolidated VIE, including those as to the new consolidated VIEs, contain substantively identical provisions that afford us, throughour wholly-owned subsidiary Ganzhou Qufenqi, the right to control all consolidated VIEs in the same manner and degree. Mr. Min Luo, our founder,chairman and chief executive officer, and Mr. Lianzhu Lv, our director and head of user experience department, are the only shareholders of Ganzhou Qudian,and Mr. Min Luo and Mr. Hongjia He, our vice president, are the only shareholders of Hunan Qudian. Mr. Min Luo is the only shareholder of Xiamen Qudian.Mr. Min Luo and Mr. Hongjia He are the only shareholders of Xiamen Weipujia. We believe such shareholding structure will enhance our administrativeefficiency and reduce uncertainties associated with the enforcement of the relevant contractual arrangements entered into with the new consolidated VIEs andtheir respective shareholder(s). Instead of relying on several shareholders’ compliance with their respective contractual obligations, we will only rely on oneor two shareholders’ compliance for each new consolidated VIE and would only need to enforce against such shareholder(s) in the event of a breach. Theestablishment of any of these new consolidated VIEs is not intended to, and will not, have an adverse impact on the rights of our ADS holders. For moreinformation, see “Item 3. Key Information on the Company — D. Risk Factors — Risks Relating to Our Corporate Structure — We rely on contractualarrangements with our consolidated VIEs and their shareholders to operate our business, which may not be as effective as direct ownership in providingoperational control and otherwise have a material adverse effect as to our business.” We intend to utilize our new consolidated VIEs to continue to conductour existing business of providing small cash and merchandise credit products and to also undertake new business opportunities, including leveraging ourrisk management model to help other financial services providers assess the credit profiles of their own customers according to their credit standards. We planto transfer our credit business under the Laifenqi brand to Ganzhou Qudian and our credit business under the Qudian brand to Xiamen Qudian over the nextfive years. As of the date of this annual report, Ganzhou Qudian and Xiamen Qudian have both commenced operations. We do not expect to transfer anyexisting business to Hunan Qudian and Xiamen Weipujia, but we may conduct new businesses through such entities in the future.Such plans may be changeddue to future developments, including the availability of government incentives in the cities where the new consolidated VIEs are located.We currently conduct our business in China mainly through our consolidated VIEs and their subsidiaries. Our wholly-owned subsidiary XiamenQudian Financial Lease Ltd. and its subsidiaries operate the Dabai Auto business. We established Xiamen Weipujia to explore various new businessinitiatives, and Xiamen Weipujia does not currently engage in material business operations.Our principal executive offices are located at Tower A, AVIC Zijin Plaza, Siming District, Xiamen, Fujian Province 361000, People’s Republic ofChina, and our telephone number is +(86) 592 591 1580. Our website address is www.qudian.com. The information on our website does not form a part of thisannual report. 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.54Table of Contents B.Business OverviewOverviewAs a provider of online credit products, we use big data-enabled technologies, such as artificial intelligence and machine learning, to transform theconsumer 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 by traditionalfinancial institutions due to their lack of traditional credit data and the operational inefficiency of traditional financial institutions. We believe our operatingefficiency and big data analytics capability to understand our prospective borrowers from different behavioral and transactional perspectives, assess theircredit profiles and offer them instantaneous and affordable credit products with customized terms distinguishes our business and 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 and loan facilitation income and others from cash credit products, (ii) financing income, salescommission fee and loan facilitation income and others from merchandise credit products and (iii) financing income, sales income and loan facilitationincome and others from budget auto financing products. In addition to small credit products and auto financing products, in the second half of 2018, welaunched an open platform for loan recommendations and referrals. We generate service fees from such recommendation and referral services we provide onthe open platform.We are a leading provider of online small consumer credit products in China. As of end of 2018, our registered users grew to 71.8 million whileoutstanding borrower base reached 5.3 million. Small credit products serve consumers’ immediate needs for discretionary consumption. They typically haveshort durations, enabling us to quickly understand a borrower’s behavior and further refine our data analytics and credit assessment model upon thecompletion 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 borrowers are thenable to draw down on their cash credit with cash disbursed immediately into their Alipay accounts in digital form. Borrowers also repay the credit drawdownsthrough their Alipay accounts. In the three months ended December 31, 2018, our cash credit products had an average size of approximately RMB1,491(US$216.9) and weighted average term of approximately 10.4 months. We also offer merchandise credit products to finance borrowers’ direct purchase ofmerchandise offered on our marketplace on installment basis. Through collaborating with more than 400 merchandise suppliers, we offer an expanding rangeof product categories ranging from consumer electronics products to watches and sports and outdoor products to capture approved borrowers’ growingconsumption demand and enhance their online shopping experience. In the three months ended December 31, 2018, our merchandise credit products had anaverage size of approximately RMB1,460 (US$212.9) and weighted average term of approximately 10.5 months. To complement our small credit products,we offer budget auto financing products through approximately 30 showrooms nationwide.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. Wefocus on data analyses that not only reflect borrowers’ ability to repay but also their willingness to do so. These analyses are based on the prospectiveborrowers’ social and shopping behavioral data, among others, in addition to the characteristic metrics such as locations and demographics. We haveincreased the number of variables analyzed by our credit assessment system from a few to several hundred for each transaction, and we assign each borrower apersonalized credit limit based on his or her credit profile. As borrowers repay, they build credit histories with us. Based on the credit histories, our artificialintelligence-based credit assessment model enables us to continually re-evaluate borrowers’ credit profiles and provide more personalized credit limits. Weoffer borrowers with stronger credit profiles 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 four quarters of 2018 remained at lessthan 2.5% through December 31, 2018. M1+ delinquency rate by vintage is defined as the total balance of outstanding principal of a vintage for which anyinstallment payment is over 30 calendar days past due as of a particular date (adjusted to reflect total amount of recovered past due payments for principal,before charge-offs), divided by the total initial principal in such vintage.55Table of Contents To provide a good user experience, we have technology and funding arrangements in place to enable instant drawdown of credit by consumers. Wecollaborate with a variety of institutional funding partners such as banks and other institutions, to secure sufficient amounts of funding for credit drawdowns.Institutional funding partners are interested in working with us because of the short duration of our credit products, our technology- driven credit assessmentcapabilities and the diversified credit portfolio with attractive risk-adjusted returns. Our strong technological capabilities enable us to seamlessly integrateour system with those of our institutional funding partners, rapidly facilitate transactions and repayment settlements at a massive scale and forecast ourfunding needs on a real-time basis. We do not directly source funding from retail investors. Currently, we retain most of the credit risk with respect to thecooperation with institutional funding partners. We also utilize our own capital to fund the credit drawdowns to enhance user experience so that they caninstantly receive funds after drawdown requests. Our longer-term objectives are to primarily leverage external institutional funding and to transfer credit riskto 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 from RMB1,442.8million in 2016 to RMB4,775.4 million in 2017, and further increased to RMB7,692.3 million (US$1,118.8 million) in 2018. We recorded net income ofRMB576.7 million, RMB2,164.5 million and RMB2,491.3 million (US$362.3 million) in 2016, 2017 and 2018, 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 quality buthave limited credit history and access to traditional consumer credit from banks or other lenders in China. We primarily offer small cash and merchandisecredit products. Small credit products typically have short durations, enabling us to quickly understand a borrower’s behavior and further refine our dataanalytics and credit assessment model. Small credit products also enjoy favorable risk characteristics compared to larger credit products. A borrower is morelikely to repay a smaller amount on time to maintain the quality of his or her credit profile, which may impact future borrowing activities. Benefits tofraudulent borrowers are also limited given the small amount of money borrowed.Our small credit products can be accessed through the public service window on the Alipay mobile app or our Laifenqi and Qudian mobile apps, andcash is disbursed into borrowers’ 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 of eachdrawdown request. Prospective borrowers complete an application and receive a decision on their application in as quick as a few seconds. When a credit isdrawn, the money is deposited directly into the borrower’s Alipay account and can be used anywhere Alipay is accepted. Borrowers are typically chargedfinancing service fees for cash credit drawdowns. In the three months ended December 31, 2018, our cash credit products had an average size ofapproximately RMB1,491 (US$216.9) and weighted average term of approximately 10.4 months.We also offer merchandise credit products to finance borrowers’ direct purchase of merchandise offered on our marketplace on installment basis. Weoperate a marketplace that connects consumers with merchandise suppliers. As the operator of the marketplace, we neither sell merchandise nor holdinventory. Customers access our marketplace through mobile apps. Only customers with approved merchandise credit limits can make purchases, and werequire a minimum amount of each purchase to be funded by utilizing our credit product. In the event the credit drawdown were insufficient to purchase therelevant merchandise, borrowers will need to pay for the portion that was not covered by the credit products using their own funds. A borrower may alsovoluntarily pay a portion of the purchase price with his or her own funds. We currently collaborate with more than 400 merchandise suppliers, includingleading consumer brands and their authorized distributors, to offer 22 categories of merchandise from over 2,000 brands covering primarily consumerelectronics, home appliances, watches and accessories, sports and outdoor merchandise and luggage. Borrowers are typically charged financing service feesfor merchandise credit drawdowns. We also earn sales commission fee from our merchandise suppliers for our intermediary services rendered. Salescommission fee represents fees earned from merchandise suppliers when borrowers purchase their merchandise on our marketplace and 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 suppliers and (ii)rebates earned from merchandise suppliers. Such fees are determined based on our negotiation with the relevant merchandise suppliers. Merchandisesuppliers do not receive any other amounts from us or borrowers..56Table of Contents We utilize our proprietary data analytics and credit assessment model to determine the amount of credit available for each borrower. For informationregarding credit assessment, see “— Credit Approval and Servicing Process — Stage 3: Credit Assessment.” 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 to fundpurchases on our marketplace. Borrowers’ credit limits are not the same as revolving lines of credit which can be utilized and paid down and utilized againbecause we have the right to not approve any additional draw downs. Upon receipt of a drawdown request, our credit assessment model and risk managementsystem normally review the application and re-evaluate the creditworthiness of such borrower to ensure that he or she is qualified 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 loan principaland financing service fees charged to borrowers. •Durations. Durations of credit products facilitated typically range from one to 18 months for cash credit products and from one to 18 monthsfor merchandise credit products as of the date of this annual report. Historically, we also offered merchandise credit products that requiremonthly 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 and vehicle sales withguarantee under the Dabai Auto brand. In the case 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 installments throughout the term of the lease. The legal title of the car is transferred to the carbuyer upon full repayment. In the case of vehicle sales with guarantee, we sell vehicles to buyers and provide loan facilitation services to funding partnerswho provide financing to the vehicle buyers. The buyer obtains control of the vehicle when the borrower physically possesses the vehicle and when wereceive cash consideration for the vehicle from the buyer. We will receive recurring service fees from the financial institution for our loan facilitation servicesand post-origination services throughout the term of the loan. In addition, we provide a guarantee on the principal and accrued interest repayments of thedefaulted loans to the financial institution. As of March 31, 2019, we have cumulatively leased out and sold approximately 25,000 cars since the launch ofthe 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. We scaled back operations of our budget auto financing businessin 2018, in response to the slowdown of the economic growth and concerns over the trajectory of industry development. As of March 31, 2019, we operate 34offline show rooms. 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 carbuyer may purchase under his or her credit limit. The retail price of the cars suggested by the relevant auto manufacturers typically range57Table of Contents from around RMB70 thousand (US$11 thousand) to around RMB150 thousand (US$22 thousand). To manage our inventory risk, we purchase cars from carmanufacturers 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 car buyer selects themodel. 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’ default, we installtelematics 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 is basedon 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 25,000 kilometers.We charge fees on car buyers whose usage exceeds such limit, but we return such fees to car buyers upon full repayment of outstandingamounts under the leases.Risk ManagementTo maintain healthy credit performance, we developed a rigorous credit assessment model and robust risk management system. As an innovator in theapplication of artificial intelligence to financial services, we analyze a variety of behavioral data typically ignored by traditional financial institutions.Leveraging machine learning, we measure prospective borrowers’ willingness and ability to repay based on behavioral data, along with data and creditanalyses from various partners. Our machine learning-based approach also enables us to continuously refine our credit assessment model based on insightsfrom the high volume of transaction data that we collect. The short-term nature of our credit products contributes to frequent repayments and repeatborrowing activities, which drive the volume and comprehensiveness of the data we collect and analyze. During the three months ended December 31, 2018,we processed an average of 4,019 credit drawdowns and 25,253 repayments per hour for our small credit products. We continuously test, validate andoptimize our model by changing the types of data we analyze. In particular, as we identify creditworthy borrowers whom our model previously regarded asrisky and raise the credit limits for quality borrowers, we are able to increase the amount of transactions without undertaking significantly 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 fraud types,new fraud types as well as organized frauds. We aggregate data from both internal and external sources and undertake multiple steps to identify frauds: •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.58Table of Contents •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 with highlycomplex patterns, and our system becomes more effective as it collects more data. We utilize unsupervised machine learning to develop anabnormal user labeling system, which enables us to identify new fraud types. By analyzing relationships among prospective borrowers, weare 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 assessment system.Credit AssessmentOur credit assessment system has undergone significant evolutions since our inception in April 2014. Prior to November 2015, we primarily engagedborrowers offline and utilized traditional credit assessment methodologies such as in-person collection of borrower information as well in-person interviews.Our borrower engagement efforts shifted from offline to online since November 2015, and we have fully automated data collection and credit assessmentmethodologies accordingly. In the fourth quarter of 2017, we adopted a new credit assessment system, which we refer to as QD score and is built on theexperience and data we have gained since our inception.QD 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 toour earlier credit assessment systems, QD score takes into account more variables relating to (i) prospective borrowers’ credit applications and delinquencieswith other financial service providers and (ii) prospective borrowers’ ability to repay. We believe such variables have enhanced our ability to identifyprospective borrowers who have borrowed from multiple sources and therefore present higher level of credit risk as well as our ability to accurately assessprospective borrowers’ ability to repay. For repeat borrowers, we place greater emphasis on such borrowers’ transaction data on our platform, which webelieve are more reliable than credit data we collect from external parties. We have cumulatively facilitated over 176.6 million number of credit transactionson our platform, which gives us proprietary data advantage in terms of users’ credit quality with regards to repayment and delinquency behavior.QD score correlates positively with credit quality and ranges from 300 to 1,000. We offer borrowers with better credit quality progressively highercredit limits. In 2018, credit limits assigned to eligible borrowers ranged from RMB500 to RMB12,000.Historical PracticesOur credit assessment system has undergone significant changes since our inception in April 2014. Prior to November 2015, we primarily engagedborrowers offline and utilized traditional risk management methodologies such as in-person interviews and in-person collection of borrower information,which included education background, PRC identity card and student identification card. We assessed borrowers’ risk profiles based on the completeness oftheir 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 process andcredit assessment system. During the period from November 2015 to January 2017, we assessed borrowers’ credit profiles based on a large number of inputs,such as Zhima Credit Score, the borrower’s delinquency record, the number of credit applications submitted by the borrower to other financial servicesproviders and delinquency rates in the region where a prospective borrower resides. None of the inputs by itself alone is determinative in our analysis. Weassigned borrowers highly differentiated credit limits based on their credit profiles.59Table of Contents In January 2017, we rolled out a major upgrade of our risk management system and adopted two distinct credit assessment systems for new borrowersand borrowers who have established certain credit histories with us. These systems allowed us to better utilize transaction data on our platform as well asdistinguish the credit quality of borrowers. In the fourth quarter of 2017, we combined the two systems into a more enhanced system, 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 take intoconsideration many of the variables that we analyze for our small credit products. We screen applicants for fraud risk, and each applicant who passes the fraudscreening is assigned a credit score using our credit assessment model. Applicants with credit scores that exceed a threshold receive preliminary credit limitsthat 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 utilize facialrecognition technology to verify each applicant’s identity. In addition, we obtain applicants’ credit reports from the Credit Reference Center of the People’sBank of China, evaluate their credit histories, including their borrowing and repayment records with respect to home loans, auto loans and credit card loans,as well as search for any negative records in data centers maintained by the public security bureaus and courts. We verify the work address and residentialaddress provided by each applicant against the location data we obtain from third-party sources. Each applicant is also required to provide contactinformation of several contact persons, and we may make phone calls with such contact persons to verify the information provided by the applicant. Weassign credit limits to applicants upon the completion of the offline credit assessment process. We may increase the credit limits for applicants based onadditional information submitted by them, such as bank statements, record of real estate ownership and tax payment record.Our Risk Management TeamWe have established a risk management team comprising of 177 employees as of December 31, 2018. Our risk management team meets regularly toexamine the credit and enterprise risks of our company, and is intimately involved in portfolio management, credit model development, validation andoptimization. Tasks performed by our risk management team includes reporting on origination trends, monitoring of portfolio performance and stability, riskconcentrations, building and maintaining credit models, performing economic stress tests on our portfolio, optimizing credit decisioning processes andconducting 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 accounts for theamount of scheduled repayments. These policies and practices are designed to optimize regulatory compliant repayment, while also providing superiorborrower experience. Our collections teams are trained to help borrowers to understand the value of their credit profile, explore available paymentalternatives and make reasonable arrangements to repay outstanding balances. Our employees contact borrowers following the first missed payment andperiodically thereafter. Our primary methods of contacting past due borrowers are to send reminders through text, voice and instant messages, phone calls,letters and emails.We have developed a machine learning algorithm to better allocate collection resources based on more detailed grouping of larger delinquency risk,which we rolled out in the second quarter of 2017. The algorithm places delinquent borrowers into different groups based on internal blacklist check, credithistory and QD score. Higher risk groups are allocated with more collection resources as the likelihood of their outstanding balance becoming longer-termdelinquent or even uncollectable is generally higher. We expect to both improve our collection efficiency and reduce delinquency under this algorithm.60Table of Contents BorrowersWe target the large and growing number of creditworthy borrowers in China who we believe are of emerging prime credit quality but have limitedcredit history and access to traditional consumer credit from banks or other lenders. As we have been focused on providing credit products to youngconsumers across China, we have gained extensive experience and understanding into the behavior and consumption preference of such demographic ofusers since our inception. In 2018, approximately 86.7% of active borrowers are between 18 and 35 years of age.We used to engage a portion of our active borrowers through different channels on the Alipay consumer interface since 2016, although fromDecember 2017 onward, we have implemented measures to promote the usage of our mobile applications and diverted the majority of transaction orders to beplaced on our own mobile applications instead of Alipay. We also seek to diversify our borrower engagement channels by collaborating with other leadingInternet companies. In addition, we have started to promote the use of our mobile applications, and we have experienced an increase in transactionsconducted through these mobile applications.We have experienced significant growth in the number of borrowers since inception. As of December 31, 2016, 2017 and 2018, approximately 11.2million, 26.2 million and 31.0 million registered users were approved with credit, respectively. In the end of 2016, 2017 and 2018, our outstanding borrowerbase was 3.6 million, 5.8 million and 5.3 million, respectively. In 2016, 2017 and 2018, repeat borrowers made up approximately 68.4%, 81.9% and 88.0% ofour total active borrowers, respectively. We believe the increase in repeat borrowers reflects borrower loyalty and our credit products’ ability to addressborrower consumption needs. On average, an active borrower drew down approximately 5.8 times in 2018.As of December 31, 2018, borrowers with outstanding credit drawdowns utilized 46.6% of their credit limits on average. We believe borrowers whodid 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, paymentcapacity, behavioral characteristics and online social network activity, and assign each borrower a personalized credit limit based on his or her credit profile.We continually review and assess the credit profiles of borrowers at each drawdown request. If the credit profile of a prospective borrower changes,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 buildcredit histories with us. Based on the credit histories, our artificial intelligence-based credit assessment model enables us to continually re-evaluateborrowers’ credit profiles and provide more personalized credit limits. We offer borrowers with stronger credit profiles higher credit limits and longerrepayment durations, thereby driving higher engagement with them. In addition to personalized credit limits, we plan to offer personalized financing servicefees 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 fee forlate 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 to ensure thatthe 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 service fees. Inaddition, we hold promotional campaigns from time to time and charge lower financing service fees during such campaigns. Such discounts were RMB10.2million, RMB1.5 million and RMB61.6 million (US$9.0 million) for the years ended December 31, 2016, 2017 and 2018, respectively.61Table of Contents Open PlatformIn the fourth quarter of 2018, we launched an open platform for loan recommendations and referrals. The platform offers our large user base with morechoices to satisfy their financial needs, while incurring no material cost of operations and no credit risk for us. For users that do not meet our creditrequirements, we provide recommendations of financial products that are offered by financial service providers that participate on our platform. The relevantfinancial service providers perform independent credit assessment of users and make the ultimate credit decisions. We typically charge such financial serviceproviders for lead generation on a cost-per-click basis. On the other hand, for users with better credit profiles that are applying for large loan amounts thatexceed the limit permitted under our policy, we refer their applications to our institutional funding partners. We do not bear credit risk and receivecommissions from our institutional funding partners for such referrals.FundingWe collaborate with institutional funding partners and, in certain cases, utilize our own capital by collaborating with banks to indirectly fund thecredit we facilitate. We believe institutions provide us with an efficient way to secure a large amount of funding, while being generally more stable than retailinvestors by nature. In addition, while we intend to focus on leveraging technology, rather than capital, to serve the broad consumer base in China, weindirectly fund certain credit drawdowns to our borrowers through funding arrangements with banks to provide ourselves with funding flexibility. The tablebelow sets forth a breakdown by funding sources for total amount of transactions in the periods presented: Year Ended December 31, 2016 2017 2018 RMB RMB RMB US$ (in thousands) On-balance sheet transactions: Credit drawdowns that were funded by institutional funding partners 10,698,269 47,247,820 17,786,502 2,586,939 Credit drawdowns transferred to institutional funding partners 8,987,195 22,430,109 1,664,062 242,028 Credit drawdowns funded through trusts(1) 1,711,074 24,817,711 16,122,440 2,344,911 Credit drawdowns that were funded by our own capital 19,523,408 31,225,916 19,249,864 2,799,777 Total on-balance sheet transactions 30,221,677 78,473,736 37,036,366 5,386,716 Off-balance sheet transactions 2,008,961 10,469,933 20,904,603 3,040,448 Total 32,230,638 88,943,669 57,940,969 8,427,164 (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, 2016 2017 2018 % On-balance sheet transactions Credit drawdowns that were funded by institutional funding partners 33.2 53.1 30.7 Credit drawdowns transferred to institutional funding partners 27.9 25.2 2.9 Credit drawdowns funded through trusts(1) 5.3 27.9 27.8 Credit drawdowns that were funded by our own capital 60.6 35.1 33.2 Total on-balance sheet transactions 93.8 88.2 63.9 Off-balance sheet transactions 6.2 11.8 36.1 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 of thecredit drawdowns to be funded, the credit drawdown requirement of the funding sources at that time and the timing of the availability of fund from thefunding sources. The financing service fee of a credit product is determined by its size and duration, instead of the funding arrangement related to thetransaction. For more information, see “— Pricing.”62Table of Contents Funding 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 by banksdue to the lack of credit data. Under such agreements, we refer to such banks qualified credit applications from borrowers, including our assessment of theircredit profiles and our suggested credit limits. They will then review the credit applications independently in accordance with their credit assessmentstandards and approve credit for drawdown. Once a credit limit is approved and funding is requested, the banks will fund the credit to the borrower directly.The relevant bank is identified as the lender under the borrowing agreement. The borrower is required to repay the principal and financing service feesdirectly to the relevant bank. Such bank will in turn deduct the principal and fees due to it from the repayment and remit the remainder to us as our loanfacilitation fees. When the borrower defaults, we are obligated to repay the full overdue amount to the relevant banks.We also entered into collaborations with consumer finance companies and small credit companies pursuant to which the consumer financecompanies and small credit companies funded the credit we facilitated for the borrower directly. Such arrangements with the consumer finance companies andsmall credit companies were similar to those entered into with banks.In 2018, the amount of transactions facilitated under these arrangements with banks, consumer finance companies and small credit companies for ourcash and merchandise credit products were RMB20,904.6 million (US$3,040.4 million). We recognize loan facilitation fees earned from banks, consumerfinance companies and small credit companies as loan facilitation income and others, which were RMB1,646.8 million (US$239.5 million) in 2018. For eachcredit drawdown directly funded by banks, consumer finance companies and small credit companies, we record the fair value of guarantee liabilities, whichrepresent the present value of our expected payout based on the estimated delinquency rate and the applicable discount rate for time value. As of December31, 2018, guarantee liabilities under our arrangement with banks, consumer finance companies and small credit companies was RMB302.6 million (US$44.0million). In 2018, we paid banks, consumer finance companies and small credit companies RMB387.2 million (US$56.3 million) for borrower default.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’ financial results inour consolidated financial statements in accordance with U.S. GAAP. Institutional funding partners invests in our trusts in the form of trust units, whichentitle the institutional funding partner to a fixed rate of return on the investment. Pursuant to the cooperative agreement with the trust company, we aredesignated as the service provider for the trusts. If a credit application is approved by us, the credit drawdown will be funded from the trusts to the borrowerdirectly. The trust is identified as the lender under the borrowing agreement. The borrower is required to repay the principal and financing service feesdirectly to the trust. The trust remits to the institutional funding partners pursuant to the terms of the trust that reflect (i) the pre-agreed rate of return and (ii)funds initially provided by the institutional funding partners. In the event payments made by borrowers are less than the amount that would reflect the pre-agreed rate of return and funds initially provided by the institutional funding partners, we are obligated to make up for the deficit so that the institutionalfunding partners still receive such total amount. Any remaining amount in the trust is retained by us. The trust company is responsible for administering thetrust and is paid a service fee.We also fund certain trusts with our own capital. In 2018, the amount of transactions facilitated through trusts was RMB23,557.3 million(US$3,426.3 million), of which RMB16,122.4 million (US$2,344.9 million) was funded by institutional funding partners and RMB7,434.9 million(US$1,081.4 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 as necessary.In addition, each of the trusts has its own funding criteria, including sizes and durations of credit products, borrowers’ ages, type of products (i.e., cash creditor merchandise credit) and minimum annualized fee rate. The funding criteria of a trust are in part based on the relevant funding criteria of the institutionalfunding partners that provided funds into such trust. Following such criteria, we have facilitated a63Table of Contents significant amount of transactions through our trusts. Since the trust company administering such trusts has been licensed by financial regulatory authoritiesto lend, credit drawdowns funded under such 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. As a result, under such arrangement, we will not be deemed as a lender or aprovider of financial services by the PRC regulatory authorities or becoming subject to supervision and restrictions on lending under the applicable laws andregulations. For more information, see “Risk Factors — Risk Relating to Our Business and Industry — We may be deemed as a lender or a provider offinancial services by the PRC regulatory authorities.”Funding Arrangements with Banks Involving Our Own CapitalIn 2018, we entered into arrangements with certain banks whereby such financial institutions act as channels for us to fund credit drawdowns with ourown capital. We bear the full credit risk for such credit drawdowns, and we record such credit drawdowns on our balance sheet. In 2018, we fundedRMB10,490.4 million (US1,525.8 million) of credit drawdowns under such arrangements.We historically funded certain credit drawdowns with two small credit companies established by us.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 the relativelyhigh cost of funds provided by P2P platforms. We also took into account the regulatory uncertainties faced by P2P platforms. The change in fundingarrangements did not have any impact on existing credit drawdown outstanding, as we continued to pay P2P platforms fees on credit drawdowns previouslytransferred to them in accordance with the relevant agreements. The change in funding arrangements has not had any negative impact on total revenues orliquidity requirements, as we have started to cooperate with other institutional funding partners. The other institutional funding partners provide cheaperfunding sources compared to P2P platforms, helping us to maintain low funding costs.Our Collaborations with Ant FinancialIn 2015, we approached Ant Financial for a potential business cooperation. We have established a rapidly expanding business as a provider of onlinecredit products and demonstrated strong capabilities in data technology and risk management. In September 2015, Ant Financial’s wholly owned subsidiaryAPI (Hong Kong) Investment Limited became a shareholder of Qufenqi Inc., a former holding company of Beijing Happy Time. We started to engageprospective borrowers through the Alipay consumer interface in November 2015. Since then, we have continued to collaborate with Ant Financial in multipleareas of our business. In connection with our restructuring in 2016, API (Hong Kong) Investment Limited became one of the principal shareholders of QudianInc.Borrower Engagement. We have engaged a portion of our active borrowers through different channels on the Alipay consumer interface since 2016,although from December 2017 onward, we have encouraged our repeat borrowers to directly engage us through our mobile applications. We promote ourproducts and launch campaigns through the public service window on the Alipay consumer interface, which is free of charge and generally available to thirdparties. We have ceased to engage Alipay users through its paid channel in August 2018 as the term of such agreement expired in August 2018.In March 2017, we entered into an online personal loan cooperation agreement with Chongqing Alibaba Small Loans Co., Ltd., or Chongqing SmallLoans, a subsidiary of Ant Financial that operates the Jiebei consumer credit business. The Jiebei platform can be accessed through the Alipay consumerinterface. Pursuant to the relevant agreement, we pay certain fees to Ant Financial based on a percentage of financing service fees we receive from borrowers.We have ceased to collaborate with Jiebei as such agreement expired in March 2018.64Table of Contents Payment Processing and Settlement. Borrowers receive proceeds from credit drawdowns as well as make repayments through their Alipay accounts.For on-balance sheet transactions, we disburse funds to, and collect repayments from, borrowers through our Alipay accounts. For off-balance sheettransactions, our institutional funding partners utilize their own Alipay accounts and transact with borrowers directly. We have entered into agreements withAnt Financial for payment processing and settlement services in connection with our Alipay accounts. Pursuant to such agreements, we are charged a fixedamount for each credit drawdown funded by our Alipay accounts as well as a percentage of each repayment made to our Alipay accounts. The paymentprocessing and settlement agreements typically provide for an initial term of one year, which 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.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 annual report, 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. Mr. 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 a participant in theshare incentive plan to be established by QuCampus. Pursuant to our framework agreement with Ant Financial, we have committed to invest an aggregate ofRMB190 million in QuCampus. We have invested RMB70.0 million (US$10.2 million) as of December 31, 2018. The book value of our equity interests inQuCampus as of December 31, 2018 was RMB33.2 million (US$4.8 million), which equals to our investment of RMB70.0 million (US$10.2 million) for suchequity interests after deducting our share of QuCampus’ loss. Ant Financial has committed to invest an aggregate of RMB100 million in QuCampus, and ithas invested RMB35.0 million (US$5.1 million) as of December 31, 2018. We and Ant Financial will each pay the remainder of the respective committedamount if the board of directors of QuCampus determines that such investment is warranted by QuCampus’ operational and financial needs. Ganzhou HappyShare has committed to invest an aggregate of RMB10 million in QuCampus, and such amount is expected to be paid when participants in the equityincentive 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. Accessiblethrough the Alipay consumer interface, QuCampus’ services cover various aspects of the daily life of college students, including those related to academia,social connection, networking and other campus life related services. Through their mobile devices, users of QuCampus are able to carry out activities such aspaying their tuition and living expenses, searching for part-time jobs, finding deals and coupons for restaurants and merchandises, selling second-hand goodsand raising funds for student organizations. Alipay will provide the joint venture with points of user traffic under the campus life channel on the Alipayconsumer interface. We believe our extensive historical on-the-ground operational experiences and understandings as to the behavior, social needs andconsumption preferences of college students across China enable the joint venture to better design and introduce relevant services. QuCampus earned a smallamount of service fees from businesses that engage users through the QuCampus platform Given its focus on college students, QuCampus offers65Table of Contents a valuable user engagement channel for businesses that provide career services, professional trainings or other services targeting students. QuCampus’ costconsists primarily 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, social needsand consumption preferences of such consumers. We believe such insights will enable us to improve terms of our credit products, identify attractivemerchandise for our marketplace, refine our credit assessment model and risk management system and cultivate long-term customer relationships.In addition to the above collaborations, we used to cooperate with Zhima Credit for their credit service and credit analysis collaboration. Under ouragreements with Zhima Credit, Zhima Credit would provide us with credit analysis information of prospective users and we would also share insights into theapplication of data technology to our own credit analysis models with Zhima Credit. We have ceased to collaborate with Zhima Credit as the relevantagreements expired in September 2018.Our Merchandise SuppliersWe operate an online marketplace where consumers purchase merchandise offered by third-party merchandise suppliers with our merchandise creditproducts. We currently collaborated with more than 400 merchandise suppliers, including leading consumer brands and their authorized distributors to offerin demand merchandise from over 2,000 brands with relatively high price points, such as iPhones and other mobile phones, tablets and computers, on ourmarketplace. Our product offerings also include consumer electronics, home appliances, watches and accessories, sports and outdoor merchandise andluggage. We believe we enable leading consumer brands and their authorized distributors/retailers to reach a large customer base who previously may nothave sufficient resources to purchase products from these brands and their authorized distributors/retailers, thereby increasing demand for their merchandise.As of December 31, 2018, there were over 477,000 SKUs offered on our marketplace.We have implemented a strict and systematic selection process for merchandise and suppliers. We have established a dedicated merchandising teamresponsible for identifying potential merchandise and suppliers. We select merchandise on the basis of brands that we expect will resonate with our users.Once a potential product is identified, we conduct due diligence reviews on potential merchandise suppliers’ qualifications based on our selection criteria,including performing background checks and examining relevant government permits and brand authorization and qualification certificates for theirmerchandise. We also evaluate their abilities to meet borrowers’ demands for timely supply of merchandise and to provide high-quality after-sales customerservice, 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 contracts setforth the price that we will remit to merchandise suppliers when borrowers purchase merchandise. Our standard form contract requires merchandise suppliersto represent that their merchandise are authentic and from lawful sources and do not infringe upon lawful rights of third parties and to pay us liquidateddamages for any breach. As we serve as a sales and marketing channel that connects borrowers, as customers, and consumer brands and their distributors, asmerchandise suppliers, our merchandise suppliers are responsible for order fulfillment. After sales services are also provided by merchandise suppliers,although our user service personnel handle initial customer queries and connect such customers with the respective merchandise suppliers. We typicallyrequest our merchandise suppliers to guarantee a minimum amount of inventory to ensure the supply of merchandise to borrowers. We constantlycommunicate with our merchandise suppliers to keep them informed of any changes to demand and to understand inventory level for merchandise offered onour 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 suppliers and (ii)rebates earned from merchandise suppliers. The sales commission fee we collect from our merchandise suppliers typically range up to 15% of the price of therelevant merchandise that we pay to the merchandise suppliers. Our merchandise suppliers currently grant us a credit period of three to 30 days after the datethat a borrower purchases the relevant merchandise on our marketplace. We may also earn rebates from merchandise suppliers.66Table of Contents Credit Approval and Servicing ProcessWe believe that we provide a convenient and user-friendly credit application process, a credit assessment mechanism that accurately determines anapplicant’s creditworthiness and a superior overall user experience. Our proprietary credit assessment model and risk management system enables us toprovide an automated online application process that aims to provide a simple, seamless and efficient experience to users. Prospective borrowers maycomplete the application and receive a decision on their application as quick as a few seconds. Once approved, we generally provide such prospectiveborrowers with both cash credit products and merchandise credit products. Approved borrowers are then able to draw down on their cash credit with fundsavailable in their Alipay accounts within a few minutes or complete the purchase of merchandise on our marketplace utilizing their merchandise creditproducts.We 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 prospective borrower isa user who has already registered on Alipay, which requires the input of his or her real name, PRC identity card information and most frequently used mobilephone number for authentication. Given the significant coverage of Alipay in China, we believe most of the targeted borrowers have completed this part ofregistration 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 for us torun a credit background check.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 such prospectiveborrower provided by third parties. For borrowers who have established certain credit histories with us, our credit assessment model places a strong focus ondata from internal sources, such as such borrowers’ repayment and delinquency record, than external data. This data is then used to verify applicants’ identityand for fraud detection. We utilize restricted list searches provided by third-parties as well as our proprietary machine learning algorithms to screen forfraudulent applications. Applicants identified to present higher risk of fraud are declined by our fraud prevention system.67Table of Contents 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 31.0 million accumulativeapplicants with approved credit line and approximately 16.7 million accumulative active borrowers that have accounted for approximately RMB183.9billion cumulative amount of credit drawdowns facilitated as of December 31, 2018. As testimony to the flexibility and scalability of our technologyinfrastructure, in connection with and prior to the Singles Day promotional campaign on November 11, 2017, we were able to facilitate in one day over562,000 transactions. Our proprietary data analytics and credit assessment model is optimized to fit the realities of the Chinese market and tailored for eachchannel through which we engage prospective borrowers, using big data and fast data from sources that target borrowers in China. Our credit assessmentmodel uses our own scoring criteria, and is routinely monitored, tested, updated and validated by our risk management team. Following credit evaluation, ourcredit determination system makes a determination as to whether the applicant is qualified, and a qualified borrower receives short-term, unsecured amount ofcredit. The full amount of such credit represents such borrower’s credit limit for merchandise credit products. A portion of the full amount represents theborrower’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 to fund purchases on our marketplace. Unqualified applicants are notified of the decision of their applicationsbeing declined, although such applicants are 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 we havestarted to apply such system to our small credit products since the fourth quarter of 2017. Continuously refined by machine learning algorithms and the highvolume of transaction data we collect, QD score analyzes a large number of variables for each transaction and enables us to better differentiate betweencreditworthy 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 ensure that heor she is qualified for the requested drawdown. If the credit profile of a prospective borrower changes, the credit limits for such borrower may vary. If theborrower has made the requisite payments in a timely manner, and there are unused credit remaining, the borrower may continue to utilize his or her credit,subject to our approval at the time of each drawdown request. Once the drawdown request is approved, we or our institutional funding partners, as applicable,will then fund credit to borrowers. Funding typically occurs in as quickly as a few seconds after a request for drawdown is made and approved. In the event wedo not approve a drawdown request, we aim to notify the relevant customer of such decision within ten minutes after the request 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 their Alipayaccounts the amount of scheduled repayments. In 2018, most of the scheduled repayments were made automatically from the borrowers’ Alipay accounts.For borrowers who do not use the automated repayment process, we provide payment reminder services, such as sending reminders through text andinstant messages on the day a repayment is due. Once a repayment is past due, we also send additional reminder text and instant messages during the first twocalendar days of delinquency.68Table of Contents 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 a delinquentborrower as soon as the collections process commences, and we take such measures to address delinquencies typically caused by borrowers’ oversight. If thepayment is still outstanding after these reminders, our collection system will initiate automated voice calls, which we believe are more difficult for borrowersto ignore compared to text and instant messages. In the event such efforts remain unsuccessful, our collection team will make phone calls to borrowersfollowing the first missed payment and periodically thereafter. We inform the relevant borrowers of our intention to make such reports and the adverse impactof delinquencies on their credit histories, which may convince such borrowers to pay the amounts past due. For larger amounts past due, we may also conductin-person visits. We may stop collection efforts when credit drawdowns are 180 calendar days overdue and collection attempts have reached a certainnumber. In the event of (i) death of the borrower, (ii) identification of fraud, and the fraud is officially reported to and filed with relevant law enforcementdepartments or (iii) the amount remained outstanding 180 calendar days past due and therefore deemed uncollectible, we will charge off the relevantoutstanding amount. Substantially all of our charge-offs since our inception were due to amounts that remain outstanding 180 calendar days past due andtherefore 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 fees pastdue for on-balance sheet transactions as of the end of the periods presented: Year Ended December 31, 2016 2017 2018 Percentage of delinquent principal and services fees for on-balance sheet transactions recovered 35.1% 44.2% 79.4% 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 algorithm placesdelinquent borrowers into different groups based on internal blacklist check, credit history and QD score. Higher risk groups are allocated with morecollection 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 collection efficiency and reducedelinquency 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 visits withthe 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 as early asseven days after the car buyer becomes delinquent. As aids to our repossession efforts, we install telematics devices on cars and retain car keys beforedelivering 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 sophisticated securityprotocols for communication among applications and we encrypt private information, such as an applicant’s identification number.69Table of Contents 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 there is sufficient bandwidth to meet the significant growth of our business andthe increase in the number of our users, while reducing capital expenditure obligations. We have multiple layers of redundancy to ensure reliability of oursystems and services. We also have a working data redundancy model with comprehensive backups of our databases and software.Our technology and product development department, which comprised 169 employees as of December 31, 2018, including core team members withextensive experiences with leading Internet, online retail and mobile commerce and fintech companies in China, focuses on the following that support ourlong-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. Thesystem is designed to handle the large volume of data required to evaluate a large number of prospective borrower applications quickly and accurately and tomanage a large number of borrowers yet flexible enough to capitalize on changing user preferences, market trends and technological advances. Our softwaredevelopment life cycle is rapid and iterative to increase the efficiency and capacity of our system. We are able to implement software updates whilemaintaining our system stability. We continually employ technological innovations to improve our technology system, which performs a variety ofintegrated 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 transactions under adiverse array of funding arrangements. The system has been seamlessly integrated with the systems of various institutional funding partners,including banks. It automatically selects the proper funding source for each credit drawdown based on the large number of funding criteriaspecified by our institutional funding partners. The system adapts to new funding arrangements quickly. For example, it typically takes twodays to complete the configuration for a new trust and two weeks to do so for a new off-balance sheet funding arrangement with a bank. •Repayment settlement system. Upon receiving borrowers’ repayments, the system separates such cash inflows into principals, financingservice fees, fees payable to institutional funding partners and penalty fees on a real-time basis and settles with the relevant partiesaccordingly.70Table of Contents •Liquidity forecast system. The system provides real-time forecasts on our funding needs by monitoring the fund inflows and outflows, andsuch forecasts are valuable information for us to manage liquidity. •Security. We collect and store personally identifiable user information, including names, addresses, identification information and financialaccounts information for the sole purpose of individual credit assessment. We retrieve this information with user’s consent and havesafeguards designed to protect such information, including the application of Advanced Encryption Standard, or AES. We store our data inencrypted form, which offers an additional layer of protection. We also verify data interchange with our institutional funding partners usingdigital signatures, which enhances the security of such interchange. We also have created controls to limit employee access to suchinformation 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. In addition to our collaboration with Alipay prior to the expiration of ouragreement with Ant Financial relating to user engagement in August 2018, we also utilize other leading Internet and mobile platforms in China, includingleading Android app stores in China and Apple App Store, to obtain qualified leads for prospective new borrowers. We do not currently pay any fees toacquire leads through Android app stores and Apple App Store. We employ and continually optimize the relevant key words associated with our apps toenhance 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 borrowers aresatisfied with their experiences, they will continue to utilize our credit for other needs or to make other purchases on our marketplace, or referring their friendsand 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 position thesebrands to better target and engage prospective borrowers. We have historically marketed our Laifenqi brand to focus on offering cash credit products toprospective borrowers. On the other hand, we have historically marketed our Qudian brand as the destination for the purchase of merchandise throughmerchandise credit products. We market our budget auto financing products under the Dabai Auto brand. We believe our cash credit products will continueto 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 in general.We compete with other financial products and companies that attract borrowers, institutional funding partners or both. For example, with respect toborrowers, we compete with other consumer finance service providers, including online consumer finance services, such as JD Finance, 360 Finance, WeBankand Huabei and Jiebei of Ant Financial, as well as traditional financial institutions, such as banks and consumer finance companies. Principal methods ofcompetition include enhancing data analytics capabilities, engaging borrowers cost effectively and strengthening funding sources. With respect toinstitutional funding partners, we primarily compete with other investment products and asset classes, such as equities, bonds, investment trust products,bank savings accounts and real estate. We believe that we are able to offer attractive returns with low investment thresholds not available from other assetclasses.As evidenced by our market leadership, we believe that our proprietary risk management system and our ability to offer personalized and affordablecredit products make us more attractive and efficient to both borrowers and institutional funding partners, providing us with a competitive advantage. In lightof the low barriers to entry in the online consumer finance industry, more players may enter this market and increase the level of competition. We anticipatethat more established Internet, technology and financial services companies that possess large, existing user bases, substantial financial resources andestablished distribution channels may also enter the market in the future. We believe that our brands, scale, network effects, historical data and performancerecord provide us with competitive advantages over existing and potential competitors.71Table of Contents We also compete with other providers of budget auto financing products, such as Youxin and Yixin, offline auto retailers such as 4S dealers as well asonline auto retail platforms. We primarily target prospective car buyers who have been our registered users and are eligible for higher credit limits. Webelieve 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 our success,and we rely on trademark and trade secret law and confidentiality, invention assignment and non-compete agreements with our employees and others toprotect our proprietary rights. We have registered 36 trademarks in the PRC for “”, “Quefenqi” and other trademarks. We also have 31 trademarks underapplication in the PRC. We are the registered holder of 43 domain names in the PRC that include qudian.com and laifenqi.com. We were also granted 49copyrights 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 significant increase inretail sales. Higher retail sales during the shopping seasons may generate greater demand for our credit products. As a result, we typically record higher totalrevenues during the fourth quarter of each year compared to other quarters. On the other hand, our total revenues for the first quarter tend to be lower due tothe Chinese New Year holiday that generally reduces borrowing activities. In addition, we hold promotional campaigns on March 21 (our anniversary),November 11 and December 12 by charging lower financing service fees, which may also increase the number of borrowers who utilize our credit productsand 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 medical insurance forour employees. We also purchased employer’s liability insurance and additional commercial health insurance to increase insurance coverage of ouremployees. We do not maintain property insurance policies covering our equipment and other property that are essential to our business operation tosafeguard against risks and unexpected events. We do not maintain business interruption insurance or general third-party liability insurance, nor do wemaintain product liability insurance or key-man insurance. We consider our insurance coverage to be sufficient for our business operations in China.RegulationThis 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 RestrictionsThe 2019 Law of Foreign Investment was adopted at the second meeting of the thirteenth National People’s Congress on March 15, 2019, which willbe effective on January 1, 2020. It will replace the trio of existing laws regulating foreign investment in China, namely, the Sino-foreign Equity Joint VentureEnterprise Law, the Sino-foreign Cooperative Joint Venture Enterprise Law and the Wholly Foreign-invested Enterprise Law, together with theirimplementation rules and ancillary regulations. The 2019 Law of Foreign Investment stipulates that the PRC government implements a system of pre-establishment national treatment plus negative list for the administration of foreign investment. Foreign investors are not allowed to invest in fields or sectorsprohibited in the72Table of Contents market access negative list for foreign investment. Foreign investors that intend to invest in the fields subject to access restrictions stipulated in market accessnegative list for foreign investment shall satisfy the conditions stipulated in such negative list. The PRC government’s policies supporting enterprisedevelopment are equally applicable to foreign-invested enterprises. The PRC government does not impose expropriation on foreign investment. Underspecial circumstances, if it requires imposing expropriation on foreign investment due to the need of public interest, expropriation shall be imposedaccording to legal procedures, and the foreign-invested enterprises concerned shall receive fair and reasonable compensation. Foreign-invested enterprisescan raise funds through public issuance of stocks, corporate bonds and other securities in accordance with the law.Investment activities in the PRC by foreign investors are principally governed by the Guidance Catalog of Industries for Foreign Investment, or theCatalog, which was promulgated and is amended from time to time by the Ministry of Commerce and the National Development and Reform Commission.The Catalog divides industries into three categories: encouraged, restricted and prohibited. Industries not listed in the Catalog are generally deemed asconstituting 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 in theform of a Sino-foreign equity joint venture. The regulations restrict the ultimate capital contribution percentage held by foreign investor(s) in a foreign-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.The Special Administrative Measures for Access of Foreign Investment (Negative List) (2018 Edition), or the List, which was promulgated jointly bythe MOFCOM and the NDRC on June 28, 2018 and became effective on July 28, 2018, has listed the special administrative measures for foreign investmentin certain industries in the PRC, including requirements on ownership percentage, senior management and etc. The industries that do not fall within the Listare administered under uniform principles for domestic and foreign investment. According to the List, the value-added telecommunications services business(excluding e-commerce business) is subject to restrictions on percentage of foreign ownership (not exceeding 50 percent).In July 2006, the predecessor, the MIIT issued the Circular of the Ministry of Information Industry on Strengthening the Administration of ForeignInvestment in Value-added Telecommunications Business, or the MIIT Circular, according to which, a foreign investor in the telecommunications serviceindustry of China must establish a foreign invested enterprise and apply for a telecommunications businesses operation license. The MIIT Circular furtherrequires that: (i) PRC domestic telecommunications business enterprises must not, through any form, lease, transfer or sell a telecommunications businessesoperation license to a foreign investor, or provide resources, offices and working places, facilities or other assistance to support the illegaltelecommunications services operations of a foreign investor; (ii) value-added telecommunications enterprises or their shareholders must directly own thedomain names and trademarks used by such enterprises in their daily operations; (iii) each value-added telecommunications enterprise must have thenecessary facilities for its approved business operations and maintain such facilities in the regions covered by its license; and (iv) all VATS providers arerequired to maintain network and Internet security in accordance with the standards set forth in relevant PRC regulations. If a license holder fails to complywith the requirements in the MIIT Circular and cure such non-compliance, the MIIT or its local counterparts have the discretion to take measures against suchlicense holder, including revoking its license for value-added telecommunications business, or the VATS License.In light of the above restrictions and requirements, we conduct our value-added telecommunications businesses through our consolidated VIEs.73Table of Contents 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 the primarygoverning law, and sets out the general framework for the provision of telecommunications services by domestic PRC companies. Under the TelecomRegulations, telecommunications service providers are required to procure operating licenses prior to their commencement of operations. The TelecomRegulations distinguish “basic telecommunications services” from “VATS.” VATS are defined as telecommunications and information services providedthrough public networks. The Telecom Catalogue was issued as an attachment to the Telecom Regulations to categorize telecommunications services aseither basic or value-added. In February 2003 and December 2015, the Telecom Catalogue was updated respectively, categorizing online data andtransaction processing, information services, among others, as VATS.The Administrative Measures on Telecommunications Business Operating Licenses, promulgated by the MIIT in 2009 and most recently amended inJuly 2017, which set forth more specific provisions regarding the types of licenses required to operate VATS, the qualifications and procedures for obtainingsuch licenses and the administration and supervision of such licenses. Under these regulations, a commercial operator of VATS must first obtain a VATSLicense, from the MIIT or its provincial level counterparts, otherwise such operator might be subject to sanctions including corrective orders and warningsfrom the competent administration authority, fines and confiscation of illegal gains and, in the case of significant infringements, the websites may be orderedto 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 the TelecommunicationsRegulation as most recently updated in December 2015. Pursuant to these measures, “Internet information services” refers to the provision of informationthrough the Internet to online users, and are divided into “commercial Internet information services” and “non-commercial Internet information services.” Acommercial Internet information services operator must obtain a VATS license for Internet information services, or the ICP license, from the relevantgovernment authorities before engaging in any commercial Internet information services operations in China, while the ICP license is not required if theoperator will only provide Internet information on a non-commercial basis. According to the Administrative Measures on Telecommunications BusinessOperating 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 will be deemed ascommercial Internet information service operator, or operators of online data and transaction processing, therefore there is uncertainty as to whether any or allof our consolidated VIEs, or the subsidiaries of our consolidated VIEs need to obtain ICP licenses, or VATS license for online data and transaction processingservices, 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 commercial Internetinformation services on mobile Internet applications are regulated by the Administrative Provisions on Information Services of Mobile Internet Applications,which was promulgated by the State Internet Information Office on June 28, 2016. The information service providers of mobile internet applications aresubject to requirements under the Administrative Provisions on Information Services of Mobile Internet Applications, including acquiring relevantqualifications required by laws and regulations and being responsible for management of information security.74Table of Contents 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 personal informationfrom any abuse or unauthorized disclosure. Internet information in China is regulated and restricted from a national security standpoint. The StandingCommittee of the National People’s Congress, China’s national legislative body, enacted the Decisions on Maintaining Internet Security in December 2000,which may subject violators to criminal punishment in China for any effort to: (i) gain improper entry into a computer or system of strategic importance; (ii)disseminate politically disruptive information; (iii) leak state secrets; (iv) spread false commercial information; or (v) infringe intellectual property rights.The Ministry of Public Security has promulgated measures that prohibit use of the Internet in ways which, among other things, result in a leakage of statesecrets or a spread of socially destabilizing content. If an Internet information service provider violates these measures, the Ministry of Public Security andthe local security bureaus may revoke its operating license and shut down its websites.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 a user andit must expressly inform the users of the method, content and purpose of the collection and processing of such user personal information and may only collectsuch information necessary for the provision of its services. An Internet information service provider is also required to properly maintain the user personalinformation, and in case of any leak or likely leak of the user personal information, the Internet information service provider must take immediate remedialmeasures and, in severe circumstances, make an immediate report to the telecommunications regulatory authority. In addition, pursuant to the Decision onStrengthening the Protection of Online Information issued by the Standing Committee of the National People’s Congress in December 2012 and the Order forthe Protection of Telecommunication and Internet User Personal Information issued by the MIIT in July 2013, any collection and use of user personalinformation must be subject to the consent of the user, abide by the principles of legality, rationality and necessity and be within the specified purposes,methods and scopes. An Internet information service provider must also keep such information strictly confidential, and is further prohibited from divulging,tampering or destroying any such information, or selling or providing such information to other parties. An Internet information service provider is requiredto take technical and other measures to prevent the collected personal information from any unauthorized disclosure, damage or loss. Any violation of theselaws and regulations may subject the Internet information service provider to warnings, 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 Legally PunishingCriminal Activities Infringing upon the Personal Information of Citizens, issued in 2013, and the Interpretation of the Supreme People’s Court and theSupreme People’s Procuratorate on Several Issues regarding Legal Application in Criminal Cases Infringing upon the Personal Information of Citizens, whichwas issued on May 8, 2017 and took effect on June 1, 2017, the following activities may constitute the crime of infringing upon a citizen’s personalinformation: (i) providing a citizen’s personal information to specified persons or releasing a citizen’s personal information online or through other methodsin violation of relevant national provisions; (ii) providing legitimately collected information relating to a citizen 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 ofapplicable rules and regulations when performing a duty or providing services; or (iv) collecting a citizen’s personal information by purchasing, accepting orexchanging such information in violation of applicable rules and regulations.The Internet Finance Guidelines jointly released by ten PRC regulatory agencies in July 2015 purport, among other things, to require Internet financeservice providers to improve technology security standards, and safeguard customer and transaction information. The Internet Finance Guidelines alsoprohibit Internet finance service providers from illegally selling or disclosing customers’ personal information. The PBOC and other relevant regulatoryauthorities will jointly adopt the implementing rules. Pursuant to the Ninth Amendment to the Criminal Law issued by the Standing Committee of theNational People’s Congress in August 2015, which became effective in November 2015, any Internet service provider that fails to fulfill the obligationsrelated to Internet information security administration as required by applicable laws and refuses to rectify upon orders is subject to criminal penalty for theresult of (i) any dissemination of illegal information in large scale; (ii) any severe effect due to the75Table of Contents leakage of the client’s information; (iii) any serious loss of criminal evidence; or (iv) other severe situation, and any individual or entity that (i) sells orprovides personal information to others in a way violating the applicable law, or (ii) steals or illegally obtain any personal information is subject to criminalpenalty in severe situation.In November 2016, the Standing Committee of the National People’s Congress promulgated the Network Security Law of the People’s Republic ofChina, 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 and othernecessary measures in accordance with the provisions of applicable laws and regulations as well as the compulsory requirements of the national andindustrial standards to safeguard the safe and stable operation of the networks, effectively respond to the network security incidents, prevent illegal andcriminal activities, and maintain the integrity, confidentiality and availability of network data. The Network Security Law emphasizes that any individualsand organizations that use networks is required to comply with the PRC Constitution and laws, abide by public order and cannot endanger network securityor make use of networks to engage in unlawful activities such as endangering national security, economic order and social order, and infringing thereputation, privacy, intellectual property rights and other lawful rights and interests of other people. The Network Security Law has reaffirmed the basicprinciples and requirements as specified in other existing laws and regulations on personal information protections, such as the requirements on thecollection, use, processing, storage and disclosure of personal information, and internet service providers being required to take technical and other necessarymeasures to ensure the security of the personal information they have collected and prevent the personal information from being divulged, damaged or lost.Any violation of the provisions and requirements under the Network Security Law may subject the Internet service provider to warnings, fines, confiscationof illegal gains, revocation of licenses, cancellation of filings, closedown of websites or even criminal liabilities.The draft of Information Security Technology-Personal Information Security Specification was issued by National Information SecurityStandardization Technical Committee on February 1, 2019. Pursuant to the draft of the Specification, product and service providers should take technical andother necessary measures to ensure the safety of personal information, clearly demonstrate the purpose, approaches and scope of processing the personalinformation to the individual and acquire the authorization.In providing our online consumer finance service, we collect certain personal information from borrowers, and also need to share the information withour business partners such as institutional funding partners for the purpose of facilitating credit to borrowers. We have obtained consent from borrowers tocollect and use their personal information, and have also established information security systems to protect the user information and to abide by othernetwork security requirements under such laws and regulations. However, there is uncertainty as to how the network security requirements for maintainingnetwork security and protecting customers’ personal information will be interpreted and implemented. We cannot assure you that our existing policies andprocedures will be deemed to be in full compliance with any laws and regulations that are applicable, or may become applicable 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 requires thatthe interest rates charged under a loan agreement must not violate the applicable provisions of the PRC laws and regulations. In accordance with the PrivateLending Judicial Interpretations issued by the Supreme People’s Court of the PRC on August 6, 2015, which came into effect on September 1, 2015, privatelending is defined as financing between individuals, legal entities and other organizations. Loans funded by financial institutions which are licensed byfinancial regulatory authorities are not private lending transactions. When private loans between individuals are paid by wire transfer, the loan contractsbetween individuals came into effect upon the deposit of funds to the borrower’s account. If either the lender or the borrower is not a natural person, the loancontracts become applicable effective upon execution of the loan contract, unless otherwise agreed by the parties or otherwise provided by laws andadministrative regulations. In the event that the loans are made through an online consumer finance lending platform and the platform only providesintermediary services, the courts will dismiss the claims of the parties concerned against the platform demanding the repayment of loans by the platform asguarantors. However, if the online consumer finance service provider76Table of Contents guarantees repayment of the loans as evidenced by its web page, advertisements or other media, or the court is provided with other proof, the lender’s claimalleging that the online consumer service provider assumes the obligations of a guarantor will be upheld by the courts. The Private Lending JudicialInterpretations also provide that agreements between the lender and borrower on loans with interest rates below 24% per annum are valid and enforceable. Asto loans with interest rates per annum between 24% and 36%, if the interest on the loans has already been paid to the lender, and so long as such payment hasnot damaged the interest of the state, the community and any third parties, the courts will turn down the borrower’s request to demand the return of theinterest payment. 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.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. Upon dueassignment of the creditor’s rights, the assignee is entitled to the creditor’s rights and the debtor must perform the relevant obligations under the agreementfor the benefit of the assignee. In addition, according to the PRC Contract Law, an intermediation contract is a contract whereby an intermediary presents toits client an opportunity for entering into a contract or provides the client with other intermediary services in connection with the 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 lendinginformation intermediaries, with individual borrowers may constitute intermediary service, and our service agreements with borrowers and investors may bedeemed as intermediation contracts under the PRC Contract Law. Pursuant to the PRC Contract Law, an intermediary must provide true information relatingto the proposed contract. If an intermediary conceals any material fact intentionally or provides false information in connection with the conclusion of theproposed contract, which results in harm to the client’s interests, the intermediary may not claim 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 Judicial Interpretations,if the annual interest rate of a private loan is higher than 36%, the excess will be void and will not be enforced by the courts; •A provider of cash loan shall not deduct interests, service fees, management fees or deposits from the loan principal or set excessive overdueinterest, 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 do notexceed 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 authorities willinterpret and enforce the requirements. We have engaged in discussions with the banks, and we will assist them in satisfying their compliance needs as theregulatory framework evolves.77Table of Contents 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” as directloans between parties through an Internet platform, which is under the supervision of CBRC, and governed by the PRC Contract Law, the General Principlesof the Civil Law of the PRC, and related judicial interpretations promulgated by the Supreme People’s Court. Online peer-to-peer lending institutions arerequired to specify their nature as information intermediaries, mainly provide information services for the direct lending between borrowers and lenders, andcan 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 Internet FinanceSector, which emphasizes that P2P platforms shall specify their nature as information intermediaries and can never engage in certain activities, including butnot limited to, setting up capital pool, extending loans and illegal fund raising. In addition, without approval from competent regulator, P2P platforms shallnot engage in financial business activities such as asset management, debt or equity transfer, and high-risk allocation in security markets. Furthermore, P2Pplatforms are required to segregate assets of lenders and borrowers in qualified banks as depositary institutions from their own assets.On August 17, 2016, the CBRC, the MIIT, Ministry of Public Security and State Internet Information Office promulgated The Interim Measures forAdministration of the Business Activities of Online Lending Information Intermediary Institutions, or the Interim Online Lending Information IntermediaryMeasures, to regulate the business activities of online lending information intermediary institutions. The “online lending” as specified in the Interim OnlineLending Information Intermediary Measures refers to direct lending between peers, which can be natural persons, legal persons or other organizations,through Internet platforms, which we understand is equivalent to the “online peer-to-peer lending” as defined in the Internet Finance Guidelines. Accordingto the Interim Online Lending Information Intermediary Measures, “online lending information intermediary institution” refer to financial informationintermediaries that are engaged in the lending information business and directly provide peers, which can be natural persons, legal persons or otherorganizations, with lending information services, such as information collection and publication, credit rating, information interaction and loan facilitationbetween borrowers 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 Private LendingJudicial Interpretation issued by the Supreme People’s Court of the PRC in August 2015.The Interim Online Lending Information Intermediary Measures generally require that online lending information intermediary institutions shall notengage 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 its dispatchingoffices are responsible for formulating a regulatory and administrative system for the business activities of online lending information intermediaryinstitutions and to regulate the behaviors thereof, and the provincial-level governments are responsible for institutional regulation of the online lendinginformation intermediary institutions within their respective jurisdictions. Furthermore, an online lending information intermediary institution and itsbranches are required, within 10 working days after obtaining the business license, to complete record-filing and registration with the local financialregulatory department of the place of the industrial and commercial registration by presenting relevant materials. After completing the record-filing andregistration with the local financial regulatory authority, they are required to apply for an appropriate telecommunication business operation permit inaccordance with relevant provisions of competent communication departments, and to include serving as an Internet lending information intermediary in itsbusiness scope. An intermediary institution that fails to apply for telecommunication business operation permit as required cannot carry out an onlinelending information intermediary business.According to these Interim Online Lending Information Intermediary Measures, online lending information intermediary institutions cannot directlyor indirectly engage in the following activities: (1) financing their own operations with the funds of lenders; (2) accepting or collecting directly or indirectlythe funds of lenders; (3)78Table of Contents providing lenders with a guarantee or promise to guarantee principal and interest thereon directly or in disguised form; (4) publicizing or promotingfinancing projects by themselves or by delegating or authorizing a third party at physical places other than by electronic means such as the Internet,landlines, mobiles etc.; (5) extending loans, except otherwise provided by applicable laws and regulations; (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 companyasset 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, fund shares etc.; (9) engaging in any form of mixture, bundling or agency with otherinstitutions in investment, agency in sale, brokerage and other business except as permitted by laws, regulations and relevant regulatory provisions on onlinelending; (10) falsifying or exaggerating the truthfulness and earnings outlook of financing projects, concealing the defects and risks of financing projects,making false advertising or promotion, etc. by using ambiguous words or other fraudulent means, fabricating or spreading false or incomplete information,impairing the business reputation of others or misleading lender or borrowers; (11) providing information intermediary services for the high-risk financingwith the 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 information intermediaryinstitutions: (1) providing, in accordance with laws, regulations and contracts, lenders and borrowers with collection, arrangement, identification, screeningand online publication of direct lending information as well as the relevant services such as credit assessment, matching between borrowing and lending,financing consulting and online dispute resolution; (2) conducting necessary examination of the qualification and eligibility of lenders and borrowers,authenticity of information as well as the authenticity and legitimacy of financing projects; (3) taking reasonable measures to prevent fraudulent behaviorsand announcing and terminating relevant network-based lending activities in a timely manner upon discovery of any fraudulent behaviors or any othercircumstances impairing the interests of lenders; (4) conducting continuously the activities for popularization of the knowledge and education of the risks ofnetwork-based lending, strengthening risk disclosure, guiding lenders to participate in network-based lending in small-amount and scattered manner andensuring that lenders are fully aware of lending risks; (5) submitting relevant information in accordance with laws, regulations and relevant regulatoryprovisions on network-based lending, of which the information on creditors’ rights and liabilities in connection with network-based lending shall besubmitted to and registered with the relevant data statistical departments in a timely manner; (6) keeping proper custody of the data and transactioninformation of lenders and borrowers without deleting, tampering with, illegally selling or divulging the basic information and transaction information oflenders and borrowers; (7) performing according to law the anti-money laundering and anti-terrorist financing obligations, such as client identityidentification, suspicious transaction reporting, keeping the identity data and transaction records of clients, etc.; (8) cooperating with relevant departments inproperly handling the work relating to preventing, investigating and punishing the finance-related illegal activities and crimes; (9) ensuring the workrelating to the Internet information content management as well as network and information security pursuant to the relevant requirements; and (10) otherobligations prescribed by the banking regulatory authority of the State Council and the provincial people’s governments of the places of industrial andcommercial registration. Furthermore, in offline physical locations, online lending information intermediary institutions shall not operate businesses otherthan risk management and necessary business processes such as information collection and confirmation, post-loan tracking and pledge management inaccordance with online-lending regulations. Online lending information intermediary institutions shall, based on their risk management capabilities, setupper limits on the loan balance of a single borrower borrowing both from one online lending intermediary and from all online lending informationintermediary institutions. In the case of natural persons, this limit shall not be more than RMB200,000 for one online lending intermediary and not more thanRMB1 million in total from all platforms, while the limit for a legal person or organization shall not be more than RMB1 million for one online lendingintermediary and not more than RMB5 million in total from all platforms. For the protection of investors and borrowers, the Interim Online LendingInformation Intermediary Measures require that online lending information intermediary institutions (i) separate their own capital from funds received fromlenders and borrowers 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 information intermediaryinstitutions established prior to79Table of Contents the effectiveness of the Interim Online Lending Information Intermediary Measures have a transition period of twelve months to rectify any activities that arenon-compliant with the Interim Online Lending Information Intermediary Measures, except with respect to criminal activity, which must be terminatedimmediately.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 provide onlinelending fund depository services, and stipulates that the depositories shall not be engaged in offering any guarantee, including: (i) offering guarantees forlending transaction activities conducted by online lending information intermediary institutions, or undertaking any liability for breach of contract related tosuch activities; (ii) offering guarantees to lenders, guarantying principal and dividend payments or bearing the risks associated with fund lending operationsfor lenders. The Depositary Guidance also stipulates certain conditions that must be met before depositories are entitled to develop an online lending funddepository business, including: (i) having a good credit record and not having been included on the List of Enterprises with Abnormal Operations or the Listof Enterprises with Serious Illegal and Dishonest Acts; (ii) satisfying various requirements relating to the technological systems of such entity’s depositoryfund business and general operations, including but not limited to assuming fund administration responsibilities and not outsourcing or assigning suchentity’s responsibilities to third parties to set up accounts, process trading information or verify trading passwords; and (iii) setting up special depositaccounts to hold online lending capital and sub-accounts for online lenders and borrowers as well as guarantors, and in order to assure fund security, useseparate accounts to hold private capital of online lending information intermediary institutions. In addition, the Depositary Guidance prohibits depositoriesfrom outsourcing or assigning their responsibilities to set up capital accounts, deal with transaction information, verify trading passwords and various otherservices to third parties, provided, however, that certain cooperation regarding payment services with third-party payment companies and depository banks ispermitted in accordance with clarifications by the CBRC. Apart from the requirements set forth in the Interim Online Lending Information IntermediaryMeasures and the Registration Guidance, the Depositary Guidance imposes certain responsibilities on online lending information intermediary institutions,including requiring them to enter into fund depository agreements with only one commercial bank to provide fund depository services, organize independentauditing on funds depository accounts of borrowers and investors and various other services. The Depositary Guidance requires online lending informationintermediary institutions to perform various obligations, and prohibits them advertising their services with the information of their depository except for inaccordance with necessary exposure requirements. The Guidance also raises other business standards and miscellaneous requirements for depositories andonline lending 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 on SpecificRectification and Inspection Relating to P2P Online Lending Risks, or Circular 57. Circular 57 requires local regulatory authorities to jointly inspect andevaluate as to whether an online lending information intermediary has complied with in the Interim Online Lending Information Intermediary Measures. Anonline lending information intermediary may not complete record-filing and registration until it receives joint approval from the local financial regulator andthe local branch of the CBRC as to its rectification measures. Circular 57 prohibits four forms of credit transfers: (i) asset securitization or transfer creditor’srights in form of packaged assets, securitized assets, trust assets or fund shares; (ii) loans initially funded by a management member of related party andsubsequently transferred to lenders on the P2P platform; (iii) wealth management products (whether with fixed terms or redeemable on demand) that arematched with transferred loans; and (iv) using creditor’s rights from P2P platforms as pledge to borrow funds from other lenders. On the other hand, Circular57 provides that infrequent transfers of loans among lenders are deemed to be in compliance with the relevant laws and regulations.It has been reported that in May 2017, the PBOC and other PRC regulatory agencies issued the Notice on Further Effectively Conducting the SpecialCampaign on Reorganizing and Rectification in Respect of Risks Related to the Internet Finance Market, or Circular 119, which classified enterprises in theInternet finance market into “compliant enterprises,” “enterprises to conduct rectifications” and “enterprises to be suspended.” Circular 119 further stipulatesvarious procedures to be taken with respect to these three types of enterprises, namely compliant enterprises, enterprises to conduct rectifications andenterprises to be suspended. According to the Circular 119 (as reported, same below), provincial government agencies should identify key market playersengaged in internet80Table of Contents financing and conduct on-site inspections. If finding business institutions involving in illegal operations, provincial government agencies should issuerectification notice to the institutions and require them to put together rectification plan and submit for review. An enterprise that has received rectificationnotices from government agencies, or an “enterprise to conduct rectifications” to promise, in its rectification plan, that it will not engage in any new non-compliant operations. Furthermore, such rectification plan shall provide a clear schedule for such enterprises to wind down and terminate all outstandingnon-compliant business contracts and operations, which schedule in principal shall be no longer than one year, except if other specific regulations stipulateotherwise. Enterprise to conduct rectifications should report regularly to the government agencies of its rectification process, finish the rectification inaccordance with the rectification plan, and apply for and accept review by government agencies. Enterprises which refuse to rectify non-compliant activities,or fail to pass rectifying inspections, or engage in significant non-compliance shall be shut down in accordance with relevant regulations. During the processof the Special Campaign, provincial government agencies shall ensure that the number of enterprises in the Internet finance market and relevant businessscale in such province to decrease, which is sometimes referred to as the Institutional Dual Decrease.It has been reported that according to Circular 175, the overarching objective of Circular 175 is for PRC government agencies to effect orderly exitsof certain peer-to-peer direct lending marketplaces without inducing systematic risk in the financial system or causing significant social turbulence until onlythose marketplaces that are strictly in compliance with all relevant laws and regulations remain in operation in the peer-to-peer direct lending industry.Circular 175 classifies peer-to-peer direct lending marketplaces into (i) marketplaces on which investors are not fully repaid or that are otherwise unable tooperate their businesses and (ii) marketplaces that have not been involved in such incidents, and the latter is further classified, based on the scale of theirbusiness operations, into (a) shell companies with zero loan balance or loan origination for more than three months and marketplaces that no longer facilitateloan application and investment, or are otherwise not in operation, (b) small-scale marketplaces, which shall be determined based on factors includingoutstanding balance and number of borrowers by provincial governmental agencies, and (c) large-scale marketplaces, including marketplaces with high risks,and Normal Marketplaces that have not demonstrated any high-risk characteristics. In accordance with Circular 175, marketplaces with high risks include, forinstance, marketplaces that fund loans to themselves or facilitate sham loans, marketplaces with unclear fund flows, marketplaces with massive negativepublicity and complaints, marketplaces that refuse to or are reluctant to rectify non-compliant operations. Pursuant to Circular 175, except for NormalMarketplaces, other marketplaces shall exit the peer-to-peer lending industry or cease operation. Even for the Normal Marketplaces, Circular 175 require tolimit the scale of outstanding business and number of investors, which is sometimes referred as the Business Dual Decrease.The aforementioned summaries of Circular 119 and Circular 175 are based on certain media reports, including alleged photocopies of Circular 119and Circular 175 presented in such reports. We are aware that Circular 119 and Circular 175 have not been officially issued to the public by any governmentagencies, and therefore there are uncertainties as to the accuracy of the media reports, as well as the authenticity, meaning and application of Circular 119 andCircular 175.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 the regulation setforth in the Interim Online Lending Information Intermediary Measures. As such, we do not consider our company as an “online lending informationintermediary institution” regulated under the above regulations. However, we cannot assure you that the CBRC or other PRC regulatory authorities wouldnot expand the applicability of the Interim Online Lending Information Intermediary Measures and regard us as an “online lending information intermediaryinstitution.” In the event that we are deemed as an online lending information intermediary institution by the PRC regulatory authorities in the future, wemay have to make registration with the local financial regulatory authority and apply for telecommunication business operating licenses if required by thecompetent authorities, and our current business practice may be considered to be not in compliance with the Interim Online Lending InformationIntermediary Measures, and accordingly, our business, results of operations and financial position will be materially and adversely affected.81Table of Contents 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 and regulations toavoid administrative and criminal liabilities. The Measures for the Banning of Illegal Financial Institutions and Illegal Financial Business Operationspromulgated by the State Council in July 1998, and the Notice on Relevant Issues Concerning the Penalty on Illegal Fund-Raising issued by the GeneralOffice of the State Council in July 2007 explicitly prohibit illegal public fund-raising. The main features of illegal public fund-raising include: (i) illegallysoliciting and raising funds from the general public by means of issuing stocks, bonds, lotteries or other securities without obtaining the approval of relevantauthorities, (ii) promising a return of interest or profits or investment returns in cash, properties or other forms within a specified period of time, and (iii) usinga 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 the JudicialInterpretations to Issues Concerning Applications of Laws for Trial of Criminal Cases on Illegal Fund-Raising, or the Illegal Fund-Raising JudicialInterpretations, which came into force in January 2011. The Illegal Fund-Raising Judicial Interpretations provide that a public fund-raising will constitute acriminal offense related to “illegally soliciting deposits from the public” under the PRC Criminal Law, if it meets all the following four 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 solicitationor advertising such as social media, promotion meetings, leafleting and short message service, or SMS, advertising; (iii) the fundraiser promises to repay, aftera specified period of time, the capital and interests, or investment returns in cash, property in kind and other forms; and (iv) the fund-raising targets thegeneral public as opposed to specific individuals. Pursuant to the Illegal Fund-Raising Judicial Interpretations, an offender that is an entity will be subject tocriminal liabilities, if it illegally solicits deposits from the general public or illegally solicits deposits in disguised form (i) with the amount of depositsinvolved exceeding RMB1,000,000, (ii) with over 150 fund-raising targets involved, or (iii) with the direct economic loss caused to fund-raising targetsexceeding RMB500,000, or (iv) the illegal fund-raising activities have caused baneful influences to the public or have led to other severe consequences. Anindividual offender is also subject to criminal liabilities but with lower thresholds. In addition, an individual or an entity who has aided in illegal fund-raising from the general public and charges fees, including but not limited to agent fees, rewards, rebates and commission, would constitute an accomplice ofthe crime of illegal fund-raising. In accordance with the Opinions of the Supreme People’s Court, the Supreme People’s Procurator and the Ministry of PublicSecurity on Several Issues concerning the application of Law in the Illegal Fund-Raising Criminal Cases, administrative proceedings for determining thenature of illegal fund- raising activities is not a prerequisite procedure for the initiation of criminal proceeding concerning the crime of illegal fund-raising,and the administrative departments’ failure in determining the nature of illegal fund-raising activities does not affect the investigation, prosecution and trialof cases concerning 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 form ofSino-foreign equity joint ventures, Sino-foreign cooperative joint ventures and wholly foreign-owned enterprises in the PRC to engage in the finance leasebusiness as well as to carry out business activities. Under the Measures, the total assets of the foreign investors of a foreign-funded finance lease companymay 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 aforeign-invested finance lease company in the form of a limited liability company shall not normally exceed 30 years; and (ii) it shall be staffed byappropriate professionals and its senior management personnel shall possess the appropriate professional qualifications and not less than three years’experience in the business. Since our Company was converted from a limited liability company into a joint stock limited company in September 2015, thecondition 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 businesses82Table of Contents approved by the examination and approval authority. “Finance lease business” refers to the trading activities in which a lessor, based on a lessee’sdesignation with respect to the seller and the leased object, agrees to purchase the assets underlying the leases from a seller and makes the leased objectavailable to the lessee for use and collects rent thereon from the lessee. Foreign-invested finance lease enterprises may carry out finance lease activities byway of direct leasing, sub-leasing, sale-leaseback, leveraged leasing, entrusted leasing and joint leasing transactions. For the purpose of the Measures, theleasing property includes: (i) movable properties such as manufacturing equipment, telecommunication equipment, medical devices, scientific and researchequipment, inspection and testing equipment, engineering and machinery equipment and office equipment; (ii) transportation equipment, such as airplanes,automobiles and ships; and (iii) intangible properties such as software and technology that are attached to the moveable properties and transportationequipment mentioned above, provided that the value of such attached intangible properties shall not exceed half of the value of the leased properties that canqualify 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 company shallnot exceed 10 times of the total amount of its net assets. The risk assets shall be determined based on residual assets, namely, the result after deducting 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 the previousyear 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 MOFCOM andbecame effective on October 1, 2013. According to the Administrative Measures, the MOFCOM and the provincial-level commerce authorities are in chargeof the supervision and administration of finance lease enterprises. A finance lease company shall report, according to the requirements of the MOFCOM, therelevant data in a timely and truthful manner through the National Finance Lease Company Management Information System. Specifically, a finance leaseenterprise shall, submit, within 15 business days after the end of each quarter, the statistics on and summary of its operation in the preceding quarter, andstatistics on and summary of its operations in the preceding year as well as its financial and accounting report (including appended notes thereto) audited byan auditing firm for the preceding year prior to April 30 of each year. In the event of a change of name, a relocation to another region, an increase or decreaseof registered capital, a change of organizational form, an adjustment of ownership structure or other changes, a finance lease company shall report to thecompetent provincial-level commerce authority in advance. A foreign-invested finance lease company that undergoes such changes shall go throughapproval and other procedures according to the relevant provisions. A finance lease company shall, within five business days after registering such changes,log into the National Finance Lease Company Management Information System to modify the above information.Finance lease enterprises should use real entities, which have clear ownership and capable of generating revenue, as lessor to carry out the financelease business. Finance lease enterprises shall not engage in deposits, loans, entrusted loans or other financial services or inter-bank borrowing unlesspermission has been granted from the relevant departments. Finance lease enterprises must not carry out illegal fund-raising activities under the name of afinance lease company. According to the Administrative Measures, finance lease enterprises shall strengthen their internal risk controls, and establisheffective systems for classifying at risk assets, and adopt a credit appraisal system for the lessee, a post recovery and disposal system and a risk alertmechanism. A finance lease company shall also establish an affiliated transaction management system, and exclude persons related to the affiliatedtransactions from the voting or decision-making process for affiliated transactions where the lessee is an affiliate. In the event of any purchase of equipmentfrom an affiliated production company, the settlement price for such equipment shall not be lower than the price offered by such company to any third partyof such equipment or equipment of the same batch.The Administrative Measures also contain regulatory provisions specifically focusing on sale-leaseback transactions. The subject matter of a sale-leaseback transaction shall be properties that possess economic functions and produce continuous economic benefits. A finance lease company shall notaccept 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 any judicial organ, orwhose ownership has any other defects as the subject matter of a sale-leaseback transaction. A finance lease company shall give adequate consideration toand objectively evaluate assets leased back, set purchasing prices for83Table of Contents subject matter thereof with reference to reasonable pricing basis in compliance with accounting principles, and shall not purchase any subject matter at aprice 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 Administration overForeign-invested Finance Lease Companies, or the Circular, foreign-invested finance lease companies that failed to conduct substantive finance leasebusiness operations in the previous fiscal year or failed to pass the annual inspection and had violations of laws and regulations, shall be ordered by the localauthority to make rectifications and report the information on such rectification to the MOFCOM. Foreign-invested finance lease companies shall not engagein deposits, loans, entrusted loans or inter-bank borrowing and equity investment unless permission has been granted from relevant departments. The Circularspecifies that foreign-invested finance lease companies are not allowed to provide direct or indirect financing to local governmental financing companieswhich 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 General Officeof the State Council of the PRC on August 31, 2015; the Guiding Opinion’s main task is to accelerate the development of the finance lease industry in fouraspects: system and mechanism reform, development in major fields, innovative development and industry supervision. According to the Guiding Opinion,there is no minimum registered capital requirement for subsidiaries of a finance lease company, a finance lease company is allowed to engage in a sidebusiness which is related to its main business, private capital and independent third-party service providers are encouraged to incorporate the finance leasecompany and applications for filing or obtaining a license for business deals in medical devices for the finance lease company 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 regulates thecivil contractual relationship among natural persons, legal persons and other organizations. Chapter 14 of the PRC Contract Law sets forth mandatory rulesabout 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, payment method and currency of the rentand 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.Without the consent of the lessee, the lessor may not modify relevant details related to the lessee of the purchase contract that has been concludedbased 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 to the property of athird party caused by the leased property while in the possession of the lessee. However, the ownership of the leased property vests in the lessor. If they havenot stipulated in which party ownership shall vest upon expiration, if such stipulation is not clear, or if ownership cannot be determined in accordance withthe 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 or whole ofthe 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 of precautionary andsupervisory measures, establishment of various systems for client identification, retention of clients’ identification information and transactions records,84Table of Contents and reports on large transactions and suspicious transactions. According to the PRC Anti- money Laundering Law, financial institutions subject to the PRCAnti-money Laundering Law include banks, credit unions, trust investment companies, stock brokerage companies, futures brokerage companies, insurancecompanies and other financial institutions as listed and published by the State Council, while the list of the non-financial institutions with anti-moneylaundering obligations will be published by the State Council. The PBOC and other governmental authorities issued a series of administrative rules andregulations to specify the anti-money laundering obligations of financial institutions and certain non-financial institutions, such as payment institutions.However, the State Council has not promulgated the list of the non-financial institutions with anti- 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 identification program, themonitoring and reporting of suspicious transactions, the preservation of customer information and transaction records, and the provision of assistance to thepublic security department and judicial authority in investigations and proceedings in relation to anti-money laundering matters. The PBOC will formulateimplementing 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-money launderingpurposes. However, as the implementing rules of the Internet Finance Guidelines have not been published, there is uncertainty as to how the anti-moneylaundering requirements in the Guidelines will be interpreted and implemented, and whether online consumer finance service providers like us must abide bythe rules and procedures set forth in the PRC Anti-money Laundering Law that are applicable to non-financial institutions with anti-money launderingobligations. We cannot assure you that our existing anti- money laundering policies and procedures will be deemed to be in full compliance 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 protection of software in China, including without limitation the PRC Copyright Law,adopted in 1997 and revised in 2001, 2010 respectively, with its implementation rules adopted in 1991 and revised in 2002, 2011 and 2013 respectively,and the Regulations for the Protection of Computer Software as promulgated on January 30, 2013. Under these rules and regulations, software owners,licensees and transferees may register their rights in software with the NCAC or its local branches and obtain software copyright registration certificates.Although such registration is not mandatory under PRC law, software owners, licensees and transferees are encouraged to go through the registration processto enjoy the better protections afforded to registered 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, handlestrademark 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 on August 24and became effective on November 1, 2017. The MIIT is in charge of the overall administration of domain names in China. The registration of domain namesin PRC is on a “first- apply-first-registration” basis. A domain name applicant will become the domain name holder upon the completion of the applicationprocedure.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. TheLCL requires employers to enter into written contracts with their employees, restricts the use of temporary workers and aims to give employees long-term jobsecurity. Pursuant to the LCL, employment contracts lawfully concluded prior to the implementation of the LCL and continuing as of the date of itsimplementation will continue to be performed. Where an employment relationship was established prior85Table of Contents to the implementation of the LCL but no written employment contract was concluded, a contract must be concluded within one month after the LCL’simplementation.According to the Social Insurance Law promulgated by SCNPC and effective from July 1, 2011, the Regulation of Insurance for Work-Related Injury,the Provisional Measures on Insurance for Maternity of Employees, Regulation of Unemployment Insurance, the Decision of the State Council on Setting UpBasic Medical Insurance System for Staff Members and Workers in Cities and Towns, the Interim Regulation on the Collection and Payment of SocialInsurance Premiums and the Interim Provisions on Registration of Social Insurance, an employer is required to contribute the social insurance for itsemployees in the PRC, including the basic pension insurance, basic medical insurance, unemployment insurance, maternity insurance and injury insurance.Under the Regulations on the Administration of Housing Funds, promulgated by the State Council on April 3, 1999 and as amended on March 24, 2002, anemployer 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, interest payments andtrade and service-related foreign exchange transactions, can be made in foreign currencies without prior approval from SAFE by complying with certainprocedural requirements. By contrast, approval from or registration with appropriate government authorities is required where RMB is to be converted intoforeign currency and remitted out of China to pay capital account items, such as direct investments, repayment of foreign currency- denominated loans,repatriation of investments and investments in securities outside of China.In November 2012, SAFE promulgated the Circular of Further Improving and Adjusting Foreign Exchange Administration Policies on Foreign DirectInvestment, which substantially amends and simplifies the current foreign exchange procedure. Pursuant to this circular, the opening of various specialpurpose foreign exchange accounts, such as pre-establishment expenses accounts, foreign exchange capital accounts and guarantee accounts, thereinvestment of RMB proceeds derived by foreign investors in the PRC, and remittance of foreign exchange profits and dividends by a foreign-investedenterprise to its foreign shareholders no longer require the approval or verification of SAFE, and multiple capital accounts for the same entity may be openedin different provinces, which was not possible previously. In addition, SAFE promulgated another circular in May 2013, which specifies that theadministration by SAFE or its local branches over direct investment by foreign investors in the PRC must be conducted by way of registration and banksmust process foreign exchange business relating to the direct investment in the PRC based on the registration information provided by SAFE and itsbranches. On February 28, 2015, SAFE promulgated the Notice on Further Simplifying and Improving the Administration of the Foreign ExchangeConcerning Direct Investment, or SAFE Notice 13. After SAFE Notice 13 became effective on June 1, 2015, instead of applying for approvals regardingforeign exchange registrations of foreign direct investment and overseas direct investment from SAFE, entities and individuals may apply for such foreignexchange registrations from qualified banks. The qualified banks, under the supervision of SAFE, may directly review the applications and conduct theregistration.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 exchange capitals offoreign-invested enterprises nationwide. Circular 19 came into force and replaced both the Circular of the State Administration of Foreign Exchange onIssues Relating to the Improvement of Business Operations with Respect to the Administration of Foreign Exchange Capital Payment and Settlement ofForeign-invested Enterprises, or Circular 142 and the Circular of the State Administration of Foreign Exchange on Issues concerning the Pilot Reform of theAdministrative Approach Regarding the Settlement of the Foreign Exchange Capitals of Foreign-invested Enterprises in Certain Areas, or Circular 36 on June1, 2015. Circular 19 allows all foreign-invested enterprises established in the PRC to use their foreign exchange capitals to make equity investment andremoves certain other restrictions had been provided in Circular 142. However, Circular 19 continues to prohibit foreign-invested enterprises from, amongother things, using RMB fund converted from its foreign exchange capitals for expenditure beyond its business scope and86Table of Contents providing entrusted loans or repaying loans between non-financial enterprises. 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 in June 2016,which reiterates some of the rules set forth in Circular 19, but Compared to Circular 19, Circular 16 provides that discretionary foreign exchange settlementapplies to foreign exchange capital, foreign debt offering proceeds and remitted foreign listing proceeds, and the corresponding RMB capital converted fromforeign 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 and implementation in practice with respect to the Circular 16. Circular 19 orCircular 16 may delay or limit us from using the proceeds of offshore offerings to make additional capital contributions or loans to our PRC subsidiaries andany violations of these circulars could result in severe monetary or other penalties.In January 2017, SAFE promulgated the Circular on Further Improving Reform of Foreign Exchange Administration and Optimizing Genuinenessand Compliance Verification, or Circular 3, which stipulates several capital control measures with respect to the outbound remittance of profit from domesticentities to offshore entities, including (i) under the principle of genuine transaction, banks shall check board resolutions regarding profit distribution, theoriginal version of tax filing records and audited financial statements; and (ii) domestic entities shall hold income to account for previous years’ losses beforeremitting the profits. Moreover, pursuant to Circular 3, domestic entities shall make detailed explanations of the sources of capital and utilizationarrangements, and provide board resolutions, contracts and other proof when completing the registration procedures in connection with an outboundinvestment.Regulations 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 Foreign Exchange onIssues Concerning the Regulation of Foreign Exchange in Equity Finance and Return Investments by Domestic Residents through Offshore Special PurposeVehicles, or SAFE Circular 75. SAFE Circular 37 regulates foreign exchange matters in relation to the use of special purpose vehicles, or SPVs, by PRCresidents or entities to seek offshore investment and financing or conduct round trip investment in China. Under SAFE Circular 37, a SPV refers to an offshoreentity established or controlled, directly or indirectly, by PRC residents or entities for the purpose of seeking offshore financing or making offshoreinvestment, using legitimate onshore or offshore assets or interests, while “round trip investment” refers to direct investment in China by PRC residents orentities through SPVs, namely, establishing foreign-invested enterprises to obtain the ownership, control rights and management rights. SAFE Circular 37provides that, before making contribution into an SPV, PRC residents or entities are required to complete foreign exchange registration with SAFE or its localbranch. SAFE promulgated the Notice on Further Simplifying and Improving the Administration of the Foreign Exchange Concerning Direct Investment inFebruary 2015, which took effect on June 1, 2015. This notice has amended SAFE Circular 37 requiring PRC residents or entities to register with qualifiedbanks rather than SAFE or its local branch in connection with their establishment or control of an offshore entity established for the purpose of overseasinvestment or financing.PRC residents or entities who had contributed legitimate onshore or offshore interests or assets to SPVs but had not obtained registration as requiredbefore the implementation of the SAFE Circular 37 must register their ownership interests or control in the SPVs with qualified banks. An amendment to theregistration 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 PRCresidents, name and operation term), increases or decreases in investment amount, transfers or exchanges of shares, and mergers or divisions. Failure tocomply with the registration procedures set forth in SAFE Circular 37 and the subsequent notice, or making misrepresentation on or failure to disclosecontrollers of the foreign-invested enterprise that is established through round-trip investment, may result in restrictions being imposed on the foreignexchange activities of the relevant foreign-invested enterprise, including payment of dividends and other distributions, such as proceeds from any reductionin capital, share transfer or liquidation, to its offshore parent or affiliate, and the capital inflow from the offshore parent, and may also subject relevant PRCresidents or entities to penalties under PRC foreign exchange administration regulations.87Table of Contents Regulations Related to Stock Incentive PlansSAFE promulgated the Circular of the State Administration of Foreign Exchange on Issues concerning the Administration of Foreign Exchange Usedfor Domestic Individuals’ Participation in Equity Incentive Plans of Companies Listed Overseas, or the Stock Option Rules in February 2012, replacing theprevious rules issued by SAFE in March 2007. Under the Stock Option Rules and other relevant rules and regulations, PRC residents who participate in stockincentive plan in an overseas publicly-listed company are required to register with SAFE or its local branches and complete certain other procedures.Participants of a stock incentive plan who are PRC residents must retain a qualified PRC agent, which could be a PRC subsidiary of the overseas publiclylisted company or another qualified institution selected by the PRC subsidiary, to conduct the SAFE registration and other procedures with respect to thestock incentive plan on behalf of the participants. In addition, the PRC agent is required to amend the SAFE registration with respect to the stock incentiveplan if there is any material change to the stock incentive plan, the PRC agent or other material changes. The PRC agent must, on behalf of the PRC residentswho have the right to exercise the employee share options, apply to SAFE or its local branches for an annual quota for the payment of foreign currencies inconnection with the PRC residents’ exercise of the employee share options. The foreign exchange proceeds received by the PRC residents from the sale ofshares under the stock incentive plans granted and dividends distributed by the overseas listed companies must be remitted into the bank accounts in thePRC opened by the PRC agents before distribution to such PRC residents.We have adopted the 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 the recipientsof awards under our 2016 Equity Incentive Plan to handle foreign exchange matters in accordance with the Stock Option Rules. However, we cannot assureyou that they can successfully register with SAFE in full compliance with the Stock Option Rules. Any failure to complete their registration pursuant to theStock Option Rules and other foreign exchange requirements may subject these PRC individuals to fines and legal or administrative sanctions, and may alsolimit our ability to contribute additional capital to our PRC subsidiary, limit our PRC subsidiary’s ability to distribute dividends to us or otherwise materiallyadversely 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 regulations governingdistribution of dividends of foreign holding companies include the Wholly Foreign-invested Enterprise Law, issued in 1986 and amended in 2000 and 2016,and the Implementation Rules under the Wholly Foreign-invested Enterprise Law, issued in 1990 and amended in 2001 and 2014 respectively. Under theseregulations, foreign investment enterprises in the PRC may pay dividends only out of their accumulated profits, if any, determined in accordance with PRCaccounting standards and regulations. In addition, foreign investment enterprises in the PRC are required to allocate at least 10% of their respectiveaccumulated profits each year, if any, to fund certain reserve funds unless these reserves have reached 50% of the registered capital of the enterprises. Thesereserves are not distributable as cash dividends. A PRC company is not permitted to distribute any profits until any losses from prior fiscal years have beenoffset. Profits retained from prior fiscal years may be distributed together with distributable profits from the current fiscal year.The 2019 Law of Foreign Investment was adopted at the second meeting of the thirteenth National People’s Congress on March 15, 2019, which willbe effective on January 1, 2020. It will replace the trio of existing laws regulating foreign investment in China, namely, the Sino-foreign Equity Joint VentureEnterprise Law, the Sino-foreign Cooperative Joint Venture Enterprise Law and the Wholly Foreign-invested Enterprise Law, together with theirimplementation rules and ancillary regulations. Once the 2019 Law of Foreign Investment was effective, the regulations mentioned above in the WhollyForeign-invested Enterprise Law will be no longer applicable. It is uncertain whether future laws and regulations will regulate dividend distribution ofwholly foreign-owned enterprises incorporated in China.88Table of Contents Regulations Related to TaxationEnterprise Income TaxUnder the Enterprise Income Tax Law, effective on January 1, 2008 and last amended on December 29, 2018, enterprises organized under the laws ofjurisdictions outside China with their “de facto management bodies” located within China may be considered PRC resident enterprises and therefore besubject to PRC enterprise income tax at the rate of 25% on their worldwide income. The Implementing Rules further define the term “de facto managementbody” as the management body that exercises substantial and overall management and control over the production and operations, personnel, accounts andproperties of an enterprise. If an enterprise organized under the laws of jurisdiction outside China is considered a PRC resident enterprise for PRC enterpriseincome tax purposes, a number of unfavorable PRC tax consequences could follow. First, it would be subject to the PRC enterprise income tax at the rate of25% on its worldwide income. Second, a 10% withholding tax would be imposed on dividends it pays to its non-PRC enterprise shareholders and withrespect to gains 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 to itsforeign enterprise investors are subject to a 10% withholding tax, unless any such foreign investor’s jurisdiction of incorporation has a tax treaty with Chinathat provides for a preferential withholding arrangement. Pursuant to the Notice of the State Administration of Taxation on Negotiated Reduction ofDividends and Interest Rates, which was issued on January 29, 2008 and supplemented and revised on February 29, 2008, and the Arrangement betweenMainland China and the Hong Kong Special Administrative Region for the Avoidance of Double Taxation and Prevention of Fiscal Evasion with Respect toTaxes on Income, which became effective 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 any year commencing on or after January 1, 2007 in the PRC, such withholding tax rate may be lowered to 5% if a Hong Kongenterprise is deemed the beneficial owner of any dividend paid by a PRC subsidiary by PRC tax authorities and holds at least 25% of the equity interest inthat particular PRC subsidiary at all times within the 12-month period immediately before distribution of the dividends. Furthermore, the StateAdministration of Taxation, or the SAT, promulgated the Notice on the Interpretation and Recognition of Beneficial Owners in Tax Treaties in October 2009,which stipulates that non-resident enterprises that cannot provide valid supporting documents as “beneficial owners” may not be approved to enjoy taxtreaty benefits. Specifically, it expressly excludes an agent or a “conduit company” from being considered as a “beneficial owner” and a “beneficial owner”analysis is required 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 Bulletin 7.Under Bulletin 7, an “indirect transfer” of assets, including equity interests in a PRC resident enterprise, by a non-resident enterprise may be re-characterizedand treated as a direct transfer of PRC taxable assets, if such transfer does not have a reasonable commercial purpose and was established for the purpose ofavoiding payment of PRC enterprise income tax. As a result, gains derived from such indirect transfer may be subject to PRC enterprise income tax.According to SAT Circular 37, the amount of taxable income equals the remainder after deducting the net equity value from the equity transfer income.Equity transfer income means the consideration collected by the transferor from the equity transfer, including income in 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 the capital contribution costs actually paid bythe equity transferor to a PRC resident enterprise at the time of the investment and equity participation, or the equity transfer costs actually paid at the time ofacquisition 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, any entity orindividual engaged in the sales of goods, provision of processing, repairs89Table of Contents and replacement services and importation of goods into China is generally required to pay a value-added tax, or VAT, for revenues generated from sales ofproducts, while qualified input VAT paid on taxable purchase 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-Added Taxto Replace Business Tax. In March 2016, the Ministry of Finance and the State Administration of Taxation further promulgated the Notice on FullyPromoting the Pilot Plan for Replacing Business Tax by Value-Added Tax, which became effective on May 1, 2016. Pursuant to the pilot plan and relevantnotices, 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 the qualified input VAT paid ontaxable purchases against the output VAT chargeable on the modern services provided.On March 20, 2019, the Ministry of Finance, the State Administration of Taxation and the General Administration of Customs jointly issued theAnnouncement on Issuing Relevant Policies for Deepening the Reform of Value-Added Tax, which became effective on April 1, 2019. According to theabove-mentioned Announcement, the current VAT rate of 16% related to certain categories of sale and imported goods will be reduced to 13%, and thecurrent VAT rate of 10% related to other categories of sale and imported goods will be reduced to 9% from April 1, 2019. In addition, the scope of businessVAT deductions will be expanded under the above-mentioned Announcement. Furthermore, the refund system of the period-end excess input VAT for trialimplementation will be adopted from April 1, 2019. However, it may be difficult to predict the trends of the VAT rates in the future. We cannot assure youthat the VAT rates will not be raised in the future, which could have a material adverse effect on our financial condition and results of operations.Regulations 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 on June 22,2009. The M&A Rules, among other things, require that (i) PRC entities or individuals obtain MOFCOM approval before they establish or control a SPVoverseas, provided that they intend to use the SPV to acquire their equity interests in a PRC company at the consideration of newly issued 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) the SPV obtains MOFCOM’sapproval before it acquires the equity interests held by the PRC entities or PRC individual in the PRC company by Share Swap; and (iii) the SPV obtainsCSRC 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 on August 1,2008 requires that transactions which are deemed concentrations and involve parties with specified turnover thresholds must be cleared by MOFCOM beforethey can be completed. In addition, on February 3, 2011, the General Office of the State Council promulgated a Notice on Establishing the Security ReviewSystem for Mergers and Acquisitions of Domestic Enterprises by Foreign Lenders, or Circular 6, which officially established a security review system formergers and acquisitions of domestic enterprises by foreign investors. Further, on August 25, 2011, MOFCOM promulgated the Regulations onImplementation of Security Review System for the Merger and Acquisition of Domestic Enterprises by Foreign Lenders, or the MOFCOM Security ReviewRegulations, which became effective on September 1, 2011, to implement Circular 6. Under Circular 6, a security review is required for mergers andacquisitions by foreign investors having “national defense and security” concerns and mergers and acquisitions by which foreign investors may acquire the“de facto control” of domestic enterprises with “national security” concerns. Under the MOFCOM Security Review Regulations, MOFCOM will focus on thesubstance and actual impact of the transaction when deciding whether a specific merger or acquisition is subject to security review. If MOFCOM decides thata specific merger or acquisition is subject to security review, it will submit it to the Inter-Ministerial Panel, an authority established under the Circular 6 ledby the National Development and Reform Commission, or NDRC, and MOFCOM under the leadership of the State Council, to carry out the security review.The regulations prohibit foreign investors from bypassing the security review by structuring transactions through trusts, indirect investments, leases, loans,control through contractual arrangements or offshore transactions.90Table of Contents C.Organizational StructureThe following diagram illustrates our company’s organizational structure, and the place of formation, ownership interest and affiliation of each of ourprincipal subsidiaries and affiliated entities as of December 31, 2018. It omits certain entities that are immaterial to our results of operations, business andfinancial condition, such as Xiamen Weipujia, which does not currently engage in material business operations. Except as otherwise specified, equityinterests depicted in this diagram are held as to 100%. The relationships between each of Ganzhou Qudian, Hunan Qudian, Xiamen Weipujia, Xiamen Qudianand Beijing Happy Time and Ganzhou Qufenqi are governed 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.(4)The following table sets forth the shareholders of Beijing Happy Time, their respective equity interests in Beijing Happy Time and their respectiverelationships with shareholders of Qudian Inc. as of the date of this annual report. For further information as to the principal shareholders of QudianInc., see “Item 6. Directors, Senior Management and Employees — E. Share Ownership.”91Table of Contents 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. and Shenzhen Guosheng Qianhai Investment Co., Ltd. Affiliates of Phoenix Auspicious FinTechInvestment L.P. and Guosheng (Hong Kong)Investment Limited (formerly known as Wa SungInvestment Limited), collectively referred to asPhoenix 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) InvestmentLimited 2,985,744 12.5 Jiaxing Blue Run Quchuan Investment L.P. and Tianjin Blue Run Xinhe Investment Center L.P. Affiliates of Ever Bliss Fund, L.P. and JoyfulBliss Limited, collectively referred to as ZhuEntities 1,681,366 7.0 Tianjin Happy Share Asset Management L.P., referred to as 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 credit businessunder the Laifenqi brand.(7)Material subsidiaries of Beijing Happy Time include (i) Fuzhou Happy Time Technology Development Co., Ltd., Ganzhou Happy Fenqi TechnologyDevelopment Co., Ltd. and Tianjin Happy Time Technology Development Co., Ltd., which operate our websites and mobile apps under the Qudianbrand, (ii) Tianjin Qufenqi Technology Co., Ltd. and Ganzhou Happy Fenqi Network Service Co., Ltd., which operate our websites and mobile appsunder the Laifenqi brand, and (iii) Ganzhou Happy Life Network Microcredit Co,.Ltd. and Fuzhou High-tech Zone Microcredit Co., Ltd., which areour 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 established inconnection with the share incentive plan to be established by QuCampus. Mr. Min Luo, our founder, chairman and chief executive officer, is thegeneral partner of Ganzhou Happy Share. We do not consolidate the financial results of QuCampus in our consolidated financial statements.Our 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, HunanQudian and Ganzhou Qudian, in 2017. In addition, Xiamen Weipujia also became one of our consolidated VIEs in 2018. We effectively control eachconsolidated VIE through a series of contractual arrangements with such VIE, 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.92Table of Contents In addition, pursuant to the resolutions of the board of directors of Qudian Inc. and/or the resolutions of all shareholders 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 consolidated VIEs andGanzhou Qufenqi’s rights under the exclusive call option agreement between Ganzhou Qufenqi and each of our consolidated VIEs. As a result of theseresolutions and the provision of unlimited financial support from the Company to each of our consolidated VIEs, Qudian Inc. has been determined to be mostclosely associated with each of our consolidated VIEs within the group of related parties and was considered to be the primary beneficiary of each of ourconsolidated VIEs. We have consolidated their financial results in our consolidated financial statements in accordance with U.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, or rulecurrently 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 uncertainties regarding the interpretation andapplication of current and future PRC laws, rules and regulations. The 2019 Law of Foreign Investment was adopted at the second meeting of the thirteenthNational People’s Congress on March 15, 2019, which will be effective on January 1, 2020. The 2019 Law of Foreign Investment presumably is to replace thetrio of existing laws regulating foreign investment in China, namely, the Sino-foreign Equity Joint Venture Enterprise Law, the Sino-foreign CooperativeJoint Venture Enterprise Law and the Wholly Foreign-invested Enterprise Law, together with their implementation rules and ancillary regulations. The 2019Law of Foreign Investment does not mention concepts including “de facto control” and “controlling through contractual arrangements,” nor does it specifythe regulation on controlling through contractual arrangements. Specifically, it does not incorporate contractual arrangements as a form of foreigninvestment, our Contractual Arrangements as a whole and each of the arrangements comprising our Contractual Arrangements will not be materially affectedand will continue to be legal, valid and binding on the parties. Notwithstanding the above, the 2019 Law of Foreign Investment stipulates that “foreigninvestment includes foreign investors invest in China through any other methods under laws, administrative regulations, or provisions prescribed by the StateCouncil.” Therefore, there are possibilities that future laws, administrative regulations or provisions of the State Council may stipulate contractualarrangements as a way of foreign investment and our Contractual Arrangements will be regarded as foreign investment. If that is the case, whether ourcontractual arrangements will be deemed to be in violation of the foreign investment access requirements and how our Contractual Arrangements will behandled are subject to uncertainties. The PRC regulatory authorities may in the future take a view that is contrary to the opinion of our PRC legal counsel.We have been further advised by our PRC legal counsel that if the PRC government finds that the agreements that establish the structure for operating ourbusiness do not comply with PRC government restrictions on foreign investment in the aforesaid business we engage in, we could be subject to severepenalties including being prohibited from continuing operations. See “Item 3. Key Information — D. Risk Factors — Risks Relating to Our CorporateStructure.”The following is a summary of the currently effective contractual arrangements by and among our wholly- owned subsidiary, Ganzhou Qufenqi, eachof 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 all oftheir equity interest in our consolidated VIEs as a continuing first priority security interest, as applicable, to respectively guarantee our consolidated VIEsand their shareholders’ performance of their obligations under the relevant contractual arrangements, which include the exclusive business cooperationagreements, exclusive call option agreements and power of attorney agreements. If our consolidated VIEs or any of93Table of Contents their shareholders breach their contractual obligations under these agreements, Ganzhou Qufenqi, as pledgee, will be entitled to certain rights regarding thepledged equity interests. In the event of such breaches, Ganzhou Qufenqi’s rights include forcing the auction or sale of all or part of the pledged equityinterests of the applicable consolidated VIE and receiving proceeds from such auction or sale in accordance with PRC law. Upon purchase of equity interestsin the applicable consolidated VIE by other persons, Ganzhou Qufenqi and such persons will need to enter into contractual arrangements that are similar toexisting ones in order for Ganzhou Qufenqi to effectively control such consolidated VIE. Each of the shareholders of our consolidated VIEs agrees that,during the term of the applicable equity interest pledge agreement, such shareholder will not dispose of the pledged equity interests or create or allowcreation of any encumbrance on the pledged equity interests without the prior written consent of Ganzhou Qufenqi. Ganzhou Qufenqi is entitled to alldividends and other distributions declared by our consolidated VIEs except as it agrees otherwise in writing. Each equity interest pledge agreement willremain effective until the applicable consolidated VIE and its shareholders discharge all their obligations under the contractual arrangements. We haveregistered pledges of equity interest in each of our consolidated VIEs with the relevant offices of the administration for industry and commerce in accordancewith the PRC Property Rights Law.Power of Attorney Agreements. Pursuant to the power of attorney agreements, each shareholder of our consolidated VIEs has irrevocably appointedthe Ganzhou Qufenqi to act as such shareholder’s exclusive attorney-in-fact to exercise all shareholder rights, including the right to attend and vote onshareholder’s meetings and appoint directors and executive officers. In the absence of contrary written instructions of Ganzhou Qufenqi, each power ofattorney 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, and FuzhouMicrocredit, or the profitable consolidated VIEs and their subsidiaries, with technical support, consulting services and other services. In exchange, GanzhouQufenqi is entitled to receive a service fee from each of the profitable consolidated VIEs on a monthly basis and at an amount equivalent to all of its netincome as confirmed by Ganzhou Qufenqi. Ganzhou Qufenqi owns the intellectual property rights arising out of the performance of the exclusive businesscooperation agreement. In addition, each of the consolidated VIEs and their subsidiaries has granted Ganzhou Qufenqi an exclusive right to purchase any orall of the business or assets of each of the profitable consolidated VIEs and their subsidiaries at the lowest price permitted under PRC law. Unless otherwiseagreed by the parties, this agreement will continue remaining effective.Agreements that Provide Us with the Option to Purchase the Equity Interest in our consolidated VIEs.Exclusive 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 have its designated person or persons to purchase, at its discretion at any time, tothe extent permitted under PRC law, all or part of such shareholder’s equity interests in the applicable, or any or all or the assets of such consolidated VIE. Forreasons discussed in this section, there may be PRC legal restrictions on Ganzhou Qufenqi’s ability to directly purchase such equity interests or assets. In theevent such equity interests or assets are sold to persons designated by Ganzhou Qufenqi, Ganzhou Qufenqi and such persons will need to enter intocontractual arrangements that are similar to the existing ones in order for Ganzhou Qufenqi to exercise effective control over and receive substantially all theeconomic benefits of such equity interests or assets. As for the equity interests in a consolidated VIE, the purchase price should be equal to the minimumprice 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 minimumprice as permitted by applicable PRC law, whichever is higher. Without Ganzhou Qufenqi’s prior written consent, each consolidated VIE and its shareholdershave agreed that such consolidated VIE shall not amend its articles of association, increase or decrease the registered capital, sell or otherwise dispose of itsassets or beneficial 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 the shareholders ofeach consolidated VIE have agreed to pay any such dividends or distributions to94Table of Contents Ganzhou Qufenqi. Each agreement will remain effective until all equity interests of the applicable consolidated VIE held by its shareholders and all assets ofsuch consolidated VIE have been transferred 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 whether suchconsolidated VIE has incurred an operational loss. The form of financial support includes but is not limited to cash, entrusted loans and borrowings. We willnot request repayment of any outstanding loans or borrowings from a consolidated VIE if it or its shareholders do not have sufficient funds or are unable torepay such loans or borrowings. Each letter is effective from the date of the other agreements entered into among Ganzhou Qufenqi, the applicableconsolidated VIE and its shareholders until the earlier of (i) the date on which all of the equity interests of such consolidated VIE have been acquired by or itsdesignated representative(s), and (ii) the date on which we in our sole and absolute discretion unilaterally terminates the applicable financial supportundertaking 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 from theissuance of equity or debt securities in the future.D.FacilitiesIn 2018, we moved our corporate headquarters from Beijing to Xiamen, Fujian Province, China, where we lease approximately 9,869 square meters ofoffice space pursuant to a series of lease expiring in first quarter of 2020 through second quarter of 2022. We also maintain leased properties of approximately202 square meters, 100 square meters, 6,630 square meters and 799 square meters in Beijing, Tianjin, Fuzhou and Ganzhou in Jiangxi Province, respectively.As of March 31, 2019, we also leased 34 show rooms in cities across China in connection with our Dabai Auto business. The size of each show room typicallyranges 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 40 years.We have commenced construction of our innovation park on such parcel of land, and the construction is expected to be completed in 2021.We believe that we will be able to obtain adequate facilities to accommodate our future expansion plans.ITEM 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 based uponcurrent expectations that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statementsas a result of various factors, including those set forth under “Item 3. Key Information — D. Risk Factors” or in other parts of this annual report.A.Operating ResultsOverviewAs a provider of online credit products, we use big data-enabled technologies, such as artificial intelligence and machine learning, to transform theconsumer 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 to95Table of Contents small credit for their discretionary spending or budget auto financing solutions, but are underserved by traditional financial institutions due to their lack oftraditional credit data and the operational inefficiency of traditional financial institutions. We believe our operating efficiency and big data analyticscapability to understand our prospective borrowers from different behavioral and transactional perspectives, assess their credit profiles and offer theminstantaneous and affordable credit products with customized terms distinguishes our business and 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 sales income from budget auto financing products.We are a leading provider of online small consumer credit products in China. In 2018, we facilitated approximately RMB57.9 billion (US$8.4billion) in transactions to 6.9 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 assessment modelupon 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 2018 remained atless than 2.5% through December 31, 2018. M1+ delinquency rate by vintage is defined as the total balance of outstanding principal of a vintage for whichany installment payment is over 30 calendar days past due as of a particular date (adjusted to reflect total amount of recovered past due payments forprincipal, 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. Wecollaborate with a variety of institutional funding partners such as banks and other institutions, to secure sufficient amounts of funding for credit drawdowns.Institutional funding partners are interested in working with us because of the short duration of our credit products, our technology- driven credit assessmentcapabilities and the diversified credit portfolio with attractive risk-adjusted returns. Our strong technological capabilities enable us to seamlessly integrateour system with those of our institutional funding partners, rapidly facilitate transactions and repayment settlements at a massive scale and forecast ourfunding needs on a real-time basis. We do not directly source funding from retail investors. Currently, we retain most of the credit risk with respect to thecooperation with institutional funding partners. We also utilize our own capital to fund the credit drawdowns to enhance user experience so that they caninstantly receive funds after drawdown requests. Our longer-term objectives are to primarily leverage external institutional funding and to transfer credit riskto 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 from RMB1,442.8million in 2016 to RMB4,775.4 million in 2017, and further increased to RMB7,692.3 million (US$1,118.8 million) in 2018. We recorded net income ofRMB576.7 million, RMB2,164.5 million and RMB2,491.3 million (US$362.3 million) in 2016, 2017 and 2018, 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, although from December2017 onward, we have implemented measures to promote the usage of our mobile applications and diverted the majority of transaction orders to be placed onour own mobile applications instead of Alipay. Our ability to continue to engage borrowers efficiently is significantly affected by our ability to attract moreusers through our own mobile apps. As we seek to broaden our borrower base, our success in collaborating with other leading Internet companies and othermarketing efforts will affect the size and credit quality of our borrower base. In addition, our brand, reputation, user experience and the pricing of our creditproducts will affect our borrower retention capability and repeat transactions by borrowers.96Table of Contents 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 and financingservice fee receivables when we believe that the future collection of the principal of on-balance sheet transactions is unlikely. We base the allowance for loanprincipal and financing service fee receivables primarily on historical loss experience using a roll rate-based model applied to our principal and financingservice fee receivables portfolios and, to a lesser extent, macroeconomic factors. As such, an increase in delinquency rates of on-balance sheet transactionswill result in a higher allowance for loan principal and financing service fee receivables. We recognize any increase in allowance for loan principal andfinancing service fee receivables as provision for loan principal and financing service fee receivables for the relevant period. We charge off loan principal andfinancing service fee receivables as a reduction to the allowance for loan principal and financing service fee receivables when the principal and financingservice fee receivables are deemed to be uncollectible. For each off-balance sheet transaction, we record the fair value of guarantee liabilities, which representthe present value of our expected payout based on the estimated delinquency rate and the applicable discount rate for time value. We first allocate thetransaction price to the guarantee liabilities at fair value in accordance with ASC 815. The remaining transaction price is then allocated to the loanfacilitation services and post-origination services on a relative standalone selling price basis. Revenues from loan facilitation services are recognized whenwe match borrowers with the funding partners and the funds are transferred to the borrower. Additionally, revenues from post-origination services arerecognized evenly over the term of the loans as the services are performed. 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 of operations.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 of capitalfor 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 and recordthem on our balance sheet. As we incur interest expenses of borrowings on such funding arrangement, an increase in such arrangement may adversely affectour profit margin. We also collaborate with certain institutional funding partners that provide funds directly to borrowers for credit drawdowns that wefacilitate, which enables us to facilitate additional transactions without utilizing our capital resources. Such institutional funding partners deduct theprincipal and service fees due to them from borrowers’ repayments and remit the remainder to us as our loan facilitation fees. Such loan facilitation fees, net ofthe fair value of guarantee liabilities which was deducted from the consideration, are recognized as loan facilitation income and others. We do not incurinterest expenses of borrowings on their funding. As such, an increase in such arrangement may enhance our profit margin. We record the credit drawdownsfunded under such arrangements off-balance sheet. Depending on the arrangement with the specific institutional funding partner, we either assume full creditrisk or share credit risk with the institutional funding partner. The fair value of guarantee liabilities, which represents the present value of our expectedpayouts due to default 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 indirectly through funding arrangements with banks. Increasing utilization of our own capital during any specific period in order to enhance userexperience and funding flexibility would also enhance our profit margin.97Table of Contents 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 transactions we facilitate. Amount of financing service fees per transaction is a function of thesize and duration of credit products. Credit products of larger size and longer duration generally correspond to higher financing service fees. In addition,borrowers with strong credit profiles may be offered discounts as to financing service fees. In April 2017, we lowered the financing service fee levels forcertain cash credit products to ensure that the annualized fee rates charged on all credit drawdowns do not exceed 36%. We may further lower the financingservice fee levels in the future in response to customer characteristics, market demand, competition and regulations, which would impact our revenue andprofitability. In addition, the relative contribution in amount of transactions facilitated under our various credit products affects revenue and profitability. Welaunched Dabai Auto, our budget auto financing products, in November 2017. Dabai Auto’s economic terms, cost structure and the credit profiles of targetborrowers differ from those of our small credit products. We scaled back operations of our Dabai Auto business in 2018, in response to the slowdown of theeconomic growth and concerns over the trajectory of industry development.In addition, we may also leverage our credit assessment model to help other financial services providers assess the credit profiles of their owncustomers according to their credit standards, and our ability to execute such plan may affect the growth of our business and profitability. We expect tocharge 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 interest rateenvironment and unemployment rates, may affect borrowers’ willingness to seek credit. For example, significant increases in interest rates could causeprospective borrowers to defer obtaining credit as they wait for interest rates to decrease. Additionally, a slowdown in the economy, resulting in a rise in theunemployment rate and/or a decrease in real income, may affect individuals’ level of disposable income. This may affect borrowers’ repayment capability andtheir 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 compliant with theexisting laws, regulations and governmental policies relating to our industry and to comply with new laws and regulations or changes under existing lawsand regulations that may arise in the future. While new laws and regulations or changes to existing laws and regulations could make facilitating credit toborrowers more difficult or expensive, or making such credit products more difficult for borrowers or institutional funding partners to accept or on termsfavorable 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 credit drawdownfacilitated by us is past due, the remaining payments that are not yet due are also considered past due for the purpose of evaluating the performance of thecredit drawdown. Based on our experience, credit drawdowns past due 1 to 30 calendar days would be largely recovered by collection, therefore our focus oncredit performance are those transactions for which any installment payment was more than 30 calendar days (“M1+”) past due. We closely monitor the creditperformance measured by the M1+ delinquency rates by vintage, which track the lifetime performance of the credit drawdowns originated in a certainvintage.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 is over 30calendar days past due as of a particular date (adjusted to reflect total amount of recovered past due payments for principal, before charge-offs), divided bythe total initial principal in such vintage.98Table of Contents 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 2016 afterthe 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 drawdowns up tothe 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 drawdowns up tothe twelfth month after such transactions for all transactions for each of the quarters in 2016 and through the first three quarters in 2018, without taking intoaccount charge-offs: M1+ delinquency rate by vintage for vintages in 2017 remained at a level of 2.0% or less up to December 31, 2018 as a result of our effective creditassessment model and risk management system despite serving a more diverse customer group.M1+ delinquency rate by vintage for the first three quarters of 2018 remained at less than 2.5% up to December 31, 2018, which demonstrates theeffectiveness of our risk management system.99Table of Contents Credit 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 1-30calendardays 31-60calendardays 61-90calendardays More than90 calendardays Total RMB RMB RMB RMB RMB US$ (in thousands) As of 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 December 31, 2018 153,188 108,535 104,483 298,091 664,297 96,618 The following table provides the balance of outstanding financing service fees for on-balance sheet transactions where the longest past due period ofan installment payment was 1 to 30, 31 to 60 and 61 to 90 calendar days as of the dates presented(1): Delinquent for 1-30calendardays 31-60calendardays 61-90calendardays Total RMB RMB RMB RMB US$ (in thousands) As of December 31, 2016 1,851 757 680 3,288 485 December 31, 2017 11,111 5,410 5,376 21,897 3,366 December 31, 2018 4,328 5,545 7,108 16,981 2,470 (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, 2016 2017 2018 RMB RMB RMB US$ (in thousands) Amount recovered past due payments for principal 102,353 361,354 500,936 72,858 Amount recovered past due payments for financing service fees 6,099 20,701 39,878 5,800 The following table sets forth the amount we charged off for the periods presented: Year Ended December 31, 2016 2017 2018 RMB RMB RMB US$ (in thousands) Amount charged off 49,427 191,023 1,077,333 156,692 We charge off loan principal and financing service fee receivables if any of the conditions specified in our charge-off policy is satisfied, includingthe amount remain outstanding 180 calendar days past due and therefore deemed uncollectible.100Table of Contents We actively detect and prevent fraud utilizing our proprietary risk management system and fraud prevention system. The following table sets forththe amount of losses due to borrower fraud identified by us for the periods presented: Year Ended December 31, 2016 2017 2018 RMB RMB RMB US$ (in thousands) Amount of losses due to identified borrower fraud 3,473 4,226 1,357 197 The amount of transactions has increased significantly since inception, which is accompanied by an increase in the amount of losses due to identifiedborrower 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, 2016 2017 2018 Provision ratio 0.40% 0.77% 3.09% We periodically adjust our allowance for loan principal and financing service fee receivables when we believe that the future collection of principalis unlikely. We base the allowance for loan principal and financing service fee receivables primarily on historical loss experience using a roll rate-basedmodel applied to our principal and financing service fee receivables portfolios and, to a lesser extent, macroeconomic factors. We recognize any increase inallowance for loan principal and financing service fee receivables as provision for loan principal and financing service fee receivables for the relevant period.Our provision ratio increased from 0.40% in 2016 to 3.09% in 2018 primarily due to an increase in M1+ overdue loan principals and financing services feereceivables.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 of thetotal amount of loan principal and financing service fee receivables as of such date. The following table sets forth our allowance ratio and principal turnoverratio as of the dates presented: As of or for the year ended December 31, 2016 2017 2018 Allowance ratio 2.09% 5.60% 6.05%Principal turnover ratio(1) 6.1x 8.6x 3.8x (1)Represents amount of transactions in 2016, 2017 and 2018, divided by outstanding principal at the respective period end. Allowance Ratio increasedfrom 2.09% as of December to 5.60% as of December 31, 2017, which was due to increases in both delinquency rate and principal turnover ratio in2017. Our principal turnover ratio increased from 6.1x for the year ended December 31, 2016 to 8.6x for the year ended December 31, 2017. Giventhe short-term nature of our credit products, the amount of on-balance sheet transactions during 2017 was 8.6 times the outstanding on-balance sheetprincipal as of December 31, 2016. As such, the performance of transactions is more accurately reflected when assessed based on the amount oftransactions facilitated during a period than based on the outstanding principal as of the period end. For a more accurate indication as to ourenhanced risk management capability, please refer to the provision ratio as elaborated above.101Table of Contents As of December 31, 2016 Non-delinquent 1-30days 31-60days 61-90days 91-120days 121-150days 151-180days Total Over 180days(1) Loan principal and financing service fee receivables (in RMB thousands) 4,877,508 76,684 20,305 15,358 11,429 9,187 9,154 5,019,626 57,974 Allowance for loan principal and financing service fee receivables (in RMB 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 1-30days 31-60days 61-90days 91-120days 121-150days 151-180days Total Over 180days(1) Loan principal and financing service fee receivables (in RMB thousands) 8,449,987 413,086 129,867 103,665 81,133 60,812 39,249 9,277,799 245,263 Allowance for loan principal and financing service fee receivables (in RMB 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.As of December 31, 2018 Non-delinquent 1-30days 31-60days 61-90days 91-120days 121-150days 151-180days Total Over 180days(1) Loan principal and financing service fee receivables (in RMB thousands) 8,987,532 157,516 114,079 111,591 103,667 99,037 95,387 9,668,809 1,320,666 Allowance for loan principal and financing service fee receivables (in RMB thousands) 91,771 75,479 81,912 86,836 84,418 83,066 81,853 585,335 1,320,666 Allowance ratio 1.02% 47.92% 71.80% 77.82% 81.43% 83.87% 85.81% 6.05% 100.00% (1)Amounts remain outstanding 180 days past due and therefore deemed uncollectible are charged off.We base the allowance for loan principal and financing service fee receivables primarily on historical loss experience using a roll rate-based model,and as indicated in the tables above, we record such allowance even with respect to loans that are non-delinquent. The Allowance Ratio for loan principalmore than 180 days past due is 100%. We also charge off such loan principal in accordance with our charge-off policy.102Table of Contents 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 a period,divided by the total balance of outstanding principal for on-balance sheet transactions for which any installment payment was more than 30 calendar dayspast due as of the end of such period. As of December 31, 2016 2017 2018M1+ delinquency coverage ratio 1.6x 1.3x 1.1x M1+ delinquency coverage ratio was above 1.0x as of December 31, 2016, 2017 and 2018, indicating that our allowance for principal and financingservice 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 of on-balancesheet transactions during such period. Year Ended December 31, 2016 2017 2018 % Charge-off ratio 0.16% 0.24% 2.91% Components of Results of OperationsRevenuesOur total revenues comprise financing income, sales commission fee, sales income, penalty fees and loan facilitation income and others. Our totalrevenues are presented net of origination costs, VAT and related surcharges. Financing income represents financing service fees that we collect fromborrowers for on-balance sheet transactions, which we have facilitated since inception in April 2014. Sales commission fee represents fee earned frommerchandise suppliers in connection with merchandise credit products. Sales income represents the sales price of cars we sell to car buyers in connection withour budget auto financing products. Penalty fees represent fees we charge borrowers for late repayment. Loan facilitation income and others represent loanfacilitation fees earned from certain institutional funding partners in connection with off-balance sheet transactions, a type of funding arrangement thatstarted in September 2016. For more information, see “Item 5. Operating and Financial Review and Prospects — A. Operating Results — Critical AccountingPolicies — Revenue Recognition.” The following table sets forth the breakdown of our total revenues, both in absolute amount and as a percentage of ourtotal revenues, for the periods presented: Year Ended December 31, 2016 2017 2018 RMB % of totalrevenues RMB % of totalrevenues RMB US$ % of totalrevenues (in thousands, except for percentages) Revenues Financing income 1,271,456 88.1 3,642,184 76.3 3,535,276 514,185 46.0 Sales commission fee 126,693 8.8 797,167 16.7 307,492 44,723 4.0 Sales income — — 26,084 0.5 2,174,789 316,310 28.3 Penalty fees 22,943 1.6 7,922 0.2 28,013 4,074 0.4 Loan facilitation income and others 21,754 1.5 302,010 6.3 1,646,773 239,513 21.3 Total revenues 1,442,846 100.0 4,775,366 100.0 7,692,343 1,118,805 100.0 103Table of Contents Financing IncomeWe charge financing service fees for facilitating on-balance sheet transactions. The financing service fees are recorded as financing income in thestatement of comprehensive income in accordance with ASC 310 using the effective interest method.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. These incentives are recorded as a reduction in financing service fees using the effective interest method.Sales Commission FeeSales commission fee represents fee earned from merchandise suppliers when borrowers purchase their merchandise on our marketplace and comprise(i) the difference 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.Sales incomeSales income comprise (i) the sales price of cars, which consists of down payment and principal under the sales-type finance leases and (ii) theamount of consideration we receive from the buyer for the sale of the vehicle, net of value-added tax, in vehicle sales with guarantee transactions.Penalty FeesPenalty fees represent fees we charge borrowers for late repayment. Penalty fees are recognized on a cash basis when the penalty fees will not bereversed.Loan Facilitation Income and OthersLoan facilitation income and others represent loan facilitation fees earned from certain institutional funding partners for credit directly funded bythem and vehicle sales with guarantee. Revenues from loan facilitation services are recognized when we match borrower with the funding partners and thefunds are transferred to the borrower. Additionally, revenues from post-origination services are recognized evenly over the term of the loans as the services areperformed.Cost of revenues and operating expensesOur cost of revenues and operating expenses consist of cost of revenues, sales and marketing expenses, general and administrative expenses, researchand development expenses, loss on guarantee liabilities and provision for receivables. The following table sets forth our cost of revenues and operatingexpenses, both in absolute amount and as a percentage of our total revenues, for the periods presented: Year Ended December 31, 2016 2017 2018 RMB % RMB % RMB US$ % (in thousands, except for percentages) Cost of revenues and operating expenses: Cost of revenues 267,862 18.6 880,846 18.4 2,735,428 397,852 35.6 Sales and marketing 182,458 12.6 431,749 9.0 540,551 78,620 7.0 General and administrative 108,786 7.5 183,674 3.8 255,867 37,214 3.3 Research and development 52,275 3.6 153,258 3.2 199,560 29,025 2.6 Loss on guarantee liabilities 861 0.1 150,152 3.1 116,593 16,958 1.5 Provision for receivables 132,177 9.2 605,164 12.9 1,178,723 171,438 15.3 Total 744,418 51.6 2,404,843 50.4 5,026,722 731,107 65.3104Table of Contents The following table sets forth our cost of revenues and operating expenses paid to related parties for the periods presented: Year Ended December 31, 2016 2017 2018 RMB RMB RMB US$ (in thousands) Cost of revenues and operating expenses paid to related parties: Cost of revenues(1) 47,337 221,009 147,611 22,335 Sales and marketing(2) 36,150 238,115 32,542 4,733 Total 83,486 459,124 180,153 27,068 (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 Guosheng FinancialHolding Inc. and Guosheng Securities Asset Management Co., Ltd. in connection with their investments in several trusts.(2)Includes borrower engagement fees to Alipay.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 goods sold,which primarily consists of cost of cars we purchase, and other lending related costs, which include payment processing and settlement fees, including thosepaid to Alipay. The following table sets forth components of our cost of revenues, both in absolute amount and as a percentage of our total revenues, for theperiods presented: Year Ended December 31, 2016 2017 2018 RMB % RMB % RMB US$ % (in thousands, except for percentages) Cost of revenues: Interest expenses of borrowings 210,950 14.6 686,890 14.4 547,369 79,612 7.1 Cost of goods sold — — 23,895 0.5 2,003,642 291,418 26.1 Other lending related costs 56,912 3.9 170,061 3.5 184,417 26,822 2.4 Total 267,862 18.6 880,846 18.4 2,735,428 397,852 35.6 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 funding partners then provide uswith funding for the credit drawdowns transferred, which are recorded as short-term borrowings and long-term borrowings on our consolidated balance sheet.After collecting principals and financing service fees from borrowers, we remit to these institutional funding partners all principals and fees payable. Ifborrowers default on their payment obligations, we are generally obligated to repay these institutional funding partners all principals and fees payable inrespect of credit drawdowns funded by them. We have ceased transferring credit drawdowns to P2P platforms in April 2017. We recognize fees paid to suchinstitutional funding partners as interest expenses of borrowing in our cost of revenues. Starting in December 2016, we also collaborate with trust companiesto enable certain institutional funding partners to provide funding to borrowers through trusts. Such trust arrangements provide a specified rate of return tothe institutional funding partners. The amount accrued that reflects such pre-agreed rate of return payable to the institutional funding partners is alsorecognized as interest expenses of borrowings. Fee rates vary among institutional funding partners. As of December 31, 2018, the weighted average interestrate for the outstanding borrowings was approximately 7.91%. The interests payable to institutional funding partners are lower than financing service fees wecollect from105Table of Contents borrowers on the credit drawdowns transferred. Certain institutional funding partners provide funds directly to borrowers for credit that we facilitate, and wedo not recognize interest expenses of borrowings relating to such credit drawdowns. In addition, when utilizing our own capital to fund credit, we also do notincur interest expenses of borrowings.Sales and MarketingSales and marketing expenses include expenses for our core online consumer finance business and Dabai Auto business and consist primarily ofexpenses related to borrower engagement and retention, salaries, benefits and share-based compensation related to our sales and marketing staff.General and AdministrativeGeneral and administrative expenses consist primarily of share-based compensation, salaries and benefits related to accounting and finance, businessdevelopment, 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, which may be a cash credit transaction, a merchandise credit transaction or a vehicle sales with guaranteetransaction, we record the fair value of guarantee liabilities, which represents the present value of our expected payout based on the estimated delinquencyrate and the applicable discount rate for time value. The financing service fees payable to us, net of guarantee liabilities which were deducted from theconsideration in connection with such transaction, are recognized as loan facilitation income and others. Any increase in the fair value of guarantee liabilitiesof such transactions is recognized as loss on guarantee liabilities in our results of operations. We started to facilitate such transactions in September 2016 andrecognized RMB0.9 million, RMB150.2 million and RMB116.6 million (US$17.0 million) of loss on guarantee liabilities in 2016, 2017 and 2018,respectively.106Table of Contents Provision for receivablesWe periodically adjust our allowance for loan principal and financing service fee receivables when we believe that the future collection of principalis unlikely. We base this allowance primarily on historical loss experience using a roll rate-based model applied to our principal and financing service feesreceivables portfolios and, to a lesser extent, macroeconomic factors. The allowance for finance lease receivables is calculated based on historical lossexperience using probability of default and loss given default methods. We stratify probability of default and loss given default by the recovered rate underdifferent scenarios (i.e. cash collection, repossessing the leased vehicle or non-recovery), and calculates allowance balance by timing exposure at defaultunder each scenario. For information regarding our accounting policy related to allowance for receivables, see “— Critical Accounting Policies — LoanPrincipal and Financing Service Fee Receivables” and “— Critical Accounting Policies —Finance lease receivables.” We periodically adjust our allowancefor other receivables when we believe that the future collection of receivables from merchandise suppliers is unlikely. Each merchandise supplier is obligatedto refund us the amount we have paid, if the relevant borrower returns previously purchased merchandise in accordance with the product return policies of ourmarketplace. We recognize any increase in allowance for loan principal, financing service fee receivables and other receivables as provision for receivablesfor the relevant period. The following table sets forth the provision for receivables, both in an absolute amount and as a percentage of total revenues, for theperiods presented. Year Ended December 31, 2016 2017 2018 RMB % RMB % RMB US$ % (in thousands, except for percentages) Provision for receivables 132,177 9.2 605,164 12.7 1,178,723 171,438 15.3Share-based CompensationThe following table sets forth the effect of share-based compensation expenses on our operating expenses line items, both in an absolute amount andas a percentage of total revenues, for the periods presented. Year Ended December 31, 2016 2017 2018 RMB % RMB % RMB US$ % (in thousands, except for percentages) Sales and marketing 690 0.0 1,891 0.0 5,641 821 0.1 General and administrative 18,986 1.3 42,849 0.9 38,587 5,612 0.5 Research and development 2,457 0.2 19,316 0.4 13,753 2,000 0.2 Total 22,134 1.5 64,056 1.3 57,981 8,433 0.8 See “— Critical Accounting Policies — Measurement of Share-based Compensation” for a description of what we account for the compensation costfrom 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 of dividends byus 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 we didnot 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.107Table of Contents 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%. Theenterprise income tax is calculated based on the entity’s global income as determined under PRC tax laws and accounting standards. Our subsidiaries inGanzhou are entitled to preferential tax rate of 15%. Xinjiang Qudian Technology Co., Ltd. is a company established in a special economic developmentzone and is therefore entitled to an exemption from income tax from January 1, 2017 to December 31, 2020. Xiamen Qudian Technology Co., Ltd. wasrecognized as a Software Enterprise and was therefore entitled to an income tax exemption for two years beginning from its first profitable tax year of 2017,and a 50% tax reduction for the subsequent three years starting from the year of 2019.We 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 are alsosubject 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 the Hong KongSpecial Administrative Region on the Avoidance of Double Taxation and Prevention of Fiscal Evasion with respect to Taxes on Income and Capital andreceives approval from the relevant tax authority. If our Hong Kong subsidiary satisfies all the requirements under the tax arrangement and receives approvalfrom the relevant tax authority, then the dividends paid to the Hong Kong subsidiary would be subject to withholding tax at the standard rate of 5%.If our holding company in the Cayman Islands or any of our subsidiaries outside of China were deemed to be a “resident enterprise” under the PRCEnterprise 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 and assumptions.We continually evaluate these estimates and assumptions based on the most recently available information, our own historical experiences and various otherassumptions that we believe to be reasonable under the circumstances. Since the use of estimates is an integral component of the financial reporting process,actual results could differ from our expectations as a result of changes in our estimates. Some of our accounting policies require a higher degree of judgmentthan 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 critical accountingpolicies, (ii) the judgments and other uncertainties affecting the application of such policies and (iii) the sensitivity of reported results to changes inconditions and assumptions.Revenue RecognitionBorrowers can withdraw cash or purchase products (e.g. personal consumer electronics) up to their approved credit limit and elect the installmentrepayment period, mainly ranging from one to 18 months through our online website and application (collectively “financing platform”) or via borrowers’Alipay accounts. We charge financing service fees for facilitating the financing and managing the financing platform. The financing service fees are recordedas financing income in the statement of comprehensive income in accordance with ASC 310 using the effective interest method.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. These incentives are recorded as a reduction in financing service fees using the effective interest method.108Table of Contents The sales commission fee is fixed based on the retail sales price without considering the financing terms chosen by the borrower. Sales commissionfees are recognized and recorded net of the related cost on delivery date, as we arrange for the goods to be provided by the suppliers and is considered to bean agent in accordance with ASC 606.We launched Dabai Auto, our budget auto financing products, in November 2017. In the form of sales-type lease, we purchase cars on our inventoryand lease them to creditworthy car buyers. The legal title of the leased assets is with us until the leasing period ends. The fair value of the leased assets atlease inception is greater than its cost or carrying amount. Consequently, we have classified the leases as sales-type finance leases for financial accountingpurposes. We report the discounted present value of future minimum lease payments as a finance lease receivable on our balance sheet and accrue interest onthe balance of the finance lease receivable based on the interest rate inherent in the applicable lease over the term of the lease. The interest earned on financelease receivables is recognized using the effective interest method. We recognize interest earned on finance leases receivables as financing income. Werecognize the sales price of cars, which consists of down payment and principal under the sales-type finance leases, as sales income. In the form of vehiclesales with guarantee, we sell vehicles to buyers and provides loan facilitation services to funding partners who provide financing to the vehicle buyers. Thebuyer obtains control of the vehicle when the borrower physically possesses the vehicle and when we receive cash consideration for the vehicle from thebuyer. We will receive recurring service fees from the financial institution for our loan facilitation services and post-origination services throughout the termof the loan. In addition, we provide a guarantee on the principal and accrued interest repayments of the defaulted loans to the financial institution. Forvehicle sales, we determine the buyer to be our customer. The transaction price for the vehicle sale is the amount of consideration we receive from the buyerfor the sale of the vehicle, net of value-added tax. We are the principal in the vehicle sale transaction and sales income is recognized on a gross basis whenthe title of the vehicle is transferred to the buyer. For the loan facilitation services, we determine both the funding partners and the buyer to be its customers.We consider the loan facilitation service, post-origination services and guarantee service as separate services, of which the guarantee service and the postorigination service is accounted for in accordance with ASC 815 and ASC 860, respectively. The transaction price is the amount of consideration to which weexpect to be entitled in exchange for transferring the promised services to the customer, net of value-added tax. The transaction price of loan facilitationservices includes variable service fees which are contingent on the borrower making timely repayments. Variable consideration is estimated using theexpected value method based on historical default rate, current and forecasted borrower repayment trends and is limited to the amount of variableconsideration that is probable not to be reversed in future periods. We make the assessment of whether the estimate of variable consideration is constrained.Any subsequent changes in the transaction price will be allocated to the performance obligations on the same basis as at contract inception. We first allocatethe transaction price to the guarantee liabilities at fair value in accordance with ASC 815. The remaining transaction price is then allocated to the loanfacilitation services and post-origination services on a relative standalone selling price basis. No observable price for the loan facilitation services and post-origination services exist because the services are not sold separately. As a result, we estimate the stand-alone selling price of the loan facilitation and post-origination services using the expected cost plus a margin approach. Revenues from loan facilitation services are recognized when we match borrowers withthe Funding Partners and the funds are transferred to the borrower. Additionally, revenues from post-origination services are recognized evenly over the termof the loans as the services are performed.Since September 2016, we have entered into credit facilitation arrangement with several financial institutions. We: (i) match borrowers with thefunding partners which directly fund the credit drawdowns to the borrowers and (ii) provide post-origination services, such as short messaging reminderservices throughout the term of the loans. For each successful match, we receive an initial intermediary fee and a recurring service fee throughout the term ofthe loans. When borrowers make instalment repayments directly to the funding partners, the funding partners will then remit the recurring service fees to uson a periodic basis. In addition, we provide a guarantee on the principal and accrued interest repayments of the defaulted loans to the funding partners. Wedetermine our customer to be both the funding partners and borrowers. We consider the loan facilitation service, post-origination services and guaranteeservice as separate services, of which the guarantee service and the post origination service is accounted for in accordance with ASC 815, Derivatives andHedging (refer to “Guarantee liabilities” for additional information) and ASC 860, Transfers and servicing of financial assets, respectively.The transaction price is the amount of consideration to which we expect to be entitled in exchange for transferring the promised services to thecustomer, net of value-added tax. The transaction price includes variable109Table of Contents service fees which are contingent on the borrower making timely repayments. Variable consideration is estimated using the expected value method based onhistorical default rate, current and forecasted borrower repayment trends and is limited to the amount of variable consideration that is probable not to bereversed in future periods. We make the assessment of whether the estimate of variable consideration is constrained. Any subsequent changes in thetransaction price will be allocated to the performance obligations on the same basis as at contract inception.We first allocate the transaction price to the guarantee liabilities at fair value in accordance with ASC 815. The remaining transaction price is thenallocated to the loan facilitation services and post-origination services on a relative standalone selling price basis. No observable price for the loanfacilitation services and post-origination services exist because the services are not sold separately. As a result, we estimate the stand-alone selling price ofthe loan facilitation and post-origination services using the expected cost plus a margin approach. Revenues from loan facilitation services are recognizedwhen we match borrowers with the funding partners and the funds are transferred to the borrower. Additionally, revenues from post-origination services arerecognized evenly over the term of the loans as the services are performed.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 loan principal.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 are alsosimilar, i.e., age, credit histories and employment status. Therefore, we apply a consistent credit risk management framework to the entire portfolio of loans inaccordance 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 service 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-month increments using historical roll rates. In each month of the simulation, losses on the loanprincipal and financing service fee receivables types are captured, and the ending delinquency stratification serves as the beginning point of the nextiteration. This process is repeated on a monthly rolling basis. The loss rate calculated for each delinquency stage is then applied to the respective loanprincipal and service fees balance. We adjust the allowance that is determined by the roll rate-based model for various Chinese macroeconomic factors, i.e.,gross-domestic product rates, per capita disposable income, interest rates and consumer price indexes. Each of these macroeconomic factors are equallyweighted, and a score is applied to each factor 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 meeting any ofthe following conditions as uncollectable and charged-off: (i) death of the borrower; (ii) identification of fraud, and the fraud is officially reported to and filedwith relevant law enforcement departments or (iii) the amount remained outstanding 180 days past due and therefore deemed uncollectible.For the year ended December 31, 2016, we considered loan principal and financing service fee receivables meeting any of the following conditionsas uncollectible and charged off: (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 days past due and after we concludes that we have exhausted its collection 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.110Table of Contents 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 loans 180days 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 fee receivables andits 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 our 2016 auditedconsolidated 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 corresponding allowanceis determined under ASC 450-20 and allocated accordingly. After an impaired financing service fee receivable has been placed on nonaccrual status,financing service fee will be recognized when cash is received on a cash basis cost recovery method by applying first to reduce principal and then tofinancing income thereafter. Financing service fee accrued but not received is generally reversed against financing income. Financing service fee receivablesmay be returned to accrual status after all of the borrower’s delinquent balances of loan principal and financing service fee have been settled and the borrowerremains current for an appropriate period.Finance Lease ReceivablesFinance lease receivables are carried at amortized cost comprising of original financing lease and direct costs, net of unearned income and allowancefor finance lease receivables..The automobile leasing service is offered to individual customers. We consider the finance lease receivables to be homogenous as they are allautomotive finance lease receivables collateralized by vehicle titles of similar principal amounts. Therefore, we apply a consistent credit risk managementframework to the entire portfolio of finance lease receivables in accordance with ASC 450-20.The allowance for finance lease receivables is calculated based on historical loss experience using probability of default (“PD”) and loss givendefault (“LGD”) methods. We stratify probability of default and loss given default by the recovered rate under different scenarios (i.e. cash collection,repossessing the leased vehicle or non-recovery), and calculates allowance balance by timing exposure at default under each scenario. This process isrepeated on a monthly basis. Loss given default is projected based on historical experience of actual loss and considered proceeds from recovery of therepossessed assets. We adjust the allowance that is determined by the PD and LGD methods for various Chinese macroeconomic factors i.e. gross-domesticproduct rates, per capita disposable income, interest rates, consumer price indexes and law and regulation impact. Each of these macroeconomic factors areequally weighted, and a score is applied to each factor based on year-on-year increases and decreases in that respective factor.Finance lease receivables are charged off when a settlement is reached for an amount that is less than the outstanding balance or when we determinedthe balance to be uncollectable. In general, we consider finance fee receivables meeting any of the following conditions as uncollectable and charged-off: (i)death of the borrower; (ii) identification of fraud, and the fraud is officially reported to and filed with relevant law enforcement departments or (iii) all financelease receivables that are 180 days past due are therefore deemed uncollectible and charged-off; (iv) the vehicle is repossessed.A finance lease receivable is considered impaired when the lease receivables are more than 90 days past due, or when it is probable that we will beunable to collect all amounts due according to the terms of the contract. Factors such as payment history, compliance with terms and conditions of theunderlying financing lease agreement and other subjective factors related to the financial stability of the borrower are considered when determining whetherfinance lease receivables are impaired. We do not accrue financing lease income on net investment of finance lease receivables that are considered impaired.A corresponding allowance is determined under ASC 450-20 and allocated accordingly. Accrual of financing lease income is suspended on accounts that areimpaired, accounts in bankruptcy and accounts in repossession. Payments received on non-accrual finance lease receivables are first applied to any fees due,then to any interest due and, finally, any remaining amounts received are recorded to principal. Interest accrual resumes once an account has receivedpayments bringing the impaired status to current.111Table of Contents Guarantee LiabilitiesAs part of our cooperation with various financial institutions, we provide guarantee on the principal and accrued interest repayment of the defaultedloans 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 guarantee liabilities inthe consolidated statements of comprehensive (loss)/income. When we settle the guarantee liabilities through performance of the guarantee by makingrequisite payments on the respective defaulted loans, we record a corresponding deduction to the guarantee liabilities. Subsequent collection from theborrower 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 the expectedfuture consequences of events that have been recognized in the consolidated financial statements or in our tax returns. Deferred tax assets and liabilities arerecognized on the basis of the temporary differences that exist between the tax bases of assets and liabilities and their reported amounts in the consolidatedfinancial statements using enacted tax rates in effect for the year in which the differences are expected to reverse. Changes in deferred tax assets and liabilitiesare recorded in earnings. Deferred tax assets are reduced by a valuation allowance through a charge to income tax expense when, in the opinion ofmanagement, it is more-likely-than-not that a portion of or all of the deferred tax assets will not be realized. Potential for recovery of deferred tax assets isevaluated by estimating the future taxable profits expected and considering prudent and feasible tax planning strategies. The components of the deferred taxassets 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 fifty percent ofbeing sustained upon an audit, based on the technical merits of the tax position). The tax position is then assessed to determine the amount of benefits torecognize in the consolidated financial statements. The amount of the benefits that may be recognized is the largest amount that has a greater than 50%likelihood of being realized upon ultimate settlement. Interest and penalties on income taxes will be classified as a component of the provisions for incometaxes. As of December 31, 2016, 2017 and 2018, we had no unrecognized tax benefit.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 Incentive Plan.For information regarding the 2014 Share Incentive Plan, see “Item 6. Directors, Senior Management and Employees — B. Compensation of Directors andExecutive Officers — 2014 Share Incentive Plan.” On various dates from August 2014 to December 2014, 18,373,219 share options were granted to certain ofour employees and a third-party consultant. On various dates in 2015, 2,449,800 share options were granted to certain of our employees.On December 26, 2015, Beijing Happy Time adopted a share incentive plan, or the 2015 Share Incentive Plan. For information regarding the 2015Share Incentive Plan, see “Item 6. Directors, Senior Management and Employees — B. Compensation of Directors and Executive Officers — 2015 ShareIncentive Plan.” On December 26, 2015, options to purchase 15,814,019 virtual shares pursuant to the 2015 Share Incentive Plan were issued to certain of ouremployees and a third-party consultant to replace the 15,814,019 share options granted to such individuals under the 2014 Share Incentive Plan.On December 9, 2016, Qudian Inc. adopted an equity incentive plan, or the 2016 Equity Incentive Plan. For information regarding the 2016 EquityIncentive Plan, see “Item 6. Directors, Senior Management and Employees112Table of Contents — B. Compensation of Directors and Executive Officers — 2016 Equity Incentive Plan.” The maximum number of ordinary shares subject to equity awardspursuant 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 aggregatenumber of ordinary shares reserved and available for issuance pursuant to awards granted under the 2016 Equity Incentive Plan will be increased by 1.0% ofthe total number of ordinary shares outstanding on December 31 of preceding calendar year. Unless terminated earlier, the 2016 Equity Incentive Plan willterminate 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 consultant pursuantto the 2016 Equity Incentive Plan to replace all awards under the 2015 Share Incentive Plan. On May 3, 2017, we granted 494,904 options to purchase ourordinary shares to certain of our employees pursuant to the 2016 Equity Incentive Plan. On August 17, 2017, we granted 200,000 options to purchase ourordinary shares to our independent director appointees and certain of our employees pursuant to the 2016 Equity Incentive Plan. On March 12, 2018, wegranted 998,000 options under the 2016 Plan. On October 1, 2018, we granted 20,000 options under the 2016 Plan. On November 30, 2018, we granted10,000 options to one independent non-executive director under the 2016 Plan. On December 20, 2018, we granted 2,608,000 options under the 2016 Plan.25% of the options will vest upon each subsequent anniversary of the engagement date. Certain options previously granted were subsequently cancelled.Share-based payment transactions with employees, such as share options are measured based on the grant date fair value of the equity instrument. Werecognize the compensation costs net of estimated forfeitures using the straight-line method, over the applicable vesting period. The estimate of forfeitureswill be adjusted over the requisite service period to the extent that actual forfeitures differ, or are expected to differ, from such estimates. Changes inestimated forfeitures will be recognized through a cumulative catch-up adjustment in the period of change and will also impact the amount of stockcompensation expense to be recognized in future periods. Share options granted to employees with market conditions attached are measured at fair value onthe grant date and are recognized as the compensation costs over the estimated requisite service period, regardless of whether the market condition has beenmet.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 of theoriginal option immediately before its terms are modified, measured based on the share price and other pertinent factors at the modification date. For vestedoptions, we recognize incremental compensation cost in the period the modification occurred. For unvested options, we recognize, over the remainingrequisite service period, the sum of the incremental compensation cost and the remaining unrecognized compensation cost for the original award on themodification date.For the year ended December 31, 2018, we estimated the fair value of the options based on the quoted share price at grant date. Due to the optionslow exercise price, the various assumptions used in the binomial option pricing model will not have a material impact in the calculation of the fair value ofthe options. For the years ended December 31, 2016 and 2017, excluding the options containing market and service vesting conditions, we calculated theestimated fair value of the options on the respective grant dates using a binomial option pricing model with assistance from independent valuation firms,with the following assumptions: Year Ended December 31, 2016 2017 Risk-free interest rate 2.47% 1.56%–2.33% Volatility 49.8%–49.9% 50.9%–52.4% Expected exercise multiple 2.2–2.8 2.2–2.8 Dividend yield 0% 0% Expected term (in years) 10 10 Exercise price (RMB) 0.0 0.0 Fair value of share options (RMB) 25.89–26.04 81.94-94.22 Determining the fair value of the share options required us to make complex and subjective judgments, assumptions and estimates, which involvedinherent uncertainty. Had we used different assumptions and estimates,113Table of Contents 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 the assistancefrom an independent valuation firm: Date of Options Grant(1) OptionsGranted ExercisePrice IntrinsicValue Fair Value ofOption Fair Value ofOrdinaryShares Discount forLack ofMarketability DiscountRate Type ofValuationsAugust 29, 2014 10,900,000 US$ 0.00 US$ 0.11 US$ 0.11 US$ 0.11 20.0% 25.5% RetrospectiveNovember 1, 2014 7,473,219 US$ 0.00 US$ 0.36 US$ 0.36 US$ 0.36 20.0% 25.0% RetrospectiveMarch 1, 2015 2,042,500 US$ 0.00 US$ 0.61 US$ 0.61 US$ 0.61 20.0% 24.5% RetrospectiveJune 4, 2015 407,300 US$ 0.00 US$ 0.79 US$ 0.79 US$ 0.79 20.0% 23.0% RetrospectiveDecember 26, 2015 15,814,019 US$ 0.00 US$ 1.95 US$ 1.95 US$ 1.95 20.0% 21.0% RetrospectiveDecember 9, 2016 1,433,800 US$ 0.00 US$ 3.75 US$ 3.75 US$ 3.75 5.0% 20.5% RetrospectiveDecember 30, 2016 13,865,219 US$ 0.00 US$ 3.75 US$ 3.75 US$ 3.75 5.0% 20.5% RetrospectiveMay 3, 2017 494,904 US$ 0.00 US$ 11.88 US$ 11.88 US$ 11.88 5.0% 20.0% RetrospectiveAugust 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 our projectedcash flow using management’s best estimate as of the valuation date. The determination of the fair value of our ordinary shares requires complex andsubjective judgments to be made regarding our projected financial and operating results, our unique business risks, the liquidity of our shares and ouroperating 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 based ona consideration of the factors, including risk-free rate, comparative industry risk, equity risk premium, company size and non-systematic riskfactors. •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 that arepublicly 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 this option-pricing model, which assumed that the put option is struck at the average price of the stock before the privately held shares can be sold, thecost of the put option was considered as a basis to determine the DLOM. This option pricing model is one of the methods commonly used inestimating DLOM as it can take into consideration factors like timing of a liquidity event, such as an initial public offering, and estimatedvolatility of our shares. The farther the valuation date is from an expected liquidity event, the higher the put option value and thus the higherthe implied DLOM. The lower DLOM is used for the valuation, the higher is the determined fair value of the ordinary shares. DLOMremained 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 growth rates ofour total revenues, as well as major milestones that we have achieved, contributed to the increase in the fair value of our ordinary shares from RMB3.82 toRMB94.22. However, these fair values are inherently uncertain and highly subjective. The assumptions used in deriving the fair values are consistent withour business plan. These assumptions include: no material changes in the existing political, legal and economic conditions in China; our ability to retaincompetent management, key personnel and staff to support our ongoing operations; and no material deviation in market conditions from economic forecasts.These assumptions are inherently uncertain. The risks associated with achieving our forecasts were assessed in selecting the appropriate discount rates.114Table of Contents Results of Operations for Continuing OperationsThe following tables set forth a summary of our consolidated results of operations for the periods presented. Our historical results presented below arenot necessarily indicative of the results that may be expected for any future period. Year Ended December 31, 2016 2017 2018 RMB RMB RMB US$ (in thousands, except for share and per share data) Revenues: Financing income 1,271,456 3,642,184 3,535,276 514,185 Sales commission fee 126,693 797,167 307,492 44,723 Sales income — 26,083 2,174,789 316,310 Penalty fees 22,943 7,922 28,013 4,074 Loan facilitation income and others 21,754 302,010 1,646,773 239,513 Total revenues 1,442,846 4,775,366 7,692,343 1,118,805 Cost of revenues: Cost of goods sold — (23,895) (2,003,642) (291,418)Cost of other revenues (267,862) (856,951) (731,786) (106,434)Total cost of revenues (267,862) (880,846) (2,735,428) (397,852)Operating expenses: Sales and marketing (182,458) (431,749) (540,551) (78,620)General and administrative (108,786) (183,674) (255,867) (37,214)Research and development (52,275) (153,258) (199,560) (29,025)Loss on guarantee liabilities (861) (150,152) (116,593) (16,958)Provision for receivables (132,176) (605,164) (1,178,723) (171,438)Total operating expenses (476,556) (1,523,997) (2,291,294) (333,255)Other operating income 14,646 50,703 23,748 3,454 Income from operations 713,074 2,421,226 2,689,369 391,152 Interest and investment income, net 1,857 4,211 35,740 5,198 Foreign exchange loss, net (9,651) (7,177) (90,771) (13,202)Other income 47 2,108 15,231 2,215 Other expenses (1,834) (363) (522) (76)Net income before income taxes 703,493 2,420,005 2,649,047 385,287 Income tax expenses (126,840) (255,546) (157,731) (22,941)Net income 576,653 2,164,459 2,491,316 362,346115Table of Contents Year Ended December 31, 2016 2017 2018 % Revenues: Financing income 88.1 76.3 46.0 Sales commission fee 8.8 16.7 4.0 Sales income — 0.5 28.3 Penalty fees 1.6 0.2 0.4 Loan facilitation income and others 1.5 6.3 21.3 Total revenues 100.0 100.0 100.0 Cost of revenues and operating expenses: Cost of goods sold — (0.5) (26.1)Cost of other revenues (18.6) (17.9) (9.5)Total cost of revenues (18.6) (18.4) (35.6)Operating expenses: Sales and marketing (12.6) (9.0) (7.0)General and administrative (7.5) (3.8) (3.3)Research and development (3.6) (3.2) (2.6)Loss on guarantee liabilities (0.1) (3.1) (1.5)Provision for receivables (9.2) (12.9) (15.3)Total operating expenses (33.0) (31.9) (29.8)Other operating income 1.0 1.1 0.3 Income from operations 49.4 50.7 35.0 Interest and investment income, net 0.1 0.1 0.5 Foreign exchange loss, net (0.7) (0.2) (1.2)Other income 0.0 0.0 0.2 Other expenses 90.1) (0.0) (0.0) Net income before income taxes 48.8 50.7 34.5 Income tax expenses (8.8) (5.4) (2.1)Net income 40.0 45.3 32.4 Comparison of Year Ended December 31, 2018 and Year Ended December 31, 2017Total revenues. Our total revenues in 2018 increased by 61.1% to RMB7,692.3 million (US$1,118.8 million) from RMB4,775.4 million in 2017,primarily due to the increase in loan facilitation income and others and an increase in sales income generated by Dabai Auto business, partially offset by adecrease in revenue from sales commission fees. Financing income totaled RMB3,535.3 million (US$514.2 million) in 2018, flat from RMB3,642.2 millionin 2017. Loan facilitation income and others increased to RMB1,646.8 million (US$239.5 million) in 2018, up 445.3% from RMB302.0 million in 2017, as aresult of the substantial increase in the volume of off-balance sheet transactions and the adoption of ASC 606, Revenue from Contracts with Customers,effective January 1, 2018. Prior to the adoption of ASC 606, loan facilitation service income was limited to the amount that is not contingent on the deliveryof the undelivered post-origination services. Upon adoption of ASC 606, loan facilitation service income is recognized when the service is rendered, i.e.,upon successfully matching borrowers with institutional funding partners. The amount recognized is limited to the amount of consideration for whichreversal is not probable in future periods. Accordingly, a portion of revenue is recognized earlier under ASC 606. The adoption of ASC 606 resulted in anincrease of RMB749.3 million (US$109.0 million) in loan facilitation income and others for 2018. Sales income substantially increased to RMB2,174.8million (US$316.3 million) from RMB26.1 million for 2017 as a result of ramp-up of the new Dabai Auto business. Sales commission fee decreased by 61.4%to RMB307.5 million (US$44.7 million) in 2018 from RMB797.2 million in 2017, as a result of a decrease in the gross merchandise value relating to themerchandise credit business as a result of tighter credit controls in 2018.116Table of Contents Total cost of revenues and operating expenses. Total cost of revenues and operating expenses increased by109.0% to RMB5,026.7 million(US$731.1 million) in 2018 from RMB2,404.8 million in 2017. •Cost of revenues. Our cost of revenues increased by 210.6% to RMB2,735.4 million (US$397.9 million) in 2018 from RMB880.8 million in2017, primarily due to costs incurred by the Dabai Auto business, partially offset by a decrease in funding costs associated with our coreonline consumer finance businesses. •Sales and marketing expenses. Our sales and marketing expenses increased by 25.2% to RMB540.6 million (US$78.6 million) in 2018 fromRMB431.7 million in 2017. The increase was primarily due to an increase in expenses associated with the new Dabai Auto business.Excluding expenses associated with Dabai Auto, sales and marketing expenses decreased by 49.4% to RMB201.6 million (US$29.3 million)from 2017, mainly attributable to a decrease in sales and marketing expenses associated with our core online consumer finance businesses asa result of termination of paid marketing through Alipay's dedicated channel for online third-party service providers. •General and administrative expenses. Our general and administrative expenses increased by 39.3% to RMB255.9 million (US$37.2 million)in 2018 from RMB183.7 million in 2017. The increase was primarily attributable to the increase in staff salary and third-party service fees. •Research and development expenses. Our research and development expenses increased by 30.2% to RMB199.6 million (US$29.0 million)in 2018 from RMB153.3 million in 2017. The increase was primarily due to an increase in staff salary and third-party service fees. •Provision for receivables. Our provision for receivables increased by 94.8% to RMB1,178.7 million (US$171.4 million) in 2018 fromRMB605.2 million in 2017. The increase was primarily due to an increase in the M1+ overdue loan principals and financing services feesreceivables.Income from operations. Our income from operations in 2018 was RMB2,689.4 million (US$391.2 million), representing a 11.1% increase fromRMB2,421.2 million during the prior year.Income tax expenses. Our income tax expenses decreased by 38.2% to RMB157.8 million (US$22.9 million) in 2018 from RMB255.5 million in2017, primarily due to the preferential tax rate for certain of our subsidiaries.Net income. Our net income totaled RMB2,491.3 million (US$362.3 million) in 2018, up 15.1% from RMB2,164.5 million in 2017. Net incomeattributable to the Company’s shareholders per diluted share was RMB7.74 (US$1.13), compared with RMB7.09 in the prior year.Adjusted net income. Our adjusted net income attributable to the Company’s shareholders, which excludes share-based compensation expenses,increased by 14.4% to RMB2,549.3 million (US$370.8 million) from RMB2,228.5 million in the prior year. Adjusted net income attributable to theCompany’s shareholders per diluted share increased to RMB7.92 (US$1.15) from RMB7.30 in the prior year.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. Financing incometotaled RMB3,642.2 million (US$559.8 million) in 2017, increasing 186.5% from RMB1,271.5 million in 2016. Loan facilitation income and othersincreased 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 in the volumeof off-balance sheet transactions. Sales commission fee increased to RMB797.2 million (US$122.5 million) in 2017, up 529.2% from RMB126.7 million in2016. The significant year-over-year growth in sales commission fee was mainly the result of an increase in merchandise credit utilized by borrowers topurchase merchandise via Qudian’s marketplace.117Table of Contents Total cost of revenues and operating expenses. Total cost of revenues and operating expenses increased by 223.1% to RMB2,404.8 million(US$369.6 million) in 2017 from 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 2017 fromRMB182.5 million in 2016. The increase was primarily due to higher borrower engagement fees in 2017, compared with 2016. •General and administrative expenses. Our general and administrative expenses increased by 68.8% to RMB183.7 million (US$28.2 million)in 2017 from RMB108.8 million in 2016. The increase was primarily attributable to the increase of administrative fee payable to trustcompanies as a result of increased use of trust funding, the increase in share-based compensation expenses for general and administrativepersonnel 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$23.6 million)in 2017 from RMB52.3 million in 2016. The increase was primarily due to an increase in salaries and benefits expenses, in order to furtherenhance our data analytics and risk management capabilities, the increase in professional service fee expenses and the increased share-basedcompensation expense for research and development personnel. •Provision for receivables. Our provision for receivables increased by 357.8% to RMB605.2 million (US$93.0 million) in 2017 fromRMB132.2 million in 2016. The increase was primarily due to an increase in the M1+ overdue loan principals and financing services feesreceivables, which we intend 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 income. Our adjusted net income attributable to the Company’s shareholders, which excludes share-based compensation expenses,increased by 272.2% to RMB2,228.5 million (US$342.5 million) from RMB598.8 million in the prior year. Adjusted net income attributable to theCompany’s shareholders per diluted share increased to RMB7.30 (US$1.12) from RMB1.97 in the prior year.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 2016, 2017 and 2018, we had net cash provided by operating activities of RMB794.1 million, RMB2,797.8 million and RMB3,332.3 million(US$484.7 million), respectively.As of December 31, 2018, we had cash and cash equivalents of RMB2,501.1 million (US$363.8 million), as compared to cash and cash equivalents ofRMB6,832.3 million as of December 31, 2017.118Table of Contents As of December 31, 2018, we had short-term amounts due from Alipay of RMB718.4 million (US$104.5 million), as compared to short-term amountsdue from Alipay of RMB549.8 million as of December 31, 2017. These represent amounts deposited in our Alipay accounts, and are unrestricted as towithdrawal 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 RMB195.0 million (US$30.0 million) in December 2017. The loan has a fixed interestrate of 5.7% per annum and a term of one year. As collateral for such loan, our subsidiary Qufengqi (HK) Limited has deposited US$30.0 million in a bankaccount designated by Guotou Taikang. We receive interest on such deposit at a rate of 2.7% per annum. We fully repaid such borrowings by the end of2018.In February 2018, Beijing Happy Time, our consolidated VIE, entered into a credit agreement with Xiamen International Bank Co., Ltd., or XiamenInternational Bank. Pursuant to such agreement, Beijing Happy Time has been granted a credit limit of up to RMB300.0 million (US$46.1 million). BeijingHappy Time drew down RMB300.0 million (US$46.1 million) in March 2018. The borrowings have a fixed interest rate of 4.18% per annum. As collateral forsuch borrowings, our subsidiary Qufengqi (HK) Limited has deposited US$50.0 million in a bank account designated by Xiamen International Bank. Wereceive interest on such deposit at a rate of 0.08% per annum. We fully repaid such borrowings by end of 2018.In January, February and March 2019, Xiamen Qudian, our consolidated VIE, entered into three term loans with China Construction Bank with anaggregate amount of RMB295.0 million (US$42.9 million). Each term loan has a fixed interest rate of 3.915% per annum and a term of 12 months. As acollateral for such borrowings, our subsidiary Qufengqi (HK) Limited has deposited US$50.2 million in a bank account designated by China ConstructionBank. We receive interest on such deposits at rates ranging from 3.28% to 3.41% per annum.The following table sets forth our total assets, total liabilities and total net assets as of the dates indicated. As of December 31, 2016 2017 2018 RMB RMB RMB US$ (in thousands) Total assets 7,117,599 19,380,416 16,253,375 2,363,955 Total liabilities 4,604,010 9,840,049 5,432,762 790,162 Total net assets(1) 2,513,589 9,540,367 10,820,613 1,573,793 (1)Defined as total assets minus total liabilities.Our total net assets increased from RMB2,513.6 million as of December 31, 2016 to RMB9,540 million as of December 31, 2017. The increase wasprimarily due to (i) proceeds from issuance of ordinary shares of RMB5,339.5 million and (ii) net income of RMB2,164.5 million in 2017. Our total net assetsfurther increased from RMB9,540 million as of December 31, 2017 to RMB10,820.6 million (US$1,573.8 million) as of December 31, 2018, primarily as aresult of (i) repurchases of Class A ordinary shares of RMB1,410.2 million under the Share Repurchase Program and (ii) net income of RMB2,491.3 million in2018.119Table of Contents The table below sets forth certain balance sheet items related to cash and merchandise credit products. The increase in such line items since December31, 2016 is in line with our business growth. As of December 31, 2016 2017 2018 RMB RMB RMB US$ (in thousands) Short-term loan principal and financing service fee receivables 4,826,791 8,758,545 8,417,821 1,224,321 Long-term loan principal and financing service fee receivables 87,822 — 665,653 96,815 Short-term borrowings and interest payables 4,183,231 7,979,415 3,860,441 561,478 Long-term borrowings and interest payables 76,052 510,024 413,400 60,127 We 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 to pursueopportunities for investment, acquisition, capital expenditure or similar actions. If we determine that our cash requirements exceed the amount of cash andcash equivalents we have on hand at the time, we may seek to issue equity or debt securities or obtain credit facilities. The issuance and sale of additionalequity would result in further dilution to our shareholders. The incurrence of indebtedness would result in increased fixed obligations and could result inoperating covenants that would restrict our operations. We cannot assure you that financing will be available in amounts or on terms acceptable to us, if atall. See “Item 3. Key Information — D. Risk Factors — Risks Relating to Our Business and Our Industry — We may need additional capital to pursuebusiness objectives and respond to business opportunities, challenges or unforeseen circumstances, and financing may not be available on terms acceptableto us, or at all.”Our ability to manage our working capital, including receivables and other assets and accrued expenses and other liabilities, may materially affectour 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, 2016 2017 2018 RMB RMB RMB US$ (in thousands) Summary Consolidated Cash Flow Data: Net cash (used in)/provided by operating activities 794,063 2,797,809 3,332,319 484,666 Net cash used in investing activities (3,598,137) (4,422,319) (2,790,734) (405,895)Net cash provided by/(used in) financing activities 3,379,730 10,001,639 (6,727,839) (978,524)Cash and cash equivalents , and restricted cash at beginning of period 210,114 785,770 9,084,952 1,321,351 Cash and cash equivalents, and restricted cash at end of period 785,770 9,084,952 2,841,015 413,208 Operating ActivitiesNet cash provided by operating activities was RMB3,332.3 million (US$484.7 million) in 2018, primarily due to net income of RMB2,491.3 million(US$362.3 million), adjusted for (i) provision for receivables of RMB1,178.7 million (US$171.4 million), (ii) share-based compensation expenses ofRMB58.0 million (US$8.4 million), (iii) share of loss from equity method investment of RMB11.3 million (US$1.6 million), and (iv) changes in workingcapital. Adjustment for changes in working capital primarily consisted of (i) a decrease in financing service fee receivables of RMB112.1 million (US$16.3million), which was primarily due to the decrease in amount of transactions we facilitated, (ii) an increase in guarantee liabilities of RMB255.6 million(US37.2 million), which was primarily due to an increase in the amount of off-balance sheet transactions facilitated and (iii) an increase in other120Table of Contents current and non-current liabilities of RMB262.7 million (US$38.2 million), which was primarily due to (i) an increase in tax payable of RMB127.0 million(US$18.5 million), (ii) an increase in accrued payroll of RMB10.4 million (US$1.5 million) and (iii) an increase in payable to external service providers ofRMB7.3 million (US$1.1 million), which was partially offset by (i) an increase in contract assets of RMB800.0 million (US$116.4 million), (ii) a decrease ininterest payables of RMB62.5 million (US$9.1 million), which was primarily due to a decrease in borrowings from institutional funding partners, (iii) anincrease in deferred tax assets of RMB128.0 million (US$18.6 million) and (iv) an increase in other current and non-current assets of RMB137.1 million(US$20.0 million), which was primarily due to (i) an increase in inventory of RMB128.0 million (US$18.6 million) and (ii) an increase in receivables fromservice providers of RMB108.1 million (US$15.7 million), which was partially offset by a decrease in prepayments for vehicles of RMB110.1 million(US$16.0 million),Net cash provided by operating activities was RMB2,797.8 million in 2017, primarily due to net income of RMB2,164.5 million, adjusted for (i)provision for receivables of RMB605.2 million, (ii) share-based compensation expenses of RMB64.1 million, (iii) share of loss from equity methodinvestment of RMB20.7 million, and (iv) changes in working capital. Adjustment for changes in working capital primarily consisted of (i) an increase ininterest payables of RMB121.4 million, which was primarily due to an increase in borrowings from institutional funding partners, (ii) an increase in guaranteeliabilities of RMB165.6 million, which was primarily due to an increase in the amount of off-balance sheet transactions facilitated and (iii) an increase inother current and non-current liabilities of RMB144.7 million, which was primarily due to (i) an increase in tax payable of RMB107.8 million, (ii) an increasein accrued payroll of RMB65.6 million and (iii) a decrease in payable to external service providers of RMB28.8 million, which was partially offset by (i) anincrease in financing service fee receivables of RMB79.0 million, which was primarily due to the increase in amount of transactions we facilitated, (ii) anincrease in deferred tax assets of RMB97.7 million and (iii) an increase in other current and non-current assets of RMB308.8 million, which was primarily dueto (i) an increase in prepayments for cars of RMB141.1 million, (ii) an increase in prepayments for land use right and prepaid expenses of RMB59.8 millionand (iii) an increase in guarantee deposits of RMB72.5 million.Net 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 receivables of RMB132.2 million, (ii) share-based compensation expense of RMB22.1 million, (iii) amortization of deferred origination costs ofRMB24.6 million, and (iv) changes in working capital. Adjustments for changes in working capital primarily consisted of an increase in other current andnon-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 inpayable to suppliers of RMB59.0 million, which was primarily due to better credit terms offered by merchandise suppliers as a result of our increasingbargaining power, which was partially offset by (i) an increase in financing service fee receivables of RMB48.5 million, which was primarily due to theincrease in amount of transactions we facilitated and (ii) an increase in other current and non-current assets of RMB39.0 million, which primarily consisted ofguarantee deposits held by our institutional funding partners.Investing ActivitiesNet cash used in investing activities was RMB2,790.7 million (US$405.9 million) in 2018, which was attributable to (i) RMB37,036.4 million(US$5,386.7 million) in payments to originate loan principal, and (ii) RMB1,322.0 million (US$193.7 million) in purchases of current assets held for lease,and (iii) RMB1,352.6 million (US$196.7 million) in purchases of short-term investments, which was partially offset by (i) RMB35,184.8 million (US$5,117.4million) in proceeds from collection of loan principal and (ii) proceeds from redemption of short-term investments of RMB1,652.6 million (US$240.4million).Net cash used in investing activities was RMB4,422.3 million in 2017, which was attributable to (i) RMB78,473.7 million in payments to originateloan principal, and (ii) RMB1,155.2 million in purchases of short-term investments, which was partially offset by (i) RMB73,958.7 million in proceeds fromcollection of loan principal and (ii) proceeds from redemption of short-term investments of RMB1,285.4 million.121Table of Contents Net cash used in investing activities was RMB3,598 million in 2016, which was attributable to (i) RMB30,219.0 million in payments to originateloan principal, and (ii) RMB4,910.3 million in purchase of short-term investments, which was partially offset by (i) RMB27,075.2 million in proceeds fromcollection of loan principal. We also paid RMB70.0 million related to our investment in QuCampus in 2016.Financing ActivitiesNet cash provided by financing activities was RMB6,727.8 million (US$978.5 million) in 2018, which was primarily attributable to (i) repayments ofborrowings of RMB8,025.9 million (US$1,167.3 million), (ii) repurchase of ordinary shares of RMB1,410.2 million (US$205.1 million), which was partiallyoffset by (i) proceeds from borrowings of RMB2,644.7 million (US$384.7 million).Net cash provided by financing activities was RMB10,001.6 million in 2017, which was primarily attributable to (i) proceeds from issuance ofordinary shares of RMB5,339.5 million, which was related to our initial public offering, (ii) proceeds from borrowings of RMB15,989.9 million, representingremittance of funds from institutional funding partners to us, and (iii) proceeds from related parties of RMB850.5 million, primarily representing financingfrom Guosheng Financing Holding Inc. in connection with its investment in one of our trusts, partially offset by (i) repayment of borrowings of RMB11,825.4million, representing repayment to the institutional funding partners, (ii) repurchase of ordinary shares of RMB421.2 million, (iii) payment of guaranteedeposits to institutional funding partners of RMB161.1 million and (iv) refund of guarantee deposits from institutional funding partners of RMB286.7million.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 funding partners.Capital ExpendituresWe made capital expenditures of RMB4.6 million, RMB11.3 million and RMB140.4 million (US$20.4 million) in 2016, 2017 and 2018,respectively. In these periods, our capital expenditures were mainly used for purchases of equipment and intangible assets, land use rights 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, consolidatedVIEs and their subsidiaries in China. As a result, Qudian Inc.’s ability to pay dividends depends upon dividends paid by our PRC subsidiary. If our existingPRC subsidiary or any newly formed ones incur debt on their own behalf in the future, the instruments governing their debt may restrict their ability to paydividends to us. In addition, our wholly foreign-owned subsidiary in China is permitted to pay dividends to us only out of its retained earnings, if any, asdetermined in accordance with PRC accounting standards and regulations. Under PRC law, each of our subsidiary, our consolidated VIEs and theirsubsidiaries in China is required to set aside at least 10% of its after-tax profits each year, if any, to fund certain statutory reserve funds until such reservefunds reach 50% of its registered capital. In addition, our wholly foreign-owned subsidiary in China may allocate a portion of its after-tax profits based onPRC accounting standards to enterprise expansion funds and staff bonus and welfare funds at its discretion, and our consolidated VIEs and their subsidiariesmay allocate a portion of its after-tax profits based on PRC accounting standards to a discretionary surplus fund at their discretion. The statutory reservefunds and the discretionary funds are not distributable as cash dividends. Remittance of dividends by a wholly foreign-owned company out of China issubject to examination by the banks designated by SAFE. Our PRC subsidiary has not paid dividends and will not be able to pay dividends until theygenerate accumulated profits and meet the requirements for statutory reserve funds.122Table of Contents Recent Accounting PronouncementsA list of recent accounting pronouncements that are relevant to us is included in note 2 to our consolidated financial statements, which are includedin 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 designed tooptimize for scalability and flexibility.D.Trend InformationOther than as disclosed elsewhere in this annual report, we are not aware of any trends, uncertainties, demands, commitments or events for the yearended December 31, 2018 that are reasonably likely to have a material effect on our total net revenues, income, profitability, liquidity or capital reserves, orthat 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. Since April 2018, we have also entered into vehicle sales with guarantee arrangements with financial institutions that providesfunding directly to car buyers. As of December 31, 2018, guarantee liabilities related to such arrangement were RMB302.6 million (US$44.0 million). As ofDecember 31, 2018, the maximum potential undiscounted future payment we would be required to make was RMB10,703.0 million (US$1,557.0 million).See “Item 5. Operating and Financial Review and Prospects A. Operating Results.”F.Tabular Disclosure of Contractual ObligationsThe following table sets forth our operating lease commitments and long-term borrowings and interest payable as of December 31, 2018. Payment due by period Total Less than1 Year 1-3 Years 3-5 Years More than5 Years RMB US$ RMB (in thousands) Operating lease commitments 65,436 9,517 29,505 31,604 4,327 — Long-term borrowings and interest payable 485,782 70,654 36,560 449,222 — — Operating lease obligations represent leasing arrangements relating to the lease of our office premises.Our capital commitments relate primarily to commitments in connection with our plan to build an office building and innovation center. Totalcapital commitments contracted but not yet reflected in the financial statements amounted to RMB99.5 million (US$14.5 million) as of December 31, 2018.All of the commitments relating to the construction will be settled in installments.Our investment commitment relates to our equity method investee Ganzhou QuCampus Technology Co., Ltd (“Ganzhou QuCampus”). On October17, 2016, we made a commitment to invest RMB190.0 million in cash for 45.9% of the equity interest in Ganzhou QuCampus which mainly operatescomputer services, advisory, and online merchandise services. As of December 31, 2018, we contributed RMB70.0 million (US$10.2 million) in GanzhouQuCampus and held a 45.9% equity interest in Ganzhou QuCampus.ITEM 6.DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEESA.Directors and Senior Management123Table of Contents Directors and Executive OfficersThe following table sets forth information regarding our directors and executive officers as of December 31, 2018. Name Age Position/TitleMin Luo 35 Chairman and Chief Executive OfficerLianzhu Lv 34 Director and Head of User Experience DepartmentShengwen Rong 50 Independent DirectorYifan Li 51 Independent DirectorRocky Ta-Chen Lee 45 Independent DirectorCarl Yeung 39 Chief Financial Officer Mr. Min Luo is our founder, chairman of our board of directors, and, since the inception of our company in 2014, has served as our chief executiveofficer. Prior to founding our company, Mr. Luo served as a vice president of marketing of OkBuy.com, an online marketplace for apparel and shoe productsin China, from 2010 to 2013. Mr. Luo was a founder and chief executive officer of Jiyiri.com, an online birthday-related service provider, from 2007 to 2009,and a co-founder of dipian.com, an online social platform for college students, from 2006 to 2007. Mr. Luo received a bachelor’s degree intelecommunication engineering from Jiangxi Normal University in 2004.Mr. Lianzhu Lv has been our director since November 2015 and has served as the head of our user experience department since 2014. From 2010 to2013, 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, heworked as a user interface designer of Jiyiri.com, an online birthday-related service provider in China. From 2005 to 2008, he worked as a supervisor of themobile department of 95 Online Information Technology Co., Ltd. Mr. Lv graduated from Cangzhou Technical College with a major in computer applicationin 2005.Mr. Shengwen Rong has served as our independent director since August 2018. From February 2017 to September 2018, Mr. Rong served as seniorvice president and then Chief Financial Officer of Yixia Technology Co., Ltd. Prior to that, Mr. Rong served as the Chief Financial Officer at Quixey, Inc.from 2015 to 2016, the Chief Financial Officer at UCWeb from 2012 to 2014, and the Chief Financial Officer at Country Style Cooking Restaurant ChainCo., Ltd., an NYSE-listed company, from 2010 to 2012. Currently Mr. Rong serves as an independent director and audit committee chair of X Financial(NYSE: XYF). Mr. Rong received a bachelor’s degree in international finance from Renmin University, a master’s degree in accounting from West VirginiaUniversity and an MBA degree from University of Chicago Booth School of Business.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 Geely HoldingGroup Co., Ltd., an automotive manufacturing company, since October 2014. From May 2014 to September 2014, he was vice president and internationalchief financial officer of Sanpower Group Co., Ltd., a company in the technology and modern service industries. From December 2010 to February 2014, heserved as vice president and chief financial officer of China Zenix Auto International Co., Ltd., a manufacturer of commercial vehicle wheels listed on theNYSE. Mr. Li is also currently a director and a member of the audit committee for a number of companies, including Xinyuan Real Estate Co., Ltd., a realestate developer listed on the NYSE, Shanghai International Port (Group) Co., Ltd., a port management company listed on the Shanghai Stock Exchange,Heilongjiang Interchina Water Co., Ltd., a water supply and treatment company listed on the Shanghai Stock Exchange, and Huaxin Securities Co., Ltd., asecurities company in China. Mr. Li received his MBA from the University of Chicago Booth School of Business in 2000, his master’s degree in accountingfrom University of Texas at Dallas in 1994, and his bachelor’s degree in economics from Fudan University in 1989. Mr. Li is a Certified Public Accountant inthe United States and a Chartered Global Management Accountant. His business address is Room 815, 1760 Jiangling Road, Binjiang District, Hangzhou,Zhejiang, PRC, 310051.124Table of Contents Mr. Rocky Ta-Chen Lee has served as our independent director since October 2017. Mr. Lee has served as an international partner and head of theU.S. corporate practice of King & Wood Mallesons since January 2017. From June 2010 to December 2016, Mr. Lee served as the Asia managing partner andhead of Greater China corporate practice of Cadwalader, Wickersham & Taft LLP. From January 2006 to May 2010, Mr. Lee served as a partner of DLA PiperUK LLP. Mr. Lee received a Juris Doctorate degree from University of California, Los Angeles and a bachelor’s degree in arts in legal studies from Universityof California Berkeley. His business address is 40/F, Tower A, Beijing Fortune Plaza, 7 Dongsanhuan Zhonglu, Chaoyang District, 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 Babes Limited,a baby and maternity retail store chain in Hong Kong. Prior to joining our company, Mr. Yeung was a co-founder of Bababaobei Ecommerce Limited, a babyand maternity cross-border e-commerce platform in China since 2015. From 2013 to 2016, Mr. Yeung served as a chief financial officer and a chief strategyofficer of BAIOO Family Interactive Limited, a children’s web game developer in China listed on the Hong Kong Stock Exchange. From 2010 to 2013, heserved as the chief financial officer of Sky-Mobi Limited, a leading mobile app platform in China previously listed on NASDAQ, and he was a director ofSky-Mobi Limited from 2013 to 2016. From 2006 to 2010, Mr. Yeung was the chief financial officer of ATA Inc., a computer-based testing and testing-related service provider based in China and listed on NASDAQ, and he was a director of ATA Inc. from 2006 to 2008. From 2008 to 2010, Mr. Yeung alsoserved as an independent non-executive director of China Natural Gas, Inc., an energy company in China previously 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 economicswith concentrations in finance and operations management from the Wharton School, University of Pennsylvania, and his bachelor’s degree in appliedscience with a concentration in systems engineering from the School of Engineering and Applied Sciences, University of Pennsylvania, in 2002.The business address for all of our executive officers and directors is Tower A, AVIC Zijin Plaza, Siming District, Xiamen, Fujian Province 361000,the People’s Republic of China.B.CompensationIn 2018, we and our subsidiaries and consolidated VIEs paid aggregate cash compensation of approximately RMB6.9 million (US$1.0 million) to ourdirectors and executive officers as a group. We did not pay any other cash compensation or benefits in kind to our directors and executive officers. We havenot set aside or accrued any amount to provide pension, retirement or other similar benefits to our directors and executive officers. Our PRC subsidiaries andconsolidated VIEs are required by law to make contributions equal to certain percentages of each employee’s salary for his or her pension insurance, medicalinsurance, unemployment insurance and other statutory benefits and a housing provident fund. Our board of directors may determine compensation to bepaid to the directors and the executive officers. The compensation committee will assist the directors in reviewing and approving the compensation structurefor 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 executive officer,such as conviction or plea of guilty to a felony or any crime involving moral turpitude, willful misconduct or gross negligence to our detriment, or seriousbreach of duty of loyalty to us. We may also terminate an executive officer’s employment without cause upon three-month advance written notice. In suchcase of termination by us, we will provide severance payments to the executive officer as expressly required by applicable law of the jurisdiction where theexecutive officer is based. 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, instrict confidence and not to use, except as required in the performance of his or her duties in connection with the employment or pursuant to applicable law,any of our confidential information or trade secrets, any confidential information or trade secrets of our business partners, or the confidential or proprietaryinformation of any third party received by us and for which we have confidential obligations. The executive officers have also agreed to disclose inconfidence to us all inventions, designs and trade secrets which they conceive,125Table of Contents develop or reduce to practice during the executive officer’s employment with us and to assign all right, title and interest in them to us, and assist us inobtaining 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) approach borrowers,institutional funding partners, merchandise suppliers or other persons or entities introduced to the executive officer in his or her capacity as a representativeof us for the purpose of doing business with such persons or entities that will harm our business relationships with these persons or entities; (ii) assumeemployment with or provide services to any of our competitors, or engage, whether as principal, partner, licensor or otherwise, any of our competitors,without our express consent; or (iii) seek directly or indirectly, to solicit the services of any of our employees who is employed by us on or after the date ofthe 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 by reason oftheir 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 to grantshare awards of such company to our employees, officers, directors and individual consultants who render services to us. The maximum number of shares thatmay be issued pursuant to all awards under the 2014 plan is 20,824,447 ordinary shares of the former holding company of Beijing Happy Time. On variousdates from August 2014 to December 2014, 18,373,219 share options were granted to certain of our employees and a third-party consultant at exercise pricesof RMB0.0 per share, which have vesting periods of four years. On various dates in 2015, 2,449,800 share options were granted to certain of our employees atexercise prices of RMB0.0 per share, which have vesting periods of four years. The 2014 Share Incentive Plan was 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 the laws ofPRC, 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 in TianjinHappy Share into 15,814,019 virtual shares and awarded the options to purchase virtual shares to grantees of the 2015 Share Incentive Plan, which enabledthe grantees to enjoy beneficial ownership of Beijing Happy Time through their respective virtual shares in Tianjin Happy Share. On December 26, 2015, alloptions to purchase 15,814,019 virtual shares were issued to certain of our employees and a third-party consultant to replace the 15,814,019 share optionsgranted to such individuals under the 2014 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 certain employeesand 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 arrangements withGanzhou Qufenqi and Beijing Happy Time and its other shareholders, according to which Ganzhou Qufenqi will exercise effective control over BeijingHappy Time and realize substantially all of the economic risks and benefits arising from Beijing Happy Time and its subsidiaries in lieu of Tianjin HappyShare and other shareholders of Beijing Happy Time. See “Item. 4 Information on the Company — B. Business Overview — Overview — Our ContractualArrangements with Consolidated VIEs and Their Shareholders.” for more information.126Table of Contents 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 Happy Share.Qufenqi Holding Limited is entitled to exercise the voting rights as the nominal shareholder with regard to these 15,814,019 ordinary shares of Qudian Inc.,while the pecuniary interests of these shares belong to Tianjin Happy Share. As such, grantees of the 2015 Share Incentive Plan enjoy the pecuniary interestsof the 15,814,019 shares, representing 5.24% of the equity interest of Qudian Inc. in proportion to their relevant numbers of options to purchase virtual sharesof Tianjin Happy Share.As of December 2016, the 2015 Share Incentive Plan was terminated. In April 2017, Tianjin Happy Share and Qufenqi Holding Limited terminatedthe share entrustment agreement, and we canceled the 15,814,019 shares that Qufenqi Holding Limited holds on behalf of Tianjin Happy Share.2016 Equity Incentive PlanOn December 9, 2016, Qudian Inc. adopted the 2016 Equity Incentive Plan, which allows us to grant share options, restricted shares, restricted shareunits and other share-based awards to our employees, directors and consultants. The maximum number of ordinary shares may be subject to equity awardspursuant 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 aggregatenumber of ordinary shares reserved and available for issuance pursuant to awards granted under the 2016 Equity Incentive Plan will be increased by 1.0% ofthe total number of ordinary shares outstanding on December 31 of preceding calendar year. Unless terminated earlier, the 2016 Equity Incentive Plan willterminate 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 and conditionsof 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.TermUnless 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 of ordinaryshares 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 schedule willbe 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.127Table of Contents 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, we granted494,904 options to purchase our ordinary shares to certain of our employees, and such options were subject to the applicable vesting schedules. In August2017, our board of directors approved the grant of 200,000 options to purchase our ordinary shares to our independent director appointees and certain of ouremployees, and such options were subject to the applicable vesting schedules. On March 12, 2018, the Company granted 998,000 options under the 2016Plan. On October 1, 2018, the Company granted 20,000 options under the 2016 Plan. On November 30, 2018, we granted 10,000 options under the 2016 Planto one independent non-executive director. On December 20, 2018, the Company granted 2,608,000 options under the 2016 Plan. 25% of the options willvest upon each subsequent anniversary of the engagement date. 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 OptionExercisePrice Grant Date Option ExpirationDateLianzhu Lv Director 5,695,219 US$ 0.0 December 30, 2016 December 8, 2026 500,000 US$ 0.0 December 20, 2018 December 20, 2028Yifan Li Independent director * US$ 0.0 October 17, 2017 December 8, 2026Rocky Ta-Chen Lee Independent director * US$ 0.0 October 17, 2017 December 8, 2026Shengwen Rong Independent director * US$ 0.0 November 30, 2018 November 30, 2028Carl Yeung CFO * US$ 0.0 December 9, 2016 December 8, 2026 * US$ 0.0 March 12, 2018 March 12, 2028 * US$ 0.0 December 20, 2018 December 20, 2028 *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 and ArkTrust (Hong Kong) Limited, or Ark Trust, as trustee of the Equity Incentive Trust, through which our ordinary shares, dividends and other rights and interestsunder awards granted pursuant to our equity incentive plans may be provided to certain of recipients of equity awards granted pursuant to our share incentiveplans.Participants in the Equity Incentive Trust transfer their equity awards to Ark Trust to be held for their benefit. Upon satisfaction of vesting conditionsand request by grant recipients, Ark Trust will exercise the equity awards and transfer the relevant ordinary shares, dividends and other rights and interestunder 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 of theEquity Incentive Trust. As of March 31, 2019, 750,000 of such ordinary shares are underlying shares of unvested options, and such shares are deemed notoutstanding. The trust deed provides that Ark Trust shall not exercise the voting rights attached to such ordinary shares unless otherwise directed by the planadministrator, 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 five 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 or128Table of Contents arrangement in which he is interested, and if he does so his vote shall be counted and he may be counted in the quorum at any meeting of our directors atwhich any such contract or proposed contract or arrangement is considered, provided (a) such director has declared the nature of his interest at the meeting ofthe board at which the question of entering into the contract or arrangement is first considered if he knows his interest then exists, or in any other case at thefirst meeting of the board after he knows he is or has become so interested, either specifically or by way of a general notice and (b) if such contract orarrangement is a transaction with a related party, such transaction has been approved by the audit committee. The directors may exercise all the powers of thecompany to borrow money, to mortgage or charge its undertaking, property and uncalled capital, and to issue debentures or other securities whenever moneyis borrowed or as security for any debt, liability or obligation of the company or of any third party. None of our non-executive directors has a service contractwith us that provides for benefits 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. Wehave 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 Shengwen Rong. Yifan Li is the chairperson of our audit committee. Yifan Lisatisfies the criteria of an audit committee financial expert as set forth under the applicable rules of the SEC. Each of Yifan Li, Rocky Ta-Chen Lee, andShengwen Rong satisfies the requirements for an “independent director” within the meaning of Section 303A of the NYSE Listed Company Manual and willmeet the criteria for independence set forth in Rule 10A-3 of the Exchange Act. Our audit committee will consist solely of independent directors within oneyear of our initial 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; •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, internal129Table of Contents 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, allalternative treatments of financial information within U.S. GAAP that have been discussed with management and all other material writtencommunications 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 Shengwen Rong. Yifan Li is the chairperson of our compensationcommittee. Each of Yifan Li, Rocky Ta-Chen Lee, and Shengwen Rong satisfies the requirements for an “independent director” within the meaning ofSection 303A of the NYSE Listed Company Manual.Our compensation committee is responsible for, among other things: •reviewing, evaluating and, if necessary, revising our overall compensation policies; •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 the chairpersonof our nominating and corporate governance committee. Each of Yifan Li and Rocky Ta-Chen Lee satisfies the “independence” requirements of Section303A of the NYSE Listed Company Manual. The nominating and corporate governance committee assists the board of directors in selecting individualsqualified to become our directors and in determining the composition of the board and its committees. The nominating and corporate governance committeeis responsible for, among other things: •selecting and recommending to the board nominees for election by the shareholders or appointment by the board;130Table of Contents •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 also have aduty to exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances. In fulfilling their duty of care tous, our directors must ensure compliance with our second amended and restated memorandum and articles of association. A shareholder has the right to seekdamages 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; •selecting 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 •exercising any other powers conferred by the shareholders meetings or under our second amended and restated memorandum and articles ofassociation.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 his or herearlier death, resignation or removal or the expiration of his or her term as provided in the written agreement with our company, if any. A director will cease tobe 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 beor becomes of unsound mind, (iii) resigns his office by notice in writing to the company, or (iv) without special leave of absence from our board, is absentfrom six consecutive board meetings and our directors resolve that his office be vacated. Our officers are elected by and serve at the discretion of the board ofdirectors.131Table of Contents D.EmployeesAs of December 31, 2018, we had a total of 1,154 employees. The following table sets forth the breakdown of our employees as of December 31, 2018by function: Function Number ofEmployees % of Total Dabai Auto(1) 184 15.9 Risk management(2) 177 15.3 Technology and product development 169 14.7 User services 68 5.9 Finance 98 8.5 Operation management 73 6.3 General administrative and others 123 10.7 New businesses 103 8.9 Sales and marketing(3) 159 13.8 Total 1,154 100.0 (1)As of December 31, 2018, our Dabai Auto team engaged in various tasks related to the launch of the new business. The team will be categorized intospecific functions as the business matures, including other new business initiatives and corporate functions.(2)The size of our risk management team decreased from 333 as of December 31, 2017 to 177 as of December 31, 2018. The decrease was primarily dueto the reduction of staff related to the Dabai Auto business and increase in efficiency of our risk management systems.(3)The size of our sales and marketing team increased from seven as of December 31, 2017 to 159 as of December 31, 2018. The increase was primarilydue to increase in staff related to our core consumer finance business.As of December 31, 2018, a majority of our employees were based in Xiamen in Fujian Province and Fuzhou in Jiangxi Province. The remainders ofour employees were based in various other locations across China.The number of our employees decreased from 1,614 as of December 31, 2017 to 1,154 as of December 31, 2018 in response to the scale back of ourDabai Auto business.We believe we offer our employees competitive compensation packages and a dynamic work environment that encourages initiative and is based onmerit. 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.As 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 ahousing provident fund. We are required under PRC law to make contributions to employee benefit plans at specified percentages of the salaries, bonuses andcertain allowances of our employees, up to a maximum amount specified by the local government from time to time. In addition, we purchased employer’sliability insurance and additional commercial health insurance to increase insurance coverage of our employees. We enter into standard labor, confidentialityand non-compete agreements with our employees. The non-compete restricted period typically expires two years after the termination of employment, and weagree to compensate the employee with a certain percentage of his or her pre-departure salary during the restricted period.We believe that we maintain a good working relationship with our employees, and we have not experienced any major labor disputes.E.Share Ownership132Table of Contents The 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 the power toreceive the economic benefit of ownership of, the securities. In computing the number of shares beneficially owned by a person and the percentage ownershipof that person, we have included shares that the person has the right to acquire within 60 days, including through the exercise of any option or other right orthe conversion of any other security.The total number of ordinary shares outstanding as of March 31, 2019 was 297,368,195, comprising 233,877,023 Class A ordinary shares and63,491,172 Class B ordinary shares, excluding (i) ordinary shares represented by the ADSs repurchased by the Company; (ii) ordinary shares underlyingunvested options that are issued but deemed to be not outstanding and held by Ark Trust in its capacity as trustee of the Equity Incentive Trust or DeutscheBank Trust Company Americas in its capacity as the depositary bank, (iii) ordinary shares issuable upon the exercise of outstanding share options and (iv)ordinary shares reserved for future issuance under our share incentive plans: Ordinary Shares Beneficially Owned Class Aordinary shares Class Bordinary shares Percentage oftotal ordinaryshares on an as-converted basis Percentage ofaggregate votingpower** Directors and Executive Officers: Min Luo(1) — 63,491,172 21.4 73.1 Lianzhu Lv(2) 4,155,219 — 1.4 0.5 Shengwen Rong — — — — Yifan Li * — * * Rocky Ta-Chen Lee * — * * Carl Yeung * — * * Directors and Executive Officers as a Group 4,482,719 63,491,172 22.9 73.6 Principal Shareholders Qufenqi Holding Limited — 63,491,172 21.4 73.1 Phoenix Entities(3) 35,666,906 — 12.0 4.1 Kunlun Group Limited(4) 19,335,399 — 6.5 2.2 API (Hong Kong) Investment Limited(5) 37,720,709 — 12.7 4.3 Zhu Entities(6) 20,379,351 — 6.9 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 owned bysuch 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 to ashareholders’ vote, each Class A ordinary share is entitled to one vote, and each Class B ordinary share is entitled to ten votes, voting together as oneclass. Each Class B ordinary share is convertible into one Class A ordinary share at any time by the holder thereof. Class A ordinary shares are notconvertible 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 is ourfounder, chairman of the board and chief executive officer. The registered address of Qufenqi Holding Limited is Geneva Place, Waterfront Drive,P.O. Box 3469, Road Town, Tortola, British Virgin Islands.133Table of Contents (2)Mr. Lianzhu Lv was granted 6,195,219 share options under the 2016 Equity Incentive Plan, of which 5,695,219 share options have vested as of thedate of the annual report.(3)Represents (i) 22,367,426 Class A ordinary shares held by Phoenix Auspicious FinTech Investment L.P. and (ii) 13,299,480 Class A ordinary sharesheld by Guosheng (Hong Kong) Investment Limited (formerly known as Wa Sung Investment Limited). Information regarding beneficial ownershipis reported as of December 31, 2018, based on the information contained in the Schedule 13G/A filed by Phoenix Entities on February 14, 2019.Phoenix Auspicious FinTech Investment L.P. is a limited partnership organized under the laws of the Cayman Islands. The general partner of PhoenixAuspicious FinTech Investment L.P. is Phoenix Wealth (Cayman) Asset Management Limited, an exempted company incorporated under the laws ofthe Cayman Islands with limited liability, which is controlled by Mr. Li Du. The registered address of Phoenix Auspicious FinTech Investment L.P. isP.O. Box 2075, #31 The Strand, 46 Canal Point Drive, Grand Cayman KY1-1105, Cayman Islands. Wa Sung Investment Limited is a limited liabilitycompany incorporated under the laws of Hong Kong and a subsidiary of Guosheng Financial Holding Inc., or Guosheng, a public company listed onthe Shenzhen Stock Exchange. Based on Guosheng’s public filings, Mr. Li Du has control over Guosheng as of the date of this annual report. Theregistered address of Wa Sung Investment Limited is Unit 606, 6th Floor, Alliance Building, 133 Connaught Road Central, Hong Kong.(4)Represents 19,335,399 Class A ordinary shares held by Kunlun Group Limited, a limited liability company Kunlun, a public company listed on theShenzhen Stock Exchange, as of March 31, 2019. The registered address of Kunlun Group Limited is Unit 204, 2/F, Malaysia Building, 50Gloucester Road, Wanchai, Hong Kong.(5)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. Information regarding beneficial ownership is reportedas of December 31, 2017, based on the information contained in the Schedule 13G filed by Ant Small and Micro Financial Services Group Co., Ltd.,Shanghai Yunju Venture Capital Co., Ltd. and API (Hong Kong) Investment Limited on February 9, 2018. The registered address of API (Hong Kong)Investment Limited is 26/F, Tower One, Times Square, 1 Matheson ST, Causeway Bay, Hong Kong.(6)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 Bliss Limited.Information regarding beneficial ownership is reported as of December 31, 2017, based on the information contained in the Schedule 13G filed byZhu Entities on February 13, 2018. Ever Bliss Fund, L.P. is a limited partnership organized under the laws of the Cayman Islands with its registeredoffice at the Office of Sertus Incorporations (Cayman) Limited, Sertus Chambers, Governors Square, Suite # 5-204, 23 Lime Tree Bay Avenue, P.O.Box 2547, Grand Cayman, KY1-1104, Cayman Islands. Joyful Bliss Limited is a limited liability company incorporated under the laws of HongKong with its registered office at RM 1501, 15/F SPA CTR 53-55, Lockhart Rd Wanchai, Hong Kong. Each of Ever Bliss Fund, L.P. and Joyful BlissLimited is ultimately controlled by Mr. Tianyu Zhu.Source Code Accelerate L.P., which used to hold approximately 13.7% of our total ordinary shares as of March 31, 2018, has ceased to be a majorshareholder of our company and held no equity interest in our company as of December 31, 2018, according to a Schedule 13G it filed on February 13, 2019.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 voting rightsof 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 TRANSACTIONSA.Major ShareholdersPlease refer to “Item 6. Directors, Senior Management and Employees — E. Share Ownership.”134Table of Contents B.Related Party TransactionsTransactions and Agreements with Ant Financial and Its Related PartiesWe have been collaborating with Ant Financial, one of our principal shareholders, in multiple areas of our business. Ant Financial ceased to be arelated party since December 8, 2018.We incurred RMB41.2 million, RMB114.2 million and RMB58.8 million (US$8.6 million) of payment processing and settlement fees to Alipay in2016, 2017 and the period from January 1, 2018 to December 8, 2018, respectively.We incurred RMB6.2 million and RMB21.4 million and RMB9.3 million (US$1.3 million) of fees related to credit analysis information provided byZhima Credit in 2016, 2017 and the period from January 1, 2018 to December 8, 2018, respectively.We incurred RMB36.1 million, RMB16.0 million and nil of borrower engagement fees to Zhima Credit in 2016, 2017 and 2018, respectively. Weincurred RMB222.1 million and RMB32.5 million (US$4.7 million) of borrower engagement fees to Alipay in 2017 and the period from January 1, 2018 toDecember 8, 2018, respectively.We incurred RMB23.2 million and RMB30.3 million (US$4.4 million) of fees related to cloud computing services provided by Alibaba CloudComputing Co., Ltd. in 2017 and the period from January 1, 2018 to December 8, 2018, respectively. No such fees were incurred in 2016.Amounts due from Alipay were RMB404.6 million and RMB549.8 million as of December 31, 2016 and 2017, respectively. These are amountsdeposited in our Alipay accounts and are unrestricted as to withdrawal and use and readily available to us on demand. We use our Alipay accounts todisburse credit to and collect repayments from borrowers.Amounts due to Zhima Credit were RMB19.6 million and RMB3.1 million as of December 31, 2016 and 2017, respectively. Such amounts representfees related to credit analysis information and borrower engagement fees payable to Zhima Credit.In August 2018, our agreement with Ant Financial relating to user engagement through Alipay’s dedicated channel for online third-party serviceproviders expired and both parties have decided not to renew the agreement.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 financing thatBeijing 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. were controlled by director before August 24, 2018. Theseentities invested in our trusts, and such investments were recognized as borrowings by us.We incurred nil, RMB56.7 million and RMB42.9 million (US$6.2 million) of interest expenses to Guosheng Financial Holding Inc. in 2016, 2017and the period from January 1, 2018 to August 24, 2018, respectively.We incurred nil, RMB2.3 million and RMB5.2 million (US$0.8 million) of interest expenses to Guosheng Securities Asset Management Co., Ltd. in2016, 2017 and the period from January 1, 2018 to August 24, 2018, respectively.135Table of Contents 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 management andtheir immediate families, none of whom are our executive officers or directors.As of December 31, 2016, 2017 and 2018, we had amounts due from our key management and their immediate families of RMB1.3 million, RMB1.0million and nil, respectively. Such amounts represented (i) principal and financing service fee receivables from certain of our key management and theirimmediate families who utilized our credit products and (ii) advances to certain of our key management in connection with our daily operations, such as useby 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 substantially settled.As of December 31, 2016, 2017 and 2018, we had amounts due to Qufenqi Inc. of RMB0.9 million, RMB0.9 million and nil, respectively, which was interestfree 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 such amounts inApril 2017.Contractual 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 relevant businessthrough contractual arrangements among Ganzhou Qufenqi, our wholly-owned PRC subsidiary, Beijing Happy Time, our consolidated VIE, and theshareholders of Beijing Happy Time. We established four new consolidated VIEs, Ganzhou Qudian, Hunan Qudian and Xiamen Qudianin 2017 and XiamenWeipujia in 2018. Ganzhou Qufenqi has entered into a series of contractual arrangements with each new consolidated VIE and its shareholders. For adescription of these contractual arrangements, see “Item 4. Information on the Company — B. Business Overview — Overview — Our ContractualArrangements with Consolidated VIEs and Their Shareholders.”C.Interests of Experts and CounselNot Applicable.ITEM 8.FINANCIAL INFORMATIONA.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. Litigationor any other legal or administrative proceeding, regardless of the outcome, is likely to result in substantial cost and diversion of our resources, including ourmanagement’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 District Courtfor 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. et al., Civil136Table of Contents Action No. 1:17-cv-09903-RA (S.D.N.Y.) (collectively, the “Federal Actions”). The Federal Actions — purportedly brought on behalf of a class of personswho allegedly suffered damages as a result of their purchase of our ADSs pursuant and/or traceable to our IPO — allege violations of Sections 11 and 15 ofthe 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, MasterFile No. 1:17-cv-09741-RA (S.D.N.Y.) and appointing lead plaintiffs and lead counsel for the consolidated case. On May 18, 2018, Plaintiffs filed aConsolidated Amended Complaint, and, on July 27, 2018, Plaintiffs filed a Second Amended Complaint. On October 12, 2018, we filed a motion to dismissthe Second Amended Complaint for failure to state a claim under the federal securities laws. On December 7, 2018, Plaintiffs filed an opposition to themotion to dismiss, along with a motion to strike certain material in the motion to dismiss, and, on January 11, 2019, we filed a reply in support of the motionto dismiss and an opposition to the motion to strike. A hearing date on the pending motions has not yet been set.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., SanMateo Cty.), a putative securities class action filed in the Superior Court of California, County of San Mateo (the “California Action”). The California Action— purportedly brought on behalf of a class of persons who allegedly suffered damages as a result of their purchase of our ADSs pursuant and/or traceable toour IPO — alleges violations of Sections 11, 12(a)(2), and 15 of the United States Securities Act of 1933 in connection with our disclosure of business andregulatory risks. On May 15, 2018, we filed a motion to stay the action in light of, inter alia, the Federal Actions. Plaintiff filed an opposition to the motion tostay on June 8, 2018, and we filed a reply on June 22, 2018. A hearing on the motion to stay was held on September 14, 2018. On December 21, 2018, thecourt granted our motion to stay.We and certain of our directors and officers were also named as defendants in two putative securities class actions filed in New York Supreme Court,Panther Partners Inc. v. Qudian Inc., Index No. 651804/2018 (N.Y. Sup. Ct., N.Y. Cty.), and The Morrow Property Trust v. Qudian Inc., Index No.653047/2018 (N.Y. Sup. Ct., N.Y. Cty.) (collectively, the “New York State Actions”). The New York State Actions — purportedly brought on behalf of a classof persons who allegedly suffered damages as a result of their purchase of our ADSs pursuant and/or traceable to our IPO — similarly allege violations ofSections 11, 12(a)(2), and 15 of the United States Securities Act of 1933 in connection with our disclosure of business and regulatory risks. On August 15,2018, the two putative securities class actions were consolidated by joint stipulation under the master caption In re Qudian Inc. Securities Litigation, IndexNo. 651804/2018 (N.Y. Sup. Ct., N.Y. Cty.). On June 1, 2018, we filed a motion to dismiss the actions for failure to state a claim or, alternatively, to stay theactions in light of the Federal Actions. On August 24, 2018, Plaintiffs filed an opposition to our motion to dismiss or stay, and we filed a reply on October 5,2018. A hearing was held on November 8, 2018. On November 14, 2018, the court granted our motion to stay.For risks and uncertainties relating to the pending cases against us, please see “Item 3. Key Information — D. Risk Factors — Risks Related to OurADSs — We have been named as a defendant in seven putative shareholder class action lawsuits that could have a material adverse impact on our business,financial condition, results of operation, cash flows and reputation.”Dividend 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 and expandour 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 factors that theboard 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 A ordinary shares,subject to the terms of the deposit agreement, including the fees and expenses payable thereunder. Cash dividends on our Class A ordinary shares, if any, willbe paid in U.S. dollars.137Table of Contents We are an exempted company incorporated in the Cayman Islands. In order for us to distribute any dividends to our shareholders and ADS holders,we may rely on dividends distributed by our PRC subsidiaries. Certain payments from our PRC subsidiaries to us may be subject to PRC withholding incometax. In addition, regulations in the PRC currently permit payment of dividends of a PRC company only out of accumulated distributable after-tax profits asdetermined in accordance with its articles of association and the accounting standards and regulations in China. Each of our PRC subsidiaries is required toset aside at least 10% of its after-tax profit based on PRC accounting standards every year to a statutory common reserve fund until the aggregate amount ofsuch reserve fund reaches 50% of the registered capital of such subsidiary. Such statutory reserves are not distributable 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 annual report.ITEM 9.THE OFFER AND LISTINGA.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 under thesymbol “QD.”B.Plan of DistributionNot Applicable.C.MarketsSee “— A. Offering and Listing Details.”D.Selling ShareholdersNot Applicable.E.DilutionNot Applicable.F.Expenses of the IssueNot Applicable.ITEM 10.ADDITIONAL INFORMATIONA.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 in ourF-1 registration statement (File No. 333-220511), as amended, initially filed with the Securities and Exchange Commission on September 18, 2017. Ourshareholders adopted our second amended and restated memorandum and articles of association by unanimous resolutions passed on May 3, 2017, andeffective immediately prior to the completion of our initial public offering of common shares represented by our ADSs.138Table of Contents 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. Informationon 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 tax consequencesrelevant 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 toany particular prospective purchaser. The discussion is based on laws and relevant interpretations thereof in effect as of the date of this annual report, all ofwhich are subject to change or different interpretations, possibly with retroactive effect. The discussion does not address U.S. state or local tax laws, or taxlaws of jurisdictions other than the Cayman Islands, the People’s Republic of China and the United States. You should consult your own tax advisors withrespect to the consequences of acquisition, ownership and disposition of our ADSs and Class A ordinary shares.Cayman 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 areno other taxes likely to be material to us levied by the Government of the Cayman Islands except for stamp duties which may be applicable on instrumentsexecuted in, or after execution brought within the jurisdiction of the Cayman Islands. No stamp duty is payable in the Cayman Islands on transfers of sharesof Cayman Islands companies except those which hold interests in land in the Cayman Islands. The Cayman Islands is a party to a double tax treaty enteredwith the United Kingdom in 2010 but is otherwise not party to any double tax treaties. There are no exchange control regulations or currency restrictions inthe Cayman Islands.Pursuant to Section 6 of the Tax Concessions Law (2011 Revision) of the Cayman Islands, we have obtained an undertaking from the Governor-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 appreciations 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 or by way of the withholding in whole or in part of any relevant payment as defined in Section 6(3) of the Tax Concessions Law(2011 Revision).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. TheEnterprise Income Tax Law provides that enterprises organized under the laws of jurisdictions outside China with their “de facto management bodies”located within China may be considered PRC resident enterprises and therefore subject to PRC enterprise income tax at the rate of 25% on their worldwideincome. The Implementing Rules of the Enterprise Income Tax Law further defines the term “de facto management body” as the management body thatexercises substantial and overall management and control over the business, personnel, accounts and properties of an enterprise. While we do not currentlyconsider our company or any of our overseas subsidiaries to be a PRC resident enterprise, there is a risk that the PRC tax authorities may deem our companyor any of our overseas subsidiaries as a PRC resident enterprise since a substantial majority of the members of our management team as well as themanagement team of some of our overseas subsidiaries are139Table of Contents located in China, in which case we or the overseas subsidiaries, as the case may be, would be subject to the PRC enterprise income tax at the rate of 25% onworldwide income. If the PRC tax authorities determine that our Cayman Islands holding company is a “resident enterprise” for PRC enterprise income taxpurposes, a number of unfavorable PRC tax consequences could follow. One example is a 10% withholding tax would be imposed on dividends we pay toour non-PRC enterprise shareholders and with respect to gains derived by our non-PRC enterprise shareholders from transferring our shares or ADSs. It isunclear whether, if we are considered a PRC resident enterprise, holders of our shares or ADSs would be able to claim the benefit of income tax treaties oragreements entered into between 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 and theprevention of tax evasion with respect to taxes on income, or the Sino-US Treaty. The Sino-US Treaty provides that, among others, subject to certainconditions and limitations, dividends paid by a company which is a resident enterprise of one Contracting State, to a resident (an individual citizen or aresident enterprise) of the other Contracting State, or interest arising in one Contracting State and paid to a resident of the other Contracting State, may betaxed in that other Contracting State, such dividend or interest may also be taxed in the Contracting State where the company paying the dividends is aresident, or the interest arises, according to the laws of such Contracting State, but if the recipient of dividend or interest is the beneficial owner of thedividend or interest, the tax so charged shall not exceed 10% of the gross amount of the dividend or the interest. The Sino-US Treaty also provides severalmethods for the elimination of double taxation: (1) in China, (a) where a resident of China derives income from the United States, the amount of the UnitedStates income tax payable in respect of that income in accordance with the provisions of the Sino-US Treaty shall be allowed as a credit against the Chinesetax imposed on that resident. The amount of credit, however, shall not exceed the amount of the Chinese tax computed with respect to that income inaccordance with the taxation laws and regulations of China; (b) where the income derived from the United States is a dividend paid by a company which is aresident of the United States to a company which is a resident of China 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 income tax payable by the company paying the dividend in respect of the profits out of which thedividends are paid; (2) in the United States, in accordance with the provisions of the law of the United States, the United States shall allow to a resident orcitizen of the United States as a credit against the United 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 company owning at least 10% of the voting rights in a company which is a resident of China and from which the UnitedStates company receives dividends, the income tax paid to China by or on behalf of the distributing company with respect to the profits out of which thedividends are paid; and (3) income derived by a resident of a Contracting State which may be taxed in the other Contracting State in accordance with theSino-US Treaty shall be deemed to 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 our ADSsand 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 assets by a UnitedStates 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 the lawsof 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.140Table of Contents 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 us andassumes 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 are subject tospecial treatment under the United States federal income tax laws, including if you are: •a dealer in securities or currencies; •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, thetax 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 a partnership holdingour 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 you areconsidering the purchase of our ADSs or Class A ordinary shares, you should consult your own tax advisors concerning the particular United Statesfederal income tax consequences to you of the purchase, ownership and disposition of our ADSs or Class A ordinary shares, as well as the consequencesto 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 ordinary sharesthat are represented by such ADSs. Accordingly, deposits or withdrawals of Class A ordinary shares for ADSs will not be subject to United States federalincome tax.141Table of Contents Taxation of DividendsSubject to the discussion under “— Passive Foreign Investment Company” below, the gross amount of distributions on the ADSs or Class A ordinaryshares (including any amounts withheld to reflect potential PRC withholding taxes, as discussed above under “— People’s Republic of China Taxation”) willbe taxable as dividends to the extent paid out of our current or accumulated earnings and profits, as determined under United States federal income taxprinciples. To the extent that the amount of any distribution exceeds our current and accumulated earnings and profits for a taxable year, the distribution willfirst be treated as a tax-free return of capital, causing a reduction in the tax basis of the ADSs or Class A ordinary shares, and to the extent the amount of thedistribution exceeds your tax basis, the excess will be taxed as capital gain recognized on a sale or exchange. We do not, however, expect to determineearnings and profits in accordance with United States federal income tax principles. Therefore, you should expect that a distribution will generally be treatedas a dividend.Any 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 for thedividends 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 reduced ratesof taxation. A foreign corporation generally is treated as a qualified foreign corporation with respect to dividends received from that corporation on shares (orADSs backed by such shares) that are readily tradable on an established securities market in the United States. United States Treasury Department guidanceindicates that our ADSs (which are listed on the NYSE) are readily tradable on an established securities market in the United States. Since we do not expectthat our Class A ordinary shares will be listed on an established securities market in the United States, we do not believe that dividends that we pay on ourcommon shares that are not represented by ADSs currently meet the conditions required for these reduced tax rates. There can be no assurance, however, thatour ADSs will be considered readily tradable on an established securities market in later years. A qualified foreign corporation also generally includes aforeign corporation that is eligible for the benefits of certain income tax treaties with the United States. In the event that we are deemed to be a PRC residententerprise under the Enterprise Income Tax Law, we may be eligible for the benefits of the income tax treaty between the United States and PRC, or theTreaty, 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 China Taxation.” Non-corporate holders that do not meet a minimumholding period requirement during which they are not protected from the risk of loss or that 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 of taxation regardless of our status as a qualified foreign corporation. Inaddition, the rate reduction will not apply to dividends if the recipient of a dividend is obligated to make related payments with respect to positions insubstantially similar or related property. This disallowance applies even if the minimum holding period has been met. You should consult your own taxadvisors regarding the application of these rules given your particular circumstances.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 preceding taxableyear. As discussed below under “— Passive Foreign Investment Company,” we believe that there is a significant risk that we will be classified as a PFIC for2018, 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 may betreated as foreign taxes eligible for credit against your United States federal income tax liability. For purposes of calculating the foreign tax credit, dividendspaid on the ADSs or Class A ordinary shares will be treated as income from sources outside the United States and will generally constitute passive categoryincome. The rules governing the foreign tax credit are complex. You are urged to consult your tax advisors regarding the availability of the foreign tax creditunder your particular circumstances.142Table of Contents 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.For 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 purposes ofdetermining whether we are a PFIC, we will be treated as owning our proportionate share of the other corporation’s assets and receiving our proportionateshare of the other corporation’s income. However, there is uncertainty as to the treatment of our corporate structure and ownership of our consolidated VIEsfor United States federal income tax purposes. For United States federal income tax purposes, we consider ourselves to own the stock of our consolidatedVIEs. If it is determined, contrary to our view, that we do not own the stock of our consolidated VIEs for United States federal income tax purposes (forinstance, 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 the PFICrules. Given the foregoing and based on the past and projected composition and classification of our income and assets, we believe that there is a significantrisk that we will be classified as a PFIC for 2018, and we may be classified as a PFIC in future taxable years. However, there are uncertainties in theapplication of the PFIC rules to a company with our particular business operations, in particular related to the classification of our income as active orpassive. The determination of whether we are a PFIC is made annually. Accordingly, it is possible that our PFIC status may change due to changes in our assetor income composition. The calculation of the value of our assets will also be based, in part, on the quarterly market value of our ADSs, which is subject tochange. Therefore, a decrease in the price of our ADSs may also result in our becoming a PFIC. If we are a PFIC for any taxable year during which you holdour 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 sale orother disposition, including a pledge, of ADSs or Class A ordinary shares. Distributions received in a taxable year will be treated as excess distributions to theextent that they are greater than 125% of the average annual distributions received during the shorter of the three preceding taxable years or your holdingperiod 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.143Table of Contents 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 or Class Aordinary shares, you will generally be subject to the special tax rules described above for that year and for each subsequent year in which you hold the ADSsor 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 can avoid the continuingimpact of the PFIC rules by making a special election to recognize gain as if your ADSs or Class A ordinary shares had been sold on the last day of the lasttaxable year during which we were a PFIC. You are urged to consult your own tax advisor about this election.In 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 meaning of theapplicable Treasury regulations). Under current law, the mark-to-market election may be available to holders of ADSs since the ADSs are listed on the NYSEwhich constitutes a qualified exchange, although there can be no assurance that the ADSs will be “regularly traded” for purposes of the mark-to-marketelection. 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 youare a holder of Class A ordinary shares that are not represented by ADSs, you generally will not be eligible to make a mark-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 the fairmarket 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 each such yearthe 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 amount previouslyincluded 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 any income inclusionand decreased by the amount of any deductions under the mark-to-market rules. In addition, upon the sale or other disposition of your ADSs in a year that weare a PFIC, any gain will be treated as ordinary income and any loss will be treated as ordinary loss, but only to the extent of the net amount of previouslyincluded 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 years unlessthe ADSs are no longer regularly traded on a qualified exchange or other market, or the Internal Revenue Service consents to the revocation of the election.You are urged to consult your tax advisor about the availability of the mark-to-market election, and whether making the election would be advisable in yourparticular circumstances.Alternatively, you can sometimes avoid the special tax rules described above by electing to treat a PFIC as a “qualified electing fund” under Section1295 of the Code. However, this option is not available to you because we do not intend to comply with the requirements necessary to permit you to makethis 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 is alsoa 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 the PFIC 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 which weare classified as a PFIC. You are urged to consult your tax advisors concerning the United States federal income tax consequences of holding ADSs or Class Aordinary 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 ordinary sharesin 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 or Class A ordinaryshares. Subject to the discussion under “— Passive Foreign Investment Company” above, such gain or loss will generally be capital gain or loss and willgenerally be long-term capital gain or loss if you have held the ADSs or Class A ordinary shares for144Table of Contents more than one year. Long-term capital gains of non-corporate United States Holders (including individuals) are eligible for reduced rates of taxation. Thedeductibility of capital losses 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 are treated as a PRC resident enterprise for PRC tax purposes and PRC tax were imposed on any gain, and if you are eligible for the benefits ofthe Treaty, you may elect to treat such gain as PRC source gain under the Treaty. If you are not eligible for the benefits of the Treaty or if you fail to make theelection to treat any gain as PRC source, then you generally would not be able to use the foreign tax credit arising from any PRC tax imposed on thedisposition of ADSs or Class A ordinary shares unless such credit can be applied (subject to applicable limitations) against tax due on other income derivedfrom 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, exchangeor other disposition of our ADSs or Class A ordinary shares that are paid to you within the United States (and in certain cases, outside the United States),unless you are an exempt recipient. A backup withholding tax may apply to such payments if you fail to provide a taxpayer identification number orcertification 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 a creditagainst 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 to anotherdocument 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 can requestcopies of this annual report, including the exhibits incorporated by reference in this annual report, upon payment of a duplicating fee, by writing informationon 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.Additionally, we will post this annual report on Form 20-F on our website at http://ir.qudian.com.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 contained inSection 16 of the Exchange Act.Our financial statements have been prepared in accordance with U.S. GAAP.145Table of Contents We will furnish our shareholders with annual reports, which will include a review of operations and annual audited consolidated financial statementsprepared in conformity with U.S. GAAP.I.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, QD TechnologiesLimited 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 the functional currency are translated intothe functional currency at the rates of exchange ruling at the balance sheet date. Transactions in currencies other than the functional currency during the yearare converted into functional currency at the applicable rates of exchange prevailing when the transactions occurred. Transaction gains and losses arerecognized in the statements of operations. Due to foreign currency translation adjustments, we had a foreign exchange loss, net, of RMB90.8 million(US$13.2 million) in 2018.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 ADSs will beaffected by the exchange rate between U.S. dollar and RMB because the value of our business is effectively denominated in Renminbi, while our ADSs willbe 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 exchange ratebetween the Renminbi and the U.S. dollar had been stable and traded within a narrow band. In June 2010, the PRC government indicated that it would makethe foreign exchange rate of the Renminbi more flexible, which increases the possibility of sharp fluctuations of the Renminbi’s value in the near future andthe unpredictability associated with the Renminbi’s exchange rate. Since then, the Renminbi has fluctuated against the U.S. dollar, at times significantly andunpredictably. 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 a freelyusable 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 thefourth quarter of 2016, the Renminbi has depreciated significantly in the backdrop of a surging U.S. dollar and persistent capital outflows of China. In 2017,however, the RMB appreciated approximately 6.7% against the U.S. dollar; and in 2018, the RMB depreciated approximately 5.7% against the U.S. dollar.With the development of the foreign exchange market and progress towards interest rate liberalization and Renminbi internationalization, the PRCgovernment may in the future announce further changes to the exchange rate system, and we cannot assure you that the Renminbi will not appreciate ordepreciate significantly in value against the U.S. dollar in the future. It is difficult to predict how market forces or PRC or U.S. government policy may impactthe 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 would havean adverse effect on the Renminbi amount we receive from the conversion. Conversely, if we decide to convert Renminbi into U.S. dollars for the purpose ofmaking payments for dividends on our ordinary shares or ADSs or for other business purposes, appreciation of the U.S. dollar against the Renminbi wouldhave a negative effect on the U.S. dollar amounts available to us.146Table of Contents 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 market interest ratein the future.After the completion of this annual report, we may invest the net proceeds we receive from the offering in interest-earning instruments. Investments inboth fixed rate and floating rate interest earning instruments carry a degree of interest rate risk. Fixed rate securities may have their fair market valueadversely 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, theyear-over-year percent changes in the consumer price index for December 2016, December 2017 and December 2018 were increases of 1.9%, 1.8% and 1.9%,respectively. Although we have not been materially affected by inflation in the past, we may be affected if China experiences higher rates of inflation in thefuture.ITEM 12.DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIESA.Debt SecuritiesNot ApplicableB.Warrants and RightsNot ApplicableC.Other SecuritiesNot Applicable147Table of Contents 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 and certaintaxes and governmental charges (in addition to any applicable fees, expenses, taxes and other governmental charges payable on the deposited securitiesrepresented by any of ADSs): Service Fees• To any person to which ADSs are issued or to any person to which a distribution ismade in respect of ADS distributions pursuant to stock dividends or other freedistributions of stock, bonus distributions, stock splits or other distributions (exceptwhere 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 proceedsfrom the sale of rights, 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• 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 the applicable recorddate(s) established by the depositary Depositary ChargesAn ADS holder will also be responsible to pay certain fees and expenses incurred by the depositary and certain taxes and governmental charges (inaddition 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 applicable toordinary 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 their clients)receiving the newly issued ADSs from the depositary and by the brokers (on behalf of their clients) delivering the ADSs to the depositary for cancelation. Thebrokers in turn charge these fees to their clients. Depositary fees payable in connection with distributions of cash or securities to ADS holders and thedepositary services fee are charged by the depositary to the holders of record of ADSs as of the applicable ADS record date.148Table of Contents 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 ADS recorddate holders concurrent with the distribution. In the case of ADSs registered in the name of the investor (whether certificated or uncertificated in directregistration), the depositary sends invoices to the applicable record date ADS holders. In the case of ADSs held in brokerage and custodian accounts (viaDTC), the depositary generally collects its fees through the systems provided by DTC (whose nominee is the registered holder of the ADSs held in DTC) fromthe brokers and custodians holding ADSs in their DTC accounts. The brokers and custodians who hold their clients’ ADSs in DTC accounts in turn chargetheir 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 program uponsuch terms and conditions as we and the depositary may agree from time to time.Payments by DepositaryAs of March 31, 2019, excluding withholding tax, we received US$0.86 million cash payment from Deutsche Bank Trust Company Americas, thedepositary bank for our ADR program.149Table of Contents 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 to ourinitial public offering, which was declared effective by the SEC on October 17, 2017. In October 2017, we completed our initial public offering in which weissued and sold an aggregate of 35,625,000 ADSs, representing 35,625,000 Class A ordinary shares, resulting in net proceeds to us of approximatelyUS$799.6 million.As of December 31, 2018, we had used a portion of the net proceeds received from our initial public offering, which consisted of US$300.0 millionfor capital contribution to fund our Dabai Auto business and US$273.6 million to repurchase our outstanding ADSs, including commission paid to brokers.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 reports filedunder the Exchange Act is recorded, processed, summarized and reported within the specified time periods and accumulated and communicated to ourmanagement, including our principal executive officer and principal accounting officer, as appropriate, to allow timely decisions regarding requireddisclosure.Our management, under the supervision and with the participation of our principal executive officer and our principal accounting officer, evaluatedthe 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 December31, 2018. Based on that evaluation, our principal executive officer and principal accounting officer have concluded that our disclosure controls andprocedures are effective in ensuring that material information required to be disclosed in this annual report is recorded, processed, summarized and reportedto them for assessment, and required disclosure is made within the time period specified in the rules and forms of the Commission.Management’s Annual Report on Internal Control over Financial Reporting.As of the end of the period covered by this annual report, our management, with the participation of our chief executive officer and chief financialofficer, has performed an evaluation of the effectiveness of our disclosure controls and procedures within the meaning of Rules 13a-15 (e) and 15d-15(e) ofthe Exchange Act. Based upon this evaluation, our management has concluded that, as of the end of the period covered by this annual report, our existingdisclosure controls and procedures were effective to provide reasonable assurance that the information required to be disclosed by us in the reports that wefile and furnish under the Exchange Act was recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms,and that the information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to ourmanagement, including our chief executive officer and chief financial officer, to allow timely decisions regarding required disclosure.150Table of Contents Internal Control Over Financial Reporting.Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rules 13a15(f)under the Exchange Act). Our internal control system was designed to provide reasonable assurance regarding the reliability of financial reporting and thepreparation and fair presentation of its published consolidated financial statements. All internal control systems, no matter how well designed, have inherentlimitations. Therefore, even those systems determined to be effective may not prevent or detect misstatements and can provide only reasonable assurancewith respect to financial statement preparation and presentation. Also, projections of any evaluation of effectiveness to future periods are subject to the riskthat controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Asrequired by Section 404 of the Sarbanes-Oxley Act of 2002 and related rules promulgated by the Securities and Exchange Commission, our managementconducted an assessment of the effectiveness of our internal control over financial reporting as of December 31, 2018. In making this assessment, it used thecriteria established within the Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the TreadwayCommission (COSO). Based on this assessment, our management has concluded that, as of December 31, 2018, our internal control over financial reportingwas effective. Our independent registered public accounting firm, Ernst & Young Hua Ming LLP has audited the effectiveness of our internal control overfinancial reporting as of December 31, 2018, as stated in its report, which appears on page F-4 of this annual report on Form 20-F.Changes in Internal Control over Financial ReportingThere were no changes in our internal controls over financial reporting that occurred during the period covered by this annual report on Form 20-Fthat 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 in Item16A 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 business conductand ethics as an exhibit to our registration statement on Form F-1(File No. 333-220511), as amended, initially filed with the SEC on September 18, 2017. Wehereby undertake to provide to any person without charge, a copy of our code of business conduct and ethics within ten working days after we receive suchperson’s written request.ITEM 16C.PRINCIPAL ACCOUNTANT FEES AND SERVICESThe following table sets forth the aggregate fees by categories specified below in connection with certain professional services rendered by Ernst &Young Hua Ming LLP, our independent public accountant for the periods indicated. We did not pay any other fees to our auditors during the periodsindicated below. For the Year EndedDecember 31, 2017 2018 (In thousands of RMB) Audit Fees(1) 10,472 13,000 Tax Fees(2) 520 550 Total 10,992 13,550 (1)Audit fees include the aggregate fees billed in each of the fiscal period listed for professional services rendered by our independent public accountantfor the audit of our annual financial statements, review of our quarterly financial statements and services related to our initial public offering.151Table of Contents (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 LLP for2018 and 2017 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, 2019: Period Total Number ofADSs Purchased Average PricePaid per ADS(1) Total Number ofADSs Purchasedas Part of PubliclyAnnounced Plansor Programs(2) ApproximateDollar Value ofADSs that MayYet Be PurchasedUnder the Program(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$236.5 million January 2018 — — — — February 2018 — — — — March 2018 — — — — April 2018 — — — — May 2018 — — — — June 2018 8,958,483 US$ 9.58 8,958,483 US$150.7 million July 2018 — — — — August 2018 85,000 US$ 6.00 85,000 US$150.2 million September 2018 9,781,767 US$ 5.27 9,781,767 US$98.6 million October 2018 8,358,409 US$ 4.68 8,358,409 US$59.5 million November 2018 1,702,700 US$ 5.12 1,702,700 US$50.8 million December 2018 4,351,400 US$ 5.34 4,351,400 US$327.6 million January 2019 — — — — February 2019 — — — — March 2019 — — — — Total 37,774,874 US$ 7.21 37,774,874 US$327.6 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 months. We further announced a share repurchase program in December 2018, underwhich we may repurchase up to US$300 million worth of our outstanding ADSs over a period of twelve months, in addition to any furtherrepurchases that may be made under the program announced in November 2017. 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 willbe, effected in compliance with Rule 10b5-1 under the Securities Exchange Act of 1934, as amended, and our insider trading policy. The number ofADSs repurchased and the timing of repurchases will depend on a number of factors, including, but not limited to, price, trading volume and generalmarket conditions.152Table of Contents On April 12, 2019, we entered into a share purchase agreement with one of our shareholders, Kunlun Group Limited, or Kunlun. Pursuant to thisagreement, we will purchase all 18,173,885 of our Class A ordinary shares currently held by Kunlun at a price of US$5.678 per share, or an aggregateconsideration of US$103.2 million.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 ordinary share,are listed on the New York Stock Exchange. Under Section 303A of the New York Stock Exchange Listed Company Manual, New York Stock Exchangelisted companies that are foreign private issuers are permitted to follow home country practice in lieu of the corporate governance provisions specified by theNew York Stock Exchange with limited exceptions.Under the New York Stock Exchange Listed Company Manual, or the NYSE Manual, U.S. domestic listed companies are required to have acompensation committee and a nominating/corporate governance committee, each composed entirely of independent directors, which are not required underthe Companies Law (2018 Revision) of the Cayman Islands, our home country. Currently, our nominating and corporate governance committee is composedof three members, only two of whom are independent directors. The NYSE Manual also requires U.S. domestic listed companies to regularly hold executivesessions for non-management directors, or an executive session that only includes independent directors at least once a year. We are not subject to thisrequirement under the Cayman Islands law and have decided to follow our home country practice on this matter. In addition, the NYSE Manual requiresshareholder approval for certain matters, such as requiring that shareholders must be given the opportunity to vote on all equity compensation plans andmaterial revisions to those plans, which is not required under the Cayman Islands law. We intend to follow the home country practice in determining whethershareholder approval is required.ITEM 16H.MINE SAFETY DISCLOSURENot Applicable.153Table of Contents PART 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 to Exhibit 3.3 tothe registration statement on Form F-1 (File No. 333-220511), as amended, initially filed with the Securities and Exchange Commission onSeptember 18, 2017)2.1 Form of American Depositary Receipt evidencing American Depositary Shares (incorporated herein by reference to Exhibit (a) to theregistration statement on Form F-6 (File No. 333-220779) filed with the Securities and Exchange Commission on October 3, 2017 withrespect 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 (incorporated herein byreference to Exhibit (a) to the registration statement on Form F-6 (File No. 333-220779) filed with the Securities and Exchange Commissionon 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 by reference toExhibit 10.1 to the registration statement on Form F-1 (File No. 333-220511), as amended, initially filed with the Securities and ExchangeCommission on September 18, 2017)4.2 Form of Employment Agreement between the Registrant and its executive officers (incorporated herein by reference to Exhibit 10.2 to theregistration statement on Form F-1 (File No. 333-220511), as amended, initially filed with the Securities and Exchange Commission onSeptember 18, 2017)4.3 Qudian Inc. 2016 Equity Incentive Plan (incorporated herein by reference to Exhibit 10.3 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)4.4 Amendment No. 1 to Qudian Inc. 2016 Equity Incentive Plan (incorporated herein by reference to Exhibit 10.4 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)4.5 Amendment No. 2 to Qudian Inc. 2016 Equity Incentive Plan (incorporated herein by reference to Exhibit 10.5 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)154Table of Contents 4.6 English Translation of Equity Interest Pledge Agreement concerning Beijing Happy Time, among Ganzhou Qufenqi, Mr. Min Luo, TianjinHappy Share, Shanghai Yunxin Venture Capital Co., Ltd., Phoenix Auspicious Internet Investment L.P., Tianjin Blue Run Xinhe InvestmentCenter L.P., Jiaxing Blue Run Quchuan Investment L.P., Ningbo Yuanfeng Venture Capital L.P., Shenzhen Guosheng Qianhai InvestmentCo., Ltd., Beijing Kunlun Tech Co., Ltd. and Beijing Happy Time, dated December 9, 2016 (incorporated herein by reference to Exhibit 10.6to the registration statement on Form F-1 (File No. 333-220511), as amended, initially filed with the Securities and Exchange Commission onSeptember 18, 2017)4.7 English translation of Power of Attorney Agreement concerning Beijing Happy Time, between Ganzhou Qufenqi and Tianjin Happy Share,dated December 9, 2016 (incorporated herein by reference to Exhibit 10.7 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)4.8 English translation of Power of Attorney Agreement concerning Beijing Happy Time, between Ganzhou Qufenqi and Shanghai YunxinVenture Capital Co., Ltd., dated December 9, 2016 (incorporated herein by reference to Exhibit 10.8 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)4.9 English translation of Power of Attorney Agreement concerning Beijing Happy Time, between Ganzhou Qufenqi and Phoenix AuspiciousInternet Investment L.P., dated December 9, 2016 (incorporated herein by reference to Exhibit 10.9 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)4.10 English translation of Power of Attorney Agreement concerning Beijing Happy Time, between Ganzhou Qufenqi and Tianjin Blue RunXinhe Investment Center L.P., dated December 9, 2016 (incorporated herein by reference to Exhibit 10.10 to the registration statement onForm F-1 (File No. 333-220511), as amended, initially filed with the Securities and Exchange Commission on September 18, 2017)4.11 English translation of Power of Attorney Agreement concerning Beijing Happy Time, between Ganzhou Qufenqi and Jiaxing Blue RunQuchuan Investment L.P., dated December 9, 2016 (incorporated herein by reference to Exhibit 10.11 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)4.12 English translation of Power of Attorney Agreement concerning Beijing Happy Time, between Ganzhou Qufenqi and Ningbo YuanfengVenture Capital L.P., dated December 9, 2016 (incorporated herein by reference to Exhibit 10.12 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)4.13 English translation of Power of Attorney Agreement concerning Beijing Happy Time, between Ganzhou Qufenqi and Shenzhen GuoshengQianhai Investment Co., Ltd., dated December 9, 2016 (incorporated herein by reference to Exhibit 10.13 to the registration statement onForm F-1 (File No. 333-220511), as amended, initially filed with the Securities and Exchange Commission on September 18, 2017)4.14 English translation of Power of Attorney Agreement concerning Beijing Happy Time, between Ganzhou Qufenqi and Beijing Kunlun TechCo., Ltd., dated December 9, 2016 (incorporated herein by reference to Exhibit 10.14 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)4.15 English translation of Power of Attorney Agreement concerning Beijing Happy Time, between Ganzhou Qufenqi and Mr. Min Luo, datedDecember 9, 2016 (incorporated herein by reference to Exhibit 10.15 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)4.16 English translation of Exclusive Business Cooperation Agreement among Ganzhou Qufenqi, Beijing Happy Time, Ganzhou Network,Ganzhou Happy Fenqi and Fuzhou Happy Time Technology Co., Ltd., dated December 9, 2016 (incorporated herein by reference to Exhibit10.16 to the registration statement on Form F-1 (File No. 333-220511), as amended, initially filed with the Securities and ExchangeCommission on September 18, 2017)155Table of Contents 4.17 English translation of Exclusive Call Option Agreement concerning Beijing Happy Time, among Ganzhou Qufenqi, Mr. Min Luo, TianjinHappy Share, Shanghai Yunxin Venture Capital Co., Ltd., Phoenix Auspicious Internet Investment L.P., Tianjin Blue Run Xinhe InvestmentCenter L.P., Jiaxing Blue Run Quchuan Investment L.P., Ningbo Yuanfeng Venture Capital L.P., Shenzhen Guosheng Qianhai InvestmentCo., Ltd., Beijing Kunlun Tech Co., Ltd. and Beijing Happy Time, dated December 9, 2016 (incorporated herein by reference to Exhibit10.17 to the registration statement on Form F-1 (File No. 333-220511), as amended, initially filed with the Securities and ExchangeCommission on September 18, 2017)4.18 Financial Support Undertaking Letter issued by the Registrant to Beijing Happy Time, dated February 15, 2017 (incorporated herein byreference to Exhibit 10.18 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)4.19 English translation of Equity Interest Pledge Agreement concerning Ganzhou Qudian, among Ganzhou Qufenqi, Mr. Min Luo, Mr. LianzhuLv and Ganzhou Qudian, dated May 1, 2017 (incorporated herein by reference to Exhibit 10.19 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)4.20 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 (File No. 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, datedMay 1, 2017 (incorporated herein by reference to Exhibit 10.21 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)4.22 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), as amended, initiallyfiled 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. LianzhuLv and Ganzhou Qudian, dated May 1, 2017 (incorporated herein by reference to Exhibit 10.23 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)4.24 Financial Support Undertaking Letter issued by the Registrant to Ganzhou Qudian, dated May 1, 2017 (incorporated herein by reference toExhibit 10.24 to the registration statement on Form F-1 (File No. 333-220511), as amended, initially filed with the Securities and ExchangeCommission on September 18, 2017)4.25 English translation of Equity Interest Pledge Agreement concerning Hunan Qudian, among Ganzhou Qufenqi, Mr. Min Luo, Mr. Hongjia Heand Hunan Qudian, dated May 1, 2017 (incorporated herein by reference to Exhibit 10.25 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)4.26 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 (File No. 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 (File No. 333-220511), as amended,initially filed with the Securities and Exchange Commission on September 18, 2017)156Table of Contents 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), as amended, initiallyfiled 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 Heand Hunan Qudian, dated May 1, 2017 (incorporated herein by reference to Exhibit 10.29 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)4.30 Financial Support Undertaking Letter issued by the Registrant to Hunan Qudian, dated May 1, 2017 (incorporated herein by reference toExhibit 10.30 to the registration statement on Form F-1 (File No. 333-220511), as amended, initially filed with the Securities and ExchangeCommission on September 18, 2017)4.31 English translation of Online Personal Loan Cooperation Agreement between Ganzhou Microcredit and Chongqing Alibaba Small LoansCo., Ltd., dated March 27, 2017 (incorporated herein by reference to Exhibit 10.31 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)4.32 English translation of Amended and Restated Alipay APP Access Agreement among Beijing Happy Time, Ganzhou Microcredit, FuzhouMicrocredit, Ganzhou Network, Xinjiang Qudian Technology Co., Ltd., Xiamen Qudian and Alipay.com Co., Ltd., dated August 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), asamended, 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., dated June 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., datedFebruary 29, 2016 (incorporated herein by reference to Exhibit 10.34 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)4.35 English Translation to Supplement Agreement to Zhima Credit Service Agreement and other agreements among Beijing Happy Time, ZhimaCredit Management Co., Ltd. and Ganzhou Happy Fenqi, dated August 16, 2016 (incorporated herein by reference to Exhibit 10.35 toamendment No. 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)4.36 English translation of Zhima Credit Service Agreement between Ganzhou Microcredit and Zhima Credit Management Co., Ltd., dated March20, 2017 (incorporated herein by reference to Exhibit 10.36 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)4.37 Trust Deed Constituting Qudian Inc. Equity Incentive Trust, dated December 30, 2016, between Qudian Inc. and Ark Trust (Hong Kong)Limited (incorporated herein by reference to Exhibit 10.37 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)4.38 English translation of Equity Interest Pledge Agreement concerning Xiamen Qudian, among Ganzhou Qufenqi, Mr. Min Luo and XiamenQudian, 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 (File No. 333-220511), as amended,initially filed with the Securities and Exchange Commission on September 18, 2017)157Table of Contents 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), as amended, initiallyfiled 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 and XiamenQudian, 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 by reference toExhibit 10.42 to the registration statement on Form F-1 (File No. 333-220511), as amended, initially filed with the Securities and ExchangeCommission on September 18, 2017)4.43 Form of Alipay Merchant Service Agreement with Alipay.com Co., Ltd. relating to multiple payments service to Alipay accounts (“MultiplePayments Agreement”) (incorporated herein by reference to Exhibit 10.43 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)4.44 Form of Supplemental Agreement to Multiple Payments Agreement (incorporated herein by reference to Exhibit 10.44 to amendment No. 1to the registration statement on Form F-1 (File No. 333-220511), as amended, filed with the Securities and Exchange Commission onSeptember 25, 2017)4.45 Form of Alipay Merchant Service Agreement with Alipay.com Co., Ltd. relating to merchant withholding service (“Merchant WithholdingAgreement”) (incorporated herein by reference to Exhibit 10.45 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)4.46 Form of Supplemental Agreement to Merchant Withholding Agreement (incorporated herein by reference to Exhibit 10.46 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 onSeptember 25, 2017)4.47 Form of Alipay Merchant Service Agreement with Alipay.com Co., Ltd. relating to wireless shortcut package service (“Wireless ShortcutAgreement”) (incorporated herein by reference to Exhibit 10.47 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)4.48 Form of Supplemental Agreement to Wireless Shortcut Agreement (incorporated herein by reference to Exhibit 10.48 to amendment No. 1 tothe registration statement on Form F-1 (File No. 333-220511), as amended, filed with the Securities and Exchange Commission on September25, 2017)4.49 Form of Alipay Merchant Service Agreement with Alipay.com Co., Ltd. relating to entrusted payment and collection service (incorporatedherein by reference to Exhibit 10.49 to amendment No. 1 to the registration statement on Form F-1 (File No. 333-220511), as amended, filedwith 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 Bank Co., Ltd.,dated March 7, 2017 (incorporated herein by reference to Exhibit 10.50 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)4.51 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 (File No. 333-220511), asamended, filed with the Securities and Exchange Commission on September 25, 2017)8.1* List of Subsidiaries158Table of Contents 11.1 Code of Business Conduct and Ethics of the Registrant (incorporated herein by reference to Exhibit 99.1 to the registration statement onForm 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 Firm15.2* Consent of Independent Registered Public Accounting Firm101.INS* XBRL Instance Document101.SCH* XBRL Taxonomy Extension Schema Document101.CAL* XBRL Taxonomy Extension Calculation Linkbase Document101.DEF* XBRL Taxonomy Extension Definition Linkbase Document101.LAB* XBRL Taxonomy Extension Label Linkbase Document101.PRE* XBRL Taxonomy Extension Presentation Linkbase Document *Filed herewith**Furnished herewith159Table of Contents SIGNATURESThe 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 and authorizedthe undersigned to sign this annual report on its behalf. QUDIAN INC. By: /s/ Min LuoName: Min LuoTitle: Chairman and Chief Executive Officer Date: April 15, 2019 160Table of Contents Qudian Inc.Audited Consolidated Financial Statements31 December 2018 161Table of Contents QUDIAN INC.INDEX TO CONSOLIDATED FINANCIAL STATEMENTS PAGE(S)Report of Independent Registered Public Accounting Firm F-2 Consolidated Balance Sheets as of December 31, 2017 and 2018 F-6 Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2016, 2017 and 2018 F-11 Consolidated Statements of Shareholders’ Equity for the Years Ended December 31, 2016, 2017 and 2018 F-13 Consolidated Statements of Cash Flows for the Years Ended December 31, 2016, 2017 and 2018 F-14 Notes to the Consolidated Financial Statements F-16 F-1Table of Contents Report 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, 2018 and 2017, the related consolidatedstatements of comprehensive income, shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2018, and the relatednotes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all materialrespects, the financial position of the Company at December 31, 2018 and 2017, and the results of its operations and its cash flows for each of the three yearsin the period ended December 31, 2018, in conformity with U.S. generally accepted accounting principles.We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company'sinternal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control-Integrated Framework issued by theCommittee of Sponsoring Organizations of the Treadway Commission (2013 framework), and our report dated April 15, 2019 expressed an unqualifiedopinion thereon.Adoption of New Accounting StandardsAs discussed in Note 2 to the consolidated financial statements, the Company changed its method for recognizing revenue in 2018 and changed its cash andcash equivalents in the statements of cash flows in 2016, 2017 and 2018. F-2Table of Contents Report of Independent Registered Public Accounting Firm-continuedBasis for OpinionThese financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financialstatements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Companyin accordance with the U.S. federal securities laws and the applicable rules 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 obtain reasonableassurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing proceduresto assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks.Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also includedevaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financialstatements. We believe that our audits provide a reasonable basis for our opinion./s/ Ernst & Young Hua Ming LLPWe have served as the Company’s auditor since 2016.Shanghai, The People’s Republic of ChinaApril 15, 2019F-3Table of Contents Report of Independent Registered Public Accounting FirmTo the Shareholders and the Board of Directors of Qudian Inc.Opinion on Internal Control over Financial ReportingWe have audited Qudian Inc.’s internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework), (the COSO criteria). In ouropinion, Qudian Inc. (the “Company”) maintained, in all material respects, effective internal control over financial reporting as of December 31, 2018, basedon the COSO criteria.We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidatedbalance sheets of the Company as of December 31, 2018 and 2017, the related consolidated statements of comprehensive income, shareholders’ equity, andcash flows for each of the three years in the period ended December 31, 2018, and the related notes and our report dated April 15, 2019 expressed anunqualified opinion thereon.Basis for OpinionThe Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness ofinternal control over financial reporting included in the accompanying Management’s Annual Report on Internal Control over Financial Reporting. Ourresponsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firmregistered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and theapplicable rules and regulations of the Securities and Exchange Commission and the PCAOB.We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonableassurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing andevaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considerednecessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.F-4Table of Contents Report of Independent Registered Public Accounting Firm-continuedDefinition and Limitations of Internal Control Over Financial ReportingA company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reportingand the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal controlover financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairlyreflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permitpreparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are beingmade only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention ortimely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation ofeffectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliancewith the policies or procedures may deteriorate./s/ Ernst & Young Hua Ming LLPShanghai, The People’s Republic of ChinaApril 15, 2019 F-5Table of Contents QUDIAN INC.CONSOLIDATED BALANCE SHEETSAS OF DECEMBER 31, 2017 AND 2018(Amounts in Renminbi (“RMB”) and US dollar (“US$”), except for number of shares and per share data) As of December 31, Note 2017 2018 RMB RMB US$ ASSETS: Current assets: Cash and cash equivalents (including RMB 434,976,983 and RMB 5,896,700 (US$ 857,639) from consolidated trusts as of December 31, 2017 and 2018, respectively) 6,832,306,121 2,501,188,374 363,782,761 Restricted cash 3 2,252,645,588 339,826,542 49,425,721 Short-term investments 4 300,000,000 — — Short-term loan principal and financing service fee receivables (net of allowance of RMB 519,254,006 and RMB 569,834,399 (US$ 82,878,976) as of December 31, 2017 and 2018, respectively; including RMB 5,582,178,034 and RMB 2,945,308,734 (US$ 428,377,388) from consolidated trusts as of December 31, 2017 and 2018, respectively) 5 8,758,544,694 8,417,821,413 1,224,321,345 Short-term finance lease receivables (net of allowance of RMB nil and RMB 10,135,319 (US$ 1,474,121) as of December 31, 2017 and 2018, respectively; including unearned revenue of RMB 604,504 and RMB 31,533,522 (US$ 4,586,361) as of December 31, 2017 and 2018, respectively) 6 8,508,487 508,646,618 73,979,582 Short-term contract asset — 903,436,469 131,399,385 Short-term amounts due from related parties (including RMB 476,431,262 and RMB nil (US$ nil) from consolidated trusts as of December 31, 2017 and 2018, respectively) 17 551,214,823 2,071 301 Other current assets (net of allowance of RMB 11,822,819 and RMB 15,121,668 (US$ 2,199,355); including RMB 83,623,450 and RMB 49,594,689 (US$ 7,213,248) from consolidated trusts as of December 31, 2017 and 2018, respectively) 7 482,350,979 1,818,222,205 264,449,452 Total current assets 19,185,570,692 14,489,143,692 2,107,358,547 The accompanying notes are an integral part of these consolidated financial statements.F-6Table of Contents QUDIAN INC.CONSOLIDATED BALANCE SHEETS - continuedAS OF DECEMBER 31, 2017 AND 2018(Amounts in Renminbi (“RMB”) and US dollar (“US$”), except for number of shares and per share data) As of December 31, Note 2017 2018 RMB RMB US$ Non-current assets: Long-term loan principal and financing service fee receivables (net of allowance of RMB nil and RMB 15,500,802 (US$ 2,254,498) as of December 31, 2017 and 2018, respectively; including RMB nil and RMB 51,541,094 (US$ 7,496,341) from consolidated trusts as of December 31, 2017 and 2018, respectively) 5 — 665,652,830 96,815,189 Long-term finance lease receivables (net of allowance of RMB nil and RMB 18,630,094(US$ 2,709,635) as of December 31, 2017 and 2018, respectively; including unearned revenue of RMB 6,006,018 and RMB 163,062,580 (US$ 23,716,469) as of December 31, 2017 and 2018, respectively) 6 17,899,825 649,242,797 94,428,448 Investment in equity method investee 8 44,518,544 33,199,265 4,828,633 Property and equipment, net 4,613,368 26,224,170 3,814,147 Intangible assets 5,907,842 7,263,548 1,056,439 Land use right — 106,545,362 15,496,380 Long-term contract asset — 15,596,885 2,268,473 Deferred tax assets 14 115,460,611 243,412,814 35,402,925 Other non-current assets 6,444,671 17,093,439 2,486,138 Total non-current assets 194,844,861 1,764,231,110 256,596,772 TOTAL ASSETS 19,380,415,553 16,253,374,802 2,363,955,319 The accompanying notes are an integral part of these consolidated financial statements.F-7Table of Contents QUDIAN INC.CONSOLIDATED BALANCE SHEETS - continuedAS OF DECEMBER 31, 2017 AND 2018(Amounts in Renminbi (“RMB”) and US dollar (“US$”), except for number of shares and per share data) As of December 31, Note 2017 2018 RMB RMB US$ LIABILITIES AND SHAREHOLDERS’ EQUITY Current liabilities: Short-term borrowings and interest payables (including short-term borrowings of the consolidated VIEs without recourse to the Company of RMB 7,979,414,522 and RMB 2,896,543,571 (US$ 421,284,790) as of December 31, 2017 and 2018, respectively) 9 7,979,414,522 3,860,440,575 561,477,794 Accrued expenses and other current liabilities (including accrued expenses and other current liabilities of the consolidated VIEs without recourse to the Company of RMB 292,946,084 and RMB 347,034,010 (US$ 50,474,003) as of December 31, 2017 and 2018, respectively) 10 315,692,795 507,486,437 73,810,841 Short-term amounts due to related parties (including short-term amounts due to related parties of the consolidated VIEs without recourse to the Company of RMB 815,262,682 and RMB 1,362,740,153 (US$ 198,202,335) as of December 31, 2017 and 2018, respectively) 17 719,563,038 — — Guarantee liabilities (including guarantee liabilities of the consolidated VIEs without recourse to the Company of RMB 46,981,325 and RMB 197,387,970 (US$ 28,708,890) as of December 31, 2017 and 2018, respectively) 11 46,981,325 302,604,578 44,012,010 Income tax payable (including income tax payable of the consolidated VIEs without recourse to the Company of RMB 268,797,914 and RMB 241,992,558 (US$ 35,196,358) as of December 31, 2017 and 2018, respectively) 268,373,167 348,829,956 50,735,213 Total current liabilities 9,330,024,847 5,019,361,546 730,035,858 The accompanying notes are an integral part of these consolidated financial statements.F-8Table of Contents QUDIAN INC.CONSOLIDATED BALANCE SHEETS - continuedAS OF DECEMBER 31, 2017 AND 2018(Amounts in Renminbi (“RMB”) and US dollar (“US$”), except for number of shares and per share data) As of December 31, Note 2017 2018 RMB RMB US$ Non-current liabilities: Long-term borrowings and interest payables (including long-term borrowings of the consolidated VIEs without recourse to the Company RMB 510,023,905 and RMB 413,400,000 (US$ 60,126,536) as of December 31, 2017 and 2018, respectively) 9 510,023,905 413,400,000 60,126,536 Total non-current liabilities 510,023,905 413,400,000 60,126,536 Total liabilities 9,840,048,752 5,432,761,546 790,162,394 The accompanying notes are an integral part of these consolidated financial statements.F-9Table of Contents QUDIAN INC.CONSOLIDATED BALANCE SHEETS - continuedAS OF DECEMBER 31, 2017 AND 2018(Amounts in Renminbi (“RMB”) and US dollar (“US$”), except for number of shares and per share data) As of December 31, Note 2017 2018 RMB RMB US$ Commitments and contingencies 19 Shareholders’ equity: Class A Ordinary shares (US$0.0001 par value; 656,508,828 shares authorized, 266,884,398 shares issued and 262,347,283 shares outstanding, as of December 31, 2017; 656,508,828 shares authorized, 243,425,092 shares issued and 232,952,916 shares outstanding, as of December 31, 2018) 20 177,140 161,442 23,481 Class B Ordinary shares (US$0.0001 par value; 63,491,172 shares authorized, 63,491,172 shares issued and outstanding, as of December 31, 2017 and 2018) 20 43,836 43,836 6,376 Treasury shares 21 (421,164,802) (362,130,324) (52,669,671)Additional paid-in capital 7,571,703,230 6,160,445,929 895,999,699 Accumulated other comprehensive loss (77,947,461) (44,858,239) (6,524,361)Retained earnings 2,467,554,858 5,066,950,612 736,957,401 Total shareholders’ equity 9,540,366,801 10,820,613,256 1,573,792,925 TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY 19,380,415,553 16,253,374,802 2,363,955,319 The accompanying notes are an integral part of these consolidated financial statements. F-10Table of Contents QUDIAN INC.CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOMEFOR THE YEARS ENDED DECEMBER 31, 2016, 2017 AND 2018(Amounts in Renminbi (“RMB”) and US dollar (“US$”), except for number of shares and per share data) For the years ended December 31, Note 2016 2017 2018 RMB RMB RMB US$ Revenues: Financing income (including related party amounts of RMB 90,539, RMB 4,551 and RMB nil (US$ nil) for the years ended December 31, 2016, 2017 and 2018, respectively) 1,271,455,857 3,642,183,767 3,535,275,780 514,184,536 Sales commission fee 126,693,335 797,167,074 307,492,444 44,722,921 Sales income — 26,083,472 2,174,788,821 316,309,915 Penalty fees 22,943,166 7,922,387 28,012,630 4,074,268 Loan facilitation income and others 21,753,981 302,009,352 1,646,772,629 239,513,145 Total revenues 1,442,846,339 4,775,366,052 7,692,342,304 1,118,804,785 Cost of revenues: Cost of goods sold — (23,895,186) (2,003,642,524) (291,417,719)Cost of other revenues (including related party amounts of RMB 47,336,686, RMB 221,009,227 and RMB 147,610,831 (US$ 21,469,105) for the years ended December 31, 2016, 2017 and 2018, respectively) 12 (267,862,006) (856,950,671) (731,785,772) (106,433,827)Total cost of revenues (267,862,006) (880,845,857) (2,735,428,296) (397,851,546)Operating expenses: Sales and marketing (including related party amounts of RMB 36,149,807, RMB 238,114,969 and RMB 32,542,281 (US$ 4,733,078) for the years ended December 31, 2016, 2017 and 2018, respectively) (182,457,597) (431,749,549) (540,550,282) (78,619,778)General and administrative (108,786,166) (183,673,832) (255,867,298) (37,214,353)Research and development (52,275,077) (153,257,564) (199,560,164) (29,024,822)Loss on guarantee liabilities (860,989) (150,152,083) (116,592,666) (16,957,700)Provision for receivables (132,176,545) (605,163,716) (1,178,723,206) (171,438,180)Total operating expenses (476,556,374) (1,523,996,744) (2,291,293,616) (333,254,833)Other operating income 14,646,251 50,702,352 23,747,754 3,453,968 Income from operations 713,074,210 2,421,225,803 2,689,368,146 391,152,374 Interest and investment income, net 13 1,857,328 4,210,903 35,740,334 5,198,216 Foreign exchange loss, net (9,651,304) (7,176,838) (90,771,459) (13,202,161)Other income 47,186 2,107,933 15,231,215 2,215,288 Other expenses (1,834,352) (362,978) (521,505) (75,850) The accompanying notes are an integral part of these consolidated financial statements.F-11Table of Contents QUDIAN INC.CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME - continuedFOR THE YEARS ENDED DECEMBER 31, 2016, 2017 AND 2018(Amounts in Renminbi (“RMB”) and US dollar (“US$”), except for number of shares and per share data) For the years ended December 31, Note 2016 2017 2018 RMB RMB RMB US$ Net income before income taxes 703,493,068 2,420,004,823 2,649,046,731 385,287,867 Income tax expenses 14 (126,840,450) (255,546,003) (157,730,518) (22,940,952)Net income 576,652,618 2,164,458,820 2,491,316,213 362,346,915 Net income attributable to Qudian Inc.’s shareholders 576,652,618 2,164,458,820 2,491,316,213 362,346,915 Earnings per share for Class A and Class B ordinary shares: Basic 15 7.27 17.13 7.82 1.14 Diluted 15 1.90 7.09 7.74 1.13 Earnings per ADS (1 Class A ordinary share equals 1 ADSs): Basic 15 — 17.13 7.82 1.14 Diluted 15 — 7.09 7.74 1.13 Weighted average number of Class A and Class B ordinary shares outstanding: Basic 15 79,305,191 126,390,196 318,685,836 318,685,836 Diluted 15 303,778,745 305,221,444 321,955,142 321,955,142 Other comprehensive income/(loss) Foreign currency translation adjustment — (77,947,461) 33,089,222 4,812,628 Total comprehensive income 576,652,618 2,086,511,359 2,524,405,435 367,159,543 Total comprehensive income attributable to Qudian Inc.’s shareholders 576,652,618 2,086,511,359 2,524,405,435 367,159,543 The accompanying notes are an integral part of these consolidated financial statements. F-12Table of Contents QUDIAN INC.CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITYFOR THE YEARS ENDED DECEMBER 31, 2016, 2017 AND 2018(Amounts in Renminbi (“RMB”) and US dollar (“US$”), except for number of shares and per share data) Class A and B Accumulated Retained Ordinary shares Additional othercomprehensive earnings/ Total Number of Treasury paid-in loss/foreigncurrency (accumulated shareholders’ Shares Outstanding Amount shares capital translationadjustment deficit) equity RMB RMB RMB RMB RMB RMB Balance at December 31, 2015 79,305,191 — — 58,324,589 — (6,633,671,978) (6,575,347,389)Capital contribution by shareholders — — — 2,546,172,365 — — 2,546,172,365 Share-based compensation (Note 18) — — — 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 preferred shares toordinary 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)Vesting of share options held by Share Based Payment Trust 8,798,912 6,136 — (6,136) — — — Share-based compensation (Note 18) — — — 64,055,851 — — 64,055,851 Other comprehensive loss — — — — (77,947,461) — (77,947,461)Net income — — — — — 2,164,458,820 2,164,458,820 Balance at December 31, 2017 325,838,455 220,976 (421,164,802) 7,571,703,230 (77,947,461) 2,467,554,858 9,540,366,801 Adjustments due to the adoption of Topic 606 — — — — — 108,079,541 108,079,541 Repurchase of ordinary shares (33,237,759) — (1,410,222,466) — — — (1,410,222,466)Canceled shares — (18,088) 1,469,256,944 (1,469,238,856) — — — Vesting of share options held by Share Based Payment Trust 3,466,307 2,141 — (2,141) — — — Exercise of share options 377,085 249 — 2,209 — — 2,458 Share-based compensation (Note 18) — — — 57,981,487 — — 57,981,487 Other comprehensive income — — — — 33,089,222 — 33,089,222 Net income — — — — — 2,491,316,213 2,491,316,213 296,444,088 205,278 (362,130,324) 6,160,445,929 (44,858,239) 5,066,950,612 10,820,613,256 The accompanying notes are an integral part of these consolidated financial statements. F-13Table of Contents QUDIAN INC.CONSOLIDATED STATEMENTS OF CASH FLOWSFOR THE YEARS ENDED DECEMBER 31, 2016, 2017 AND 2018(Amounts in Renminbi (“RMB”) and US dollar (“US$”), except for number of shares and per share data) For the years ended December 31, 2016 2017 2018 RMB RMB RMB US$ Cash flows from operating activities: Net income 576,652,618 2,164,458,820 2,491,316,213 362,346,915 Adjustments to reconcile net income to net cash used in operating activities: Provision for receivables 132,176,545 605,163,716 1,178,723,206 171,438,180 Depreciation and amortization 1,503,467 5,790,986 12,065,648 1,754,876 Loss on disposal of property and equipment — — 137,268 19,965 Amortization of deferred origination costs 24,602,131 100,598 — — Share-based compensation expense 22,133,620 64,055,851 57,981,487 8,433,058 Share of loss from equity method investment 4,805,183 20,676,273 11,319,279 1,646,321 Investment income of short-term investments — — (10,117,286) (1,471,498)Foreign exchange loss, net 9,651,304 7,176,838 90,771,459 13,202,161 Changes in operating assets and liabilities: Financing service fee receivables (48,525,142) (78,970,874) 112,068,030 16,299,619 Contract asset — — (799,992,914) (116,354,144)Receivables from related parties (180,927,010) 629,329 372,812 54,223 Deferred tax assets (17,787,699) (97,672,912) (127,952,203) (18,609,876)Other current and non-current assets (39,046,338) (308,848,775) (137,098,248) (19,940,113)Interest payables 17,598,338 121,442,961 (62,457,896) (9,084,124)Payables to related parties 20,473,187 (16,496,440) (3,108,873) (452,167)Guarantee liabilities 6,357,074 165,571,647 255,623,253 37,178,860 Other current and non-current liabilities 264,395,861 144,730,768 262,667,592 38,203,416 Net cash provided by operating activities 794,063,139 2,797,808,786 3,332,318,827 484,665,672 Cash flows from investing activities: Proceeds from redemption of short-term investments 4,529,102,112 1,285,350,000 1,652,558,415 240,354,653 Proceeds from collection of loan principal 27,075,216,252 73,958,650,963 35,184,841,574 5,117,422,962 Principal collection of finance lease receivables — 70,773 222,069,392 32,298,653 Proceeds from collection of loan principal due from related parties 4,132,735 272,318 1,000,000 145,444 Realized investment income of short- term investments — — 10,117,286 1,471,498 Purchases of short-term investments (4,910,302,112) (1,155,150,000) (1,352,558,415) (196,721,462)Purchases of property and equipment, intangible assets and land use right (4,607,296) (11,298,011) (140,387,756) (20,418,552)Purchases of equity method investment (70,000,000) — — — Payments to originate loan principal (30,218,978,369) (78,473,735,690) (37,036,365,868) (5,386,716,001)Purchase of current assets held for lease — (26,479,085) (1,332,008,977) (193,732,671)Payments to originate loan principal due from related parties (2,700,000) — — — Net cash used in investing activities (3,598,136,678) (4,422,318,732) (2,790,734,349) (405,895,476) The accompanying notes are an integral part of these consolidated financial statements.F-14Table of Contents QUDIAN INC.CONSOLIDATED STATEMENTS OF CASH FLOWS - continuedFOR THE YEARS ENDED DECEMBER 31, 2016, 2017 AND 2018(Amounts in Renminbi (“RMB”) and US dollar (“US$”), except for number of shares and per share data) For the years ended December 31, 2016 2017 2018 RMB RMB RMB US$ Cash flows from financing activities: Contribution from shareholders 2,546,172,365 — — — Proceeds from issuance of ordinary shares — 5,339,532,767 — — Proceeds from borrowings 9,487,194,896 15,989,866,179 2,644,659,751 384,649,807 Proceeds from related parties — 850,500,000 513,847,929 74,736,082 Refund of guarantee deposits from Funding Partners 90,375,383 286,707,459 396,555,231 57,676,566 Proceeds from exercise of share options — — 2,458 358 Payments to related parties (777,326,275) (17,812,790) (2,231,923) (324,620)Repayment of borrowings (6,897,751,640) (11,825,431,453) (8,025,871,949) (1,167,314,661)Distributions to shareholders (838,434,577) — — — Repurchase of ordinary shares — (421,164,802) (1,410,222,466) (205,108,351)Payments for IPO expenditure (450,000) (39,461,883) (1,378,058) (200,430)Payments of guarantee deposits to Funding Partners (230,050,643) (161,096,338) (843,200,007) (122,638,355)Net cash (used in)/provided by financing activities 3,379,729,509 10,001,639,139 (6,727,839,034) (978,523,604)Effect of exchange rate changes — (77,947,461) (57,682,237) (8,389,533)Net (decrease)/increase in cash and cash equivalents, and restricted cash 575,655,970 8,299,181,732 (6,243,936,793) (908,142,941)Cash and cash equivalents, and restricted cash at beginning of the year 210,114,007 785,769,977 9,084,951,709 1,321,351,423 Cash and cash equivalents, and restricted cash at end of the year 785,769,977 9,084,951,709 2,841,014,916 413,208,482 Supplemental disclosures of cash flow information: Income taxes paid 54,370,824 231,132,984 208,640,115 30,345,446 Interest expense paid 193,351,692 565,446,800 609,826,651 88,695,608 The accompanying notes are an integral part of these consolidated financial statements. F-15Table of Contents QUDIAN INC.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFOR THE YEARS ENDED DECEMBER 31, 2016, 2017 AND 2018(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 operation of onlineplatforms to provide small consumer credit products in the People’s Republic of China (the “PRC”). The Company does not conduct any substantiveoperations of its own. As PRC laws and regulations prohibit foreign control of companies involved in internet value-added business, the Company conductsits primary business operations through its VIEs and the subsidiaries of the VIEs.As of December 31, 2018, the Company’s subsidiaries and VIEs are as follows: EntityDate of incorporationPlace of incorporationPercentage of legalownership by the CompanyPrincipal activitiesSubsidiaries QD Data Limited (“Qudian HK”)December 2, 2016Hong Kong (“HK”)100%Investment holding QD Technology Limited (“Qudian BVI”)November 23, 2016British VirginIslands (“BVI”)100%Investment holding Qufenqi (Ganzhou) Information Technology Co., Ltd. (“Qufenqi Ganzhou”)September 5, 2016PRC100%Investment holding, research and developmentQudian Inc. Equity Incentive Trust (“Share Based Payment Trust”)December 30, 2016HKNilEmployee benefitsQufenqi (HK) Limited (“Qufenqi HK”)April 28, 2014HK100%Investment holdingXiamen Qudian Financial Lease Ltd. (“Xiamen Financial Lease”)April 21, 2017PRC100%Financial leaseTianjin Qudian Financial Lease Co., Ltd. (“Tianjin Financial Lease”)January 19, 2018PRC100%Financial leaseXiamen Happy Time Technology Co., Ltd. (“Xiamen Happy Time”)September 5, 2018PRC100%Technology development and service VIEs Beijing Happy Time Technology Development Co., Ltd. (“Beijing Happy Time”)April 9, 2014PRCNilTechnology development and service, sale of productsGanzhou Qudian Technology Co., Ltd. (“Ganzhou Qudian”)November 25, 2016PRCNilTechnology development and service, sale of productsHunan Qudian Technology Development Co., Ltd. (“Hunan Qudian”)November 2, 2016PRCNilTechnology development and service, sale of productsXiamen Qudian Technology Co., Ltd. (“Xiamen Qudian”)April 1, 2017PRCNilTechnology development and service, sale of productsXiamen Weipujia Technology Co., Ltd. (“Xiamen Weipujia”)June 6, 2018PRCNilHousehold service F-16Table of Contents QUDIAN INC.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continuedFOR THE YEARS ENDED DECEMBER 31, 2016, 2017 AND 2018(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, Xiamen Qudian and Xiamen Weipujia 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 another wholly-owned subsidiary, Qudian HK in Hong Kong. On December 5, 2016, the Company transferred all of its shares of Qudian HK to Qudian BVI. On December 9,2016, Qudian HK acquired all the equity interests of Qufenqi Ganzhou from Qufenqi HK, for a consideration of US$100,000. From December 9, 2016 toNovember 22, 2018, Beijing Happy Time, Hunan Qudian, Ganzhou Qudian, Xiamen Qudian and Xiamen Weipujia signed a series of contractual agreementswith Qufenqi Ganzhou and their 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 the VIEsthat gave Qufenqi Ganzhou the power to direct the activities that most significantly affect the economic performance of the VIEs and acquire the equityinterests in the VIEs when permitted by the PRC laws, respectively. Certain exclusive agreements have been entered into with the VIEs through QufenqiGanzhou, which obligate Qufenqi Ganzhou to absorb a majority of the risk of loss from the VIEs’ activities and entitle Qufenqi Ganzhou to receive a majorityof their residual returns. In addition, the Company has entered into share pledge agreements for the equity interests in the VIEs held by the nomineeshareholders of the VIEs. The Company agreed to provide unlimited financial support to the VIEs for their operations. In addition, pursuant to the resolutionsof all shareholders of the Company and the resolutions of the board of directors of the Company (the “Resolutions”), the board of directors of the Company(the “Board of Directors”) or any officer authorized by the Board of Directors (the “Authorized Officer”) shall cause Qufenqi Ganzhou to exercise the rightsunder the power of attorney entered into among Qufenqi Ganzhou, the VIEs and the nominee shareholders of the VIEs and Qufenqi Ganzhou’s rights underthe exclusive call option agreement between Qufenqi Ganzhou and the VIEs. As a result of the Resolutions and the provision of unlimited financial supportfrom the Company to the VIEs, the Company has been determined to be most closely associated with the VIEs within the group of related parties and wasconsidered 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 their votingrights underlying their equity interest in the VIEs to the Company. In addition, through the other exclusive agreements, which consist of exclusive optionagreement, exclusive business cooperation agreement, and equity pledge agreement, the Company, through its wholly-owned subsidiaries in the PRC, hasthe right to receive economic benefits from the VIEs that potentially could be significant to the VIEs. Lastly, through the financial 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 theprimary beneficiary of the VIEs and consolidates the VIEs and its consolidated subsidiaries as required by SEC Regulation S-X Rule 3A-02 and ASC topic810 (“ASC 810”), Consolidation.F-17Table of Contents QUDIAN INC.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continuedFOR THE YEARS ENDED DECEMBER 31, 2016, 2017 AND 2018(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 shareholder irrevocablyappointed Qufenqi Ganzhou as its attorney-in-fact to exercise on each shareholder’s behalf any and all rights that each shareholder has in respect of its equityinterest in the VIEs (including but not limited to executing the exclusive right to purchase agreements, the voting rights and the right to appoint directorsand executive officers of the VIEs). The agreements are effective and irrevocable as long as the nominee shareholder remains a 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 nominee shareholdersirrevocably granted Qufenqi Ganzhou a call option to request the nominee shareholders to transfer or sell any part or all of its equity interests in the VIEs, orany or all of the assets of the VIEs, to Qufenqi Ganzhou, or their designees. The purchase price of the equity interests in the VIEs shall be equal to theminimum price required by PRC law. As for the assets of the VIEs, the purchase price should be equal to the book value of the assets or the minimum price aspermitted by applicable PRC law, whichever is higher. Without Qufenqi Ganzhou’s prior written consent, the VIEs and their nominee shareholders shall notamend their articles of association, increase or decrease the registered capital, sell or otherwise dispose of their assets or beneficial interests, create or allowany encumbrance on their assets or other beneficial interests and provide any loans or guarantees, etc. The nominee shareholders cannot request anydividends or other form of assets. If dividends or other form of assets were distributed, the nominee shareholders shall transfer all received distribution toQufenqi Ganzhou or their designees. The agreements are not terminated until all of the equity interests of the VIEs have been transferred to Qufenqi Ganzhouor the person(s) designated by Qufenqi Ganzhou. None of the nominee shareholders have the right to terminate or revoke the agreements under anycircumstance 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 Ganzhou providesexclusive technical support and consulting services in return for fees based on 100% of the VIEs’ profit before tax, which is adjustable at the sole discretionof Qufenqi Ganzhou. Without Qufenqi Ganzhou’s consent, the VIEs and their subsidiaries cannot procure services from any third party or enter into similarservice arrangements with any other third party, except for those from Qufenqi Ganzhou. In addition, the profitable consolidated VIEs and their subsidiarieshave granted Qufenqi Ganzhou an exclusive right to purchase any or all of the business or assets of each of the profitable consolidated VIEs and theirsubsidiaries at the lowest price permitted under PRC law. The agreements are irrevocable or can only be unilaterally revoked/amended by Qufenqi Ganzhou.F-18Table of Contents QUDIAN INC.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continuedFOR THE YEARS ENDED DECEMBER 31, 2016, 2017 AND 2018(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: - 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 of attorneyagreements, the exclusive call option agreements and the exclusive business cooperation agreements. Qufenqi Ganzhou is entitled to all dividends during theeffective period of the share pledge except as it agrees otherwise in writing. If the VIEs or any of the nominee shareholder breaches its contractual obligations,Qufenqi Ganzhou will be entitled to certain rights regarding the pledged equity interests, including receiving proceeds from the auction or sale of all or partof the pledged equity interests of the VIEs in accordance with PRC law. None of the nominee shareholders shall, without the prior written consent of QufenqiGanzhou, assign or transfer to any third party, distribute dividends and create or cause any security interest and any liability in whatsoever form to be createdon, all or any part of the equity interests it holds in the VIEs. The agreements are not terminated until all of the technical support and consulting and servicefees have been fully paid under the exclusive business cooperation agreements and all of VIEs’ obligations have been terminated under the other controllingagreements.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 the VIEs, tothe extent permissible under the applicable PRC laws and regulations, whether or not any such operational loss is actually incurred. The Company will notrequest 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 violate applicablePRC laws and regulations; (ii) each of the VIE Agreements is valid, binding and enforceable in accordance with its terms and applicable PRC laws orregulations and will not violate applicable PRC laws or regulations; (iii) the financial support letters issued by the Company to the VIEs, does not violate thePRC laws and regulations (iv) the resolutions are valid in accordance with the articles of association of the Company and Cayman Island Law.However, uncertainties in the PRC legal system could cause the Company’s current ownership structure to be found in violation of existing and/or futurePRC laws or regulations and could limit the Company’s ability to enforce its rights under these contractual arrangements. Furthermore, the nomineeshareholders of the VIEs may have interests that are different than those of the Company, which could potentially increase the risk that they would seek to actcontrary to the terms of the contractual agreements with the VIEs.F-19Table of Contents QUDIAN INC.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continuedFOR THE YEARS ENDED DECEMBER 31, 2016, 2017 AND 2018(Amounts in Renminbi (“RMB”) and US dollar (“US$”), except for number of shares and per share data) 1.Organization - continued 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 or regulations, theCompany could be subject to penalties, which could include, but not be limited to, revocation of business and operating licenses, discontinuing or restrictingbusiness operations, restricting the Company’s right to collect revenues, temporary or permanent blocking of the Company’s internet financial servicesplatforms, restructuring of the Company’s operations, imposition of additional conditions or requirements with which the Company may not be able tocomply, or other regulatory or enforcement actions against the Company that could be harmful to its business. The imposition of any of these or otherpenalties 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 other pledge orcollateralization of the VIEs’ assets. Creditors of the VIEs have no recourse to the general credit of the Company, who is the primary beneficiary of the VIEs,through its 100% controlled subsidiary Qufenqi Ganzhou. The Company has not provided any financial or other support that it was not previouslycontractually required to provide to the VIEs during the periods presented. The table sets forth the assets and liabilities of the VIEs included in theCompany’s consolidated balance sheets: As of December 31, 2017 2018 RMB RMB US$ Short-term loan principal and financing service fee receivables 8,758,544,694 8,417,821,413 1,224,321,345 Other current assets 5,801,157,313 3,472,629,937 505,073,078 Total current assets 14,559,702,007 11,890,451,350 1,729,394,423 Total non-current assets 165,191,933 1,066,321,556 155,090,038 Total assets 14,724,893,940 12,956,772,906 1,884,484,461 Total current liabilities 9,403,402,527 5,045,698,262 733,866,376 Total non-current liabilities 510,023,905 413,400,000 60,126,536 Total liabilities 9,913,426,432 5,459,098,262 793,992,912 The following table sets forth the results of operations of the VIEs included in the Company’s consolidated statements of comprehensive income: For the years ended December 31, 2016 2017 2018 RMB RMB RMB US$ Revenues 1,442,846,339 4,749,249,922 5,112,097,579 743,523,755 Net income 650,872,408 2,222,086,399 2,558,375,744 372,100,319 F-20Table of Contents QUDIAN INC.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continuedFOR THE YEARS ENDED DECEMBER 31, 2016, 2017 AND 2018(Amounts in Renminbi (“RMB”) and US dollar (“US$”), except for number of shares and per share data) 1.Organization - continued The table sets forth the cash flows of the VIEs included in the Company’s consolidated statements of cash flows: For the years ended December 31, 2016 2017 2018 RMB RMB RMB US$ Net cash provided by operating activities 793,604,997 2,587,050,255 3,375,764,483 490,984,580 Net cash used in investing activities (3,598,136,678) (4,295,677,821) (1,789,268,184) (260,238,264)Net cash (used in)/provided by financing activities 3,380,179,509 5,251,615,220 (4,568,154,072) (664,410,453) As of December 31, 2017, and 2018, except for all assets of the consolidated trusts, the deposits that were held by the Funding Partners as guarantee deposits,there was no pledge or collateralization of the VIEs’ assets. The amount of the net assets of the VIEs were RMB 4,811 million and RMB 7,497 million (US$1,090 million) as of December 31, 2017 and 2018. The creditors of the VIEs’ third-party liabilities did not have recourse to the general credit of the PrimaryBeneficiary in the normal course of business. The Company did not provide or intend to provide financial or other supports not previously contractuallyrequired 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 party and theCompany. Such trusts are administered by third party trust companies as the trustees. The Company provides loan facilitation service and financial guaranteeto 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 the purposeof holding options awarded to certain employees and the underlying shares before they are exercised as instructed by the employees. Upon the exercise of theoptions, the shares will be transferred to the relevant employees. As the Company has the power to govern the financial and operating policies of the ShareBased Payment Trust and derives benefits from the contributions of the employees who have been awarded the options of the Company through theircontinued employment with the Company, 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.F-21Table of Contents QUDIAN INC.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continuedFOR THE YEARS ENDED DECEMBER 31, 2016, 2017 AND 2018(Amounts in Renminbi (“RMB”) and US dollar (“US$”), except for number of shares and per share data) 2. Summary of Significant Accounting Policies - continuedUse of estimatesThe preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect thereported amounts of assets and liabilities, disclosures of contingent assets and liabilities at the date of the consolidated financial statements and the reportedamounts of revenues and expenses during the reporting period. Significant accounting estimates reflected in the Company’s consolidated financialstatements include, but are not limited to, allowance for loan principal and financing service fee receivables, allowance for finance lease receivables,allowance for other receivables, share-based compensation, valuation allowance for deferred tax assets, uncertain tax positions, estimate of variableconsideration and fair value of guarantee liabilities. Actual results could differ from these estimates.Revenue recognitionThe Company generates revenues primarily by providing borrowers with merchandise and cash installment credit services and automobile financing services.On January 1, 2018, the Company adopted ASC 606, Revenue from Contracts with Customers, using the modified retrospective method applied to thosecontracts which were not completed as of January 1, 2018. Results for reporting periods beginning after January 1, 2018 are presented under ASC 606, whileprior period amounts have not been adjusted and continue to be reported in accordance with the Company’s historic accounting under ASC 605, Revenuerecognition. Under ASC 606, revenue is recognized when control of the promised goods or services is transferred to the Company’s customers, in an amountthat reflects the consideration that the Company expects to be entitled to in exchange for those goods or services, net of value-added tax. The Companydetermines revenue recognition through the following steps:•Identify the contract(s) with a customer;•Identify the performance obligations in the contract;•Determine the transaction price;•Allocate the transaction price to the performance obligations in the contract; and•Recognize revenue when (or as) the entity satisfies a performance obligation.Credit facilitationThe Company entered into credit facilitation arrangements with various Funding Partners. The Company: (i) matches borrowers with the Funding Partnerswhich directly fund the credit drawdowns to the borrowers and (ii) provides post-origination services, such as short messaging reminder services throughoutthe term of the loans. For each successful match, the Company receives an initial intermediary fee and a recurring service fee throughout the term of the loans.When borrowers make instalment repayments directly to the Funding Partners, the Funding Partners will then remit the recurring service fees to the Companyon a periodic basis. In addition, the Company provides a guarantee on the principal and accrued interest repayments of the defaulted loans to the FundingPartners.The Company determines its customers to be both the Funding Partners and borrowers. The Company considers the loan facilitation service, post-originationservices and guarantee service as separate services, of which the guarantee service and the post origination service is accounted for in accordance with ASC815, Derivatives and Hedging (refer to “Guarantee liabilities” for additional information) and ASC 860, Transfers and servicing of financial assets,respectively.The transaction price is the amount of consideration to which the Company expects to be entitled in exchange for transferring the promised services to thecustomer, net of value-added tax. The transaction price includes variable service fees which are contingent on the borrower making timely repayments.Variable consideration is estimated using the expected value method based on historical default rate, current and forecasted borrower repayment trends and islimited to the amount of variable consideration that is probable not to be reversed in future periods. As a result, the estimation of variable considerationinvolves significant judgement. The Company makes the assessment of whether the estimate of variable consideration is constrained. Any subsequentchanges in the transaction price will be allocated to the performance obligations on the same basis as at contract inception.F-22Table of Contents QUDIAN INC.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continuedFOR THE YEARS ENDED DECEMBER 31, 2016, 2017 AND 2018(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 - continuedCredit facilitation - continuedThe Company first allocates the transaction price to the guarantee liabilities at fair value in accordance with ASC 815. The remaining transaction price isthen allocated to the loan facilitation services and post-origination services on a relative standalone selling price basis. The Company does not haveobservable price for the loan facilitation services and post-origination services because the services are not provided separately. As a result, the estimation ofstandalone selling price involves significant judgement. The Company estimates the standalone selling price of the loan facilitation and post-originationservices using the expected cost plus a margin approach.Revenues from loan facilitation services are recognized when the Company matches borrowers with the Funding Partners and the funds are provided to theborrower. Additionally, revenues from post-origination services are recognized evenly over the term of the loans as the services are performed.Vehicle sales with guaranteeThe Company sells vehicles to buyers and provides loan facilitation services to Funding Partners who provides financing to the vehicle buyers. The buyerobtains control of the vehicle when the buyer physically possesses the vehicle and when the Company receives cash consideration for the vehicle from thebuyer. The Company will receive recurring service fees from the financial institution for its loan facilitation services and post-origination services throughoutthe term of the loan. In addition, the Company provides a guarantee on the principal and accrued interest repayments of the defaulted loans to the financialinstitution.For vehicle sales, the Company determines the buyer to be its customer. The transaction price for the vehicle sale is the amount of consideration theCompany receives from the buyer for the sale of the vehicle, net of value-added tax. The Company is the principal in the vehicle sale transaction and salesincome is recognized on a gross basis when the title of the vehicle is transferred to the buyer.For the loan facilitation services, the Company determines both the Funding Partners and the buyer to be its customers. The Company considers the loanfacilitation service, post-origination services and guarantee service as separate services, of which the guarantee service and the post origination service isaccounted for in accordance with ASC 815 and ASC 860, respectively.The transaction price is the amount of consideration to which the Company expects to be entitled in exchange for transferring the promised services to thecustomer, net of value-added tax. The transaction price of loan facilitation services includes variable service fees which are contingent on the borrowermaking timely repayments. Variable consideration is estimated using the expected value method based on historical default rate, current and forecastedrepayment trends and is limited to the amount of variable consideration that is probable not to be reversed in future periods. As a result, the estimation ofvariable consideration involves significant judgement. The Company makes the assessment of whether the estimate of variable consideration is constrained.Any subsequent changes in the transaction price will be allocated to the performance obligations on the same basis as at contract inception.The Company first allocates the transaction price to the guarantee liabilities at fair value in accordance with ASC 815. The remaining transaction price isthen allocated to the loan facilitation services and post-origination services on a relative standalone selling price basis. The Company does not haveobservable price for the loan facilitation services and post-origination services because the services are not provided separately. As a result, the estimation ofstandalone selling price involves significant judgement. The Company estimates the standalone selling price of the loan facilitation and post-originationservices using the expected cost plus a margin approach.Revenues from loan facilitation services are recognized when the Company provides loan facilitation services to Funding Partners and the buyer.Additionally, revenues from post-origination services are recognized evenly over the term of the loans as the services are performed.F-23Table of Contents QUDIAN INC.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continuedFOR THE YEARS ENDED DECEMBER 31, 2016, 2017 AND 2018(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 - continuedFinancing incomeBorrowers can withdraw cash (“cash installment credit services”) or purchase products (e.g. personal consumer electronics) (“merchandise installment creditservices”) up to their approved credit limit and elect the installment repayment period, ranging from one to eighteen months through the Company’s onlinewebsite and application (collectively “financing platform”) or via borrowers’ Alipay accounts. The Company charges financing service fees for facilitatingthe financing and managing the financing platform. The financing service fees are recorded as financing income in the statement of comprehensive income inaccordance with ASC 310 using the effective interest method.Incentives are provided to certain borrowers and can only be applied as a reduction to the borrower’s repayments and cannot be withdrawn by the borrowersin cash. These incentives are recorded as a reduction in financing service fees using the effective interest method.Sales commission feesIn addition to financing income, the Company earns a margin from its merchandise installment credit services on the products purchased from suppliers onbehalf 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 are recognized and recorded net of the related cost on delivery date, as the Company arranges for the goods to be provided by thesuppliers and is considered to be an agent in accordance with ASC 606.Sales-type leaseThe Company determines the classification of the lease in accordance with ASC 840. A lease arrangement that transfers substantially all of the benefits andrisks incident to the ownership of property and that give rise to a dealer’s profit or loss is classified as a sales-type lease. The sales income recognized is thepresent value of the minimum lease payments computed at the interest rate implicit in the lease, and sales income is recognized on gross basis, as theCompany acts as the principal in the transaction. The Company’s net investment in a sales-type lease consists of the gross investment minus the unearnedincome. The unearned income on a sales-type lease is subsequently amortized to financing income over the lease term using the interest method.Penalty feesThe Company charges borrowers and lessees penalty fees for late installment payments. The penalty fee is calculated based on the number of overdue days ofunpaid outstanding balance of loan principals and lease receivables at the applicable late payment rate. The penalty fees are recognised on a cash basis,which coincides with the penalty fees being probable not to be reversed.Revenue recognition under ASC 605Before January 1, 2018, the Company considers the loan facilitation services and the post origination services as a multiple element revenue arrangementunder ASC 605, and the Funding Partners as the sole customer in the arrangement. The Company first allocates the consideration to the guarantee liabilityequaling to the fair value of the guarantee liability. The remaining consideration is allocated to the loan facilitation services and post origination services.The Company does not have vendor specific objective evidence, or VSOE, of selling price for the loan facilitation services and post origination servicesbecause the Company does not provide loan facilitation services or post origination services on a standalone basis. There is also no third-party evidence ofthe 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 thebest estimate of selling prices of loan facilitation services and post origination services as the basis of revenue allocation. Nevertheless, the amount allocatedto the delivered 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 income.F-24Table of Contents QUDIAN INC.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continuedFOR THE YEARS ENDED DECEMBER 31, 2016, 2017 AND 2018(Amounts in Renminbi (“RMB”) and US dollar (“US$”), except for number of shares and per share data) 2. Summary of Significant Accounting Policies - continuedRevenue recognition - continuedRevenue recognition under ASC 605 - continuedFor loan facilitation services, post origination services and sales commission fees, the Company recognizes revenue when the following four revenuerecognition criteria are met: (i) persuasive evidence of an arrangement exists, (ii) services have been rendered, (iii) the fee is fixed or determinable, and (iv)collectability is reasonably assured, in accordance with ASC 605. As collectability is uncertain in relation to the remaining loan facilitation services incomedue to the potential default by borrowers such that they are not considered to be fixed or determinable, the remaining loan facilitation service income isrecorded on a cash basis.For penalty fees, as collectability is not reasonably assured, the penalty fee is recorded on a cash basis.Foreign currency translation and transactionsThe functional currency of the Company, Qudian BVI and Qudian HK is US$. The Company’s subsidiaries, VIEs and subsidiaries of the VIEs with operationsin the PRC adopted RMB as their functional currencies. The determination of the respective functional currency is based on the criteria stated in ASC 830,Foreign Currency Matters. The Company uses RMB as its reporting currency. The financial statements of the Company, Qudian BVI and Qudian HK aretranslated into RMB using the exchange rate as of the balance sheet date for assets and liabilities and average exchange rate for the year for income andexpense items. Translation gains and losses are recorded in accumulated other comprehensive loss, as a component of shareholders’ equity. Transactions incurrencies other than the functional currency are measured and recorded in the functional currency 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 income duringthe 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 investments that arereadily convertible to known amounts of cash and with original maturities from the date of purchase of three months or less to be cash equivalents. All cashand cash equivalents are unrestricted as to withdrawal and use.Guarantee depositsIn the ordinary course of business, the Company is required to guarantee the recoverability of the loan principal and interest for loans originated by theCompany that are transferred to certain Funding Partners, and the recoverability of loans directly funded by certain Funding Partners. As a result, theCompany may provide a cash deposit to the respective Funding Partners. The cash deposits are released only after the loan principal and interest are settled.Guarantee deposits represent cash that cannot be withdrawn without the permission of the Funding Partners. These guarantee deposits qualify ascompensating balance arrangements under SEC Regulation S-X Rule 5-02, and are classified as current assets in the consolidated balance sheets.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 principal andfinancing service fee receivables are recorded at amortized cost, net of allowance for loan principal. Deferred origination costs are netted against revenue andamortized 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. Therefore, the Company appliesa consistent credit risk management framework to the entire portfolio of loans in accordance with ASC 450-20, Loss Contingencies.F-25Table of Contents QUDIAN INC.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continuedFOR THE YEARS ENDED DECEMBER 31, 2016, 2017 AND 2018(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 - continuedThe allowance for loan principal and financing service fee receivables losses is calculated based on historical loss experience using a roll rate-based model.The roll rate-based model stratifies the loan principal and financing service fee receivables by delinquency stages (i.e., current, 1-30 days past due, and 31-60days past due etc.) and projected forward in one-month increments using historical roll rates. In each month of the simulation, losses on the loan principal andfinancing service fee receivables types are captured, and the ending delinquency stratification serves as the beginning point of the next iteration. Thisprocess is repeated on a monthly rolling basis. The loss rate calculated for each delinquency stage is then applied to the respective loan principal and servicefees balance. The Company adjusts the allowance that is determined by the roll rate-based model for various Chinese macroeconomic factors i.e. gross-domestic product rates, per capita disposable income, interest rates, consumer price indexes and law and regulation impact. Each of these macroeconomicfactors are equally weighted, and a score is applied to each factor 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 outstanding balance orwhen the Company determined the balance to be uncollectable. In general, the Company considers loan principal and financing service fee receivablesmeeting any 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) loans are 180 days past due.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 is placed on nonaccrual status,financing service fee will be recognized when cash is received on a cash basis cost recovery method by applying first to reduce principal and then tofinancing income thereafter. Financing service fee accrued but not received is generally reversed against financing income. Financing service fee receivablesmay be returned to accrual status after all of the borrower’s delinquent balances of loan principal and financing service fee have been settled and the borrowerremains current for an appropriate period.Finance lease receivablesFinance lease receivables are carried at amortized cost comprising of original financing lease and direct costs, net of unearned income and allowance forfinance lease receivables.Allowance for finance lease receivablesThe Company considers the finance lease receivables to be homogenous as they are all automotive finance lease receivables collateralized by vehicle titlesof similar principal amounts. Therefore, the Company applies a consistent credit risk management framework to the entire portfolio of finance leasereceivables in accordance with ASC 450-20.The allowance for finance lease receivables is calculated based on historical loss experience using probability of default (PD) and loss given default (LGD)methods. The Company stratifies probability of default and loss given default by the recovered rate under different scenarios (i.e. cash collection,repossessing the leased vehicle or non-recovery), and calculates allowance balance by timing exposure at default under each scenario. This process isrepeated on a monthly basis. Loss given default is projected based on historical experience of actual loss and considered proceeds from recovery of therepossessed assets. The Company adjusts the allowance that is determined by the PD and LGD methods for various Chinese macroeconomic factors i.e. gross-domestic product rates, per capita disposable income, interest rates, consumer price indexes and law and regulation impact. Each of these macroeconomicfactors are equally weighted, and a score is applied to each factor based on year-on-year increases and decreases in that respective factor.Finance lease receivables are charged off when a settlement is reached for an amount that is less than the outstanding balance or when the Companydetermined the balance to be uncollectable. In general, the Company considers finance fee receivables meeting any of the following conditions asuncollectable and charged-off: (i) death of the borrower; (ii) identification of fraud, and the fraud is officially reported to and filed with relevant lawenforcement departments or (iii) all finance lease receivables that are 180 days past due are therefore deemed uncollectible and charged-off; (iv) the vehicle isrepossessed.F-26Table of Contents QUDIAN INC.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continuedFOR THE YEARS ENDED DECEMBER 31, 2016, 2017 AND 2018(Amounts in Renminbi (“RMB”) and US dollar (“US$”), except for number of shares and per share data) 2. Summary of Significant Accounting Policies - continuedNonaccrual finance lease receivablesA finance lease receivable is considered impaired when the lease receivables are more than 90 days past due, or when it is probable that the Company will beunable to collect all amounts due according to the terms of the contract. Factors such as payment history, compliance with terms and conditions of theunderlying financing lease agreement and other subjective factors related to the financial stability of the borrower are considered when determining whetherfinance lease receivables are impaired. The Company does not accrue financing lease income on net investment of finance lease receivables that areconsidered impaired. A corresponding allowance is determined under ASC 450-20 and allocated accordingly. Accrual of financing lease income is suspendedon accounts that are impaired, accounts in bankruptcy and accounts in repossession. Payments received on non-accrual finance lease receivables are firstapplied to any fees due, then to any interest due and, finally, any remaining amounts received are recorded to principal. Interest accrual resumes once anaccount has received payments bringing the impaired status to current.Contract AssetsContract assets represents the Company’s right to consideration in exchange for loan facilitation services that the Company has transferred to the customerbefore payment is due. The Company assesses contract assets for impairment in accordance with ASC 310, Receivables.Contract assets as of December 31, 2018 was RMB 919,033,354 (US$ 133,667,858). The remaining unsatisfied performance obligations as of December 31,2018, pertaining to post-origination services amounted to RMB 42,968,967 (US$ 6,249,577).InventoriesInventories are stated at the lower of cost and net realizable value.BorrowingsThe Company facilitates credit to borrowers and then transfers certain loan principals to certain Funding Partners. The payment terms with the FundingPartners range from 27 to 365 days at varying annual interest rates. The loan principals are not derecognized when they are transferred to the FundingPartners as the loan principals are not legally isolated in accordance with ASC 860. As a result, the loan principal remains on the Company’s balance sheetand the funds received from the Funding Partners are recorded as borrowings. Borrowings are initially recognized at fair value which is the cash received fromFunding Partners, and measured subsequently at amortized cost using the effective interest method.The borrowings from banks and the Company’s consolidated trusts' payables to the third party beneficiary are initially recognized equaling to the cashreceived from the beneficiary and measured subsequently at amortized cost using the effective interest method.Guarantee liabilitiesAs part of the Company’s cooperation with various Funding Partners, the Company provides guarantee on the principal and accrued interest repayment of thedefaulted loans to the Funding Partners, even if the loans are subsequently sold by the Funding Partners.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 gain or loss on guaranteeliabilities in the consolidated statements of comprehensive income. When the Company settles the guarantee liabilities through performance of the guaranteeby making requisite payments on the respective defaulted loans, the Company records a corresponding deduction to the guarantee liabilities. Subsequentcollection from the borrower through the Funding Partners will be recognized as a reversal of the deduction to guarantee liabilities.F-27Table of Contents QUDIAN INC.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continuedFOR THE YEARS ENDED DECEMBER 31, 2016, 2017 AND 2018(Amounts in Renminbi (“RMB”) and US dollar (“US$”), except for number of shares and per share data) 2. Summary of Significant Accounting Policies - continuedTreasury 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.Fair value measurements of financial instrumentsFinancial instruments include guarantee deposits, short-term investments, contract asset, 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 financial instruments,except for long-term loan principal and financing service fee receivables, long-term finance lease receivables and long-term borrowings, approximate fairvalue because of their short maturities. The short-term investments are carried at fair value. The Company’s short-term investments comprise of monetarywealth management products which are classified as held for trading. The fair value of such monetary wealth management products are determined based onthe quoted subscription/ redemption price published by the investment manager of the products. The carrying amount of the long-term loan principal andfinancing service fee receivables and long-term borrowings, approximate their fair values due to the fact that the related interest rates approximate ratescurrently offered by Funding Partners 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 expected payoutsfrom the arrangement with the Funding Partners. The Company estimates its expected future payouts based on estimates of expected delinquency rate and adiscount 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 residual valuebased on the estimated useful lives of the class of asset, which range as follows: CategoryEstimatedUseful LifeEstimatedResidualOffice and electronic equipment3-5 yearsNil%-5%Leasehold improvementsOver the shorter of the expected life ofleasehold improvements or the lease termNil% Costs associated with the repair and maintenance of property and equipment are expensed as incurred. Construction in progress represents buildingconstruction costs, which is stated at cost and is not depreciated.Land use rightsLand use rights represent lease prepayments to the local government authorities. Land use rights are carried at cost less accumulated amortization and anyimpairment loss. Amortization is calculated on a straight-line basis over the term of the related land use right contracts, which is 40 years.Intangible assetsIntangible assets represent purchased computer software. These intangible assets are amortized on a straight line basis over their estimated useful lives of therespective assets, most of which varies from 1-10 years.F-28Table of Contents QUDIAN INC.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continuedFOR THE YEARS ENDED DECEMBER 31, 2016, 2017 AND 2018(Amounts in Renminbi (“RMB”) and US dollar (“US$”), except for number of shares and per share data) 2. Summary of Significant Accounting Policies - continuedResearch and developmentResearch and development expenses are primarily incurred in the development of new services, new features and general improvement of the Company’stechnology infrastructure to support its business operations. Research and development costs are expensed as incurred unless such costs qualify forcapitalization as software development costs. In order to qualify for capitalization, (i) the preliminary project should be completed, (ii) management hascommitted to funding the project and it is probable that the project will be completed and the software will be used to perform the function intended, and (iii)it will result in significant additional functionality in the Company’s services. No research and development costs were capitalized for all years presented asthe 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 carrying amountof long-lived assets against the estimated undiscounted future cash flows associated with it. Impairment exists when the estimated undiscounted future cashflows are less than the carrying value of the asset being evaluated. Impairment loss is calculated as the amount by which the carrying value of the assetexceeds its fair value. No impairment loss was recognized for the years ended December 31, 2016, 2017 and 2018, 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 which certainpension benefits, medical care, unemployment insurance, employee housing fund and other welfare benefits are provided to employees. Chinese laborregulations require that the Company make contributions to the government for these benefits based on a certain percentage of the employee’s salaries. TheCompany has no legal obligation for the benefits beyond the contributions. The total amount that was expensed as incurred, was RMB 16,070,410, RMB35,004,467 and RMB 71,413,352 (US$ 10,386,641) for the years ended December 31, 2016, 2017 and 2018, respectively.Advertising costsAdvertising costs are expensed as incurred in accordance with ASC 720-35, Other Expense-Advertising costs. Advertising costs were RMB 67,258,213, RMB43,470,301 and RMB 9,994,935 (US$ 1,453,703) for the years ended December 31, 2016, 2017 and 2018, respectively. Advertising costs are included insales and marketing expenses in the consolidated statements of comprehensive income.Government grantsGovernment grants include cash subsidies received by the Company’s entities in the PRC from local governments as incentives for investing in certain localdistricts, and are typically granted based on the amount of investment made by the Company in the form of registered capital or taxable income generated bythe Company in these local districts. Such grants allow the Company full discretion in utilizing the funds and are used by the Company for general corporatepurposes. The local governments have sole discretion as to whether the Company met all of the criteria to be entitled to the subsidies. The Company does notin all instances receive written confirmation from local governments indicating the approval of the cash subsidies before cash is received. Cash subsidies ofRMB nil, RMB 127,800 and RMB 2,598,055 (US$ 377,871) are included in other non-operating income for the years ended December 31, 2016, 2017 and2018, respectively. Refunds for the value-added taxes paid of RMB 14,646,251, RMB 50,702,352 and RMB 15,596,811 (US$ 2,268,462) are included inother operating income. Refunds for the corporate income taxes paid of RMB 12,123,338, RMB 32,929,930 and RMB 42,413,415 (US$ 6,168,775) arerecognized as deduction of income tax expense. Government grants are recognized when received and all the conditions for their receipt have been satisfied.F-29Table of Contents QUDIAN INC.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continuedFOR THE YEARS ENDED DECEMBER 31, 2016, 2017 AND 2018(Amounts in Renminbi (“RMB”) and US dollar (“US$”), except for number of shares and per share data) 2. Summary of Significant Accounting Policies - continuedValue added taxesBeijing Happy Fenqi Technology Development Co., Ltd., a subsidiary of Beijing Happy Time, and Xiamen Weipujia Technology Co., Ltd. are small-scaleVAT taxpayers with an applicable VAT rate of 3%. The other subsidiaries of the VIEs are all general VAT taxpayers (applicable tax rate: 6% or 16%). VAT isreported as a deduction to revenue when incurred and amounted to RMB 107,065,470, RMB 280,586,358 and RMB 810,200,790 (US$ 117,838,818) for theyears ended December 31, 2016, 2017 and 2018, respectively. Entities that are VAT general taxpayers are allowed to offset qualified input VAT paid tosuppliers against their output VAT liabilities. Output VAT receivable net of input VAT payable is recorded in accrued expenses and other current liabilitieson 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 future consequencesof events that have been recognized in the consolidated financial statements or in the Company’s tax returns. Deferred tax assets and liabilities arerecognized on the basis of the temporary differences that exist between the tax basis of assets and liabilities and their reported amounts in the consolidatedfinancial statements using enacted tax rates in effect for the year in which the differences are expected to reverse. Changes in deferred tax assets and liabilitiesare recorded in earnings. Deferred tax assets are reduced by a valuation allowance through a charge to income tax expense when, in the opinion ofmanagement, it is more-likely-than-not that a portion of or all of the deferred tax assets will not be realized. Potential for recovery of deferred tax assets isevaluated by estimating the future taxable profits expected and considering prudent and feasible tax planning strategies. The components of the deferred taxassets 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 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, 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 that more-likely-than not to be realized upon ultimate settlement. The Company’s estimated liability for unrecognized tax benefits which is included in the income taxpayable in the consolidated balance sheets is periodically assessed for adequacy and may be affected by changing interpretations of laws, rulings by taxauthorities, changes and/or developments with respect to tax audits, and expiration of the statute of limitations. Changes in recognition and measurementestimates are recognized in the period in which the changes occur. The Company elects to classify interest and penalties related to an uncertain tax position,if and when required, as part of income tax expense in the consolidated statements of comprehensive income. The Company did not recognize any incometax due to uncertain tax position or incur any interest and penalties related to potential underpaid income tax expenses for the years ended December 31,2016, 2017 and 2018.Segment informationIn 2017, based on changes to the Company’s operations and how the Company's chief executive officer, identified as the chief operating decision maker(“CODM”) reviews operating results and makes decisions about resource allocation, the Company has identified two reportable segments that are reported inthe consolidated financial statements: installment credit services and automobile financing services.As the Company generates substantially all of its revenues in the PRC, no geographical segments are presented.Operating LeasesLeases where the Company is the lessee, and substantially all the rewards and risks of ownership of assets remain with the lessor are accounted for asoperating leases. Rentals applicable to such operating leases are recognized on a straight-line basis over the lease term. Certain of the operating leaseagreements contain rent holidays. Rent holidays are considered in determining the straight-line rent expense to be recorded over the lease term.F-30Table of Contents QUDIAN INC.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continuedFOR THE YEARS ENDED DECEMBER 31, 2016, 2017 AND 2018(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 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 at themeasurement date. When determining the fair value measurements for assets and liabilities required or permitted to be recorded at fair value, the Companyconsiders the principal or most advantageous market in which it would transact and the market-based risk measurement or assumptions that marketparticipants would use when pricing 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 inactive markets, quoted prices for identical or similar assets and liabilities in markets that are not active, or other inputs that are observable orcan be corroborated 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 of theequity instrument. The Company recognizes the compensation costs net of estimated forfeitures using the straight-line method, over the applicable vestingperiod for each separately vesting portion of the award. The estimate of forfeitures is adjusted over the requisite service period to the extent that actualforfeitures differ, or are expected to differ, from such estimates. Changes in estimated forfeitures is recognized through a cumulative catch-up adjustment inthe period of change and also impact the amount of share-based compensation expense to be recognized in future 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 the incrementalcompensation cost of a modification as the excess of the fair value of the modified option over the fair value of the original option immediately before itsterms are modified, measured based on the share price and other pertinent factors at the modification date. For vested options, the Company recognizesincremental compensation cost in the period the modification occurred. For unvested options, the Company recognizes, over the remaining requisite serviceperiod, the sum of the incremental compensation cost and the remaining unrecognized compensation cost for the original 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 Payments to Non-Employees. The Company uses the Black-Scholes-Merton option pricing model method to measure the value of options granted to non-employees at eachvesting date to determine the appropriate charge to share-based compensation. ASC 718 requires share-based compensation to be presented in the samemanner as cash compensation rather than as a separate line item.Earnings per shareBasic earnings per share is computed by dividing net income attributable to ordinary shareholders by the weighted average number of ordinary sharesoutstanding during the period and year presented.Diluted earnings per ordinary share reflect the potential dilution that could occur if securities were exercised or converted into ordinary shares.F-31Table of Contents QUDIAN INC.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continuedFOR THE YEARS ENDED DECEMBER 31, 2016, 2017 AND 2018(Amounts in Renminbi (“RMB”) and US dollar (“US$”), except for number of shares and per share data) 2. Summary of Significant Accounting Policies - continuedConvenience 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 RMB 6.8755 per US$1.00 onDecember 31, 2018, as published on the website of the United States Federal Reserve Board. No representation is made that the RMB amounts could havebeen, or could be converted into US$ 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 equity interestor otherwise control, generally accompanying a shareholding of between 20% and 50% of the voting rights. The share of earnings or losses of the investee arerecognized in the consolidated statements of comprehensive income. Equity method adjustments include the company’s proportionate share of investeeincome 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 the investee’sliquidity, 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 by PBOC.Approval of foreign currency payments by the PBOC or other regulatory institutions requires submitting a payment application form together with 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, guarantee deposits,short-term investment, loan principal and financing service fee receivables, finance lease receivables and other receivables.The Company places its cash and cash equivalents and short-term investments, with reputable financial institutions that have high-credit ratings and quality.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 its ongoingmonitoring 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, 2016, 2017and 2018.Credit DerivativesThe Company enters into guarantee arrangements with Funding Partners classified as a credit derivative contract to facilitate borrowing transactions, underwhich the Company provides the Funding Partners protection against the risk of default on a set of loans invested by them. The Company will have toperform the guarantee obligation if a default event as defined under the contract occurs. The contractual or notional amounts of these credit derivativesrepresent the maximum potential amounts of future payments without consideration of possible recoveries under recourse provisions.F-32Table of Contents QUDIAN INC.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continuedFOR THE YEARS ENDED DECEMBER 31, 2016, 2017 AND 2018(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 - continuedThe Company manages current payment/performance risk of the credit derivatives through self-developed risk management model. The rating scale of riskmanagement model takes into account factors such as identity characteristics, credit history, payment overdue history, payment capacity, behavioralcharacteristics 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, the Companyreviews and takes appropriate steps to manage its interest rate exposures on its interest-bearing assets and liabilities. The Company has not been exposed tomaterial risks due to changes in market interest rates, and not used any derivative financial instruments to manage the interest risk exposure during the yearspresented.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 ofoperations or cash flows: changes in the overall demand for services; competitive pressures due to new entrants; advances and new trends in newtechnologies and industry standards; changes in certain strategic relationships; regulatory considerations and risks associated with the Company’s ability toattract employees necessary to support its growth. The Company’s operations could also be adversely affected by significant political, regulatory, economicand social uncertainties in the PRC.Comparative Information Certain items in the consolidated financial statements have been adjusted to conform with the current year’s presentation to facilitate comparison.Recently Adopted Accounting PronouncementsRevenue RecognitionIn May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts withCustomers (Topic 606). This standard update, along with related subsequently issued updates, clarifies the principals for recognizing revenue and develops acommon revenue standard for US GAAP.On January 1, 2018, the Company adopted the new standard to all contracts using the modified retrospective method. The Company recognized thecumulative effect of initially applying the new revenue standard as an adjustment to the opening balance of retained earnings. The comparative informationwas not restated and continued to be reported under Topic 605.F-33Table of Contents QUDIAN INC.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continuedFOR THE YEARS ENDED DECEMBER 31, 2016, 2017 AND 2018(Amounts in Renminbi (“RMB”) and US dollar (“US$”), except for number of shares and per share data) 2. Summary of Significant Accounting Policies - continuedRecently Adopted Accounting Pronouncements - continuedRevenue Recognition - continuedThe cumulative effect of the changes made to the Company’s consolidated balance sheet as of January 1, 2018 for the adoption of Topic 606 is as follows: Balance as ofDecember 31,2017 Adjustmentsdue to theadoption ofTopic 606 Balance asof January 1,2018 RMB RMB RMB Assets: Contract assets — 119,040,440 119,040,440 Liabilities: Income tax payable 268,373,167 3,414,183 271,787,350 Other tax payable 32,262,859 7,546,716 39,809,575 Equity: Retained earnings 2,467,554,858 108,079,541 2,575,634,399 The impact of adopting Topic 606 on the Company’s consolidated balance sheet as of December 31, 2018 are as follows: As reported Balanceswithout theadoption ofTopic 606 Effect ofchangeHigher/(lower) RMB RMB RMB Assets: Contract assets 919,033,354 — 919,033,354 Liabilities: Income tax payable 348,829,956 244,925,634 103,904,322 Other tax payable 166,802,584 108,539,313 58,263,271 Equity Retained earnings 5,066,950,612 4,310,084,851 756,865,761 F-34Table of Contents QUDIAN INC.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continuedFOR THE YEARS ENDED DECEMBER 31, 2016, 2017 AND 2018(Amounts in Renminbi (“RMB”) and US dollar (“US$”), except for number of shares and per share data) 2. Summary of Significant Accounting Policies - continuedRecently Adopted Accounting Pronouncements - continuedRevenue Recognition - continued The impact of adopting Topic 606 on the Company’s statement of comprehensive income for the year ended December 31, 2018 are as follows: As reported Amountswithout theadoption ofTopic 606 Effect ofchangeHigher/(lower) RMB RMB RMB Loan facilitation income and others 1,646,772,629 897,496,270 749,276,359 Total revenues 7,692,342,304 6,943,065,945 749,276,359 Net income before income taxes 2,649,046,731 1,899,770,372 749,276,359 Income tax expense 157,730,518 57,240,379 100,490,139 Net income after income taxes 2,491,316,213 1,842,529,993 648,786,220 Basic income per share 7.82 5.78 2.04 Diluted income per share 7.74 5.72 2.02 Statement of Cash FlowsIn November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash, which requires companies to include amountsgenerally described as restricted cash in cash and cash equivalents when reconciling beginning-of-period and end-of-period total amounts shown on thestatements of cash flows. The Company adopted this standard update effective January 1, 2018, using the retrospective transition approach. The followingtable presents the impact to the consolidated statements of cash flows for the year ended December 31,2017: Previouslyreported Adjustmentsdue to theadoption ofTopic 230 As revised RMB RMB RMB Operating activities 3,076,140,032 (278,331,246) 2,797,808,786 Investing activities (705,567,600) (3,716,751,132) (4,422,318,732)Financing activities 3,753,911,173 6,247,727,966 10,001,639,139 Effect of exchange rate changes (77,947,461) — (77,947,461)Net change in cash, cash equivalents, and restricted cash 6,046,536,144 2,252,645,588 8,299,181,732 There was no impact to the consolidated statements of cash flows for the year ended December 31, 2016, as there was no restricted cash for the year thenended.F-35Table of Contents QUDIAN INC.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continuedFOR THE YEARS ENDED DECEMBER 31, 2016, 2017 AND 2018(Amounts in Renminbi (“RMB”) and US dollar (“US$”), except for number of shares and per share data) 2. Summary of Significant Accounting Policies - continuedRecently Adopted Accounting Pronouncements – continuedStatement of Cash Flows - continuedAs of December 31, 2016, 2017 and 2018, cash and cash equivalents are RMB 785,769,977, RMB 6,832,306,121 and RMB 2,501,188,374 (US$363,782,761), respectively, and restricted cash are RMB nil, RMB 2,252,645,588 and RMB 339,826,542 (US$ 49,425,721), respectively. The sum amountsof cash and cash equivalents and restricted cash reported on the consolidated balance sheets as of December 31, 2016, 2017 and 2018 are RMB 785,769,977,RMB 9,084,951,709, and RMB 2,841,014,916 (US$ 413,208,482), respectively, which are equal to cash and cash equivalents, and restricted cash at the endof 2016, 2017 and 2018 on the consolidated statement of cash flows.Financial InstrumentsIn January 2016, the FASB issued ASU No. 2016-01, Financial Instruments – Overall (Subtopic 825-10), which requires equity investments (except thoseaccounted for under the equity method of accounting or those that result in consolidation of the investee) to be measured at fair value with changes infair value recognized in net income. However, an entity may choose to measure equity investments that do not have readily determinable fair valuesat cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similarinvestment of the same issuer. The Company adopted this standard update effective January 1, 2018, using the prospective method. The standard updatedid not have a material impact on the Company’s statement of financial position.Recent accounting pronouncementsIn February 2016, the FASB issued ASU No. 2016-02, Leases, which requires lessees to recognize assets and liabilities on the balance sheet for all leases, withcertain exceptions. In addition, through improved disclosure requirements, the standard update will enable users of financial statements to furtherunderstand the amount, timing, and uncertainty of cash flows arising from leases. This standard update allows for a modified retrospective applicationand is effective for interim and annual periods beginning after December 15, 2018, and early adoption is permitted. The most significant impact of thestandard relates to the right-of-use assets and lease liability.The Company will adopt the new standard effective January 1, 2019, using the modified retrospective transition method. As of December 31, 2018, theamount of right-of-use assets and lease liability would have been approximately RMB54 million (US$ 8million) and RMB53 million (US$ 8million).F-36Table of Contents QUDIAN INC.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continuedFOR THE YEARS ENDED DECEMBER 31, 2016, 2017 AND 2018(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 - continuedIn 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 financial instruments heldby financial institutions and other organizations. This ASU requires the measurement of all expected credit losses for financial assets held at the reportingdate based on historical experience, current conditions, and reasonable and supportable forecasts. This ASU requires enhanced disclosures to help investorsand other financial statement users better understand significant estimates and judgments used in estimating credit losses, as well as the credit quality andunderwriting standards of the Company’s portfolio. These disclosures include qualitative and quantitative requirements that provide additional informationabout the amounts recorded in the financial statements. This ASU is effective for interim and annual periods beginning after December 15, 2019, and earlyadoption is permitted. The Company is 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. 2017-04, Simplifying the Test for Goodwill Impairment, which simplifies the accounting for goodwill impairmentby eliminating Step two from the goodwill impairment test. If the carrying amount of a reporting unit exceeds its fair value, an impairment loss shall berecognized 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 iseffective for annual and interim impairment tests performed in periods beginning after December 15, 2019. Early adoption is permitted for all entities forannual and interim goodwill impairment testing dates on or after January 1, 2017. The guidance should be applied on a prospective basis. The Company doesnot believe this standard will have a material impact on its consolidated financial statements.In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements forFair Value Measurement, which eliminates certain disclosure requirements for fair value measurements for all entities, requires public entities to disclosecertain new information and modifies some disclosure requirements. The new guidance is effective for all entities for fiscal years beginning after 15 December2019 and for interim periods within those fiscal years. The Company is in the process of evaluating the impact of adoption of this guidance on itsconsolidated financial statements.3. Restricted cashRestricted cash mainly represents (i) cash held by the consolidated trusts through segregated bank accounts; (ii) time deposits that are pledged for short-termbank loans; (iii) security deposits held in designated bank accounts for the provision of guarantee. Such restricted cash is not available to fund the generalliquidity needs of the Company.4. Short-term investmentsShort-term investments consist 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 debt securitiesand central bank bills. The Company valued the short-term investments based on the quoted subscription/redemption price published by China MerchantsBank and China CITIC Bank. The realized investment income of short-term investments is recognized in the consolidated statements of comprehensiveincome.F-37Table of Contents QUDIAN INC.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continuedFOR THE YEARS ENDED DECEMBER 31, 2016, 2017 AND 2018(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, 2017 2018 RMB RMB US$ Short-term loan principal and financing service fee receivables: Loan principal and financing service fee receivables 9,277,798,700 8,987,655,812 1,307,200,321 Less: allowance for loan principal and financing service fee receivables (519,254,006) (569,834,399) (82,878,976)Short-term loan principal and financing service fee receivables, net 8,758,544,694 8,417,821,413 1,224,321,345 Long-term loan principal and financing service fee receivables: Loan principal and financing service fee receivables — 681,153,632 99,069,687 Less: allowance for loan principal and financing service fee receivables — (15,500,802) (2,254,498)Long-term loan principal and financing service fee receivables, net — 665,652,830 96,815,189 As of December 31, 2017 and 2018, loans amounting to RMB 2,334,820,237 and RMB 1,511,540,000 (US$ 219,844,375), respectively, were transferred tocertain Funding 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, 2017 and 2018, respectively. As of December 31, 2017 2018 RMB RMB US$ Nonaccrual loan principal 181,193,812 298,090,833 43,355,513 Less: allowance for nonaccrual loan principal (147,790,782) (249,337,315) (36,264,608)Nonaccrual loan principal, net 33,403,030 48,753,518 7,090,905 F-38Table of Contents QUDIAN INC.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continuedFOR THE YEARS ENDED DECEMBER 31, 2016, 2017 AND 2018(Amounts in Renminbi (“RMB”) and US dollar (“US$”), except for number of shares and per share data) 5. Loan principal and financing service fee receivables - continued5.3 The following table presents the aging of past-due loan principal and financing service fee receivables as of December 31, 2017: 1-30 days 31-60 days 61-90 days 91-120 days 121-150days 151-180days Total pastdue Current Total Total RMB RMB RMB RMB RMB RMB RMB RMB RMB US$ Domestic consumer loans (uncollateralized) -Loan principal 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 -Financing servicefee receivables 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 The following table presents the aging of past-due loan principal and financing service fee receivables as of December 31, 2018: 1-30 days 31-60 days 61-90 days 91-120days 121-150days 151-180days Total pastdue Current Total Total RMB RMB RMB RMB RMB RMB RMB RMB RMB US$ Domestic consumer loans (uncollateralized) -Loan principal 153,188,330 108,534,529 104,483,171 103,666,846 99,037,153 95,386,834 664,296,863 8,882,336,723 9,546,633,586 1,388,500,267 -Financing service fee receivables 4,328,154 5,544,754 7,107,525 - - - 16,980,433 105,195,425 122,175,858 17,769,741 157,516,484 114,079,283 111,590,696 103,666,846 99,037,153 95,386,834 681,277,296 8,987,532,148 9,668,809,444 1,406,270,008 As of December 31, 2017 and 2018, all loans which are past due 90 days or more are nonaccrual. F-39Table of Contents QUDIAN INC.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continuedFOR THE YEARS ENDED DECEMBER 31, 2016, 2017 AND 2018(Amounts in Renminbi (“RMB”) and US dollar (“US$”), except for number of shares and per share data) 5. Loan principal and financing service fee receivables - continued5.4 Movement of allowance for loan principal and financing service fee receivables is as follows: As of December 31, 2017 2018 Loanprincipal Financingservice feereceivables Total Loanprincipal Financingservice feereceivables Total RMB RMB RMB RMB RMB RMB US$ Balance at the beginning of the year 103,111,134 2,002,605 105,113,739 506,296,690 12,957,316 519,254,006 75,522,363 Additions 594,209,005 10,954,711 605,163,716 1,139,260,526 4,153,561 1,143,414,087 166,302,682 Charge-offs (191,023,449) - (191,023,449) (1,077,332,892) - (1,077,332,892) (156,691,571)Balance at the end of the year 506,296,690 12,957,316 519,254,006 568,224,324 17,110,877 585,335,201 85,133,474 Evaluated for impairment on a portfolio basis 506,296,690 12,957,316 519,254,006 568,224,324 17,110,877 585,335,201 85,133,474 6. Finance lease receivables6.1 Finance lease receivables consists of the following: As of December 31, 2017 2018 RMB RMB US$ Gross investment in finance lease receivables 33,018,834 1,381,250,930 200,894,616 Less: unearned income (6,610,522) (194,596,102) (28,302,830)Net investment in finance lease receivables 26,408,312 1,186,654,828 172,591,786 Less: allowance for finance lease receivables — (28,765,413) (4,183,756)Finance lease receivables, net 26,408,312 1,157,889,415 168,408,030 6.2 The following table presents nonaccrual finance lease receivables as of December 31, 2017 and 2018, respectively. As of December 31, 2017 2018 RMB RMB US$ Nonaccrual finance lease receivables — 15,486,171 2,252,370 Less: allowance for nonaccrual financial lease receivables — (2,399,986) (349,063)Nonaccrual finance lease receivables, net — 13,086,185 1,903,307 6.3 As of December 2017, all finance lease receivables are current. The following table presents the aging of past-due finance lease receivables as ofDecember 31, 2018: 1-30 31-60 61-90 90-180 Total past days days days days due Current Total Total RMB RMB RMB RMB RMB RMB RMB US$ Finance lease receivables 28,615,122 16,647,141 11,380,743 15,486,171 72,129,177 1,114,525,651 1,186,654,828 172,591,786 As of December 31, 2017 and 2018, all finance lease receivables which are past due 90 days or more are nonaccrual.F-40Table of Contents QUDIAN INC.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continuedFOR THE YEARS ENDED DECEMBER 31, 2016, 2017 AND 2018(Amounts in Renminbi (“RMB”) and US dollar (“US$”), except for number of shares and per share data) 6.Finance lease receivables - continued6.4 The following table presents the future minimum lease payments to be received: Less than 1 year 1 - 2 years 2 - 3 years 3 - 4 years 4 - 5 years Total RMB RMB RMB RMB RMB RMB As of December 31, 2017 Finance lease receivables 9,112,991 9,112,991 8,835,630 5,957,222 — 33,018,834 Less than 1 year 1 - 2 years 2 - 3 years 3 - 4 years 4 - 5 years Total RMB RMB RMB RMB RMB RMB As of December 31, 2018 Finance lease receivables 550,315,459 496,391,986 284,434,371 50,109,114 — 1,381,250,930 Less than 1 year 1 - 2 years 2 - 3 years 3 - 4 years 4 - 5 years Total US$ US$ US$ US$ US$ US$ As of December 31, 2018 Finance lease receivables 80,040,064 72,197,220 41,369,264 7,288,068 — 200,894,616 6.5 Movement of allowance for finance lease receivables for the year ended December 31, 2018 is as follows: RMB US$ Balance at the beginning of the year — — Additions 32,010,270 4,655,701 Charge-offs (3,244,857) (471,945)Balance at the end of the year 28,765,413 4,183,756 Evaluated for impairment on a portfolio basis 28,765,413 4,183,756 7.Other current assetsOther current assets consist of the following: As of December 31, 2017 2018 RMB RMB US$ Prepaid expenses 52,989,718 68,691,524 9,990,768 Prepayments for vehicles 7.1 141,082,860 30,944,103 4,500,633 Inventory — 128,014,636 18,618,957 Deposits in trust protection fund 7.2 72,490,890 50,276,500 7,312,414 Guarantee deposits held by Funding Partners 121,731,691 568,378,857 82,667,276 Receivables from third party payment service providers 7.3 262,494 821,217,132 119,441,078 Receivables from service providers 9,296,505 117,432,654 17,079,871 Others 96,319,640 48,388,467 7,037,810 Total 494,173,798 1,833,343,873 266,648,807 Less: Allowance for other current assets (11,822,819) (15,121,668) (2,199,355) 482,350,979 1,818,222,205 264,449,452 7.1 The Company prepaid vehicle vendors for its automobile financing services.7.2 According to the relevant PRC regulations, the consolidated trusts are required to deposit 1% of the trusts’ capital to the trust protection fund, which willbe released when the trusts are liquidated.7.3 The Company has accounts with third-party payment service providers mainly to grant and collect loans. The balance of receivables from third-partypayment service providers is unrestricted as to withdrawal and use and readily available to the Company on demand.F-41Table of Contents QUDIAN INC.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continuedFOR THE YEARS ENDED DECEMBER 31, 2016, 2017 AND 2018(Amounts in Renminbi (“RMB”) and US dollar (“US$”), except for number of shares and per share data) 8. Investment in equity method investeeOn October 17, 2016, the Company made a commitment to invest RMB 190 million in cash for 45.9% of the equity interest in Ganzhou QuCampusTechnology Co., Ltd (“Ganzhou QuCampus”) which mainly operates computer services, advisory, and online merchandise services. As of December 31,2018, the Company contributed RMB 70 million in Ganzhou QuCampus and held a 45.9% equity interest in Ganzhou QuCampus. As the Company hassignificant influence over Ganzhou QuCampus, Ganzhou QuCampus was accounted for as an equity method investment. The difference between the RMB190 million and RMB 70 million is a commitment to make future contributions to Ganzhou QuCampus. The commitment generally would not be included inthe initial measurement of equity method investment unless other authoritative guidance requires it. The cost of the investment over the proportional fairvalue of the assets and liabilities of the investee is reflected in the Company’s memo accounts as “equity method goodwill”. The equity method goodwill isnot subsequently amortized and is not tested for impairment under ASC 350. Equity method investments is reviewed periodically for impairment inaccordance with paragraph ASC 323-10-35-32. The Company’s share of loss in Ganzhou QuCampus for the years ended December 31, 2016, 2017 and 2018was RMB 4,805,183, RMB 20,676,273 and RMB11,319,279 (US$ 1,646,321), respectively, which was recognized in the consolidated statements ofcomprehensive income. The Company expects that Ganzhou QuCampus has the ability to recover the carrying amount of the investment and determined thatthe investment is not impaired as of December 31, 2017 and 2018. 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 Transfers andServicing the loan principals are not derecognized upon transfer as they are not legally isolated. Hence, the Company continues to report the transferred loanprincipal in the consolidated balance sheets and account for the proceeds from the transfer as a secured borrowing with pledge of collateral.The following table presents short-term borrowings from the Funding Partners as of December 31, 2017 and 2018. Short-term borrowings include borrowingswith terms shorter than one year, the current portion of the long-term borrowings and long-term borrowings with early repayment options that are exercisableby the Funding Partners on demand: As of December 31, Funding Partners Fixed annual rate (%) Term* 2017 2018 RMB RMB US$ P2P platforms 7.5% to 12% 1 to 12 months 79,410,422 — — Other institutions 5.8% to 10% 27 to 365 days 1,227,347,947 1,553,910,792 226,006,951 Trust beneficiaries 6% to 16% 12 to 24 months 5,389,958,760 2,250,801,743 327,365,536 Private financial assets trading platform 7.5% to 12% 14 to 365 days 1,087,388,643 — — Bank 5.7% to 7% 1 to 12 months 195,308,750 55,728,040 8,105,307 7,979,414,522 3,860,440,575 561,477,794 *Includes current portion of borrowings greater than 1 year. The following table presents long-term borrowings from Funding Partners as of December 31, 2017 and 2018: As of December 31, Funding Partners Fixed annual rate (%) Term 2017 2018 RMB RMB US$ P2P platforms 6% to 12% 13 to 34 months 23,905 — — Trust beneficiaries 7.4% to 10% 13 to 36 months 510,000,000 413,400,000 60,126,536 510,023,905 413,400,000 60,126,536 The weighted average interest rate for the outstanding borrowings was approximately 9.40% and 7.91% as of December 31, 2017 and 2018, respectively.F-42Table of Contents QUDIAN INC.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continuedFOR THE YEARS ENDED DECEMBER 31, 2016, 2017 AND 2018(Amounts in Renminbi (“RMB”) and US dollar (“US$”), except for number of shares and per share data) 9. Short-term and long-term borrowings - continuedThe following table sets forth the contractual obligations which has not included impact of discount of time value as of December 31, 2017 and 2018: Payment due by period Less than1 year 1 – 2years Greater than2 years Total As of December 31, 2017 Long-term borrowings and interest payables (RMB) 38,017,759 520,336,141 1,959 558,355,859 As of December 31, 2018 Long-term borrowings and interest payables (RMB) 36,560,000 159,548,333 289,673,333 485,781,666 As of December 31, 2018 Long-term borrowings and interest payables (US$) 5,317,431 23,205,343 42,131,239 70,654,013 10. Accrued expenses and other current liabilitiesAccrued expenses and other current liabilities consist of the following: As of December 31, 2017 2018 RMB RMB US$ Accrued payroll 81,623,990 91,993,195 13,379,855 Tax payables 32,262,859 166,802,584 24,260,430 Payable to suppliers 85,772,102 57,353,842 8,341,770 Payable to external service providers 45,122,393 52,443,595 7,627,605 Others 70,911,451 138,893,221 20,201,181 315,692,795 507,486,437 73,810,841 11. Guarantee liabilitiesThe movement of guarantee liabilities is as follows: For the years ended December 31, 2017 2018 RMB RMB US$ Balance at beginning of the year 6,207,812 46,981,325 6,833,150 Fair value of guarantee liabilities upon the inception of new loans 119,683,496 526,265,099 76,542,084 Performed guarantee (124,798,134) (387,234,512) (56,320,924)Change in fair value of guarantee liabilities 45,888,151 116,592,666 16,957,700 Balance at end of the year 46,981,325 302,604,578 44,012,010 As of December 31, 2017 and 2018, the maximum potential undiscounted future payment the Company would be required to make was RMB 2,082 millionand RMB 10,703 million (US$ 1,557 million), respectively. The term of the guarantee is the same as the term of loans facilitated under the arrangements withthe Funding Partners, which ranges from 7 days to 4 years, as of December 31, 2018.F-43Table of Contents QUDIAN INC.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continuedFOR THE YEARS ENDED DECEMBER 31, 2016, 2017 AND 2018(Amounts in Renminbi (“RMB”) and US dollar (“US$”), except for number of shares and per share data) 12. Cost of other revenuesCost of other revenues consists of the following: For the years ended December 31, 2016 2017 2018 RMB RMB RMB US$ Interest expenses of borrowings 210,950,030 686,889,761 547,368,755 79,611,484 Other lending related costs 56,911,976 170,060,910 184,417,017 26,822,343 267,862,006 856,950,671 731,785,772 106,433,827 13.Interest and investment income, netInterest and investment income, net consists of the following: For the years ended December 31, 2016 2017 2018 RMB RMB RMB US$ Share of loss from equity method investment (4,805,183) (20,676,273) (11,319,279) (1,646,321)Investment income of short-term investments 3,406,166 3,526,506 11,282,694 1,641,000 Interest income 3,256,345 21,360,670 35,776,919 5,203,537 1,857,328 4,210,903 35,740,334 5,198,216 14. Income taxesCayman IslandsUnder the current laws of the Cayman Islands, the Company is not subject to tax on income or capital gain arising in Cayman Islands. Additionally, uponpayments of dividends by the Company to its shareholders, no Cayman Islands withholding tax will be imposed.British Virgin IslandsUnder the current laws of the BVI, Qudian BVI is not subject to tax on income or capital gains. In addition, upon payments of dividends by these companiesto their shareholders, no British Virgin Islands withholding tax will be imposed.Hong KongQudian HK and Qufenqi HK are incorporated in Hong Kong and are subject to Hong Kong profits tax of 16.5% on their activities conducted in Hong Kong.PRCThe VIEs and their subsidiaries domiciled in the PRC are subject to the statutory rate of 25%, in accordance with the Enterprise Income Tax law (the ‘‘EITLaw’’), which was effective since January 1, 2008 except for the following entities eligible for preferential tax rates.As stipulated by the Taxation Law of PRC, the subsidiaries in Ganzhou are qualified enterprises engaged in industry under the Western DevelopmentStrategy and are therefore entitled to preferential tax rate of 15%. Xinjiang Qudian Technology Co., Ltd. is a qualified enterprise engaged in industry as acompany established in the special economic development zone and is therefore entitled to an exemption from income tax from January 1, 2017 to December31, 2020. Xiamen Qudian Technology Co., Ltd. was recognized as Software Enterprise and was thereby entitled to an income tax exemption for two yearsbeginning from its first profitable taxation year of 2017, and a 50% reduction for the subsequent three years starting from the year of 2019.F-44Table of Contents QUDIAN INC.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continuedFOR THE YEARS ENDED DECEMBER 31, 2016, 2017 AND 2018(Amounts in Renminbi (“RMB”) and US dollar (“US$”), except for number of shares and per share data) 14. Income taxes - continuedDividends, interests, rent or royalties payable by the Company’s PRC subsidiaries, to non-PRC resident enterprises, and proceeds from any such non-residententerprise investor’s disposition of assets (after deducting the net value of such assets) shall be subject to 10% withholding tax, unless the respective non-PRC resident enterprise’s jurisdiction of incorporation has a tax treaty or arrangements with China that provides for a reduced withholding tax rate or anexemption from withholding tax.The EIT Law of the PRC includes a provision specifying that legal entities organized outside PRC will be considered residents for Chinese income taxpurposes if their place of effective management or control is within PRC. If legal entities organized outside PRC were considered residents for Chineseincome tax purpose, they would become subject to the EIT Law on their worldwide income. This would cause any income from legal entities organizedoutside PRC earned to be subject to PRC’s 25% EIT. The Implementation Rules to the EIT Law provides that non-resident legal entities will be considered asPRC residents if substantial and overall management and control over the manufacturing and business operations, personnel, accounting, and properties, etc.reside within PRC.Despite the present uncertainties resulting from the limited PRC tax guidance on the issue, the Company does not believe that the legal entities organizedoutside PRC should be characterized as PRC residents for EIT Law purposes.The current and deferred component of income tax expenses which were substantially attributable to the Company’s PRC subsidiaries, VIEs and subsidiariesof the VIEs, are as follows: For the years ended December 31, 2016 2017 2018 RMB RMB RMB US$ Current income tax expenses 144,628,149 353,218,915 285,682,721 41,550,828 Deferred income tax expenses (17,787,699) (97,672,912) (127,952,203) (18,609,876)Total income tax expenses 126,840,450 255,546,003 157,730,518 22,940,952 The principal components of the deferred tax assets and liabilities are as follows: As of December 31, 2017 2018 RMB RMB US$ Non-current deferred tax assets Allowance for loan principal and financing service fee receivables 138,683,016 307,612,727 44,740,416 Allowance for finance lease receivable — 8,002,568 1,163,925 Allowance for other current assets 2,300,135 3,124,847 454,490 Guarantee liabilities 3,700,872 30,238,834 4,398,056 Share-based compensation 26,240,241 13,849,997 2,014,399 Investment loss under equity method 6,370,364 9,200,184 1,338,111 Deferred revenue — 5,091,787 740,570 Net operating loss carry forwards 80,539,001 96,242,160 13,997,841 Less: valuation allowance (142,373,018) (229,950,290) (33,444,883)Non-current deferred tax assets, net 115,460,611 243,412,814 35,402,925 The Company operates through its subsidiaries, VIEs and subsidiaries of the VIEs and valuation allowance is considered on an individual entity basis. TheCompany recorded valuation allowance against deferred tax assets of those entities that were in a three-year cumulative financial loss and are not forecastingprofits in the near future as of December 31, 2017 and 2018. In making such determination, the Company also evaluated a variety of factors including theCompany’s operating history, accumulated deficit, existence of taxable temporary differences and reversal periods.F-45Table of Contents QUDIAN INC.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continuedFOR THE YEARS ENDED DECEMBER 31, 2016, 2017 AND 2018(Amounts in Renminbi (“RMB”) and US dollar (“US$”), except for number of shares and per share data) 14. Income taxes - continued As of December 31, 2017 and 2018, the Company had deferred tax assets related to net operating loss carry forwards of RMB 80,539,001 and RMB96,242,160 (US$ 13,997,841), respectively, from its subsidiaries, VIEs and subsidiaries of the VIEs registered in the PRC, which can be carried forward tooffset taxable income. The net operating losses will expire in years 2019 to 2023 if not utilized.Reconciliation between the income taxes expense computed by applying the PRC tax rate to profit before income taxes and the actual provision for incometaxes is as follows: For the years ended December 31, 2016 2017 2018 RMB RMB RMB US$ Profit before income tax 703,493,068 2,420,004,823 2,649,046,731 385,287,867 PRC statutory income tax rate 25% 25% 25% 25%Income tax at statutory tax rate 175,873,268 605,001,206 662,261,683 96,321,967 Effect of different tax rates (72,661,772) (367,422,131) (574,131,524) (83,503,967)Exempt income — (2,064,183) (2,720,020) (395,611)Expenses not deductible for tax purposes 183,808 4,298,559 27,662,307 4,023,316 Over-accrued EIT for previous years — — (16,309,757) (2,372,156)Financial subsidy (12,123,338) (32,929,930) (31,810,061) (4,626,581)Tax rate change — — 5,200,618 756,398 Changes in valuation allowance 35,568,484 48,662,482 87,577,272 12,737,586 Income tax expenses 126,840,450 255,546,003 157,730,518 22,940,952 Management has asserted to indefinitely reinvest the undistributed earnings of the subsidiaries located in the PRC. The cumulative amount of the temporarydifferences in respect of investments in foreign subsidiaries is RMB 6,015 million (US$ 875 million) as of December 31, 2018. Upon repatriation of theforeign subsidiaries and the VIEs’ earnings, in the form of dividends or otherwise, the Company would be subject to various PRC income taxes includingwithholding income tax. The related unrecognized deferred tax liabilities were approximately RMB 2,406 million (US$ 350 million).Unrecognized Tax Benefit As of December 31, 2017 and 2018, the Company had nil unrecognized tax benefit. A roll-forward of unrecognized tax benefits is as follows: For the years ended December 31, 2017 2018 RMB RMB US$ Balance at beginning of the year — — — Additions — 74,169,005 10,787,434 Decreases — (74,169,005) (10,787,434)Balance at end of the year — — — In general, the PRC tax authority has up to five years to conduct examinations of the Company’s tax filings. Accordingly, as of December 31, 2018, the taxyears ended December 31, 2014 through period ended as of the reporting date for the Company’s PRC subsidiaries remain open to examination by the PRCtax authorities.F-46Table of Contents QUDIAN INC.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continuedFOR THE YEARS ENDED DECEMBER 31, 2016, 2017 AND 2018(Amounts in Renminbi (“RMB”) and US dollar (“US$”), except for number of shares and per share data) 15. Earnings per shareThe following table sets forth the computation of basic earnings per share for the years ended December 31, 2016, 2017 and 2018: For the years ended December 31, 2016 20172018 RMB RMB RMB RMB US$ RMB US$ Ordinaryshare Class A Class B Class A Class A Class B Class B Earnings per share – basic: Numerator: Allocation of net income attributable to Qudian Inc. for basic computation 576,652,618 1,077,159,077 1,087,299,743 1,994,976,030 290,157,229 496,340,183 72,189,686 Millions of Shares (denominator): Weighted average number of ordinary share outstanding – basic 79.31 62.90 63.49 255.19 255.19 63.49 63.49 Denominator used for basic earnings per share 79.31 62.90 63.49 255.19 255.19 63.49 63.49 Earnings per share – basic 7.27 17.13 17.13 7.82 1.14 7.82 1.14 The following table sets forth the computation of diluted earnings per share for the years ended December 31, 2016, 2017 and 2018: For the years ended December 31, 2016 2017 2018 RMB RMB RMB RMB US$ RMB US$ Ordinaryshare Class A Class B Class A Class A Class B Class B Earnings per share – diluted: Numerator: Allocation of net income attributable to Qudian Inc. for diluted computation 576,652,618 1,714,215,136 450,243,684 2,000,018,251 290,890,590 491,297,962 71,456,325 Reallocation of net income attributable to Qudian Inc. as a result of conversion of — 450,243,684 — 491,297,962 71,456,325 — — Class B to Class A shares Allocation of net income attributable to Qudian Inc 576,652,618 2,164,458,820 450,243,684 2,491,316,213 362,346,915 491,297,962 71,456,325 Millions of Shares (denominator): Weighted average number of ordinary share outstanding– basic 79.31 62.90 63.49 255.19 255.19 63.49 63.49 Dilutive effect of preferred shares 222.46 177.36 — — — — — Conversion of Class B to Class A ordinary shares — 63.49 — 63.49 63.49 — — Adjustments for dilutive share options 2.01 1.47 — 3.28 3.28 — — Denominator used for diluted earnings per share 303.78 305.22 63.49 321.96 321.96 63.49 63.49 Earnings per share – diluted 1.90 7.09 7.09 7.74 1.13 7.74 1.13 F-47Table of Contents QUDIAN INC.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continuedFOR THE YEARS ENDED DECEMBER 31, 2016, 2017 AND 2018(Amounts in Renminbi (“RMB”) and US dollar (“US$”), except for number of shares and per share data) 15. Earnings per share - continuedThe following table sets forth the computation of basic and diluted earnings per ADS for the years ended December 31, 2017 and 2018: For the years ended December 31, 2016 2017 2018 RMB RMB RMB RMB US$ RMB US$ Ordinaryshare Class A Class B Class A Class A Class B Class BEarnings per share – ADS: Denominator used for earnings per ADS – basic 41.44 113.82 113.82 Denominator used for earnings per ADS – diluted 41.44 114.99 114.99 Earnings per ADS – basic 17.13 7.82 1.14 Earnings per ADS – diluted 7.09 7.74 1.13 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 receivables andborrowings at amortized cost. The carrying value of loan principal and financing service fee receivables approximate their fair value due to their short-termnature and are considered a level 3 measurement. The fair value was estimated by discounting the scheduled cash flows through to estimated maturity usingestimated discount rates based on current offering rates of comparable institutions with similar services. The carrying value of the Company’s debtobligations approximate fair value as the borrowing rates are similar to the market rates that are currently available to the Company for financing obligationswith similar terms and credit risks and represent a level 2 measurement. The guarantee liabilities are presented as a level 3 measurement, with fair valueestimated by discounting expected future payouts, net charge off rates, expected collection rates and a discount rate for time 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 whenever events orchanges 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. As of December 31, 2017, the short-term investments were wealthmanagement products issued by China Merchants Bank that are redeemable at any time. The Company valued the short-term investments based on thequoted subscription/redemption price published by China Merchants Bank. As of December 31, 2018, the short-term investment was nil.The Company measured its guarantee liabilities at fair value on a recurring basis. As the Company’s guarantee liabilities are not traded in an active marketwith readily observable prices, the Company uses significant unobservable inputs to measure the fair value of guarantee liabilities. Guarantee liabilities arecategorized in the Level 3 valuation hierarchy based on the significance of unobservable factors in the overall fair value measurement. The Company did nottransfer any assets or liabilities in or out of level 3 during the years ended December 31, 2017 and 2018. F-48Table of Contents QUDIAN INC.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continuedFOR THE YEARS ENDED DECEMBER 31, 2016, 2017 AND 2018(Amounts in Renminbi (“RMB”) and US dollar (“US$”), except for number of shares and per share data) 16. Fair value measurements - continued Assets and liabilities measured at fair value on a recurring basis - continuedThe following table summarizes the Company’s financial assets and liabilities measured and recorded at fair value on recurring basis as of December 31, 2017and 2018: As of December 31, 2017 Activemarket(Level 1) Observableinput(Level 2) Non-observableinput(Level 3) Total RMB RMB RMB RMB Assets: Short-term investments Monetary wealth management products — 300,000,000 — 300,000,000 Liabilities: Guarantee liabilities — — 46,981,325 46,981,325 As of December 31, 2018 Activemarket(Level 1) Observableinput(Level 2) Non-observableinput(Level 3) Total RMB RMB RMB RMB Liabilities: Guarantee liabilities — — 302,604,578 302,604,578 As of December 31, 2018 Activemarket(Level 1) Observableinput(Level 2) Non-observableinput(Level 3) Total US$ US$ US$ US$ Liabilities: Guarantee liabilities — — 44,012,010 44,012,010 At December 31, 2017 and 2018, 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 model is usedto determine fair value, the significant input used in the valuation model is the discount rate applied to present value the projected cash flows. Increases inthe discount rate can significantly lower the fair value of guarantee liabilities; conversely a decrease in the discount rate can significantly increase the fairvalue of the guarantee liabilities. The discount rate is determined based on the market rates. Increase in the expected delinquency rates can significantlyincrease the fair value of guarantee liabilities; conversely a decrease in the expected delinquency rates can significantly decrease the fair value of guaranteeliabilities.F-49Table of Contents QUDIAN INC.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continuedFOR THE YEARS ENDED DECEMBER 31, 2016, 2017 AND 2018(Amounts in Renminbi (“RMB”) and US dollar (“US$”), except for number of shares and per share data) 16. Fair value measurements - continued Assets and liabilities measured at fair value on a recurring basis - continued Significant Unobservable Inputs Range of InputsWeighted - AverageAs of December 31, Financial Liabilities Unobservable Input 2017 2018 Guarantee liabilities Discount rates 5.87% 4.89% Expected delinquency rates 0.70%-6.24% 0.32%-10.47% Refer to Note 11 for additional information about Level 3 guarantee liabilities measured at fair value on a recurring basis for the years ended December 31,2017 and 2018.17.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 before December 31, 2015Alipay.com Co., Ltd. Company controlled by party that has significant influence over the Company before December 8, 2018Ganzhou QuCampus Company’s equity method investeeGanzhou Happy Share Capital Management LLP Company controlled by FounderZhima Credit Management Co., Ltd. Company controlled by party that has significant influence over the Company before December 8, 2018Chongqing Alibaba Small Loan Co., Ltd. Company controlled by party that has significant influence over the Company before December 8, 2018Ant Zhixin (Hangzhou) Information Technology Co., Ltd. Company controlled by party that has significant influence over the Company before December 8, 2018Guosheng Financial Holding Inc. Company controlled by Director before August 24, 2018Guosheng Securities Asset Management Co., Ltd. Company controlled by Director before August 24, 2018Alibaba Cloud Computing Co., Ltd. Company controlled by the ultimate controlling individual of shareholder before December 8, 2018Key management and their immediate families The Company’s key management and their immediate families F-50Table of Contents QUDIAN INC.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continuedFOR THE YEARS ENDED DECEMBER 31, 2016, 2017 AND 2018(Amounts in Renminbi (“RMB”) and US dollar (“US$”), except for number of shares and per share data) 17.Related party balances and transactions - continued17.1 Amounts due to related parties As of December 31, Note 2017 2018 RMB RMB US$ Qufenqi Inc.(i) 813,326 — — Guosheng Financial Holding Inc.(ii) 631,746,787 — — Guosheng Securities Asset Management Co., Ltd.(ii) 83,475,455 — — Alipay.com Co., Ltd. 418,597 — — Zhima Credit Management Co., Ltd.(iii) 3,108,873 — — Total 719,563,038 — — (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 2017 2018 RMB RMB US$ Short-term amounts due from related parties Qufenqi Inc. 27,475 — — Ganzhou QuCampus 23,714 — — Ganzhou Happy Share Capital Management LLP 770 2,071 301 Alipay.com Co., Ltd.(i) 549,842,011 — — Alibaba Cloud Computing Co., Ltd. 320,853 — — Key management and their immediate families Loan principal and financing service fee receivables(ii) 1,000,000 — — Total short-term amounts due from related parties 551,214,823 2,071 301 Total amounts due from related parties 551,214,823 2,071 301 (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. As of December 31, 2018, the balance was presented in other current assets in the consolidated balance sheets.(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, 2017 2018 RMB RMB US$ Balance at beginning of the year 1,272,318 1,000,000 145,444 Loan principal and financing service fee receivables — — — Payments (272,318) (1,000,000) (145,444)Balance at end of the year 1,000,000 — — As of December 31, 2017 and 2018, the total outstanding balance, which was due on demand, interest free and uncollateralized due from these related parties,was RMB1,000,000 and RMB nil (US$ nil), respectively.The Company does not plan to enter into similar transactions with related parties in the future.F-51Table of Contents QUDIAN INC.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continuedFOR THE YEARS ENDED DECEMBER 31, 2016, 2017 AND 2018(Amounts in Renminbi (“RMB”) and US dollar (“US$”), except for number of shares and per share data) 17.Related party balances and transactions - continued17.3 Transactions with related parties For the years ended December 31, 2016 2017 2018 RMB RMB RMB US$ Service income Key management and their immediate families 90,539 4,551 — — Cost of revenues Alipay.com Co., Ltd. 41,186,645 114,175,547 58,835,038 8,557,201 Zhima Credit Management Co., Ltd. 6,150,041 21,435,176 9,265,375 1,347,593 Alibaba Cloud Computing Co., Ltd. — 23,173,116 30,297,435 4,406,579 Chongqing Alibaba Small Loan Co., Ltd. — 3,151,324 — — Ant Zhixin (Hangzhou) Information Technology Co., Ltd. — — 1,095,684 159,361 Guosheng Financial Holding Inc. — 56,746,787 42,900,685 6,239,646 Guosheng Securities Asset Management Co., Ltd. — 2,327,277 5,216,614 758,725 47,336,686 221,009,227 147,610,831 21,469,105 Sales and marketing Zhima Credit Management Co., Ltd. 36,149,807 16,033,107 — — Alipay.com Co., Ltd. — 222,081,862 32,542,281 4,733,078 36,149,807 238,114,969 32,542,281 4,733,078 18. Share-based compensationStock options On December 9, 2016, as a part of the restructuring, the Board of Directors of Qudian Inc. approved the 2016 Equity Incentive Plan (the “2016 Plan”), as wellas the cancelation of the 2015 Share Plan and the 2015 Incentive Plan Supplementary Agreement which were approved on December 26, 2015 and May 1,2016, respectively. During the year ended December 31, 2016, the Company granted a total of 15,299,019 of share options for the ordinary shares of QudianInc. under 2016 Plan. The Company granted 12,364,319 share options under the 2016 Plan to the employees as replacement awards for the 2015 plan. All theshare options granted under 2016 Plan were vested 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 before theyare exercised as instructed by the employees. As of December 31, 2016, 13,865,219 options are held by the trustee of the Share Based Payment Trust.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 2016Plan. 20,000 of the options were granted to two independent non-executive directors. 25% of the options will vest upon each subsequent anniversary of theCompany’s IPO. On March 12, 2018, the Company granted 998,000 options under the 2016 Plan. On October 1, 2018, the Company granted 20,000 options under the 2016Plan. On November 30, 2018, the Company granted 10,000 options to one independent non-executive director under the 2016 Plan. On December 20, 2018,the Company granted 2,608,000 options under the 2016 Plan. 25% of the options will vest upon each subsequent anniversary of the engagement date. F-52Table of Contents QUDIAN INC.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continuedFOR THE YEARS ENDED DECEMBER 31, 2016, 2017 AND 2018(Amounts in Renminbi (“RMB”) and US dollar (“US$”), except for number of shares and per share data) 18. Share-based compensation - continuedStock options – continuedFor the year ended December 31, 2018, the Company estimated the fair value of the options based on the quoted share price at grant date. Due to the optionslow exercise price, the various assumptions used in the binomial option pricing model will not have a material impact in the calculation of the fair value ofthe options. For the years ended December 31, 2016 and 2017, the Company calculated the estimated fair value of the options on the respective grant datesusing a binomial option pricing model with assistance from independent valuation firm. Assumptions used to determine the fair value of share optionsgranted during 2016 and 2017 are summarized in the following table: For the years ended December 31, 2016 2017 Risk-free interest rate (%) 2.47 1.56 to 2.33 Volatility (%) 49.8 to 49.9 50.9 to 52.4 Expected exercise multiple 2.2 to 2.8 2.2 to 2.8 Dividend yield Nil Nil Expected life (in years) 10 10 Exercise price Nil Nil Fair value of ordinary shares (RMB) 25.89 to 26.04 81.94 to 94.22 The Company recognized compensation cost for the share options on a graded vesting basis. The total share-based compensation expenses recognized by theCompany for the share option granted were RMB 22,133,620, RMB 64,055,851 and RMB 57,981,487 (US$ 8,433,058) for the years ended December 31,2016, 2017 and 2018, respectively. A summary of share option activity under the 2016 Plan for the year ended December 31, 2018 is as follows: Weightedaverage Weightedaverage Weightedaverageremaining Aggregated Number ofshares exerciseprice grant datefair value contractualterm intrinsicvalue RMB RMB Years RMB Balance, December 31, 2017 15,752,273 — 28.51 8.97 1,358,130,772 Granted 3,636,000 — 53.79 Exercised (3,590,783) — 43.40 Forfeited (583,975) — 67.79 Balance, December 31, 2018 15,213,515 — 29.53 8.38 424,630,143 Vested and expected to vest as of December 31, 2018 14,813,554 — 31.53 8.38 413,466,692 Exercisable, December 31, 2018 9,864,962 — 25.25 7.96 275,344,667 The aggregate intrinsic value in the table above represents the difference between the Company’s closing stock price on the last trading day in 2018 and theexercise price. Total intrinsic value of options exercised for the years ended December 31, 2016, 2017 and 2018 was RMB nil, RMB nil and RMB155,850,409 (US$ 22,667,502) respectively. As of December 31, 2018, total unrecognized compensation expense relating to unvested share options was RMB 139,310,631(US$ 20,261,891). Theexpense is expected to be recognized over a weighted-average period of 3.52 years. F-53Table of Contents QUDIAN INC.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continuedFOR THE YEARS ENDED DECEMBER 31, 2016, 2017 AND 2018(Amounts in Renminbi (“RMB”) and US dollar (“US$”), except for number of shares and per share data) 18. Share-based compensation - continuedStock options - continued For the years ended December 31, 2016, 2017 and 2018, the Company allocated share-based compensation expense as follows: For the years ended December 31, 2016 2017 2018 RMB RMB RMB US$ Sales and marketing 690,486 1,890,690 5,641,771 820,562 General and administrative 18,986,103 42,848,932 38,586,741 5,612,209 Research and development 2,457,031 19,316,229 13,752,975 2,000,287 22,133,620 64,055,851 57,981,487 8,433,058 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, 2016,2017 and 2018 were RMB 11,253,841, RMB 15,931,076 and RMB 49,673,943 (US$ 7,224,775), respectively.Future minimum lease payments under non-cancelable operating leases agreements consist of the following as of December 31, 2018: RMB US$ Year ending December 31: 2019 29,504,842 4,291,301 2020 18,334,607 2,666,658 2021 and after 17,596,725 2,559,338 Total 65,436,174 9,517,297 The Company’s operating lease commitments have no renewal options, rent escalation clauses and restriction or contingent rents. Capital Commitments The Company’s capital commitments relate primarily to commitments in connection with its plan to build an office building and innovation center. Totalcapital commitments contracted but not yet reflected in the financial statements amounted to RMB 99,484,045 (US$ 14,469,354) as of December 31, 2018.All of the commitments relating to the construction will be settled in installments. Investment Commitment The Company’s investment commitment relates to its equity method investee Ganzhou QuCampus. Refer to Note 8 for additional information.F-54Table of Contents QUDIAN INC.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continuedFOR THE YEARS ENDED DECEMBER 31, 2016, 2017 AND 2018(Amounts in Renminbi (“RMB”) and US dollar (“US$”), except for number of shares and per share data) 20. 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 shares with anominal 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 the surrenderof 15,814,019 of the said issued ordinary shares (the “Surrendered Shares”) at no consideration and all the Surrendered Shares were canceled.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, immediately followingthe closing of the IPO, the Memorandum and Articles of Association was amended and restated such that the authorized share capital increased to800,000,000 ordinary shares at a par value of US$0.0001 per share, of which 656,508,828 shares as Class A ordinary shares and 63,491,172 as Class Bordinary shares. The rights of the holders of Class A and Class B ordinary shares are identical, except with respect to voting and conversion rights. Each shareof Class A ordinary shares is entitled to one vote per share and is not convertible into Class B ordinary shares under any circumstances. Each share of Class Bordinary shares is entitled to ten votes per share and is convertible into one Class A ordinary share at any time by the holder thereof. Upon any transfer ofClass 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 beautomatically converted into equal number of Class A ordinary shares.As of December 31, 2018 there were 243,425,092 and 63,491,172 Class A and Class B ordinary shares issued, 232,952,916 and 63,491,172 Class A and ClassB ordinary shares outstanding respectively.21. Treasury sharesOn November 11, 2017, the Board of Directors of the Company authorized a share repurchase program (“Share Repurchase Program”), pursuant to which theCompany was authorized to repurchase its own issued and outstanding American depositary shares (“ADSs”) up to an aggregate value of US$100 millionfrom the open market, in negotiated transactions off the market, or through other legally permissible means in accordance with applicable securities laws fromtime to time.On November 25, 2017, the Board of Directors of the Company authorized an amendment to the Share Repurchase Program by increasing the maximumamount from US$100 million to US$300 million. As of December 31, 2017, the Company had repurchased under the Share Repurchase Program an aggregateof 4,537,115 ADSs, representing 4,537,115 Class A ordinary shares, at an average price of $14.03 per ADS, for US$63,658,143 (RMB 421,164,802).On December 13, 2018, the Board of Directors of the Company authorized another share repurchase program, pursuant to which the Company was authorizedto repurchase its own issued and outstanding ADS up to an aggregate value of US$300 million from the open market, in negotiated transactions off themarket, or through other legally permissible means in accordance with applicable securities laws from time to time.As of December 31, 2018, the Company repurchased an aggregate of 37,774,874 ADSs, representing 37,774,874 Class A ordinary shares under the ShareRepurchase Program, at an average price of $7.24 per ADS, for US$ 273,577,191 (RMB 1,831,387,268). As of December 31, 2018, 27,302,698 shares werecancelled. The remaining balance of treasury shares represents 10,472,176 Class A ordinary shares, at an average price of $5.01 per ADS, for US$ 52,423,156(RMB 362,130,324). These shares were recorded at their purchase cost on the consolidated balance sheets and have not been canceled as of December 31,2018.F-55Table of Contents QUDIAN INC.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continuedFOR THE YEARS ENDED DECEMBER 31, 2016, 2017 AND 2018(Amounts in Renminbi (“RMB”) and US dollar (“US$”), except for number of shares and per share data) 22. Segment reportingThe operations of the Company are organized into two segments, consisting of installment credit services and automobile financing services. Installmentcredit services represents traditional online installment credit business, including cash installment credit services and merchandise installment credit services.Automobile financing services represents the business of sales-type lease and vehicle sales with guarantee.The Company derives the results of the segments directly from its internal management reporting system. The CODM measures the performance of eachsegment based on metrics of total assets, revenues and earnings from operations and uses these results to evaluate the performance of, and to allocateresources to, each of the segments. The Company does not allocate any share-based compensation expenses to its segments as the CODM does not use thisinformation to measure the performance of the operating segments. As substantially all of the Company’s long-lived assets and revenues are located in andderived from the PRC, geographical segments are not presented.The table below provides a summary of the Company’s operating segment results for the years ended December 31, 2016, 2017 and 2018. For the years ended December 31, 2016 2017 2018 RMB RMB RMB US$ Revenues: Installment credit services 1,442,846,339 4,749,249,922 5,405,029,804 786,128,980 - Financing income 1,271,455,857 3,642,151,122 3,452,148,166 502,094,126 - Sales commission fee 126,693,335 797,167,074 307,492,444 44,722,921 - Penalty fees 22,943,166 7,922,374 27,891,913 4,056,711 - Loan facilitation income and others 21,753,981 302,009,352 1,617,497,281 235,255,222 Automobile financing services — 26,116,130 2,287,312,500 332,675,805 - Financing income — 32,645 83,127,614 12,090,410 - Sales income — 26,083,472 2,174,788,821 316,309,915 - Penalty fees — 13 120,717 17,557 - Loan facilitation income and others — — 29,275,348 4,257,923 Total consolidated revenues 1,442,846,339 4,775,366,052 7,692,342,304 1,118,804,785 Income from operations: Installment credit services 713,074,210 2,454,048,135 3,170,766,608 461,168,877 Automobile financing services — (32,396,552) (423,416,975) (61,583,445)Total segment income from operations 713,074,210 2,421,651,583 2,747,349,633 399,585,432 Unallocated expenses — (425,780) (57,981,487) (8,433,058)Total consolidated income from operations 713,074,210 2,421,225,803 2,689,368,146 391,152,374 Total other expense, net (9,581,142) (1,220,980) (40,321,415) (5,864,507)Net income before income taxes 703,493,068 2,420,004,823 2,649,046,731 385,287,867 F-56Table of Contents QUDIAN INC.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continuedFOR THE YEARS ENDED DECEMBER 31, 2016, 2017 AND 2018(Amounts in Renminbi (“RMB”) and US dollar (“US$”), except for number of shares and per share data) 23. 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 retained earnings,if any, as determined in accordance with PRC accounting standards and regulations. The consolidated results of operations reflected in the consolidatedfinancial statements prepared in accordance with U.S. GAAP differ from those reflected in the statutory financial statements of the Company’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 PRC entitiesare required to allocate at least 10% of their after tax profits on an individual company basis as determined under PRC accounting standards to the statutoryreserve and has the right to discontinue allocations to the statutory reserve if such reserve has reached 50% of registered capital on an individual companybasis. 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 appropriated fromnet income as reported in the Company’s statutory accounts. The Company is required to allocate 1.5% of its balance of loan principal to the statutoryreserve. The statutory reserves can only be used for specific purposes 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. The PRCentities are also subject to similar statutory reserve requirements. These reserves can only be used for specific purposes and are not transferable to theCompany 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 4,666 million and RMB6,482million (US$ 943 million) as of December 31, 2017 and 2018.24. 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, 2017 2018 RMB RMB US$ ASSETS: Current assets: Cash and cash equivalents 2,511,803,710 543,307,703 79,020,828 Short-term amounts due from related parties 2,277,228,227 2,970,270,234 432,007,888 Other current assets 4,564,046 1,715,437 249,500 Total current assets 4,793,595,983 3,515,293,374 511,278,216 Non-current assets: Investments in subsidiaries, VIEs and VIEs’ subsidiaries 4,585,078,902 7,312,249,746 1,063,522,616 Total non-current assets 4,585,078,902 7,312,249,746 1,063,522,616 TOTAL ASSETS 9,378,674,885 10,827,543,120 1,574,800,832 F-57Table of Contents QUDIAN INC.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continuedFOR THE YEARS ENDED DECEMBER 31, 2016, 2017 AND 2018(Amounts in Renminbi (“RMB”) and US dollar (“US$”), except for number of shares and per share data) 24.Condensed financial information of the parent company – continuedCondensed balance sheets - continued As of December 31, 2017 2018 RMB RMB US$ LIABILITIES AND SHAREHOLDERS’ EQUITY: Current liabilities: Accrued expenses and other current liabilities 1,378,058 2,536,138 368,866 Short-term amounts due to related parties 4,971,082 4,393,726 639,041 Total current liabilities 6,349,140 6,929,864 1,007,907 TOTAL LIABILITIES 6,349,140 6,929,864 1,007,907 Commitments and contingencies Shareholders’ equity Class A Ordinary shares (US$0.0001 par value; 656,508,828 shares authorized, 266,884,398 shares issued and 262,347,283 shares outstanding, as of December 31, 2017; 656,508,828 shares authorized, 243,425,092 shares issued and 232,952,916 shares outstanding, as of December 31, 2018) 177,140 161,442 23,481 Class B Ordinary shares (US$0.0001 par value; 63,491,172 shares authorized, 63,491,172 shares issued and outstanding, as of December 31, 2017 and 2018) 43,836 43,836 6,376 Treasury stock (421,164,802) (362,130,324) (52,669,671)Additional paid-in capital 5,441,668,033 4,030,410,733 586,198,929 Accumulated other comprehensive income/(loss) (329,387,410) (44,858,239) (6,524,361)Retained earnings 4,680,988,948 7,196,985,808 1,046,758,171 Total shareholders’ equity 9,372,325,745 10,820,613,256 1,573,792,925 TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY 9,378,674,885 10,827,543,120 1,574,800,832 Condensed statements of comprehensive income For the years ended December 31, 2016 2017 2018 RMB RMB RMB US$ Share-based compensation expense (22,133,620) (66,522,766) (55,734,443) (8,106,239)General and administrative — (7,263,250) (26,615,449) (3,871,057)Interest and investment income, net — 6,189,009 9,919,513 1,442,733 Other non-interest income — — 5,701,978 829,318 Foreign exchange loss, net — — (92,089,724) (13,393,895)Share of profit in subsidiaries, VIEs and VIEs’ subsidiaries 598,786,238 2,315,454,720 2,549,589,488 370,822,411 Net income before income taxes 576,652,618 2,247,857,713 2,390,771,363 347,723,271 Income tax expense — — — — Net income 576,652,618 2,247,857,713 2,390,771,363 347,723,271 Other comprehensive income Foreign currency translation adjustment — (329,387,410) 284,529,171 41,383,052 Total comprehensive income 576,652,618 1,918,470,303 2,675,300,534 389,106,323F-58Table of Contents QUDIAN INC.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continuedFOR THE YEARS ENDED DECEMBER 31, 2016, 2017 AND 2018(Amounts in Renminbi (“RMB”) and US dollar (“US$”), except for number of shares and per share data) 24. Condensed financial information of the parent company – continuedCondensed statements of cash flows For the years ended December 31, 2016 2017 2018 RMB RMB RMB US$ Cash flows from operating activities: Net income 576,652,618 2,247,857,713 2,390,771,363 347,723,271 Adjustments to reconcile net income to net cash used in operating activities: Share of profit in subsidiaries, VIEs and VIEs’ subsidiaries (598,786,238) (2,315,454,720) (2,549,589,488) (370,822,411)Share-based compensation expense 22,133,620 66,522,766 55,734,443 8,106,239 Foreign exchange loss net — — 92,089,724 13,393,895 Changes in operating assets and liabilities: Receivables from related party — (22,577) (5,508,535) (801,183)Other current receivables — (4,564,046) 2,848,608 414,313 Other current payables — 1,378,058 1,158,081 168,436 Net cash used in operating activities — (4,282,806) (12,495,804) (1,817,440)Net cash used in investing activities — (2,033,240,388) (562,307,977) (81,784,303)Net cash (used in) /provided by financing activities — 4,881,181,230 (1,410,797,361) (205,191,966)Effect of exchange rate changes on cash and cash equivalents — (331,854,326) 17,105,135 2,487,839 Net (decrease)/increase in cash and cash equivalents — 2,511,803,710 (1,968,496,007) (286,305,870)Cash and cash equivalents at beginning of the year — — 2,511,803,710 365,326,698 Cash and cash equivalents at end of the year — 2,511,803,710 543,307,703 79,020,828 Basis of presentationCondensed financial information is used for the presentation of the Company, or the parent company. The condensed financial information of the parentcompany has been prepared using the same accounting policies as set out in the Company’s consolidated financial statements except that the parentcompany 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-EquityMethod and Joint Ventures. Such investments are presented on the condensed balance sheets as “Investment in subsidiaries and VIEs” and their respectiveprofit or loss as “Equity in profits of subsidiaries and VIEs” on the condensed statements of comprehensive income. Equity method accounting ceases whenthe carrying amount of the investment, including any additional financial support, in a subsidiary and VIEs is reduced to zero unless the parent company hasguaranteed obligations of the subsidiary and VIEs or is otherwise committed to provide further financial support. If the subsidiary and VIEs subsequentlyreports net income, the parent company shall resume applying the equity method only after its share of that net income equals the share of net losses notrecognized 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 statementsF-59Exhibit 8.1LIST OF SUBSIDIARIES AND CONSOLIDATED VARIABLE INTEREST ENTITIES OFQUDIAN INC. Subsidiaries Jurisdiction of IncorporationQufenqi (Ganzhou) Information Technology Co., Ltd.* 趣分期(赣州)信息技术有限公司 PRCXiamen Happy Time Technology Co., Ltd.* 厦门快乐时代科技有限公司 PRCQufenqi (HK) Limited Hong KongQD Technologies Limited British Virgin IslandsTianjin Qudian Financial Lease Co. Ltd.* 天津趣店融资租赁有限公司 PRCQD Data Limited Hong KongXiamen 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 PRCChongqing Dabai Car Leasing Co., Ltd* 重庆大白汽车租赁有限公司 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 PRCXiamen Qudian Technology Co., Ltd.* 厦门趣店科技有限公司 PRCHunan Qudian Technology Development Co., Ltd.* 湖南趣店科技发展有限公司 PRCGanzhou Qudian Technology Co., Ltd.* 赣州趣店科技有限公司 PRCXiamen Weipujia Technology Co., Ltd.* 厦门唯谱家科技有限公司 PRC Subsidiaries of Consolidated VIEs Jurisdiction of IncorporationGanzhou Happy Fenqi Network Service Co., Ltd.* 赣州快乐分期网络服务有限公司 PRCXinjiang Qudian Technology Co., Ltd. * 新疆趣店科技有限公司 PRCFuzhou High-tech Zone Microcredit Co., Ltd.* 抚州高新区趣分期小额贷款有限公司 PRCGanzhou Happy Life Network Microcredit Co., Ltd.* 赣州快乐生活网络小额贷款有限公司 PRCQufenqi (Beijing) Information Technology Co., Ltd.* 趣分期(北京)信息技术有限公司 PRCFuzhou Happy Time Technology Development Co., Ltd.* 抚州快乐时代科技发展有限公司 PRCXiamen Qudian Commercial Factoring Co., Ltd.* 厦门趣店商业保理有限公司 PRCGanzhou Happy Fenqi Technology Development Co., Ltd.* 赣州快乐分期科技发展有限公司 PRCGanzhou Happy Time E-Commerce Co., Ltd.* 赣州快乐时代电子商务有限公司 PRCXiamen Junda Network Technology Co., Ltd.* 厦门均达网络科技有限公司 PRCTianjin Qufenqi Technology Co., Ltd.* 天津趣分期科技有限公司 PRCTianjin Happy Fenqi Technology Development Co., Ltd.* 天津快乐分期科技发展有限公司 PRCGanzhou Laifenqi Technology Development Co., Ltd.* 赣州来分期科技发展有限公司 PRCHunan Happy Time Technology Development Co., Ltd.* 湖南快乐时代科技发展有限公司 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 PRCBeijing Happy Fenqi Technology Development Co., Ltd.* 北京快乐分期科技发展有限公司 PRCGanzhou Qudian Commerce Development Co., Ltd.* 赣州趣店商贸发展有限公司 PRCTianjin Happy Time Technology Development Co., Ltd.* 天津快乐时代科技发展有限公司 PRC *The English name of this subsidiary, consolidated VIE or subsidiary of consolidated VIE, as applicable, has been translated from its Chinese name. 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 defined inExchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-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 our supervision,to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to us by others withinthose 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 statements forexternal 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 covered bythe 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. Date: April 15, 2019 By: /s/ Min LuoName: Min LuoTitle: Chairman and Chief Executive Officer 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 defined inExchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-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 our supervision,to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to us by others withinthose 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 statements forexternal 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 covered bythe 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. Date: April 15, 2019 By: /s/ Carl YeungName: Carl YeungTitle: Chief Financial Officer 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, 2018 as filed with theSecurities and Exchange Commission on the date hereof (the “Report”), I, Min Luo, Chairman and Chief Executive Officer of the Company, certify, pursuantto 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 theCompany. Date: April 15, 2019 By: /s/ Min LuoName: Min LuoTitle: Chairman and Chief Executive Officer 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, 2018 as filed with theSecurities and Exchange Commission on the date hereof (the “Report”), I, Min Luo, Chairman and Chief Executive Officer of the Company, certify, pursuantto 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 theCompany. Date: April 15, 2019 By: /s/ Min LuoName: Carl YeungTitle: Chief Financial Officer Exhibit 15.110/F, Tower B, CPIC Plaza, No. 28 Fengsheng Lane, Xicheng District, Beijing 100032, ChinaTel: 86 10 5776 3888 Fax: 86 10 5776 3777April 15, 2019Qudian Inc.Tower A, AVIC Zijin PlazaSiming District, XiamenFujian Province 361000People’s Republic of 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— If the PRC government deems that the contractual arrangements in relation to our consolidated VIEs do not comply with PRC regulatory restrictions onforeign investment in the relevant industries, or if these regulations or the interpretation of existing regulations change in the future, we could be subject tosevere penalties 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 31,2018 (the “Annual Report”), which is filed with the Securities and Exchange Commission (the “SEC”) on April 15, 2019. 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 Firm Exhibit 15.2Consent of Independent Registered Public Accounting FirmWe consent to the incorporation by reference in the Registration Statement (Form S-8 No. 333-224249) pertaining to the 2016 EquityIncentive Plan of Qudian Inc. of our reports dated April 15, 2019, with respect to the consolidated financial statements of Qudian Inc.,and the effectiveness of internal control over financial reporting of Qudian Inc., included in this Annual Report (Form 20-F) for the yearended December 31, 2018./s/ Ernst & Young Hua Ming LLPShanghai, The People’s Republic of ChinaApril 15, 2019

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