Qudian Inc.
Annual Report 2021

Plain-text annual report

Table of Contents UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 20-F (Mark One) ☐ REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR 12(g) OF THE SECURITIES EXCHANGE ACT OF 1934 ☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 OR For the fiscal year ended December 31, 2021 OR ☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 OR ☐ SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Date 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 Plaza Siming District, Xiamen Fujian Province 361000, People’s Republic of China (Address of principal executive offices) Min Luo, Chairman and Chief Executive Officer Telephone: telephone: +86-592-5911580 Email: ir@qudian.com At the address of the Company set forth above (Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person) Securities registered or to be registered pursuant to Section 12(b) of the Act: Title of each class American Depositary Shares, each representing one Class A ordinary share Class A Ordinary Shares, par value US$0.0001 per share* Trading Symbol(s) QD Name of each exchange on which registered 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. Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Indicate by check mark whether the registrant has submitted every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). 190,243,651 Class A ordinary shares 63,491,172 Class B ordinary shares ☐ Yes ☒ No ☐ Yes ☒ No ☒ Yes ☐ No ☒ Yes ☐ No Large accelerated filer ☐ Accelerated filer ☒ Non-accelerated filer ☐ Emerging growth company ☐ If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards† provided pursuant to Section 13(a) of the Exchange Act. ☐ † The term “new or revised financial accounting standard” refers to any update issued by the Financial Accounting Standards Board to its Accounting Standards Codification after April 5, 2012. Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes- Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒ Indicate by check mark which basis of accounting the registration has used to prepare the financial statements included in this filing: U.S. GAAP ☒ International Financial Reporting Standards as issued by the International Accounting Standards Board ☐ 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. If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Securities Exchange Act of 1934). (APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST FIVE YEARS) Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Other ☐ ☐ Item 17 ☐ Item 18 ☐ Yes ☒ No ☐ Yes ☐ No Table of Contents CONVENTIONS THAT APPLY TO THIS ANNUAL REPORT ON FORM 20-F FORWARD-LOOKING INFORMATION Table of Contents Part I. ITEM 1. ITEM 2. ITEM 3. ITEM 4. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS OFFER STATISTICS AND EXPECTED TIMETABLE KEY INFORMATION INFORMATION ON THE COMPANY ITEM 4A. UNRESOLVED STAFF COMMENTS ITEM 5. ITEM 6. ITEM 7. ITEM 8. ITEM 9. ITEM 10. ITEM 11. ITEM 12. Part II. ITEM 13. ITEM 14. ITEM 15. OPERATING AND FINANCIAL REVIEW AND PROSPECTS DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS FINANCIAL INFORMATION THE OFFER AND LISTING ADDITIONAL INFORMATION QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS CONTROLS AND PROCEDURES ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT ITEM 16B. CODE OF ETHICS ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS ITEM 16F. CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT ITEM 16G. CORPORATE GOVERNANCE ITEM 16H. MINE SAFETY DISCLOSURE ITEM 16I. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS i 1 3 4 4 4 4 78 135 135 163 174 174 177 177 185 187 189 189 189 189 190 190 190 191 191 191 191 192 192 Table of Contents Part III. ITEM 17. ITEM 18. ITEM 19. SIGNATURES FINANCIAL STATEMENTS FINANCIAL STATEMENTS EXHIBITS INDEX TO CONSOLIDATED FINANCIAL STATEMENTS ii 193 193 193 193 198 F-1 Table of Contents CONVENTIONS THAT APPLY TO THIS ANNUAL REPORT ON FORM 20-F Except where the context otherwise requires, references in this annual report to: • • • • • • • • • • • • • • • • “active borrowers” are to borrowers who have drawn down credit in the specified period; “ADSs” are to our American depositary shares, each of which represents one Class A ordinary share, and “ADRs” are to the American depositary receipts that evidence our ADSs; “amount of transactions” are to the aggregate principal amount of credit drawdowns that are provided to borrowers in the specified period, which are comprised of (i) credit drawdowns that are facilitated under the Group’s loan book business and (ii) credit drawdowns that are facilitated under the Group’s transaction services business; “Ant Financial” are to Ant Small and Micro Financial Services Group Co., Ltd., a company organized under the laws of the PRC, and its affiliates; “China” and the “PRC” are to the People’s Republic of China, excluding, for the purposes of this annual report only, Taiwan, the Hong Kong Special Administrative Region and the Macao Special Administrative Region; “the Group” are to Qudian Inc., the Group VIEs and their respective subsidiaries; “Group VIEs” are to Beijing Happy Time Technology Development Co., Ltd., or Beijing Happy Time, Xiamen Qudian Technology Co., Ltd., or Xiamen Qudian, Ganzhou Qudian Technology Co., Ltd, or Ganzhou Qudian, Xiamen Weipujia Technology Co., Ltd., or Xiamen Weipujia, Xiamen Qu Plus Plus Technology Development Co., Ltd., or Xiamen Qu Plus Plus; “loan book business” are to the Group’s business of offering small credit products to consumers; the relevant transactions may be funded by the Group’s institutional funding partners or the Group’s own capital, and the Group undertakes credit risk for such transactions; “M1+ delinquency coverage ratio” are to the balance of allowance for principal and financing service fee receivables at the end of a period, divided by the total balance of outstanding principal for on-balance sheet transactions for which any installment payment was more than 30 calendar days past due as of the end of such period; “M1+ delinquency rate by vintage” are to the total outstanding principal balance of the transactions of a vintage for which any repayment is overdue for more than 30 days, divided by the total initial principal of the transactions facilitated in such vintage; “number of transactions” are to the number of credit drawdowns facilitated by the Group to borrowers, which are comprised of (i) credit drawdowns that are facilitated under the Group’s loan book business and (ii) credit drawdowns that are facilitated under the Group’s transaction services business; “off-balance sheet transactions” are to credit drawdowns under the Group’s loan book business that are not recorded on the Group’s balance sheets; the Group bears credit risk for such transactions; “on-balance sheet transactions” are to credit drawdowns under the Group’s loan book business that are recorded on the Group’s balance sheets; “outstanding borrowers” are to borrowers who have outstanding loans under either the loan book business or the transaction services business as of a specified date; “provision ratio” are to the amount of provision for loan principal and financing service fee receivables incurred during a period as a percentage of the total amount of on-balance sheet transactions facilitated during such period; “P2P platforms” are to financial information intermediaries that are engaged in lending information business and directly provide peers, which can be natural persons, legal persons or other organizations, with lending information services; 1 Table of Contents • • • • • • • • • • “Qudian marketplace” are to the Group’s online marketplace where consumers purchased merchandise offered by third-party merchandise suppliers with the Group’s merchandise credit products; “registered users” are to individuals who have registered with the Group in connection with the Group’s credit business; “RMB” or “Renminbi” are to the legal currency of China; “small credit products” are to cash or merchandise credit products that are less than RMB5,000 in amount; “Subsidiary” are to an entity controlled by Qudian Inc. and consolidated with Qudian Inc.’s results of operations due to Qudian Inc.’s equity interest in such entity, instead of contractual arrangements; for avoidance of doubt, the Group VIEs are not subsidiaries of Qudian Inc.; “transaction services business” are to the Group’s business of offering loan recommendation and referral services to third-party financial service providers; the Group assumes no credit risk for the transactions facilitated under the transaction services business; the Group ceased its transaction services business in the third quarter of 2021; “transactions” are to borrowers’ credit drawdowns from the Group’s platform; “US$,” “U.S. dollars,” or “dollars” are to the legal currency of the United States; “vintage” are to the on-balance sheet transactions and off-balance sheet transactions facilitated under the loan book business during a specified time period; and “we,” “us,” “our company” and “our” are to Qudian Inc. and/or its subsidiaries, as the context requires. The translations from Renminbi to U.S. dollars and from U.S. dollars to Renminbi in this annual report were made at a rate of RMB6.3726 to US$1.00, the exchange rates set forth in the H. 10 statistical release of the Federal Reserve Board on December 30, 2021. We make no representation that the Renminbi or U.S. dollar amounts referred to in this annual report could have been or could be converted into U.S. dollars or Renminbi, as the case may be, at any particular rate or at all. On March 31, 2022, the noon buying rate for Renminbi was RMB6.3393 to US$1.00. 2 Table of Contents FORWARD-LOOKING INFORMATION This annual report on Form 20-F contains statements of a forward-looking nature. All statements other than statements of historical facts are forward-looking statements. These forward-looking statements are made under the “safe harbor” provision under Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act, and as defined in the Private Securities Litigation Reform Act of 1995. These statements involve known and unknown risks, uncertainties and other factors that may cause the Group’s actual results, performance or achievements to be materially different from those expressed or implied by the forward-looking statements. In some cases, these forward-looking statements can be identified by words or phrases such as “may,” “will,” “expect,” “anticipate,” “aim,” “estimate,” “intend,” “plan,” “believe,” “potential,” “continue,” “is/are likely to” or other similar expressions. These forward-looking statements relate to, among others: • • • • • • the Group’s goal and strategies; the Group’s expansion plans; the Group’s future business development, financial condition and results of operations; the Group’s expectations regarding demand for, and market acceptance of, the Group’s products and services; the Group’s expectations regarding keeping and strengthening its relationships with customers, business partners and other parties the Group collaborates with; and general economic and business conditions. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect the Group’s financial condition, results of operations, business strategy and financial needs. You should read these statements in conjunction with the risks disclosed in “Item 3.D. Key Information—Risk Factors” of this annual report and other risks outlined in our other filings with the Securities and Exchange Commission, or the SEC. Moreover, the Group operates in an emerging and evolving environment. New risks may emerge from time to time, and it is not possible for our management to predict all risks, nor can we assess the impact of such risks on the Group’s business or the extent to which any risk, or combination of risks, may cause actual results to differ materially from those contained in any forward-looking statements. The forward-looking statements made in this annual report relate only to events or information as of the date on which the statements are made in this annual report. Except as required by law, we undertake no obligation to update any forward-looking statements to reflect events or circumstances after the date on which the statements are made or to reflect the occurrence of unanticipated events. You should read this annual report and the documents that we have referred to in this annual report, completely and with the understanding that the Group’s actual future results may be materially different from what we expect. 3 Table of Contents Part I. ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS Not Applicable. ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE Not Applicable. ITEM 3. KEY INFORMATION Contractual Arrangements with the Group VIEs and Their Shareholders Qudian Inc. is a Cayman Islands holding company, and the Group’s operations are primarily conducted by its subsidiaries in China and through contractual arrangements with the Group VIEs. Investors in our ADSs and Class A ordinary shares do not hold equity interest in the Group’s operating entities in China, but instead hold equity interest in Qudian Inc. As used in this annual report, “Qudian,” “we,” “us,” “our company” or “our” refers to Qudian Inc. and/or its subsidiaries, and “the Group” refers to Qudian Inc., the Group VIEs and their respective subsidiaries. Under the PRC laws and regulations, the operations of Internet content providers in the PRC are subject to foreign investment restrictions and license requirements. Therefore, we operate such businesses in China through the Group VIEs. Currently, the Group VIEs are (i) Beijing Happy Time; (ii) Ganzhou Qudian; (iii) Xiamen Qudian; (iv) Xiamen Weipujia; and (v) Xiamen Qu Plus Plus. We have entered into a series of contractual arrangements with each of the Group VIEs and the respective shareholders of the Group VIEs, including (i) power of attorney agreements and equity interest pledge agreements, which provide us with effective control over the Group VIEs; (ii) exclusive business cooperation agreements, which allow us to receive substantially all of the economic benefits from the Group VIEs; and (iii) exclusive call option agreements, which provide us with exclusive options to purchase all or part of the equity interests in or all or part of the assets of or inject registered capital into the Group VIEs when and to the extent permitted by PRC law. As a result of these contractual arrangements, we are the primary beneficiary of the Group VIEs for accounting purposes. We have consolidated their financial results in the Group’s consolidated financial statements. However, we do not own any equity interest in the Group VIEs. The contractual arrangements with the Group VIEs and the respective shareholders of the Group VIEs may not be as effective as direct ownership in providing us with control over the Group VIEs. If any of the Group VIEs or the respective shareholders of the Group VIEs fails to perform their obligations under the contractual arrangements, we may have to incur substantial costs and expend additional resources to enforce such arrangements. Furthermore, there are very few precedents and little formal guidance as to how contractual arrangements in the context of a variable interest entity should be interpreted or enforced under PRC law. If the PRC government deems that the contractual arrangements in relation to the Group VIEs do not comply with PRC regulatory restrictions on foreign investment in the relevant industries, or if these regulations or the interpretation of existing regulations change in the future, our ADSs may significantly decline in value or become worthless if we are unable to assert our contractual control rights over the assets of the Group VIEs. See “Item 3. Key Information—D. Risk Factors—Risks Related to Our Corporate Structure.” Operations in China The Group faces various legal and operational risks and uncertainties associated with being based in and having its operations primarily in China and the country’s complex and evolving laws and regulations. For example, the Group faces risks associated with regulatory approvals on offerings conducted overseas by and foreign investment in China-based issuers, the use of the Group VIEs, anti-monopoly regulatory actions, and oversight on cybersecurity and data privacy, which may impact the Group’s ability to conduct certain businesses, accept foreign investments, or list on a U.S. or other foreign exchange outside of China. In addition, the Chinese government may intervene or influence the Group’s operations at any time. These risks could result in a material adverse change in the Group’s operations and the value of our ADSs and Class A ordinary shares, significantly limit or completely hinder our ability 4 Table of Contents to offer or continue to offer securities to investors, or cause the value of such securities to significantly decline or become worthless. See “Item 3. Key Information—D. Risks Factors—Risks Related to Doing Business in China.” Furthermore, the Holding Foreign Companies Accountable Act, or the HFCA Act, may affect our ability to maintain our listing on the NYSE. Among other things, the HFCA Act states that if the SEC determines that we are an issuer that has filed audit reports issued by a registered public accounting firm that has not been subject to inspection for the PCAOB for three consecutive years beginning in 2021, the SEC shall prohibit our shares or ADSs from being traded on a national securities exchange or in the over-the-counter trading market in the United States. In the event of such determination by the SEC, the NYSE would delist our ADSs. As stated in its report dated December 16, 2021, the U.S. Public Company Accounting Oversight Board, or the PCAOB, has determined that it is unable to inspect or investigate completely registered public accounting firms headquartered in mainland China and Hong Kong. The PCAOB identified our auditor as one of the registered public accounting firms that the PCAOB is unable to inspect or investigate completely. See “Item 3. Key Information—D. Risks Factors—Risks Related to Doing Business in China—Our ADSs will be prohibited from trading in the United States under the Holding Foreign Companies Accountable Act, or the HFCA Act, in 2024 if the PCAOB is unable to inspect or fully investigate auditors located in China, or 2023 if proposed changes to the law are enacted. The delisting of our ADSs, or the threat of their being delisted, may materially and adversely affect the value of your investment.” PRC Permissions and Approvals The Group has received all material permissions that are, or may be, required for its operations in China, and no material permission has been denied from the Group by relevant authorities in China. See “Item 4. Information on the Company—B. Business Overview—Licenses and Permissions Requirements.” However, the Group is subject to risks relating to the regulatory environment in China. See “Item 3. Key Information—D. Risk Factors —Risks Related to Doing Business in China—There are uncertainties regarding the interpretation and enforcement of PRC laws, rules and regulations. In addition, rules and regulations in China can change quickly with little advance notice.” Under the PRC laws, rules and regulations currently in effect, no prior permission or approval from PRC government authority is required for issuing our ADSs to foreign investors. However, there remain substantial uncertainties as to how the relevant PRC laws, rules and regulations will be interpreted or implemented, and we cannot assure you that the relevant PRC government authorities will reach the same conclusion. Furthermore, laws, rules and regulations in China may change frequently. We cannot rule out the possibility that relevant PRC governmental authorities may subsequently determine our initial public offering in the U.S. or any debt financing activities should be subject to any approval, filing or other regulatory procedures, and we cannot assure you that we can obtain the required approval or accomplish the required filing or other regulatory procedures in a timely manner, or at all. See “Item 3. Key Information—D. Risks Factors—Risks Related to Doing Business in China—Privacy concerns relating to the Group’s products and services and the use of user information could damage our reputation, deter current and potential users and customers from using the Group’s products,” “Item 3. Key Information—D. Risk Factors—Risks Related to Our Business and Industry—There are uncertainties regarding the interpretation and enforcement of PRC laws, rules and regulations. In addition, rules and regulations in China can change quickly with little advance notice” and “Item 3. Key Information—D. Risks Factors—Risks Related to Our Corporate Structure—Uncertainties exist with respect to the interpretation and implementation of the Foreign Investment Law and its implementing rules and how they may impact our business, financial condition and results of operations.” Cash Transfers within Our Corporate Structure Our subsidiaries and the Group VIEs conduct business transactions that include intercompany loans and other intercompany transactions related to operating activities, subject to satisfaction of applicable government registration and approval requirements. The cash flows occurred between our company, our subsidiaries and the Group VIEs are summarized below: For the years ended December 31, 2019, 2020 and 2021, our company did not provide any capital contribution to our subsidiaries. For the years ended December 31, 2019, 2020 and 2021, the Group VIEs 5 Table of Contents provided loans of RMB1,043 million, RMB1,543 million and RMB528 million (US$83 million), respectively, to our subsidiaries, and received repayments of RMB1,635 million, RMB1,051 million and RMB642 million (US$101 million), respectively. For the years ended December 31, 2019, 2020 and 2021, our subsidiaries provided loans of RMB914 million, RMB1,854 million and RMB410 million (US$64 million), respectively, to the Group VIEs, and received repayments of RMB213 million, RMB2,322 million and RMB489 million (US$77 million), respectively. With respect to other intercompany transactions related to operating activities, our company received cash from our subsidiaries amounted to RMB571 million, RMB1,528 million and nil for the years ended December 31, 2019, 2020 and 2021, respectively, and paid cash to our subsidiaries amounted to RMB164 million, RMB553 million and RMB33 million (US$5 million) for the years ended December 31, 2019, 2020 and 2021, respectively. The Group VIEs received cash from our subsidiaries amounted to RMB664 million, RMB212 million and RMB308 million (US$48 million) for the years ended December 31, 2019, 2020 and 2021, respectively, and repaid cash to our subsidiaries amounted to RMB2,317 million, RMB335 million and RMB537 million (US$84 million) for the years ended December 31, 2019, 2020 and 2021, respectively. The Group VIEs received cash from our company amounted to nil, RMB 543 million and nil for the years ended December 31, 2019, 2020 and 2021, respectively, and repaid cash to our company amounted to nil, RMB365 million and RMB150 million (US$24 million) for the years ended December 31, 2019, 2020 and 2021, respectively. We are subject to restrictions on currency exchange. In particular, the PRC government imposes controls on the convertibility of Renminbi into foreign currencies and, in certain cases, currency remittance out of the PRC. Since the Group receives substantially all of its revenues in Renminbi and cash flow will be denominated in Renminbi, any existing and future restrictions on currency exchange may limit the Group’s ability to utilize cash generated in Renminbi to fund the Group’s business activities outside of the PRC or pay dividends in foreign currencies to our shareholders, including holders of the ADSs, and may limit our ability to obtain foreign currency through debt or equity financing for our PRC subsidiaries and the affiliated consolidated entities. See “Item 3. Key Information—D. Risk Factors—Risks Related to Doing Business in China—PRC regulation of loans to, and direct investment in, PRC entities by offshore holding companies and governmental control of currency conversion may restrict or prevent us from using the proceeds of our initial public offering to make loans to our PRC subsidiaries and Group VIEs, or to make additional capital contributions to our PRC subsidiaries.” In addition, there are certain limitations on the ability of our PRC subsidiaries and the Group VIEs to distribute earnings to our offshore holding companies and the U.S. investors. In particular, each of our PRC subsidiaries, the Group VIEs and their subsidiaries in the PRC are required to set aside at least 10% of its net income each year to fund certain statutory reserves until the cumulative amount of such reserves reaches 50% of its registered capital. These reserves, together with the registered capital, are not distributable as cash dividends. See “Item 3. Key Information—D. Risk Factors—Risks Related to Our Corporate Structure—We rely to a significant extent on dividends and other distributions on equity paid by our principal operating subsidiaries to fund offshore cash and financing requirements.” If any of our subsidiaries incurs debt on its own behalf in the future, the instruments governing such debt may restrict its ability to pay dividends to us. Since inception, we have not declared or paid any dividends on our shares. We do not have any present plan to declare or pay any dividends on our ordinary shares or ADSs in the foreseeable future. We intend to retain most, if not all, of our available funds and any future earnings to operate and expand our business. See “Item 8. Financial Information—A. Consolidated Statements and Other Financial Information—Dividend Policy.” For certain Cayman Islands, PRC and United States federal income tax considerations of an investment in the ADSs and Class A ordinary shares, see “Item 10. Additional Information—E. Taxation.” 6 Table of Contents A. Selected Financial Data The following selected consolidated statements of operations for the years ended December 31, 2019, 2020 and 2021 and selected consolidated balance sheets as of December 31, 2020 and 2021 have been derived from the Group’s audited consolidated financial statements included elsewhere in this annual report. The following selected consolidated statements of operations for the years ended December 31, 2017 and 2018 and selected consolidated balance sheets as of December 31, 2017, 2018 and 2019 have been derived from the Group’s audited consolidated financial statements not included in this annual report. You should read the selected consolidated financial data in conjunction with the financial statements and the related notes included elsewhere in this annual report and “Item 5. Operating and Financial Review and Prospects.” The Group’s consolidated financial statements are prepared and presented in accordance with U.S. GAAP. The Group’s historical results do not necessarily indicate the Group’s results expected for any future periods. Condensed Consolidated Statement of Operations Data: Revenues Financing income Sales commission fee Sales income Penalty fees Guarantee income Loan facilitation income and other related 2017 RMB 2018 RMB 2019 RMB 2020 RMB 2021 RMB US$ (in thousands, except for share and per share data) Year Ended December 31, 3,642,184 797,167 26,083 7,922 — 3,535,276 307,492 2,174,789 28,013 — 3,510,055 356,812 431,946 44,354 — 2,102,665 80,992 610,793 72,235 826,198 1,255,488 35,411 100,668 67,316 3,935 197,014 5,557 15,797 10,563 617 income 302,010 1,646,773 2,297,413 131,633 39,531 6,203 Transaction services fee and other related income Total revenues Cost of revenues Cost of goods sold Cost of other revenues Total cost of revenues Operating expenses(1) Sales and marketing General and administrative Research and development Changes in guarantee liabilities and risk assurance liabilities Provision for receivables and other assets Impairment loss from long-lived assets Total operating expenses Other operating income Income from operations Interest and investment income, net Loss from equity method investments — 4,775,366 — 7,692,343 2,199,464 8,840,044 (136,542) 3,687,974 151,694 1,654,043 23,804 259,555 (23,895) (856,951) (880,846) (2,003,642) (731,786) (2,735,428) (431,749) (183,674) (153,258) (540,551) (255,867) (199,560) (366,015) (535,773) (901,788) (280,616) (286,059) (204,781) (645,083) (217,271) (862,354) (78,533) (220,193) (298,726) (293,282) (285,905) (170,691) (127,376) (443,276) (141,264) (150,152) (605,164) — (1,523,997) 50,703 2,421,226 24,887 (20,676) (116,593) (1,178,723) (1,143,427) (2,283,126) 87,894 (1,641,362) — — — (2,291,294) 23,748 2,689,369 47,060 (11,319) (4,198,009) 108,508 3,848,755 24,292 (3,420) (2,303,346) 343,324 865,598 708,251 (370,039) 201,602 151,817 (156,394) (514,891) 82,273 922,699 129,456 (221,798) (12,324) (34,553) (46,877) (19,988) (69,560) (22,167) 31,636 23,823 (24,542) (80,798) 12,912 144,792 20,314 (34,805) 7 Table of Contents Unrealized gain on derivative instruments Foreign exchange gain/(loss), net Other income Other expenses Net income before income taxes Income tax expenses Net income Less: net loss attributable to noncontrolling interests Net Income attributable to Qudian 2017 RMB 2018 RMB Year Ended December 31, 2020 2019 RMB RMB 2021 RMB US$ (in thousands, except for share and per share data) — (7,177) 2,108 (363) 2,420,005 (255,546) 2,164,459 — (90,771) 15,231 (522) 2,649,047 (157,731) 2,491,316 — 6,635 24,583 (10,323) 3,890,522 (626,234) 3,264,288 — (107) 26,358 (9,263) 1,220,798 (261,979) 958,819 17,375 (51) 5,213 (6,485) 846,409 (260,482) 585,927 2,727 (8) 818 (1,018) 132,820 (40,875) 91,945 — — — — (3,147) (494) Inc.’s shareholders 2,164,459 2,491,316 3,264,288 958,819 589,074 92,439 Earnings per share for Class A and Cass B ordinary shares — Basic Earnings per share for Class A and Class B ordinary shares — Diluted Earnings per ADS (1 Class A ordinary shares equals 1 ADSs) — Basic Earnings per ADS (1 Class A ordinary shares equals 1 ADSs) — Diluted Weighted average number of Class A and Class B ordinary shares outstanding — Basic Weighted average number of Class A and Class B ordinary shares outstanding — Diluted Other comprehensive (loss)/income: Foreign currency translation adjustment Total comprehensive income Less: comprehensive loss attributable to noncontrolling interests Total comprehensive income attributable to Qudian Inc.’s shareholders 17.13 7.82 11.72 3.78 2.32 0.36 7.09 7.74 10.94 3.59 2.27 0.36 17.13 7.82 11.72 3.78 2.32 0.36 7.09 7.74 10.94 3.59 2.27 0.36 126,390,196 318,685,836 278,531,382 253,658,448 253,438,807 253,438,807 305,221,444 321,955,142 300,457,711 274,333,161 266,292,869 266,292,869 (77,947) 2,086,512 33,089 2,524,405 31,893 3,296,181 (38,455) 920,364 (7,577) 578,350 (1,189) 90,756 — — — — (3,147) (494) 2,086,512 2,524,405 3,296,181 920,364 581,497 91,250 (1) Share-based compensation expenses are allocated in operating expenses as follows: 8 Table of Contents Sales and marketing General and administrative Research and development Total share-based compensation expenses Summary Consolidated Balance Sheets: Cash and cash equivalents Restricted cash and cash equivalent Time deposits Short-term amounts due from related parties(1) Short-term investments Short-term loan principal and financing service fee receivables, net Short-term finance lease receivables, net Short-term contract assets Long-term loan principal and financing service fee receivables Long-term finance lease receivables, net Long-term contract assets Total assets Short-term borrowings and interest payables Long-term borrowings and interest payables Convertible senior notes Total liabilities Year Ended December 31, 2017 2018 2019 2020 2021 RMB RMB RMB RMB RMB US$ (in thousands) 1,891 5,641 4,482 1,912 1,727 271 42,849 38,587 74,312 40,895 29,684 4,658 19,316 13,753 8,505 2,827 3,934 617 64,056 57,981 87,299 45,634 35,345 5,546 2017 RMB 2018 RMB 2019 RMB 2020 RMB 2021 RMB US$ As of December 31, (in thousands) 6,832,306 2,252,646 — 551,215 — 2,501,188 339,827 — 2 — 2,860,938 1,257,649 231,132 — — 1,537,558 135,404 — — 5,042,314 2,065,495 177,925 — — 5,926,601 8,758,545 8,508 — 8,417,821 508,647 903,436 7,894,697 398,256 2,741,914 3,940,461 179,613 92,813 2,371,966 31,462 27,965 324,121 27,920 — — 930,013 372,213 4,937 4,388 — 17,900 — 665,653 649,243 15,597 19,380,416 16,253,375 424 239,697 273,597 18,361,604 — 28,771 23,094 13,398,032 — 399 31 14,091,125 — 63 5 2,211,205 7,979,415 510,024 — 9,840,049 3,860,441 413,400 — 5,432,762 1,049,570 — 2,339,552 6,437,552 — 102,415 822,005 1,488,188 — 145,312 681,401 1,567,586 — 22,803 106,927 245,988 1,075 Non-controlling interest — — — 10,000 6,853 Total Qudian Inc. shareholders’ equity / (deficit) 9,540,367 10,820,613 11,924,052 11,899,844 12,516,686 1,964,141 Total shareholders’ equity / (deficit) 9,540,367 10,820,613 11,924,052 11,909,844 12,523,539 1,965,217 (1) Includes RMB549.8 million deposited in the Group’s Alipay accounts as of December 31, 2017. Such amount is unrestricted as to withdrawal and use and readily available to the Group on demand. Non-GAAP Measure Adjusted Net Income Attributable to Qudian Inc.’s Shareholders We use adjusted net income attributable to Qudian Inc.’s shareholders, a non-GAAP financial measure, in evaluating the Group’s operating results and for financial and operational decision-making purposes. We believe 9 Table of Contents that adjusted net income attributable to Qudian Inc.’s shareholders help identify underlying trends in the Group’s business by excluding the impact of (i) share-based compensation expenses, which are non-cash charges, and (ii) convertible senior notes buyback income, which is non-cash and non-recurring. We believe that such non-GAAP financial measure provides useful information about the Group’s operating results, enhance the overall understanding of the Group’s past performance and future prospects and allow for greater visibility with respect to key metrics used by our management in its financial and operational decision-making. For the year ended December 31, Adjusted net income attributable to Qudian Inc.’s shareholders(1) 2017 RMB 2019 RMB (in thousands) 2,228,515 2,549,297 3,351,587 382,344 612,372 96,095 2020 RMB 2018 RMB RMB 2021 US$ (1) Defined as net income attributable to Qudian Inc.’s shareholders excluding share-based compensation expenses and convertible senior notes buyback income. Adjusted net income attributable to Qudian Inc.’s shareholders is not defined under U.S. GAAP and are not presented in accordance with U.S. GAAP. This non-GAAP financial measure has limitations as analytical tools, and when assessing the Group’s operating performance, cash flows or the Group’s liquidity, investors should not consider them in isolation, or as a substitute for net income, cash flows provided by operating activities or other consolidated statements of operation and cash flow data prepared in accordance with U.S. GAAP. The Group mitigates these limitations by reconciling the non-GAAP financial measure to the most comparable U.S. GAAP performance measure, all of which should be considered when evaluating the Group’s performance. The following table reconciles the Group’s adjusted net income attributable to Qudian Inc.’s shareholders in the years presented to the most directly comparable financial measure calculated and presented in accordance with U.S. GAAP, which is net income attributable to Qudian Inc.’s shareholders: For the year ended December 31, Net income attributable to Qudian Inc.’s shareholders Add: share-based compensation expenses Less: Convertible senior notes buyback income Adjusted net income attributable to Qudian Inc.’s shareholders 2017 RMB 2018 RMB 2019 RMB (in thousands) 2,164,459 2,491,316 3,264,288 958,819 589,074 92,439 5,546 87,299 1,890 2,228,515 2,549,297 3,351,587 382,344 612,372 96,095 45,634 — 622,109 35,345 12,047 64,056 — 57,981 — 2020 RMB RMB 2021 US$ 10 Table of Contents Financial Schedules Related to the Group VIEs The tables set forth below the condensed consolidated schedule depicting the results of operations, the financial position and cash flows that disclose the financial information for Qudian Inc., or the Parent Company, the financial information for the subsidiaries of the Parent Company that are not the Group VIEs, the financial information for the Group VIEs, the eliminating adjustments between our Company and the Group VIEs and the consolidated results. Condensed Consolidated Schedule of Results of Operation 2019 For the year ended December 31, 2020 Parent Company Subsidiaries of Parent Company Group VIEs (RMB in thousands) Elimination Consolidated Parent Company Subsidiaries of Parent Company Group VIEs Elimination Consolidated Parent Company Subsidiaries of Parent Company 2021 Group VIEs Elimination Consolidated (RMB in thousands) (RMB in thousands) Revenues Income from subsidiaries and VIEs Net — 2,809,433 8,049,577 (2,018,966) 8,840,044 — 462,334 3,549,458 (323,818) 3,687,974 — 551,534 1,600,712 (498,203) 1,654,043 3,374,438 — — (3,374,438) — 414,868 — — (414,868) — 639,520 — — (639,520) — income/(loss) 3,264,288 (66,492) 3,440,930 (3,374,438) 3,264,288 958,819 (147,604) 562,472 (414,868) 958,819 589,074 (232,100) 868,473 (639,520) 585,927 Condensed Consolidated Schedule of Balance Sheets Parent Company Subsidiaries of Parent Company 2020 Group VIEs Elimination Consolidated Company Parent Subsidiaries of Parent Company 2021 Group VIEs For the year ended December 31, Elimination Consolidated Cash and cash equivalents Restricted cash Total current assets Investments in subsidiaries Total non-current assets Total assets Total current liabilities Total non-current liabilities Total liabilities (RMB in thousands) 574,449 6,525 149,933 128,879 813,176 — — 2,065,495 177,925 — 2,557,157 2,354,790 11,044,967 (4,266,438) 11,690,476 2,353,746 2,799,127 11,767,368 (4,702,152) 12,218,089 10,178,732 — 10,178,732 105,027 1,744,115 (10,826,796) 1,873,037 12,735,889 2,700,257 12,405,656 (14,443,770) 13,398,032 13,204,437 2,904,154 13,511,483 (15,528,948) 14,091,126 493,517 681,401 (200,000) 1,074,069 592,668 687,752 3,673,560 1,931,720 (4,725,446) 1,567,586 472,608 14,041 3,211,596 1,541,885 (4,294,914) 822,005 7,933 1,015,580 836,046 3,212,477 1,726,646 (4,286,981) 1,488,188 — 10,850,691 345,467 1,360,689 (10,177,332) 1,707,556 10,850,691 6,351 3,673,560 1,339,052 (4,525,446) — 1,537,558 135,404 — — (10,178,732) — (10,850,691) 558,272 — 184,761 — — 881 — (RMB in thousands) 123,342 1,383,881 19,593 158,332 11 Table of Contents Condensed Consolidated Schedule of Cash Flows Parent Company Subsidiaries of Parent Company 2019 Group VIEs Elimination Consolidated Parent Company (RMB in thousands) For the year ended December 31, 2020 Subsidiaries of Parent Company Group VIEs (RMB in thousands) Elimination Consolidated Parent Company Subsidiaries of Parent Company 2021 Group VIEs Elimination (RMB in thousands) Cash flows generated from/(used in) operating activities Cash flows (used (5,822) 2,671,753 4,362,960 (1,525,502) 5,503,389 (223,271) (86,145) 2,250,346 530,782 2,471,712 (11,537) 1,003,060 747,408 (816,866 in)/generated from investing activities 330,197 (785,183) (842,120) 367,547 (929,559) 1,497,131 (135,982) (2,252,530) (2,378,495) (3,269,876) (132,143) (927,961) 645,957 167,567 Cash flows generated from/(used in) financing activities 9,588 (1,684,664) (2,855,955) 1,158,696 (3,372,335) (1,522,314) (734,396) (1,429,390) 2,094,828 (1,591,272) (127,088) (108,221) (571,156) 722,273 Effect of exchange rate changes on cash, cash equivalents and restricted cash Net increase/(decrease) in cash, cash equivalents and restricted cash 100,138 (23,320) — (741) 76,077 84,221 106,134 571 (247,115) (56,189) 15,864 35,984 291 (72,974 434,101 178,586 664,885 — 1,277,572 (164,233) (850,389) (1,431,003) — (2,445,625) (254,904) 2,862 822,500 — 12 Table of Contents Exchange Rate Information Substantially all of the Group’s operations are conducted in China and all of the Group’s revenues is denominated in Renminbi. This annual report contains translations of Renminbi amounts into U.S. dollars at specific rates solely for the convenience of the reader. Unless otherwise noted, all translations from Renminbi to U.S. dollars and from U.S. dollars to Renminbi in this annual report were made at a rate of RMB6.3726 to US$1.00, the exchange rate set forth in the H.10 statistical release of the Federal Reserve Board on December 30, 2021. We make no representation that the Renminbi or U.S. dollar amounts referred to in this annual report could have been or could be converted into U.S. dollars or Renminbi, as the case may be, at any particular rate or at all. The PRC government imposes control over its foreign currency reserves in part through direct regulation of the conversion of Renminbi into foreign exchange and through restrictions on foreign trade. B. Capitalization and Indebtedness Not Applicable. C. Reasons for the Offer and Use of Proceeds Not Applicable. D. Risk Factors Summary of Risk Factors Investing in our ADSs and Class A ordinary shares involves significant risks. You should carefully consider all of the information in this annual report before making an investment in our ADSs and Class A ordinary shares. Below please find a summary of the principal risks we face, organized under relevant headings. Risks Related to Our Business and Industry • • • • • • • • The Group has significantly downsized its credit business, and it may wind down the business in the future. The Group has very limited experience in offering ready-to-cook meals, and the Group is likely to incur loss initially as a result of operating such business. We intend to continue to explore new business opportunities, and such new businesses may not deliver the expected benefits. Changes in food costs and availability could materially adversely affect the QD Food business. Food safety and food-borne illness incidents or advertising or product mislabeling may materially adversely affect the QD Food business by exposing the Group to lawsuits, product recalls or regulatory enforcement actions, increasing the Group’s operating costs and reducing demand for its product offerings. From time to time the Group may evaluate and potentially consummate strategic investments or acquisitions, which could require significant management attention, disrupt its business and materially and adversely affect its financial results. The Group relies on its proprietary credit assessment model and risk management system in the determination of credit approval and credit limit assignment. If the Group’s proprietary credit assessment model and risk management system fail to perform effectively, such failure may materially and adversely impact the Group’s operating results. If the Group is unable to effectively manage delinquency rates for transactions facilitated by it, its business and results of operations may be materially and adversely affected. Further, historical delinquency rates may not be indicative of future results. 13 Table of Contents • • Increase in the delinquency rate of on-balance sheet transactions would increase the Group’s allowance for loan principal and financing service fee receivables and provision for loan principal and financing service fee receivables, which could have a material adverse effect on the Group’s business, results of operations and financial positions. Increase in the amount of off-balance sheet transactions may lead to higher changes in guarantee liabilities and risk assurance liabilities and the Group’s business and results of operations may be materially and adversely affected. Risks Related to Our Corporate Structure • • • • • If the PRC government deems that the contractual arrangements in relation to the Group VIEs do not comply with PRC regulatory restrictions on foreign investment in the relevant industries, or if these regulations or the interpretation of existing regulations change in the future, we could be subject to severe penalties or be forced to relinquish our interests in those operations. Our contractual arrangements with the Group VIEs may result in adverse tax consequences to the Group. We rely on contractual arrangements with the Group VIEs and their shareholders to operate the our business, which may be less effective as direct ownership in providing operational control and otherwise have a material adverse effect as to our business. The shareholders of the Group VIEs may have potential conflicts of interest with us, which may materially and adversely affect our business and financial condition. Our corporate actions will be substantially controlled by our founder, chairman and chief executive officer, Mr. Min Luo, who will have the ability to control or exert significant influence over important corporate matters that require approval of shareholders, which may deprive you of an opportunity to receive a premium for your ADSs and materially reduce the value of your investment. Risks Related to Doing Business in China • • • • • • Changes in the political and economic policies of the PRC government may materially and adversely affect the Group’s business, financial condition and results of operations and may result in the Group’s inability to sustain its growth and expansion strategies. There are uncertainties regarding the interpretation and enforcement of PRC laws, rules and regulations. In addition, rules and regulations in China can change quickly with little advance notice. The audit report included in this annual report is prepared by an auditor who is not inspected by the U.S. Public Company Accounting Oversight Board and, as such, our investors are deprived of the benefits of such inspection. Our ADSs will be prohibited from trading in the United States under the Holding Foreign Companies Accountable Act, or the HFCA Act, in 2024 if the PCAOB is unable to inspect or fully investigate auditors located in China, or 2023 if proposed changes to the law are enacted. The delisting of our ADSs, or the threat of their being delisted, may materially and adversely affect the value of your investment. The opinions on supervision of illegal securities activities issued by the General Office of the Central Committee of the Communist Party of China and the General Office of the State Council may subject us to additional compliance requirements in the future. The China Securities Regulatory Commission, or the CSRC, has released for public consultation the draft rules to exert more oversight and control over offerings that are conducted overseas and foreign investment in China-based issuers, which could significantly limit or completely hinder our ability to offer our securities to overseas investors and could cause the value of our ADSs to significantly decline. 14 Table of Contents • • • PRC regulations relating to investments in offshore companies by PRC residents may subject our PRC-resident beneficial owners or our PRC subsidiaries to liability or penalties, limit our ability to inject capital into our PRC subsidiaries or limit our PRC subsidiaries’ ability to increase their registered capital or distribute profits. Any failure to comply with PRC regulations regarding our employee share incentive plans may subject the PRC plan participants or us to fines and other legal or administrative sanctions. We rely to a significant extent on dividends and other distributions on equity paid by our principal operating subsidiaries to fund offshore cash and financing requirements. Risks Related to Our Ordinary Shares and ADSs • • • The trading price of our ADSs may be volatile, which could result in substantial losses to you. If securities or industry analysts do not publish research or publish inaccurate or unfavorable research about our business, the market price for our ADSs and trading volume could decline. Because we do not expect to pay dividends in the foreseeable future, you must rely on price appreciation of our ADSs for return on your investment. Risks Related to Our Business and Industry The Group has significantly downsized its credit business, and it may wind down the business in the future. The Group historically derived substantially all of its revenue from its credit business. In light of the regulatory uncertainties in China’s online consumer finance market and to maintain its asset quality, the Group has implemented stringent credit standards for its credit business, which has led to a significant decrease in the amount of transactions facilitated in the first quarter of 2022. As a result, the Group expects its revenue to decline sequentially in the first quarter of 2022, compared with the fourth quarter of 2021. In addition, the Group expects further decreases in the total amount of transactions and related revenue in the second quarter of 2022. The Group will continue to evaluate conditions in the online consumer finance market and relevant regulatory developments. Based on this ongoing assessment, the Group may wind down its credit business, which could result in a further decrease to the Group’s revenue. The Group has very limited experience in offering ready-to-cook meals, and the Group is likely to incur loss initially as a result of operating such business. The Group launched its ready-to-cook meal business, or “QD Food,” in March 2022. The Group has very limited experience in most aspects of QD Food’s business operations, such as product design, supply chain management, fulfillment and user acquisition. QD Food’s prospects may be affected by a number of possible reasons that are beyond our control, including decreasing consumer spending, increasing competition, the emergence of alternative business models, decreasing demand for ready-to-cook meals, effects of the COVID-19 pandemic, as well as changes in rules, regulations, government policies or general economic conditions. There can be no assurance that the Group will be able to successfully grow QD Food. In particular, the ramp-up of QD Food may be adversely affected by the COVID-19 pandemic. Since March 2022, major outbreaks of the Omicron variant of COVID-19 have occurred in many parts of China. These outbreaks have resulted in widespread lockdowns, highway closures and other restrictive measures across China, which have caused severe hardships to countless consumers and businesses in China. The Group is unable to accurately predict the full impact of the Omicron outbreaks due to numerous uncertainties, including the geographic scope of the outbreaks, the duration of the outbreaks, as well as additional restrictive measures that may be taken by governmental authorities. 15 Table of Contents In the near term, the Group expects to offer discounts and incur significant marketing expenses to expand QD Food’s user base. As a result, the Group is likely to incur losses initially as a result of this new venture. To support the growth of QD Food, the Group may also make significant capital expenditures to establish food preparation and fulfillment facilities. The Group’s ability to achieve profitability depends on its ability to enhance brand recognition, expand user base, maintain competitive pricing, and increase operational efficiency, which may be affected by numerous factors beyond our control. If the Group is unable to generate adequate revenue growth and manage its costs and expenses, the Group may not be able to achieve profitability or positive cash flow on a consistent basis, which may impact its business growth and adversely affect its financial condition and results of operations. We intend to continue to explore new business opportunities, and such new businesses may not deliver the expected benefits. Besides QD Food, the Group has been exploring other innovative consumer products and services to satisfy the fundamental and daily needs of Chinese consumers. If the Group experiences initial success with a new business, the Group may decide to invest significant amounts of capital to grow the business. We cannot assure you that the Group’s new business initiatives will be successful. For example, the Group is in the process of winding down its budget auto financing business and the Wanlimu e-commerce platform. The Group is also in the process of significantly downsizing its Wanlimu Kids Clubs business. The Group may make significant capital expenditures to develop new businesses, and our management’s attention may be diverted. The Group may also incur significant cost to comply with the laws and regulations that apply to such new businesses. Any failure of the Group’s efforts to pursue new business opportunities could have a material adverse effect on the Group’s business, prospects, financial condition and results of operations. Changes in food costs and availability could materially adversely affect the QD Food business. The success of the QD Food business depends in part on the Group’s ability to anticipate and react to changes in food and supply costs and availability. The QD Food business is susceptible to increases in food costs as a result of factors beyond the Group’s control, such as general economic conditions, inflation, market changes, increased competition, seasonal fluctuations, shortages or interruptions, weather conditions, global demand, food safety concerns, public health crises, such as pandemics and epidemics, generalized infectious diseases, changes in law or policy, declines in fertile or arable lands, product recalls and government regulations. For example, any prolonged negative impact of the COVID-19 pandemic or inflationary periods on food and supply costs and availability could materially and adversely impact the QD Food business. In addition, deflation in food prices could reduce the attractiveness of the Group’s product offerings relative to competing products and thus impede the Group’s ability to maintain or increase overall sales, while food inflation, particularly periods of rapid inflation, could reduce the Group’s operating margins as there may be a lag between the time of the price increase and the time at which the Group is able to increase the price of its product offerings. The Group generally does not have long term supply contracts or guaranteed purchase commitments with its suppliers, and it does not hedge its commodity risks. As a result, we may not be able to anticipate, react to or mitigate against cost fluctuations which could materially adversely affect the QD Food business. Any increase in the prices of the ingredients most critical to the Group’s recipes, or scarcity of such ingredients, such as vegetables, poultry, beef and pork, would adversely affect the Group’s operating results. Alternatively, in the event of cost increases or decrease of availability with respect to one or more of the Group’s key ingredients, the Group may choose to temporarily suspend including such ingredients in its recipes, rather than paying the increased cost for the ingredients. Any such changes to the Group’s available recipes could materially adversely affect its business, financial condition and operating results. 16 Table of Contents Food safety and food-borne illness incidents or advertising or product mislabeling may materially adversely affect the QD Food business by exposing the Group to lawsuits, product recalls or regulatory enforcement actions, increasing the Group’s operating costs and reducing demand for its product offerings. Selling food for human consumption involves inherent legal and other risks, and there is increasing governmental scrutiny of and public awareness regarding food safety. Unexpected side effects, illness, injury or death related to allergens, food-borne illnesses or other food safety incidents (including food tampering or contamination) caused by products the Group sells, or involving suppliers that supply the Group with ingredients, condiments and other products, could result in the discontinuance of sales of these products or the Group’s relationships with such suppliers, or otherwise result in increased operating costs or harm to the Group’s reputation. Shipment of adulterated products, even if inadvertent, can result in criminal or civil liability. Such incidents could also expose the Group to government investigations and/or product liability or other lawsuits brought by consumers, as well as negative publicity. Any administrative penalties, judgment and/or negative publicity against the Group could have a material and adverse effect on the Group’s results of operations and financial condition. The occurrence of food-borne illnesses or other food safety incidents could also adversely affect the price and availability of affected ingredients, resulting in higher costs, disruptions in supply and a reduction in the Group’s sales. Furthermore, any instances of food contamination, whether or not caused by the Group’s products, could subject the Group or its suppliers to a food recall. Food recalls could result in significant losses due to their costs, the destruction of product inventory, lost net revenues due to customer credits and refunds, lost future sales due to the unavailability of the product for a period of time and potential loss of existing customers and a potential negative impact on the Group’s ability to retain existing customers and attract new customers due to negative consumer experiences or as a result of an adverse impact on the Group’s brand and reputation. In addition, food companies have been subject to targeted, large-scale tampering as well as to opportunistic, individual product tampering, and the Group could be a target for product tampering. Forms of tampering could include the introduction of foreign material, chemical contaminants and pathological organisms into consumer products as well as product substitution. If the Group does not adequately address the possibility, or any actual instance, of product tampering, it could face possible recall of its products and the imposition of civil or criminal sanctions, which could materially adversely affect its business, financial condition and operating results. From time to time the Group may evaluate and potentially consummate strategic investments or acquisitions, which could require significant management attention, disrupt its business and materially and adversely affect its financial results. We may evaluate and consider strategic investments, combinations, acquisitions or alliances to better serve customers and enhance our competitive position. These transactions could be material to the Group’s financial condition and results of operations if consummated. There can be no assurance that these transactions will offer the expected benefits, and we may suffer significant investment losses as a result of such transactions. We purchased 10,204,082 Class A ordinary shares issued by Secoo Holding Limited (NASDAQ: SECO), or Secoo, for an aggregate consideration of US$100 million in June 2020. Secoo is a large online integrated upscale products and services platform. As of March 31, 2022, we held approximately 28.9% of Secoo’s issued and outstanding shares, and we are its largest shareholder. The Group’s loss from equity method investments amounted to RMB370.0 million and RMB221.8 million (US$34.8 million) in 2020 and 2021, respectively, which was primarily related to its investment in Secoo. The Group may continue to recognize loss from such investment in the future, which could have a material and adverse effect on the Group’s financial condition and results of operations. If we are able to identify an appropriate business opportunity, we may not be able to successfully consummate the transaction and, even if we do consummate such a transaction, we may be unable to obtain the 17 Table of Contents benefits or avoid the difficulties and risks of such transaction, which may result in investment losses. Strategic investments or acquisitions will involve risks commonly encountered in business relationships, including: • • • • • • • • • • • difficulties in assimilating and integrating the operations, personnel, systems, data, technologies, products and services of the acquired business; inability of the acquired technologies, products or businesses to achieve expected levels of revenue, profitability, productivity or other benefits including the failure to successfully further develop the acquired technology; difficulties in retaining, training, motivating and integrating key personnel; diversion of management’s time and resources from the Group’s normal daily operations and potential disruptions to the Group’s ongoing businesses; difficulties in maintaining uniform standards, controls, procedures and policies within the combined organizations; difficulties in retaining relationships with users, business partners, employees and other partners of the acquired business; risks of entering markets in which the Group has limited or no prior experience; regulatory risks, including remaining in good standing with existing regulatory bodies or receiving any necessary pre-closing or post- closing approvals, as well as being subject to new regulators with oversight over an acquired business; assumption of contractual obligations that contain terms that are not beneficial to the Group, require the Group to license or waive intellectual property rights or increase the Group’s risk for liability; liability for activities of the acquired business before the acquisition, including intellectual property infringement claims, violations of laws, commercial disputes, tax liabilities and other known and unknown liabilities; and unexpected costs and unknown risks and liabilities associated with strategic investments or acquisitions. We may not make any investments or acquisitions, or any future investments or acquisitions may not be successful, may not benefit the Group’s business strategy, may not generate sufficient revenues to offset the associated acquisition costs or may not otherwise result in the intended benefits. From time to time we may also make financial investments, such as investments in equity securities of other companies, and there can be no assurance that we will be able to realize profits from such investments. We may also engage in corporate restructuring in order to facilitate capital raising and/or incubate new businesses. However, we may fail to obtain such intended benefits. The Group relies on its proprietary credit assessment model and risk management system in the determination of credit approval and credit limit assignment. If the Group’s proprietary credit assessment model and risk management system fail to perform effectively, such failure may materially and adversely impact the Group’s operating results. Credit limits for the Group’s borrowers are determined and approved based on risk assessment conducted by the Group’s proprietary credit assessment model and risk management system. Such model and system use big data-enabled technologies, such as artificial intelligence and machine learning, that take into account transactions that the Group has processed. While the Group relies on big data analytics to refine its model and system, there can be no assurance that its application of such technology will continue to deliver the expected benefits. As the Group has a limited operating history, it may not have accumulated sufficient credit analysis and data to optimize 18 Table of Contents its model and system. Furthermore, the Group’s existing data and credit assessment model and risk management system might not be effective. If the Group’s system contains programming or other errors, if the Group’s model and system are ineffective or if the credit analysis and data the Group obtained are incorrect or outdated, the Group’s credit assessment abilities could be negatively affected, resulting in incorrect approvals or denials of credit applications or mispriced credit products. If the Group is unable to effectively and accurately assess the credit profiles of borrowers or price credit products appropriately, it may either be unable to offer attractive financing service fee and credit limits to borrowers, or be unable to maintain low delinquency rates of transactions facilitated by the Group. The Group’s risk and credit assessment may not be able to provide more predictive assessments of future borrower behavior and result in better evaluation of its borrower base when compared to its competitors. If the Group’s proprietary credit assessment model and risk management system fail to perform effectively, its business and results of operations may be materially and adversely affected. If the Group is unable to effectively manage delinquency rates for transactions facilitated by it, its business and results of operations may be materially and adversely affected. Further, historical delinquency rates may not be indicative of future results. The Group may not be able to maintain low delinquency rates for transactions facilitated by it, or such delinquency rates may be significantly affected by economic downturns or general economic conditions beyond the Group’s control and beyond the control of individual borrowers. For example, certain regulatory developments have reduced the availability of funding for consumer credit and driven up delinquency rates across the online consumer finance industry, including the Group’s loan portfolio. To better protect the Group and its institutional funding partners from these industry headwinds, the Group implemented significantly stricter standards for credit approvals. However, there can be no assurance that the Group will be able to effectively manage delinquency rates with such measures. The Group experienced decreases in M1+ delinquency rate by vintage over time. M1+ delinquency rate by vintage for transactions in 2020 was 7.9% through March 31, 2021. M1+ delinquency rate by vintage for transactions in 2021 was less than 3.0% through March 31, 2022. Such decrease was primarily due to the Group’s deployment of a conservative and prudent strategy in its cash credit business. Major outbreaks of the Omicron variant of COVID-19 have occurred in many parts of China since March 2022. These outbreaks have caused severe hardships to countless consumers in China and adversely affected their ability to repay their borrowings. As a result, the Group is likely to experience increases in delinquency rates in the near term. Increase in the delinquency rate of on-balance sheet transactions would increase the Group’s allowance for loan principal and financing service fee receivables and provision for loan principal and financing service fee receivables, which could have a material adverse effect on the Group’s business, results of operations and financial positions. The Group reserves any estimated loss for on-balance sheet transactions due to the borrowers’ default as allowance for loan principal and financing service fee receivables. When evaluating the loan principal receivables on a pooled basis, the Group applies a roll rate model based on historical loss rates, while also taking into consideration macroeconomic conditions in order to calculate the pooled allowance. Subsequent to January 1, 2020, the Group adjusts the allowance that is determined by the roll rate-based model for various qualitative factors that reflect current conditions and reasonable and supportable forecasts of future economic conditions, in accordance with Accounting Standards Update (“ASU”) No. 2016-13, Financial instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASC 326”). Accordingly, any increase in the delinquency rates of on-balance sheet transactions would increase the Group’s allowance for loan principal and financing service fee receivables, and the Group recognizes any increase in allowance for loan principal and financing service fee receivables as provision for loan principal and financing service fee receivables for the relevant period. Such increase could have a material adverse effect on the Group’s business, results of operations and financial positions. Furthermore, if the actual delinquency rates for on-balance sheet transactions were higher than predicted, the Group’s cash flow would be reduced and the Group’s allowance for 19 Table of Contents loan principal and financing service fee receivables may not be able to cover the actual losses as expected, which could have a material adverse effect on the Group’s working capital, financial condition, results of operations and business operations. In 2019, 2020 and 2021, on-balance sheet transactions represented 37.4%, 99.5% and 99.1% of the total amount of transactions under the Group’s loan book business. In 2019, 2020 and 2021, provision for loan principal and financing service fee receivables and other assets was RMB2,283.1 million, RMB1,641.4 million and a reversal of RMB151.8 million (US$23.8 million), respectively; and the Group’s provision ratio during the same periods was 9.5%, 7.8% and a reversal of 1.3%, as a result of the decrease was primarily due to the decrease in past-due on-balance sheet outstanding principal receivables. The Group’s charge-off ratio, which is defined as the amount of loan principal receivables the Group charged off during a period, divided by the total amount of on-balance sheet transactions during such period, in 2019,2020 and 2021 was 5.3%,11.6% and 2.6%, respectively. As of December 31, 2019, 2020 and 2021, the Group’s M1+ delinquency coverage ratio, defined as the balance of allowance for loan principal and financing service fee receivables at the end of a period, divided by the total balance of outstanding principal for on-balance sheet transactions for which any installment payment was more than 30 calendar days past due as of the end of such period, was 1.5x, 2.4x and 1.8x, respectively. With respect to on-balance sheet transactions, principal for which any installment payment was more than 30 calendar days past due accounted for 11.1%, 7.5% and 5.9% of total on-balance sheet outstanding principal as of December 31, 2019, 2020 and 2021, respectively. As of December 31, 2019, 2020 and 2021, the Group’s loan principal and financing service fee receivables for on-balance sheet transactions for which any installment payment was more than 90 calendar days past due were approximately RMB630.0 million, RMB254.9 million and RMB91.0 million (US$14.3 million), respectively. As of December 31, 2019, 2020 and 2021, the Group’s allowance for loan principal and financing service fee receivables were approximately RMB1,528.9 million, RMB849.2 million and RMB267.0 million (US$41.9 million), respectively. The Group does not accrue financing income on principal that is considered impaired or on credit drawdowns for which any installment payment is more than 90 calendar days past due. Financing income previously accrued but subsequently placed on nonaccrual status will be netted from the Group’s financing income for the current period. Therefore, an increase in delinquency rates of on-balance sheet transactions will lead to an increase in such adjustments of financing income. Increase in the amount of off-balance sheet transactions may lead to higher changes in guarantee liabilities and risk assurance liabilities and the Group’s business and results of operations may be materially and adversely affected. Under the Group’s loan book business, it has entered into off-balance sheet funding arrangements with certain institutional funding partners, which directly fund credit drawdowns by borrowers for credit products and receive guarantees from the Group. The Group also funded budget auto financing products under off-balance sheet arrangements historically. Borrowers directly repay principal and financing service fees to the relevant institutional funding partners, who will in turn deduct the principal and fees due to them from the repayments and remit the remainder to the Group as its loan facilitation fees. Revenues from loan facilitation services are recognized when the Group matches borrowers with funding partners and the funds are transferred to the borrowers. At the inception of each off-balance sheet transaction, the Group records the fair value of (i) guarantee liabilities, which represent the present value of the Group’s expected payout based on the estimated delinquency rate and the applicable discount rate for time value; or (ii) risk assurance liabilities, which considers the premium required by a third-party market participant to issue the same risk assurance in a standalone transaction, as applicable. The contingent loss rising from risk assurance liabilities is recognized when borrower default is probable, and the amount of loss is estimable. Subsequent to January 1, 2020, the contingent liability relating to the expected credit losses arising from the contingent aspect of the risk assurance liability is initially measured under current expected credit loss model, or CECL model, in accordance with ASC 326. Accordingly, an increase in the expected delinquency rates of off-balance sheet transactions would result in an increase in the amount of guarantee liabilities and risk assurance liabilities, which are recognized as changes 20 Table of Contents in guarantee liabilities and risk assurance liabilities. In 2019, 2020 and 2021, off-balance sheet transactions represented 62.6%, 0.5% and 0.9% of the total amount of transactions under the Group’s loan book business, respectively, and the Group recognized RMB1,143.4 million, a reverse of RMB87.9 million and a reverse of RMB201.6 million (US$31.6 million) of changes in guarantee liabilities and risk assurance liabilities during such periods, respectively. Furthermore, if the actual delinquency rates for off-balance sheet transactions were higher than expected, the Group’s guarantee liabilities and risk assurance liabilities may not be able to cover the actual losses as expected, which could have a material adverse impact on the Group’s working capital, financial condition, results of operations and business operations. The Group’s guarantee liabilities and risk assurance liabilities were RMB1,517.8 million and RMB31.4 million as of December 31, 2019 and 2020, respectively, and the Group paid the relevant institutional funding partners RMB2,084.1 million and RMB1,684.4 million in 2019 and 2020, respectively, as a result of borrowers’ default for off-balance sheet transactions. The Group’s guarantee liabilities and risk assurance liabilities were RMB0.9 million (US$0.1 million) as of December 31, 2021. Although the relevant amount under the Group’s off-balance sheet transactions decreased significantly as it primarily funded its credit products with its own capital in 2021, we cannot assure you that off-balance sheet transactions will not increase in the future. The Group’s business depends on its ability to collect payment on and service the transactions the Group facilitates under the loan book business. The Group has implemented payment and collection policies and practices designed to optimize regulatory compliant repayment, while also providing superior borrower experience. The Group’s collection process is divided into distinct stages based on the severity of delinquency, which dictates the level of collection steps taken. For example, automatic reminders through text, voice and instant messages are sent to a delinquent borrower as soon as the collections process commences. The Group’s collection team will also make phone calls to borrowers following the first missed payment and periodically thereafter. For amounts more than 90 calendar days past due, the Group may continue to contact the relevant borrowers by phone. During 2019, 2020 and 2021, the Group recovered RMB197.3 million, RMB310.7 million and RMB244.5 million (US$38.4 million), respectively, of principal and financing service fees of on-balance sheet transactions for which any installment payment is more than 90 calendar days past due. Despite the Group’s servicing and collection efforts, we cannot assure you that the Group will be able to collect payments on the transactions it facilitates under the loan book business as expected. The Group’s failure to collect payment on the transactions will have a material adverse effect on its business operations and financial positions. In addition, we aim to control bad debts by utilizing and enhancing the Group’s credit assessment system rather than relying on collection efforts to maintain healthy credit performances. As such, the Group’s collection team may not possess adequate resources and manpower to collect payment on and service the transactions the Group facilitated. If the Group fails to adequately collect amounts owed, then payments of principals and financing service fees to the Group may be delayed or reduced and the Group’s results of operations will be adversely affected. If the amount of transactions facilitated by the Group under the loan book business increases in the future, it may devote additional resources into its collection efforts. However, there can be no assurance that the Group would be able to utilize such additional resources in a cost-efficient manner. Moreover, the current regulatory regime for debt collection in the PRC remains unclear. Although we aim to ensure the Group’s collection efforts comply with the relevant laws and regulations in the PRC and the Group has established strict internal policies that its collections personnel do not engage in aggressive practices, we cannot assure you that such personnel will not engage in any misconduct as part of their collection efforts. Any such misconduct by the Group’s collection personnel or the perception that the Group’s collection practices are considered to be aggressive and not compliant with the relevant laws and regulations in the PRC may result in harm to the Group’s reputation and business, which could further reduce the Group’s ability to collect payments from borrowers, lead to a decrease in the willingness of prospective borrowers to apply for and utilize the Group’s credit or fines and penalties imposed by the relevant regulatory authorities, any of which may have a material adverse effect on the Group’s results of operations. 21 Table of Contents The Group’s business may be adversely affected if it is unable to secure funding on terms acceptable to it, or at all. The Group collaborates with institutional funding partners to fund certain credit drawdowns it facilitates. The Group’s current institutional funding partners include banks, trust companies, consumer finance companies, asset management companies and other institutions. For credit drawdowns currently funded by institutional funding partners, such credit drawdowns are typically either facilitated to borrowers directly from institutional funding partners or indirectly from institutional funding partners through trusts the Group established in collaboration with trust companies. Currently, the Group primarily fund its loan book business with its own capital. The total amount of transactions facilitated by the Group under the loan book business and the transaction services business in 2021 was RMB15,117.3 million (US$2,372.2 million), and RMB480.8 million (US$75.4 million) of such transactions was funded by the Group’s institutional funding partners. The Group’s funding arrangements has changed significantly since inception. The Group’s funding arrangements may continue to evolve. There can be no assurance that the Group’s cooperation with new institutional funding partners will meet its expectations or the expectations of borrowers. The availability of funding from institutional funding partners depends on many factors, some of which are out of our control. Some of the Group’s institutional funding partners have limited operating history, and there can be no assurance that the Group will be able to rely on their funding in the future. The Group’s ability to cooperate with new institutional funding partners may be subject to regulatory or other limitations. In addition, regardless of the Group’s risk management efforts, credit facilitated by the Group may nevertheless be considered riskier and have a higher delinquency rate than loans provided by traditional financial institutions. In the event there is a sudden or unexpected shortage of funds from the Group’s institutional funding partners or if the Group’s institutional funding partners have determined not to continue to collaborate with the Group, the Group may not be able to maintain necessary levels of funding without incurring high costs of capital, or at all. Furthermore, the Group had historically relied on one institutional funding partner to fund a substantial portion of credit facilitated by the Group. While the Group has since managed to diversify its funding sources, there can be no assurance that the Group’s funding sources will remain or become increasingly diversified in the future. If the Group becomes dependent on a small number of institutional funding partners and any such institutional funding partner determines not to collaborate with the Group or limits the funding that is available, the Group’s business, financial condition, results of operations and cash flow may be materially and adversely affected. Since inception, the Group has from time to time experienced, and may continue to experience, constraints as to the availability of funds from the Group’s institutional funding partners. Such constraints have affected and may continue to affect user experience, including by limiting the Group’s ability to approve new credit applications or resulting in the Group having to curtail the amount that can be drawn down by borrowers under their existing credit limits. Any prolonged constraint as to the availability of funds from the Group’s institutional funding partners may also harm our reputation or result in negative perception of the credit products the Group offers, thereby decreasing the willingness of prospective or existing borrowers to seek credit products from the Group or to draw down on their existing credit. In addition, the Group may not be able to obtain timely payment of the relevant fees from the institutional funding partners and the Group’s relationship with them may suffer as a result. The Group may be deemed as a lender or a provider of financial services by the PRC regulatory authorities. The Group commenced its business in early 2014. The Group has established trusts in collaboration with trust companies starting in December 2016. Such trusts are funded by funds from institutional funding partners and the Group’s own capital. Since the trust companies administering such trusts have been licensed by financial regulatory authorities to lend, credit drawdowns funded under this arrangement are not private lending transactions within the meaning of the Provisions of the Supreme People’s Court the Provisions on Several Issues Concerning the Application of Law in the Trial of Private Lending Cases, or the Private Lending Judicial Interpretation, issued by the Supreme People’s Court of the PRC in 2015. The second revised version of the Private Lending Judicial Interpretation, or the Second Revised Private Lending Judicial Interpretation, has been issued in December 2020. In 22 Table of Contents 2021, the amount of transactions facilitated through trusts was RMB14,459.3 million (US$2,269.0 million), representing approximately 97.9% of the total amount of transactions facilitated under the loan book business during such period. The Group currently funds a majority of credit drawdowns initially disbursed by the Group through banks or trusts. The Group historically funded credit drawdowns through online small credit companies established by the Group. The Group disbursed funds to borrowers without utilizing online small credit companies or trusts in the past, which may be considered to involve the use of the Group’s own capital in lending, as a result of which the Group may be deemed as a lender or a provider of financial services by the PRC regulatory authorities, and the Group may become subject to supervision and restrictions on lending under applicable laws and regulations. For example, the Measures for the Banning of Illegal Financial Institutions and Illegal Financial Business Operations, promulgated by the PRC State Council, or the State Council, in July 1998 and revised in 2011, prohibits financial business activity, including fund raising and facilitating loans to the public, to be conducted without the approval of the People’s Bank of China, or the PBOC. The General Rules on Loans issued by the PBOC in June 1996 provides that a financial institution shall conduct the business with the approval of the PBOC. Otherwise, it will be subject to a fine from one time to five times of the illegal revenues, and the PBOC has the authority to order such business to suspend its operations. Such existing PRC laws and regulations with respect to the supervision and restrictions on lending to the public were primarily aimed to regulate traditional banking and financial institutions at the time of their respective promulgations, and the regulatory environment in the PRC has evolved since then. With the rapid development and evolving nature of the consumer finance industry and other new forms of Internet finance business in China, there are uncertainties as to the interpretation of the laws and regulations mentioned above as well as whether such laws and regulations are applicable to the Group’s business. In the event that the Group is considered by the relevant authorities to be subject to such PRC laws and regulations, and the Group’s past business operations are deemed to be in violation of such laws and regulations, the Group may be exposed to certain administrative penalties, including the confiscation of illegal revenue and fines up to five times the amount of the illegal revenue as mentioned above. Furthermore, the Group’s financing service fees received from borrowers might be fully or partially deemed as interest, such fees may be subject to the restrictions on interest rate as specified in applicable rules on private lending. For example, under the Second Revised Private Lending Judicial Interpretation issued by the Supreme People’s Court in December 2020, such total annual percentage rates (inclusive of any default rate, default penalty and any other fee) exceeding four times that of China’s benchmark one-year loan prime rate, or LPR, as published on the 20th of each month will not be legally protected. Based on the LPR of 3.7% as published on April 20, 2022, such cap would be 14.8%. See “Item 4. Information on the Company—B. Business Overview—Regulations—Regulations related to Loans and Intermediation.” In August 2015, the Legislative Affairs Office of the State Counsel of the PRC published a consultation paper seeking public comments on the Regulations on Non-Deposit-Taking Lending Organizations (Draft for Comment), or the Draft Regulations on Non-Deposit-Taking Lending, with a Note on the Draft Regulations on Non-Deposit-Taking Lending published by the PBOC, or the PBOC Note on the Draft Regulations on Non-Deposit-Taking Lending. According to the PBOC Note on the Draft Regulations on Non-Deposit-Taking Lending, rather than generally categorizing activities like lending to public without the approval of PBOC as illegal, PBOC recognizes that, with the continuous development of the financial industry, the credit market in the PRC has developed into multiple segments, in addition to the traditional lending by financial institutions, and non-deposit-taking lending organizations of various types have formed an important part of, and enriched the tiers of, the credit market of the PRC. The PBOC also states that the Draft Regulations on Non-Deposit-Taking Lending seeks to regulate small credit companies and other non-deposit-taking lending organizations that are not covered by the current regulatory framework in the PRC, which we believe may include companies such as the Group. It is uncertain when or whether the Draft Regulations on Non-Deposit Lending-Taking will be officially promulgated and take effect and whether the promulgated version would be substantially revised. Therefore, substantial uncertainty remains regarding the final framework, scope and applicability of the Draft Regulations 23 Table of Contents on Non-Deposit Lending-Taking to us. We cannot assure you that the Group’s past or existing practices would not be deemed to violate any existing or future laws, regulations and governmental policies. If the Draft Regulations on Non-Deposit Lending-Taking is enacted as proposed, the Group may have to obtain the requisite business permit and operate in accordance with relevant requirements provided therein. The laws and regulations governing the online consumer finance industry in the PRC are still at a nascent stage and subject to further change and interpretation. If the Group’s business practices or the business practices of the Group’s institutional funding partners are deemed to violate any PRC laws or regulations, the Group’s business, financial condition, results of operations and prospects would be materially and adversely affected. The PRC government has not adopted a clear regulatory framework governing the new and rapidly-evolving online consumer finance industry in which the Group operates, and the Group’s business may be subject to a variety of laws and regulations in the PRC that involve financial services, including consumer finance, small credit, and private lending. The application and interpretation of these laws and regulations are ambiguous, particularly in the new and rapidly-evolving online consumer finance industry in which the Group operates, and may be interpreted and applied inconsistently between the different government authorities. As of December 31, 2021, the Group had not been subject to any material fines or other penalties under any PRC laws or regulations as to the Group’s business operations. However, if the PRC government adopts a stringent regulatory framework for the online consumer finance industry in the future, and subject market participants such as the Group to specific requirements (including without limitation, capital requirements, reserve requirements and licensing requirements), the Group’s business, financial condition and prospects would be materially and adversely affected. The existing and future rules, laws and regulations can be costly to comply with and if the Group’s practice is deemed to violate any existing or future rules, laws and regulations, the Group may face injunctions, including orders to cease illegal activities, and may be exposed to other penalties as determined by the relevant government authorities as well. In July 2015, the Guidelines on Promoting the Healthy Development of Internet Finance, or the Internet Finance Guidelines, were jointly released by ten PRC regulatory agencies. The Internet Finance Guidelines set out the regulatory framework and some basic principles on regulating the online consumer finance business in the PRC. The Internet Finance Guidelines specify that the China Banking Regulatory Commission, or the CBRC, will have primary regulatory responsibility for the online consumer finance businesses in China, which as currently used in the Internet Finance Guidelines is interpreted as businesses conducted via the Internet by consumer finance companies. Pursuant to the Pilot Measures for the Administration of Consumer Finance Companies released by the CBRC in November 2013, or the Pilot Consumer Finance Measures, consumer finance companies in the PRC refer to non-banking financial institutions as approved by the CBRC that do not engage in taking public deposits from individual lenders and provide individual borrowers with consumer loans pursuant to the principles that such loans be small amount in nature and widely dispersed to various borrowers. However, the Internet Finance Guidelines and the Pilot Consumer Finance Measures do not explicitly provide guidance or requirements on other forms of online consumer finance business conducted by participants other than the CBRC-approved consumer finance companies as defined in the Pilot Consumer Finance Measures, including, for example, the Group’s business. Therefore, it is currently uncertain whether the Group’s business practice is subject to the relevant rules regarding online consumer finance companies provided under the Internet Finance Guidelines and consumer finance companies provided under the Pilot Consumer Finance Measures. Given the evolving regulatory environment of the consumer finance industry, the Group cannot rule out the possibility that the CBRC or other government authorities will issue new regulatory requirements to institute a new licensing regime covering our industry. If such a license regime is introduced or new regulatory rules are promulgated, we cannot assure you that the Group would be able to obtain any new licenses or other regulatory approvals in a timely manner, or at all, which would materially and adversely affect the Group’s business and impede the Group’s ability to continue its operations. According to two circulars promulgated in April 2016, namely the Circular of the General Office of the PRC State Council on Issuing the Implementing Proposals for the Special Rectification of Internet Financial Risks and the Circular on Issuing the Implementing Proposals for the Special Rectification of P2P online 24 Table of Contents Financial Risks, two special task forces at the central-government level, namely the Office of the Leading Group for Specific Rectification against Online Finance Risks, or the Online Finance Risks Rectification Office, and the Office of the Leading Group for Specific Rectification against P2P Online Lending Risks, or the P2P Online Lending Rectification Office, were established to align the regulatory measures of the PBOC, the CBRC, and other relevant PRC government authorities that regulate the business operations of online finance companies and P2P platforms. In addition, in August 2016, the CBRC, the Ministry of Industry and Information Technology, or the MIIT, the Ministry of Public Security of China and the Office for Cyberspace Affairs jointly promulgated the Interim Measures for Administration of the Business Activities of Online Lending Information Intermediary Institutions, or the Interim Online Lending Information Intermediary Measures, which set out certain rules to regulate the business activities of online lending information intermediary institutions. The Interim Online Lending Information Intermediary Measures define “online lending” as direct lending between peers, which can be natural persons, legal persons or other organizations, through Internet platforms, and “online lending information intermediary institutions” as financial information intermediaries that are engaged in lending information business and directly provide peers with lending information services, such as information collection and publication, credit rating, information interaction and loan facilitation between borrowers and lenders for them to form direct peer-to-peer lending relationships. The Interim Online Lending Information Intermediary Measures are only applicable to private lending transactions according to relevant interpretations by the China Banking Regulatory Commission. Loans funded by financial institutions which are licensed by financial regulatory authorities are not private lending transactions within the meaning of the Second Revised Private Lending Judicial Interpretation issued by the Supreme People’s Court of the PRC in December 2020. Therefore, facilitation of loans funded directly by such licensed financial institutions is not subject to the regulation set forth in the Interim Online Lending Information Intermediary Measures. On December 8, 2017, the P2P Online Lending Rectification Office issued the Notice on the Rectification and Inspection Acceptance of Risk of Online Lending Intermediaries, or Circular 57, which provides further clarification on several matters in connection with the rectification of online lending information intermediaries. The Circular 57 requires that online lending intermediaries set up custody accounts with qualified banks that have passed certain testing and evaluation procedures run by the P2P Online Lending Rectification Office to hold customer funds. Pursuant to the Circular 57, online lending information intermediaries that have already established risk reserve funds shall not continue to set aside any of their funds as additional risk reserve and shall gradually reduce the balance of their existing risk reserve funds. Other than risk reserve funds, online lending information intermediaries shall actively seek alternative means of investor protection, such as third-party guarantee arrangements. In particular, starting from the issuance of the Circular on the Classification and Disposal of Risks of Online Lending Institutions and Risk Prevention on December 19, 2018, or Circular 175, by the Online Finance Risks Rectification Office and the P2P Online Lending Rectification Office, a storm of regulatory measures have been taken by the PRC government centered on the enhancement of rectification of existing P2P platforms, with the goal of guiding such platforms to wind down and exit P2P business. The overarching objective of Circular 175 is for the PRC government agencies to effect orderly exits of peer-to-peer direct lending marketplaces without inducing systematic risks in the financial system or causing significant social turbulence. In accordance with Circular 175, P2P lending platforms which have demonstrated risk characteristics should exit the business or cease operation, and even the normal platforms must limit the scale of outstanding business and number of investors, which is sometimes referred as the “Business Dual Decrease,” and eventually seek to become licensed small credit companies, loan facilitation companies servicing banking institutions or companies channeling information for banking institutions. The regulatory actions under such stringent regulation on P2P lending platforms have decimated P2P lending platforms, including many well-known or listed companies such as Yidai, LuFax, and China Rapid Finance (NYSE: XRF). It is reported that in November 2019, the Online Finance Risks Rectification Office and the P2P Online Lending Rectification Office jointly issued the Guidance of Transformation of Online Lending Information Intermediaries to Small Credit Companies, or Guidance 83, 25 Table of Contents which further signals the fundamental goal of the PRC government to end of P2P business. As of December 31, 2020, all P2P lending platforms have been exited or have completed their business transformation. The Group does not engage in direct loan facilitation between peers. While the Group facilitates transactions that are directly funded by certain institutional funding partners, such companies are financial institutions licensed by financial regulatory authorities to lend. As such, the Group does not consider itself as an “online information intermediary institution” regulated under the Interim Online Lending Information Intermediary Measures. However, we cannot assure you that the CBRC, the P2P Online Lending Rectification Office or other PRC governmental agencies would not expand the applicability of the Interim Online Lending Information Intermediary Measures and/or otherwise regard the Group as an online lending information intermediary institution. As a provider of online credit products, the Group’s business shares certain similarities with those of P2P platforms. In March 2017, Beijing Happy Time received a rectification notice from the Beijing Branch of the Office of Leading Group for Special Rectification against Online Finance Risks, which was also the Office of the Leading Group for Special Rectification against P2P Online Lending Risks of Beijing or the Beijing Rectification Office, the regulator of the Internet finance and online lending industry in Beijing. The rectification notice required Beijing Happy Time to conduct certain improvements and corrections to its business operation to be in compliance with the Interim Online Lending Information Intermediary Measures and the Implementing Scheme of Special Rectification of Risks in the Internet Finance Sector. We do not believe the Group is subject to the Interim Online Lending Information Intermediary Measures, Circular 57 and Circular 157 and have discussed with the Beijing Rectification Office about the difference between the Group’s business and those of “online information intermediary institution” as defined in the Interim Online Lending Information Intermediary Measures and that certain correction requirements in the notice were not actually related to the Group’s business. Nevertheless, the Beijing Rectification Office still required the Group to comply with certain requirements under the Interim Online Lending Information Intermediary Measures regardless of whether the Group is a P2P platform due to the fact that the Group’s institutional funding partners used to include P2P platforms, which were identified as online lending information intermediary institutions in accordance with the Interim Online Lending Information Intermediary Measures and other PRC laws and regulations. As such, the Group was deemed to be participating in a certain part of the “online lending” process as defined in the Interim Online Lending Information Intermediary Measures. The Group has since carried out certain improvements and corrections as required by the Beijing Rectification Office and are maintaining an ongoing dialogue with the Beijing Rectification Office. As of the date of this annual report, the Group has not received final clearance from the Beijing Rectification Office that the Group’s rectification efforts were sufficient, and there can be no assurance that the Group will be able to receive such final clearance. We also cannot assure you that the Beijing Rectification Office will agree with our position that the Group is not an “online information intermediary institution.” In the event that the Group is deemed as an online lending information intermediary institution by the PRC regulatory authorities in the future, the Group may have to register with local financial regulatory authorities and apply for telecommunication business operation licenses if required by the competent authorities, and the Group’s current business practices may be considered to be in violation of the Interim Online Lending Information Intermediary Measures. Accordingly, the Group may face administrative orders to make rectification, receive administrative warnings or criticism notice, monetary penalties up to RMB30,000 and other penalties, and the Group’s business, results of operations and financial position could be materially and adversely affected. The Group has cooperated with its institutional funding partners, whose compliance with PRC laws and regulations may affect the Group’s business. The Group’s collaboration with institutional funding partners have exposed the Group to and may continue to expose it to additional regulatory uncertainties faced by such institutional funding partners. In addition, the Group has ceased transferring credit drawdowns to P2P platforms in April 2017. Nonetheless, we cannot assure you that the business operations of the Group’s institutional funding partners currently are or will be in compliance with the relevant laws and regulations, and in the event that the Group’s institutional funding partners do not operate their businesses in accordance with the relevant laws and regulations or are engaged in illegal activities, they will be exposed to various regulatory risks and accordingly, the Group’s business, financial condition and prospects would be materially and adversely affected. 26 Table of Contents In April 2017, the P2P Online Lending Rectification Office, the regulator for administration and supervision on the nationwide Internet finance and online lending, issued the Notice on the Conduction of Check and Rectification of Cash Loan Business Activities and a supplementary notice, or the Notice on Cash Loan. The Notice on Cash Loan requires the local counterparts of the P2P Online Lending Rectification Office to conduct a full-scale and comprehensive inspection of cash loan business conducted by online platforms and require such platforms to conduct necessary improvements and corrections within a designated period to comply with the relevant requirements under the Second Revised Private Lending Judicial Interpretation in December, 2020, the Measures for the Banning of Illegal Financial Institutions and Illegal Financial Business Operations, the Guiding Opinions on Small Credit Companies, the Interim Online Lending Information Intermediary Measures and the Implementing Scheme of Special Rectification of Risks in the Internet Finance Sector. The Notice on Cash Loan focuses on preventing malicious fraudulent activities, loans that are offered at extortionate interest rates and violence in the loan collection processes in the cash loan business operation of online platforms. The P2P Online Lending Rectification Office issued a list of cash loan business that are to be examined, which includes Laifenqi, one of the brands in which the Group uses to market its credit products. In light of the Notice on Cash Loan, the Group has taken measures, including re-evaluating and adjusting the amount of financing service fees it charges on all credit drawdowns in an effort to comply with applicable regulations. Due to the uncertainties with respect to the interpretation and application of the laws and regulations as stated in the Notice on Cash Loan, we cannot assure you the Group’s business practice will be deemed to be in full compliance with all such laws and regulations, and the Group may face injunctions, including orders to change the Group’s current business activities, and may be exposed to other penalties as determined by the relevant government authorities after such examination according to the Notice on Cash Loan. Furthermore, the Group may be required to conduct certain other improvements or corrections which could be costly, and the Group’s business, financial condition, results of operations and prospects would be materially and adversely affected. The Online Finance Risks Rectification Office and P2P Online Lending Rectification Office jointly issued the Circular on Regulating and Rectifying Cash Loan Business on December 1, 2017, or Circular 141. Circular 141 sets out the principles and new requirements for the conduct of “cash loan” businesses by small loan companies, P2P platforms and banking financial institutions. Circular 141 does not clearly define “cash loans,” but it indicates that cash loans that are subject to regulation and rectification have certain features, such as the lack of (i) specific user cases (which, as we understand the term, refers to scenarios in which users purchase specific products or services on credit), (ii) specified uses of loan proceeds, (iii) defined customer base, or (iv) collateral. The Circular 141 sets forth several general requirements with respect to “cash loan” business, including, among others: (i) no organizations or individuals may conduct the lending business without obtaining approvals for the lending business; (ii) the aggregate borrowing costs of borrowers charged by institutions in the forms of interest and various fees should be annualized and subject to the limit on interest rate of private lending set forth in the Private Lending Judicial Interpretations issued by the Supreme People’s Court; (iii) all relevant institutions shall follow the “know-your-customer” principle and prudently assess and determine the borrower’s eligibility, credit limit, cooling-off period and other relevant features; (iv) loans to any borrower without income sources are prohibited; (v) all relevant institutions shall enhance the internal risk control and prudently use “data-driven” risk management models; (vi) no lending institution or any third party entrusted thereby may collect debts by means of violence, intimidation, insult, defamation or harassment; and (vii) lending institutions shall strengthen the protection of customers’ information, and shall not steal or misuse customers’ private information in the name of “Big Data,” or illegally trade or disclose customers’ private information. The Circular 141 also sets forth several requirements on banking financial institutions participating in “cash loan” business, including, among others,(i) such banking financial institutions shall not extend loans jointly with any third-party institution which has not obtained approvals for the lending business, or fund such institution for the purpose of extending loans in any form; (ii) with respect to the loan business conducted in cooperation with third-party institutions, such banking financial institutions shall not outsource the core business (including the credit assessment and risk control), and shall not accept any credit enhancement service whether or not in a disguised form (including the commitment to taking default risks) provided by any third-party institutions with no guarantee qualification and (iii) such banking financial institutions must require and ensure that the third-party 27 Table of Contents institutions shall not collect any interests or fees from the borrowers. It remains uncertain how the regulatory authorities will interpret and enforce the requirements of Circular 141 under various circumstances. The Group has entered into arrangements with several banks which directly fund credit drawdowns to borrowers. The Group refers to such banks qualified credit applications from borrowers, including the Group’s assessment of their credit profiles and the Group’s suggested credit limits. They will then review the credit applications and approve credit for drawdown. Borrowers directly repay principal and financing service fees to the relevant institutional funding partners, who will in turn deduct the principal and fees due to them from the repayments and remit the remainder to the Group as the Group’s loan facilitation fees. On October 9, 2019, the Supplementary Provisions on the Supervision and Administration of Financing Guarantee, or Financing Guarantee Provisions, is jointly issued by the China Banking and Insurance Regulatory Commission, the National Development and Reform Commission and other seven central governmental departments. Although financing guarantee, which means guarantor providing security for the secured party’s debt financing such as borrowings and issuance of bonds, has always been a licensed activity, the Financing Guarantee Provisions further tightens the supervision of such business. Specifically, it provides that institutions providing customer referral, credit rating or other services for loan lenders are barred from offering financing guarantee services in any manner unless after obtaining necessary approvals. The Group’s off-balance sheet transactions may be deemed to involve both customer referral and financing guarantee services. However, The Group does not directly or indirectly provide any financing guarantee to lenders without approvals. The Group’s outstanding loans, if involving guarantees, are either guaranteed by one of our wholly owned subsidiaries, Xiamen Xincheng Youda Financing Guarantee Ltd., or Xiamen Xincheng or covered by alternative arrangements with third-party companies with financing guarantee licenses. Xiamen Xincheng has obtained a license to provide financing guarantee service. We have provided guarantees for credit drawdowns through Xiamen Xincheng, which has a registered capital of RMB900 million. As of December 31, 2021, the net assets of Xiamen Xincheng was RMB934.3 million (US$146.6 million), and it was therefore permitted to incur guarantee liabilities and risk assurance liabilities up to RMB9,000.0 million (US$1,412.3 million). We have applied for regulatory approval for a reduction of Xiamen Xincheng’s registered capital to RMB100 million, and we have not received such approval as of the date of this annual report. Nonetheless, if the Group’s arrangement to provide guarantees through the alternative arrangements are deemed to be in violation of Circular 141 or Financing Guarantee Provisions, it could be subject to penalties and/or be required to change its business model. In addition, if the registered capital of Xiamen Xincheng or any other entity that through which the Group provides finance guarantee service decreases, the Group’s ability to provide such service may also be negatively affected. As a result, the Group’s business, financial condition, results of operations and prospects could be materially and adversely affected. On July 23, 2019, the Supreme People’s Court of the PRC, the Supreme People’s Procuratorate of the PRC, the Ministry of Public Security and Ministry of Justice of the PRC jointly issued the Opinions on Several Issues Concerning Handling Illegal Lending Criminal Cases, or the Illegal Lending Opinions. According to the Illegal Lending Opinions, providing loans to unspecified public regularly (meaning more than ten borrowers in any given two years) without necessary governmental approvals will constitute illegal lending practices, of which the provision of loans of annual interest rate (including nominal interest and fees charged to borrowers in combination) higher than 36%, under serious or very serious circumstances, is criminally punishable (“Illegal High-interest Lending”). The Illegal Lending Opinions also provides specific definition of “serious” and “very serious” Illegal High-Lending. In comparison to previous administrative and judicial practices, the Illegal Lending Opinions criminalizes Illegal High-interest Lending practices at the first time. In addition, under the Illegal Lending Opinions, the collection of debts by means of violence is forbidden. Whoever gathers, instigates or hires others to forcibly collect debts by disturbing, pestering, beguiling, gathering a crowd to create momentum or otherwise, which does not constitute a crime independently, but the illegal lending has constituted the crime of illegal operation, shall be imposed a heavier punishment as the case may be in accordance with the provisions on the crime of illegal operation. In an effort to comply with potentially applicable laws and regulations, the Company adjusted the pricing of its credit products in April 2017 to ensure that the annualized fee charged on all credit drawdowns rates (including interest and fees combined) do not exceed 36%. The 28 Table of Contents Company does not believe the regulatory change represented by the Illegal Lending Opinions will materially affect the Group’s business. The Group focuses on complying with relevant laws, regulations and government policies applicable to the Group’s business practice in the PRC and have implemented various measures. The Group has established trusts in collaboration with trust companies starting in December 2016. In addition, the Group continuously seeks to work with additional institutional funding partners, including more traditional banking institutions. In April 2017, the Group ceased transferring credit drawdowns to P2P platforms and certain other institutional funding partners. However, due to the lack of clarity in the potential interpretation of the relevant rules and the fact that the rules, laws and regulations are expected to continue to evolve in this newly emerging industry in which the Group operates, we cannot assure you that the Group’s measures would effectively prevent it from violating any existing or future rules, laws and regulations. In addition, although the relevant regulations on P2P platforms do not directly apply to the Group, any regulatory restrictions may cause borrowers with lower credit qualities to seek for the Group’s service, which may have negative effect on the Group’s delinquency rates. Furthermore, such changes in regulations may also affect market sentiment and have a negative impact on the Group’s partnership with institutional funding partners. As part of the Group’s efforts to obtain funding at competitive costs, the Group may from time to time explore alternative funding initiatives, including through standardized capital instruments. The current PRC regulatory framework does not impose many restrictions and obligations on us as the credit originator of any potential asset-backed securities offering. Pursuant to the relevant PRC laws and regulations, an institution, such as the Group’s online small credit companies, is entitled to establish an asset-backed securities scheme as a credit originator for such scheme on the condition that it has legitimate ownership to the underlying transferred assets that are able to generate independent and predictable cash flow in compliance with relevant laws and regulations. However, the initiators of any potential asset-backed securities scheme with whom the Group works with are required to be financial institutions and they are subject to a variety of laws and regulations in the PRC, such as Administrative Provisions on the Asset Securitization Business of Securities Companies and the Subsidiaries of Fund Management Companies and Measures for the Supervision and Administration of Pilot Projects of Credit Asset Securitization of Financial Institutions. Since the Group will not operate as an initiator of any asset- backed securities scheme, the Group will not be subject to these laws and regulations governing financial institutions as initiators. However, as the laws and regulations applicable to asset-backed securities are still developing, it remains uncertain as to the application and interpretation of such laws and regulations, particularly relating to the new and rapidly evolving online consumer finance industry in which the Group operates. To the extent the Group issues asset-backed securities in the future, the Group does not plan to issue such securities to investors located in the United States or otherwise meeting the definition of “U.S. persons” as defined under Rule 902 under the Securities Act. As such, we do not believe that any such potential issuances will be subject to the requirements in Regulation AB under the Securities Act and the related rules. Nonetheless, if the Group issues asset-backed securities in the future that are required to be registered under the Securities Act, the Group may need to comply with Regulation AB and related rules, which may make the issuance of such asset-backed securities impracticable. The Group’s financing service fees may decline in the future and any material decrease in such financing service fees could harm the Group’s business, financial condition and results of operations. The Group generates a material portion of its total revenues from financing service fees. In 2021, financing income, which the Group recognizes for its on-balance sheet transactions, comprised 75.9% of the Group’s total revenues. In addition, the Group recognizes revenues from loan facilitation services when it matches borrowers with funding partners and the funds are transferred to the borrowers. Additionally, revenues from post-origination services are recognized evenly over the term of the loans as the services are performed. As such, the amount of financing service fees charged under such arrangements may affect the amount of loan facilitation fees that the Group collects. Any material decrease in the Group’s financing service fees would have a substantial impact on the 29 Table of Contents Group’s margin. In the event that the amount of financing service fees the Group charges for credit drawdowns it facilitated decrease significantly in the future and the Group is not able to reduce its cost of capital for funds from institutional funding partners or to adopt any cost control initiatives, the Group’s business, financial condition and results of operations will be harmed. To compete effectively, the financing service fees the Group charges could be affected by a variety of factors, including the creditworthiness and ability to repay of the borrowers, the competitive landscape of our industry, the Group’s access to capital and regulatory requirements. The Group’s financing service fees may also be affected by a change over time in the mix of the types of products the Group offers and a change to the Group’s borrower engagement initiatives. The Group’s competitors may also offer more attractive fees, which may require the Group to reduce its financing service fees to compete effectively. Certain consumer financing solutions offered by traditional financial institutions may provide lower fees than the Group’s financing service fees. Although we do not believe such consumer financing solutions currently compete with the Group’s products or target the same unserved or underserved consumers in China, such traditional financial institutions may decide to do so in the future, which may have a material adverse effect as to the financing service fees that the Group will be able to charge. Furthermore, as the Group’s borrowers establish their credit profile over time, they may qualify for and seek out other consumer financing solutions with lower fees, including those offered by traditional financial institutions offline, and the Group may need to adjust its financing service fees to retain such borrowers. In addition, the Group’s financing service fees may be affected by many macroeconomic factors beyond the Group’s control, such as inflation, recession, the state of the credit markets, changes in market interest rates, global economic disruptions, unemployment and fiscal and monetary policies. The Group’s financing service fees, to the extent they are fully or partially deemed as interest, may also be subject to the restrictions on interest rate as specified in applicable rules on private lending. Circular 141 provides that overall capital cost charged on a borrower, comprised of interests and fees, should be in compliance with the judicial interpretations by the Supreme People’s Court of the PRC regarding interest rates in private lending. According to the Private Lending Judicial Interpretations, if the annual interest rate of a private loan is higher than 36%, the excess will be void and will not be enforced by the courts. In an effort to comply with potentially applicable laws and regulations, the Group adjusted the pricing of its credit products in April 2017 to ensure that the annualized fee rates charged on all credit drawdowns do not exceed 36%. See “—The laws and regulations governing the online consumer finance industry in the PRC are still at a nascent stage and subject to further change and interpretation. If the Group’s business practices or the business practices of the Group’s institutional funding partners are deemed to violate any PRC laws or regulations, the Group’s business, financial condition, results of operations and prospects would be materially and adversely affected.” In addition, as some of the Group’s institutional funding partners are prohibited from charging fees at annualized rates in excess of 24%, the Group cooperates with various insurance and asset management companies to charge additional fees from the relevant borrowers so that the overall fee rates applicable to such borrowers would still be within the limit of 36% on an annualized basis. If such arrangements were found by the regulatory authorities to be in violation of the applicable laws and regulations, the Group’s business, results of operations and financial condition could be materially and adversely affected. Under the Second Revised Private Lending Judicial Interpretation issued by the Supreme People’s Court in December 2020, total annual percentage rates (inclusive of any default rate, default penalty and any other fee) for private lending exceeding four times that of China’s benchmark one-year loan prime rate, or LPR, as published on the 20th of each month will not be legally protected. Based on the LPR of 3.7% as published on April 20, 2022, such cap would be 14.8%. According to the Second Revised Private Lending Judicial Interpretation and Reply by Supreme People’s Court to Issues Concerning the Scope of Application of the New Judicial Interpretation on Private Lending, the interest rate cap is not applicable to the lending business of financial institutions and their branches that have been established with the approval of financial regulatory authorities. Rather, this new policy is generally interpreted as only being applicable to private lending, while the Group’s business almost entirely involves financial institutions. However, it is important to note that the Second Revised Private Lending Judicial Interpretation is newly promulgated, and the policy is subject to further clarifications by courts and regulatory authorities. If the same interest rate cap were 30 Table of Contents applied to the Group’s business as required by relevant courts or regulatory authorities, the Group’s profitability may suffer a material adverse impact, and the Group could incur net losses. In addition, the Circular 141 requires financial institutions to ensure that the loan facilitation operators they cooperate with do not collect interests or fees from borrowers. Although the Group no longer charges borrowers directly of any financing service fees, the Group does receive service fees from the Group’s institutional funding partners and third-party guarantee companies, which in turn charge fees from borrowers. We do not believe such practice is in violation of Circular 141. However, as the Circular 141 and other relevant regulations lack detailed guidance, the relevant authorities have broad discretion in the interpretation and implementation of such rules. We cannot rule out the possibility that the government authorities would still consider the Group’s business practices described above to be in violation of Circular 141. These regulations may be interpreted or enforced in ways that are different from our understanding and expectations. Moreover, the PRC government may seek to enhance the regulatory scrutiny of our industry and promulgate new laws and regulations in response to the growth of consumer finance. To the extent that any new laws and regulations or any interpretations of existing laws and regulations restrict the Group’s ability to continue its current operations, cause any aspects of the Group’s current operations to become non-compliant, or impose material compliance costs on it, the Group’s business and results of operations may be materially and adversely affected. The Group may be deemed to operate financing guarantee business by the PRC regulatory authorities. The State Council promulgated the Regulations on the Administration of Financing Guarantee Companies, or the Financing Guarantee Rules, on August 2, 2017 which became effective on October 1, 2017. Pursuant to the Financing Guarantee Rules, “financing guarantee” refers to the activities in which guarantors provide guarantee to the guaranteed parties as to loans, bonds or other types of debt financing, and “financing guarantee companies” refer to companies legally established and operating financing guarantee business. According to the Financing Guarantee Rules, the establishment of financing guarantee companies shall be subject to the approval by the competent government department, and unless otherwise stipulated by the state, no entity may operate financing guarantee business without such approval. If any entity violates these regulations and operates financing guarantee business without approval, the entity may be subject to penalties including ban or suspension of business, fines of RMB500,000 to RMB1,000,000, confiscation of illegal gains if any, and if the violation constitutes a criminal offense, criminal liability shall be imposed in accordance with the law. On October 9, 2019, the Supplementary Provisions on the Supervision and Administration of Financing Guarantee Companies, or Financing Guarantee Provisions, is jointly issued by the China Banking and Insurance Regulatory Commission, the National Development and Reform Commission and other seven central governmental departments. Although financing guarantee has always been a licensed activity, the Financing Guarantee Provisions further tightens the supervision of such business. Specifically, it provides that institutions providing customer referral, credit rating or other services for loan lenders are barred from offering financing guarantee services in any manner unless after obtaining necessary approvals. Under the Group’s loan bank business, the Group has entered into cooperative arrangements with certain banks in which they are identified as the lender under the agreements with borrowers and the borrowers are required to repay the principal and financing service fees directly to them. However, when borrowers under arrangements with banks fail to repay, the Group is obligated to repay the relevant bank the full overdue amount. In addition, pursuant to the Group’s agreement with a consumer finance company, the Group will make cash payments to the consumer finance company based on the overdue amount of loans that the Group has facilitated in which the consumer finance company originates. For 2021, such transactions, which are off-balance sheet transactions, represented 0.9% of the total amount of transactions under the Group’s loan book business. Historically, the Group also entered into arrangements with various institutional funding partners to fund on-balance sheet transactions, and the Group was also obligated to compensate such institutional funding partners for borrower default. For 2021, the Group funded all of the on-balance sheet transactions with its own capital. As such, transactions funded by institutional funding partners represented 0.9% of the total amount of transactions under the Group’s loan book business for year 2021. 31 Table of Contents Due to the lack of further interpretations, the exact definition and scope of “operating financing guarantee business” under the Financing Guarantee Rules is unclear. It is uncertain whether the Group would be deemed to operate financing guarantee business because of the Group’s current arrangements with institutional funding partners. However, institutions providing customer referral, credit rating or other services for loan lenders are barred from offering financing guarantee services in any manner unless after obtaining necessary approvals in accordance with Financing Guarantee Provisions. Furthermore, pursuant to Circular 141, a bank participating in loan facilitation transactions may not accept credit enhancement service from a third party which has not obtained any license or approval to provide guarantees, including credit enhancement service in the form of a commitment to assume default risks. One of our wholly-owned subsidiaries, Xiamen Xincheng, obtained a license to provide financing guarantee service in March 2019. The Group provides guarantees for certain credit drawdowns through Xiamen Xincheng. Under the Financing Guarantee Rules, the outstanding guarantee liabilities and risk assurance liabilities of a financing guarantee company shall not exceed ten times of its net assets. Nonetheless, the Group may also provide guarantees through alternative arrangements, such as cooperation with third parties with financing guarantee licenses. If such alternative arrangements are deemed to be in violation of Circular 141, the Group could be subject to penalties and/or be required to change the Group’s business model. As a result, the Group’s business, financial condition, results of operations and prospects could be materially and adversely affected. Injuries, accidents, food safety incidents or other harm suffered by students or employees of the Group’s premises that it operates may subject it to liabilities and damage our reputation. The Group has significantly downsized the Wanlimu Kids Clubs business. Nonetheless, the business involves inherent risks associated with the safety and wellbeing of the Group’s students and other people visiting or working at the Group’s premises. The Group could face negligence claims for inadequate maintenance of the Group’s premises or lack of supervision of its teachers and other employees. In addition, any defects playground equipment in the Group’s premises or educational tools the Group uses in classrooms may cause harm to students. The Group therefore could be liable for accidents, injuries, food safety incidents or other harm to students or other people at the Group’s premises. Even if the Group is found not legally liable for such accidents or injuries, disputes on liabilities or general complaints by parents regarding food quality, students’ wellbeing or, from time to time, air quality and renovation fumes within the Group’s premises may create unfavorable publicity and our reputation may be damaged on such occasions. Additionally, although the Group maintains certain liability insurance, the insurance coverage may not be adequate to fully protect the Group from claims and liabilities, and reoccurrence of similar accidents may make it difficult for the Group to obtain liability insurance at reasonable prices in the future. Defending such claims may also cause the Group to incur substantial expenses and divert the time and attention of our management. As the Group is winding down or downsizing certain businesses, it may incur significant write-downs or write-offs, and the Group’s results of operations, financial condition and liquidity may be materially and adversely affected. The Group launched the Wanlimu e-commerce platform, which offers online luxury fashion products, in March 2020. The Group is in the process of winding down this business to focus on the Group’s other service offerings. The Group operated the Wanlimu e-commerce platform primarily on the basis of just-in-time ordering, whereby the Group purchased the relevant products from suppliers upon receiving customer orders. As of December 31, 2021, inventory relating to the platform amounted to RMB1.4 million (US$0.2 million). As the Group is winding down the Wanlimu e-commerce platform, it may be subject to a heightened risk of inventory obsolescence, a decline in inventory values, and inventory write-downs or write-offs. In addition, the Group may be required to lower sale prices in order to reduce inventory level, which may lead to lower gross margins. Any of the above may materially and adversely affect the Group’s results of operations and financial condition. The Group launched Wanlimu Kids Clubs, an early childhood education business, in January 2021, and the Group is in the process of significantly downsizing such business. As a result, the Group may incur significant 32 Table of Contents write-downs or write-offs of leasehold improvements and equipment relating to its Wanlimu Kids Clubs business, which may in turn have a material and adverse effect on the Group’s results of operations and financial condition. The Group has limited experience managing its allowance for loan principal and financing service fee receivables. In addition, the Group’s allowance for loan principal and financing service fee receivables is determined based on both objective and subjective factors and may not be adequate to absorb loan losses if the Group fails to accurately forecast the expected loss. The Group faces the risk that borrowers fail to repay their principals and financing service fees in full. Estimated credit loss relating to on-balance sheet transactions is recorded as allowance for loan principal and financing service fee receivables. If the Group experiences higher delinquency rates, such allowance would also increase. See “Item 5. Operating and Financial Review and Prospects—B. Liquidity and Capital Resources.” The Group has established an evaluation process designed to determine the adequacy of its allowance for loan principal and financing service fee receivables. While this evaluation process uses historical and other objective information, it is also dependent on the Group’s subjective assessment based upon its experience and judgment. In addition, since January 1, 2020 and our adoption of ASC 326, the Group’s evaluation process also take into account certain forward-looking factors that reflect current conditions and reasonable and supportable forecasts of future economic conditions. Actual losses are difficult to forecast, especially if such losses stem from factors beyond the Group’s historical experience. The Group has limited experience managing its allowance for loan principal and financing service fee receivables. Furthermore, the Group shifted its focus of target borrower base from college students to young consumers in general starting from November 2015, and it may not be able to accurately forecast delinquencies of its current target borrower base. Given these challenges, it is possible that the Group will underestimate or overestimate the allowance for loan principal and financing service fee receivables. In addition, the Group is not subject to periodic review by bank regulatory agencies of its allowance for loan principal and financing service fee receivables. As a result, if the Group underestimates the allowance for loan principal and financing service fee receivables, there can be no assurance that the Group’s allowance for loan principal and financing service fee receivables will be sufficient to absorb losses or prevent a material adverse effect on the Group’s business, financial condition and results of operations. Conversely, if the Group overestimates the allowance for loan principal and financing service fee receivables, the Group will record higher provision for loan principal and financing service fee receivables, which will adversely affect the Group’s results of operations. The Group faces intense competition and, if the Group does not compete effectively, its results of operations could be harmed. The online consumer finance industry in China is highly competitive and the Group competes with other consumer finance service providers, including online consumer finance service providers, as well as traditional financial institutions, such as banks and consumer finance companies. The Group’s competitors may operate different business models, have different cost structures or participate selectively in different market segments. They may ultimately prove more successful or more adaptable to consumer demand and new regulatory, technological and other developments. Some of the Group’s current and potential competitors have significantly more financial, technical, marketing and other resources than the Group does and may be able to devote greater resources to the development, promotion, sale and support of their offerings. The Group’s competitors may also have longer operating history, more extensive borrower bases or funding sources, greater brand recognition and brand loyalty and broader relationships with funding partners than the Group. Additionally, a current or potential competitor may acquire, or form a strategic alliance with, one or more of the Group’s competitors. The Group’s competitors may be better at developing new products, offering more attractive fees, responding more quickly to new technologies and undertaking more extensive and effective marketing campaigns. Furthermore, in light of the low barriers to entry in the online consumer finance industry, more players may enter this market and increase the level of competition. In response to competition, the Group may have to offer lower amount of financing service fees, which could materially and adversely affect the Group’s business and results of operations. If the Group is unable to compete with such companies and meet the need for innovation in its 33 Table of Contents industry, the demand for the Group’s credit products could stagnate or substantially decline, which could harm the Group’s business and results of operations. The markets in which the QD Food business competes are rapidly evolving and intensely competitive, and the Group faces an array of competitors from different industry sectors. The Group’s current and potential competitors include, among others, (1) other online food and meal delivery companies, (2) a wide array of food retailers, such as supermarkets and convenience stores, (3) e-commerce platforms and (4) casual dining and quick- service restaurants. The Group has very limited experience in most aspects of QD Food’s business operations, such as product design, supply chain management, fulfillment and user acquisition. If the QD Food business fails to compete effectively, the Group’s results of operations and financial condition would be materially and adversely affected. The Group may be required to obtain additional value-added telecommunication business licenses. PRC regulations impose sanctions for engaging in Internet information services of a commercial nature without having obtained an Internet content provider license, or the ICP license, and sanctions for engaging in the operation of online data processing and transaction processing without having obtained a value-added telecommunications services, or VATS, license for online data processing and transaction processing, or ODPTP license (ICP and ODPTP are both sub-sets of value-added telecommunication business). These sanctions include corrective orders and warnings from the PRC communication administration authority, fines and confiscation of illegal gains and, in the case of significant infringements, the websites and mobile apps may be ordered to cease operation. Nevertheless, the interpretation of such regulations and PRC regulatory authorities’ enforcement of such regulations in the context of online consumer finance industry remains uncertain, it is unclear whether online consumer finance service provider like the Group are required to obtain ICP license or ODPTP license, or any other kind of value-added telecommunication business licenses. As of December 31, 2021, Qufenqi (Beijing) Information Technology Co., Ltd., or Qufenqi Beijing, Xiamen Qudian Culture and Technology Co., Ltd., or Xiamen Qudian Culture and Technology, Xiamen Qudian, Xiamen Qu Plus Plus, Xiamen Wanlimu Technology Co., Ltd., and Xiamen Wanlimu Growth Technologies Co., Ltd., or Xiamen Wanlimu Growth, had obtained ICP licenses, and Xiamen Qudian had obtained an ODPTP license and a Service provider license. Given the evolving regulatory environment of the consumer finance industry and value-added telecommunication business, we cannot rule out the possibility that the PRC communication administration authority or other government authorities will explicitly require any of the Group VIEs or subsidiaries of the Group VIEs to obtain ICP licenses, ODPTP licenses or other value-added telecommunication business licenses, or issue new regulatory requirements to institute a new licensing regime for our industry. If such value-added telecommunication business licenses are clearly required in the future, or a new license regime is introduced or new regulatory rules are promulgated, we cannot assure you that the Group would be able to obtain any required license or other regulatory approvals in a timely manner, or at all, which would subject the Group to the sanctions described above or other sanctions as stipulated in the new regulatory rules, and materially and adversely affect the Group’s business and impede its ability to continue its operations. PRC regulation of loans to, and direct investment in, PRC entities by offshore holding companies and governmental control of currency conversion may restrict or prevent us from making loans to our PRC subsidiaries and the Group VIEs, or to make additional capital contributions to our PRC subsidiaries. We, as an offshore holding company, are permitted under PRC laws and regulations to provide funding to our PRC subsidiaries, which are treated as foreign-invested enterprises under PRC laws, through loans or capital contributions. However, loans by us to our PRC subsidiaries to finance their activities cannot exceed statutory limits and must be registered with the local counterpart of State Administration of Foreign Exchange, or the SAFE, and capital contributions to our PRC subsidiaries are subject to the requirement of making necessary filings in the Foreign Investment Comprehensive Management Information System, and registration with other governmental authorities in China. 34 Table of Contents SAFE promulgated the Notice of the State Administration of Foreign Exchange on Reforming the Administration of Foreign Exchange Settlement of Capital of Foreign-invested Enterprises, or Circular 19, effective on June 1, 2015, in replacement of the Circular on the Relevant Operating Issues Concerning the Improvement of the Administration of the Payment and Settlement of Foreign Currency Capital of Foreign-Invested Enterprises, or SAFE Circular 142, the Notice from the State Administration of Foreign Exchange on Relevant Issues Concerning Strengthening the Administration of Foreign Exchange Businesses, or Circular 59, and the Circular on Further Clarification and Regulation of the Issues Concerning the Administration of Certain Capital Account Foreign Exchange Businesses, or Circular 45. According to Circular 19, the flow and use of the RMB capital converted from foreign currency-denominated registered capital of a foreign-invested company is regulated such that RMB capital may not be used for the issuance of RMB entrusted loans, the repayment of inter-enterprise loans or the repayment of banks loans that have been transferred to a third party. Although Circular 19 allows RMB capital converted from foreign currency-denominated registered capital of a foreign-invested enterprise to be used for equity investments within the PRC, it also reiterates the principle that RMB converted from the foreign currency-denominated capital of a foreign-invested company may not be directly or indirectly used for purposes beyond its business scope. Thus, it is unclear whether SAFE will permit such capital to be used for equity investments in the PRC in actual practice. SAFE promulgated the Notice of the State Administration of Foreign Exchange on Reforming and Standardizing the Foreign Exchange Settlement Management Policy of Capital Account, or Circular 16, effective on June 9, 2016, which reiterates some of the rules set forth in Circular 19, but changes the prohibition against using RMB capital converted from foreign currency-denominated registered capital of a foreign-invested company to issue RMB entrusted loans to a prohibition against using such capital to issue loans to non-associated enterprises. Violations of SAFE Circular 19 and Circular 16 could result in administrative penalties. Circular 19 and Circular 16 may significantly limit our ability to transfer any foreign currency we hold to our PRC subsidiaries, which may adversely affect our liquidity and our ability to fund and expand our business in the PRC. Due to the restrictions imposed on loans in foreign currencies extended to any PRC domestic companies, we are not likely to make such loans to any of the Group VIEs and their subsidiaries, each a PRC domestic company. Meanwhile, we are not likely to finance the activities of the Group VIEs and their subsidiaries by means of capital contributions given the restrictions on foreign investment in the businesses that are currently conducted by the Group VIEs and their subsidiaries. In light of the various requirements imposed by PRC regulations on loans to, and direct investment in, PRC entities by offshore holding companies, we cannot assure you that we will be able to complete the necessary government registrations or obtain the necessary government approvals on a timely basis, if at all, with respect to future loans to our PRC subsidiaries or any consolidated variable interest entity or future capital contributions by us to our PRC subsidiaries. As a result, uncertainties exist as to our ability to provide prompt financial support to our PRC subsidiaries or the Group VIEs and their subsidiaries when needed. If we fail to complete such registrations or obtain such approvals, our ability to use foreign currency and to capitalize or otherwise fund our PRC operations may be negatively affected, which could materially and adversely affect our liquidity and our ability to fund and expand our business. We may need additional capital to pursue business objectives and respond to business opportunities, challenges or unforeseen circumstances, and financing may not be available on terms acceptable to us, or at all. Since inception, we have issued equity securities to support the growth of the Group’s business. In addition, we issued US$345 million aggregate principal amount of convertible senior notes in July 2019. As we intend to continue to make investments to support the growth of the Group’s business, we may require additional capital to pursue the Group’s business objectives and respond to business opportunities, challenges or unforeseen circumstances, including developing new products and services, further enhancing the Group’s risk management capabilities, increasing the Group’s marketing expenditures to improve brand awareness and diversify the Group’s borrower engagement channels by collaborating with other leading Internet companies, enhancing the Group’s operating infrastructure and acquiring complementary businesses and technologies. Accordingly, we may need to 35 Table of Contents engage in equity or debt financings to secure 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 the debts may divert a substantial portion of cash flow to pay principal and interest on such debt, which would reduce the funds available for expenses, capital expenditures, acquisitions and other general corporate purposes; and we may suffer default and foreclosure on the Group’s assets if the Group’s operating cash flow is insufficient 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 further issuances of equity or convertible debt securities, our existing stockholders could suffer significant dilution, and any new equity securities we issue could have rights, preferences and privileges superior to those of holders of our Class A ordinary shares. If we are unable to obtain adequate financing or financing on terms satisfactory to us when we require it, our ability to continue to pursue the Group’s business objectives and to respond to business opportunities, challenges or unforeseen circumstances could be significantly limited, and the Group’s business, operating results, financial condition and prospects could be adversely affected. Servicing our debt may require a significant amount of cash, and we may not have sufficient cash flow from the Group’s business to pay our debt. In July 2019, we issued US$345 million aggregate principal amount of convertible senior notes due 2026. The convertible notes bear interest at a rate of 1.00% per year, payable on July 1 and January 1 of each year, beginning on January 1, 2020. The convertible notes will mature on July 1, 2026, unless earlier redeemed, repurchased or converted in accordance with their terms. As of March 31, 2022, we have repurchased US$297.5 million aggregate principal amount of convertible notes, and the outstanding principal amount was US$47.5 million. Our ability to make scheduled payments of the principal of, to pay interest on or to refinance our indebtedness, including the notes, depends on the Group’s future performance, which is subject to economic, financial, competitive and other factors beyond our control. The Group’s business may not continue to generate cash flow from operations in the future sufficient to service our debt and make necessary capital expenditures. If the Group is unable to generate such cash flow, we may be required to adopt one or more alternatives, such as selling assets, restructuring debt or obtaining additional equity capital on terms that may be onerous or highly dilutive. Our ability to refinance our indebtedness will depend on the capital markets and our financial condition at such time. We may not be able to engage in any of these activities or engage in these activities on desirable terms, which could result in a default on our debt obligations. Any harm to our brands or reputation or any damage to the reputation of the online consumer finance industry may materially and adversely affect the Group’s business and results of operations. Enhancing the recognition and reputation of our brands is critical to the Group’s business and competitiveness, since this initiative affects our ability to attract and better serve borrowers and institutional funding partners. Factors that are vital to this objective include our ability to: • • • • • • • maintain the effectiveness, quality and reliability of the Group’s systems; provide borrowers with a superior experience; engage a large number of quality borrowers with low delinquency rate; enhance and improve the Group’s credit assessment model and risk management system; enhance the quality of the Group’s funding sources; effectively manage and resolve borrower complaints; and effectively protect personal information and privacy of borrowers. 36 Table of Contents Any malicious or otherwise negative allegation made by the media or other parties about the foregoing or other aspects of the Group, including our management, business, compliance with law, financial condition, prospects or the Group’s historical business operations on campuses, such as the ongoing putative shareholder class action lawsuits that we are involved in, whether with merit or not, could severely hurt our reputation and harm the Group’s business and results of operations. In addition, certain factors that may adversely affect our reputation are beyond our control. Negative publicity about the parties that the Group collaborates with, such as institutional funding partners or other business partners, including negative publicity about any failure by them to adequately protect the information of their users, to comply with applicable laws and regulations or to otherwise meet required quality and service standards, could also harm our reputation or result in negative perception of the products the Group offers. Furthermore, any negative development in the online consumer finance industry, such as bankruptcies or failures of other consumer finance service providers, and especially a large number of such bankruptcies or failures, or negative perception of the industry as a whole, such as that arises from any failure of other consumer finance platforms to detect or prevent money laundering or other illegal activities, even if factually incorrect or based on isolated incidents, could compromise our image, undermine the trust and credibility we have established and impose a negative impact on the Group’s ability to attract new borrowers and to collaborate with and retain institutional funding partners. Negative developments in our industry, such as widespread borrower default, fraudulent behavior and/or the closure of other online consumer finance service providers, may also lead to tightened regulatory scrutiny of the sector and limit the scope of permissible business activities that may be conducted. If any of the foregoing takes place, the Group’s business and results of operations could be materially and adversely affected. As the Group winds down Dabai Auto business, revenues generated from such business will decrease, and the Group may record write-downs in relation to the process of winding down such business. The Group has started to wind down its budget auto financing business in the second quarter of 2019 to focus on its core consumer finance business. As a result, revenues generated from the Dabai Auto business will further decrease. Sales income in relation to Dabai Auto business was RMB411.4 million, RMB122.8 million and RMB23.3 million (US$3.7 million) in 2019, 2020 and 2021, respectively. As of December 31, 2021, the Group carried finance lease receivable of RMB31.9 million (US$5.0 million). The decrease in revenues generated from Dabai Auto business and any further write-down that may be recorded during the process of winding down such business may adversely affect the Group’s business, financial condition and results of operations. Credit analysis and other information that the Group receives from other parties concerning a prospective borrower may be inaccurate or may not accurately reflect such prospective borrower’s creditworthiness, which may compromise the accuracy of the Group’s credit assessment. For the purpose of credit assessment and pricing, the Group obtains prospective borrower’s credit analysis and other information from them as well as, with their authorization, from external parties, and assess applicants’ creditworthiness based on such information. Such external party’s credit assessment system may still be at a development stage and therefore have limitations in measuring borrowers’ creditworthiness. The Group has experienced instances where credit analysis information provided by an external party was not fully predictive of actual delinquency rates. Therefore, the Group does not rely on inputs from one or only a few external parties. Instead, the Group uses inputs from many external parties for its credit assessment model to enhance its risk management capabilities. As the credit assessment methodologies of external parties are not disclosed to the Group, the Group may not have adequate knowledge of the assumptions behind their credit analysis, which could cause the Group’s model to produce inaccurate results. In addition, if there is an adverse change in the economic condition, credit analysis information provided by external parties may not be a reliable reference to assess an applicant’s creditworthiness, which may compromise the Group’s risk management capabilities. As a result, the Group’s assessment of a borrower’s credit profile may not reflect that particular borrower’s actual creditworthiness because assessment may be based on outdated, incomplete or inaccurate information. In addition, the completeness and reliability of information on borrower’s credit risk available in the PRC is relatively limited. The PBOC has developed and put into use a credit reference center which remains relatively underdeveloped. The information 37 Table of Contents available to the Group and external parties from whom the Group obtains information for its credit assessment model is limited. The Group also currently does not have a comprehensive way to determine whether prospective borrowers have obtained loans through other consumer finance platforms, creating the risk whereby a borrower may utilize the Group’s credit products in order to pay off loans from other sources. There is also a risk that, following the Group’s 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 the Group’s credit assessment and adversely affect the effectiveness of the Group’s control over its delinquency rates. The Group may not be able to recoup funds underlying transactions made in connection with inaccurate or incomplete borrower credit information, in which case the Group’s results of operations will be harmed. Erroneous reports with respect to certain of the Group’s users have been sent to the credit reference center of the PBOC, which may result in reputational damage to us. Some of the Group’s institutional funding partners report delinquencies of the Group’s users to the credit reference center of the PBOC, which adversely affect such users’ abilities to obtain loans in the future. Due to errors in the Group’s interfaces with certain institutional funding partners, the Group failed to inform such institutional funding partners about repayments made by certain of the Group’s users. As a result, such institutional funding partners believed that the users were delinquent on loan repayments and therefore made erroneous reports to the credit reference center of the PBOC. Neither the Group nor the institutional funding partners are subject to legal liabilities if the institutional funding partners timely inform the PBOC about the errors after receiving complaints from the borrowers. As isolated incidents, the erroneous reports have not resulted in any material adverse effect on the Group’s business. To avoid future errors, the Group has started to request its institutional funding partners to compare their records of delinquent borrowers with the Group’s. However, there can be no assurance that the Group’s institutional funding partners will agree with the measure we proposed or that such measure will be effective in preventing errors. If additional erroneous reports were made to the PBOC in the future, the Group may suffer reputational damage due to the negative publicity, which could have a material adverse effect on the Group’s business, results of operations and financial condition. The Group is subject to risks associated with other parties with which it collaborates. If such other parties fail to perform or provide reliable or satisfactory services, the Group’s business, financial condition and results of operations may be materially and adversely affected. The Group collaborates with certain other parties in providing the Group’s credit products to borrowers. Such other parties include the Group’s institutional funding partners and the Group’s cloud computing service provider. These parties may not be able sufficiently or timely fund credit that the Group facilitates or provide satisfactory merchandise and services to the Group and/or borrowers on commercially acceptable terms or at all. Any failure by these parties to continue with good business operations, comply with applicable laws and regulations or any negative publicity on these parties could damage our reputation, expose the Group to significant penalties and decrease the Group’s total revenues and profitability. Also, if the Group fails to retain existing or attract new quality parties to collaborate with, the Group’s ability to retain existing borrowers, engage prospective borrowers may be severely limited, which may have a material and adverse effect on the Group’s business, financial condition and results of operations. In addition, certain of these other parties that the Group 38 Table of Contents collaborates with have access to the Group’s user data to a limited extent in order to provide their services. If these other parties engage in activities that are negligent, illegal or otherwise harmful to the trustworthiness and security of the Group’s products or system, including the leak or negligent use of data, or users are otherwise dissatisfied with their service quality, we could suffer reputational harm, even if these activities are not related to, attributable to or caused by the Group. Fraudulent activity could negatively impact the Group’s results of operations, brand and reputation and cause the use of the Group’s credit products and services to decrease. The Group is subject to the risk of fraudulent activity associated with borrowers and parties handling user information. The Group’s resources, technologies and fraud detection tools may be insufficient to accurately detect and prevent fraud. For example, the Group currently does not have a comprehensive way to determine whether prospective borrowers have obtained loans through other consumer finance platforms, creating the risk whereby a borrower may borrow money through the Group in order to pay off loans from other sources. Even if the Group identifies a fraudulent borrower and reject his or her credit application, such borrower may re-apply by using fraudulent information. The Group may fail to identify such behavior, despite its measures to verify personal identification information provided by borrowers. Furthermore, the Group may not be able to recoup funds underlying transactions made in connection with fraudulent activities. A significant increase in fraudulent activities could negatively impact our brands and reputation, discourage institutional funding partners from collaborating with the Group, reduce the amount of transactions facilitated to borrowers and lead the Group to take additional steps to reduce fraud risk, which could increase the Group’s costs. High profile fraudulent activity could even lead to regulatory intervention, and may divert our management’s attention and cause the Group to incur additional expenses and costs. Although the Group has not experienced any material business or reputational harm as a result of fraudulent activities in the past, we cannot rule out the possibility that fraudulent activities may materially and adversely affect the Group’s business, financial condition and results of operations in the future. The Group relies on institutional funding partners to fund credit drawdowns to borrowers, which may constitute provision of intermediary service, and the Group’s agreements with these institutional funding partners and borrowers may be deemed as intermediation contracts under the PRC Civil Code. Under the PRC Civil Code, if an intermediary conceals any material fact intentionally or provides false information in connection with the conclusion 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 the damages caused. See “Item 4. Information on the Company—B. Business Overview—Regulations—Regulations related to Loans and Intermediation.” Therefore, if the Group fails to provide material information to institutional funding partners, or if it fails to identify false information received from borrowers or others and in turn provide such information to institutional funding partners, and in either case if the Group is also found to be at fault, due to failure or deemed failure to exercise proper care, such as to conduct adequate information verification or supervision of the Group’s employees, or to accurately detect and prevent fraud due to ineffectiveness of the Group’s fraud detection tools, the Group could be held liable for damages caused to institutional funding partners as an intermediary pursuant to the PRC Civil Code. In addition, if the Group fails to complete its obligations under the agreements with institutional funding partners and borrowers, it could also be held liable for damages caused to borrowers or institutional funding partners pursuant to the PRC Civil Code. On the other hand, the Group does not assume any 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 it does not conceal any material fact intentionally or provide false information, and are not found to be at fault otherwise. However, due to the lack of detailed regulations and guidance in the area of online consumer finance platforms and the possibility that the PRC government authority may promulgate new laws and regulations regulating online consumer finance platforms in the future, there are substantial uncertainties regarding the interpretation and application of current or future PRC laws and regulations for the online consumer finance industry, and there can be no assurance that the PRC government authority will ultimately take a view that is consistent with ours. 39 Table of Contents Fluctuations in interest rates could negatively affect the amount of transactions facilitated by the Group and cost of capital for funds provided to borrowers. All credit facilitated by the Group have fixed financing service fees. If prevailing market interest rates rise, the Group’s cost of capital for funds will increase, which may force the Group to increase the financing service fees it charges for on-balance sheet transactions. If the Group’s borrowers decide not to utilize the Group’s credit products because of such an increase in financing service fees, the Group’s ability to retain existing borrowers, attract or engage prospective borrowers as well as the Group’s competitive position may be severely limited. We cannot assure you that the Group will be able to effectively manage such interest risk at all times or pass on any increase in interest rate to the Group’s borrowers. If the Group is unable to effectively manage such an increase, the Group’s business, profitability, results of operations and financial condition could be materially and adversely affected. If prevailing market interest rates decrease and the Group fails to adjust the amount of financing service fees it charges for on-balance sheet transactions accordingly, prospective borrowers may take advantage of the lower funding cost offered by other parties. As a result, any fluctuation in the interest rate environment may discourage borrowers from making credit applications from the Group or utilize their approved credit, which may adversely affect the Group’s business. If the Group is unable to provide a high quality borrower experience, its business and reputation may be materially and adversely affected. The success of the Group’s business depends in part on its ability to provide high quality borrower experience, which in turn depends on a variety of factors. These factors include the Group’s ability to continue to offer credit products at competitive amount of financing service fees and adequate credit limits, reliable and user-friendly website interface and mobile apps for borrowers to browse, apply for credit, and purchase merchandise, and further improve the Group’s online credit approval process and maintain collection practices that are in strict compliance with applicable laws. If borrowers are not satisfied with the Group’s credit products, or the Group’s system is severely interrupted or otherwise fail to meet the borrowers’ requests, the Group’s reputation and borrower loyalty could be adversely affected. The Group’s quarterly results may fluctuate significantly and may not fully reflect the underlying performance of the Group’s business. The Group’s quarterly results of operations, including the levels of the Group’s total revenues, cost of revenues and operating expenses, net income/(loss) and other key 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 the Group’s operating results may not be meaningful, especially given the Group’s limited operating history. Accordingly, the results for any one quarter are not necessarily an indication of future performance. Fluctuations in quarterly results may adversely affect the price of our ADSs. Factors that may cause fluctuations in the Group’s quarterly financial results include: • • • • • • • • the Group’s ability to attract new borrowers and maintain relationships with existing borrowers; the amount of transactions; the mix of products the Group offers; delinquency rates of transactions the Group facilitates; the amount and timing of cost of revenues and operating expenses related to acquiring borrowers and the maintenance and expansion of the Group’s business, operations and infrastructure; the Group’s ability to establish relationship with additional institutional funding partners and maintain relationships with existing institutional funding partners; the Group’s ability to secure funding for credit the Group facilitates on reasonable terms; performance of the Group’s non-credit businesses; 40 Table of Contents • • • • 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, the Group may experience seasonality in its credit business, reflecting a combination of seasonality patterns of the retail market and the Group’s promotional activities. In recent years, many online and offline retailers in China hold promotions on November 11 and December 12 of each year, which drives significant increase in retail sales. Higher retail sales during the shopping seasons may generate greater demand for the Group’s credit products. As a result, the Group may record higher total revenues during the fourth quarter of each year compared to other quarters. On the other hand, the Group’s total revenues for the first quarter tend to be lower due to the Chinese New Year holiday that generally reduces borrowing activities. On the other hand, lower financing service fee amount may decrease the Group’s margin for the relevant periods. Due to the Group’s limited operating history, the seasonal trends that it has experienced in the past may not apply to, or be indicative of, its future operating results. Furthermore, the Group has commenced construction of its innovation park in Xiamen, Fujian Province, and the construction is expected to be completed in the first quarter of 2023. If the costs and expenses incurred for the construction exceed our planned limits, the Group’s financial results may be negatively affected. The Group may experience seasonality in the QD Food business. However, as the Group only launched the business recently, it has not observed any seasonal trends relating to QD Food. The Group’s success and future growth depend significantly on the Group’s successful marketing efforts, and if the Group is unable to promote and maintain our brands in an effective and cost-efficient way, the Group’s 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 users. Successful promotion of our brands and the Group’s ability to attract users depend largely on the effectiveness of the Group’s marketing efforts and the success of the channels the Group uses to promote its brands and products. Our efforts to build our brands may cause the Group to incur significant expenses. These efforts may not result in increased revenue in the immediate future or at all and, even if they do, any increases in revenue may not offset the expenses incurred. If the Group fails to successfully promote and maintain our brands while incurring substantial expenses, the Group’s results of operations and financial condition would be adversely affected, which may impair the Group’s ability to grow its business. The Group’s business and internal systems rely on software that is highly technical, and if it contains undetected errors, the Group’s business could be adversely affected. The Group’s business and internal systems rely on software that is highly technical and complex. In addition, the Group’s business and internal systems depend on the ability of such software to store, retrieve, process and manage large amounts of data. The software on which the Group relies has contained, and may now or in the future contain, undetected errors or bugs. Some errors may only be discovered after the code has been released for external or internal use. Errors or other design defects within the software on which the Group relies may result in a negative experience for users, delay introductions of new features or enhancements, result in errors or compromise our ability to protect user data or the Group’s intellectual property, or affect the accuracy of the Group’s operating data. Any errors, bugs or defects discovered in the software on which the Group relies could result in harm to the Group’s reputation, loss of users, liability for damages, any of which could adversely affect the Group’s business, financial condition and results of operations. 41 Table of Contents Any significant disruption in the Group’s information technology systems, including events beyond our control, could prevent the Group from offering its products, thereby reduce the attractiveness of the Group’s products and result in a loss of borrowers or institutional funding partners. In the event of a system outage and physical data loss, the Group’s ability to provide products would be materially and adversely affected. The satisfactory performance, reliability and availability of the Group’s technology and its underlying network infrastructure are critical to the Group’s operations, user service, reputation and the Group’s ability to attract new and retain existing borrowers and institutional funding partners. The Group’s information technology systems infrastructure is currently deployed and the Group’s data is currently maintained on customized cloud computing services in China. The Group’s operations depend on the service provider’s ability to protect its and the Group’s systems in its facilities against damage or interruption from natural disasters, power or telecommunications failures, air quality issues, environmental conditions, computer viruses or attempts to harm the Group’s systems, criminal acts and similar events. Since the launch of the Group’s business, the Group had experienced the system outage during the holiday seasons in China due to competition for available cloud computing services provided by the Group’s service provider and we cannot assure you that such incidents will not occur in the future. Moreover, if the Group’s arrangement with this service provider is terminated or if there is a lapse of service or damage to their facilities, the Group could experience interruptions in its service as well as delays and additional expense in arranging new products for borrowers. Any interruptions or delays in the Group’s service, whether as a result of third-party error, the Group’s error, natural disasters or security breaches, whether accidental or willful, could harm the Group’s relationships with borrowers and institutional funding partners and our reputation. Additionally, in the event of damage or interruption, the Group’s insurance policies may not adequately compensate the Group for any losses that it may incur. The Group also may not have sufficient capacity to recover all data and services in the event of an outage. These factors could prevent the Group from processing credit applications and other business operations, damage our brands and reputation, divert the Group’s employees’ attention, reduce the Group’s revenue, subject the Group to liability and cause users to abandon the Group’s products, any of which could adversely affect the Group’s business, financial condition and results of operations. Misconduct and errors by the Group’s employees and parties the Group collaborates with could harm the Group’s business and reputation. The Group is exposed to many types of operational risks, including the risk of misconduct and errors by the Group’s employees and parties that the Group collaborates with. The Group’s business depends on its employees and/or business partners to interact with users, process large numbers of transactions, deliver merchandise purchased by borrowers, providing user and after-sale product services and support the collection process, all of which involve the use and disclosure of personal information. The Group could be materially and adversely affected if transactions were redirected, misappropriated or otherwise improperly executed, if personal information was disclosed to unintended recipients or if an operational breakdown or failure in the processing of transactions occurred, whether as a result of human error, purposeful sabotage or fraudulent manipulation of the Group’s operations or systems. It is not always possible to identify and deter misconduct or errors by employees or business partners, and the precautions the Group takes to detect and prevent this activity may not be effective in controlling unknown or unmanaged risks or losses. If any of the Group’s employees or business partners take, convert or misuse funds, documents or data or fail to follow the Group’s rules and procedures when interacting with users, the Group could be liable for damages and subject to regulatory actions and penalties. Any future allegations of employee misconduct, whether perceived or actual, could materially and adversely affect the Group’s reputation and business. The Group could also be perceived to have facilitated or participated in the illegal misappropriation of funds, documents or data, or the failure to follow the Group’s rules and procedures, and therefore be subject to civil or criminal liability. Any of these occurrences could result in the Group’s diminished ability to operate its business, potential liability to users, inability to attract users, reputational damage, regulatory intervention and financial harm, which could negatively impact the Group’s business, financial condition and results of operations. 42 Table of Contents The Group’s teachers are the ones who interact directly with the Group’s students and their families. Despite the Group’s constant emphasis on service quality, the Group’s continuous training of its teachers as well as its close supervision on a daily basis, we cannot assure that the Group’s teachers will completely follow the Group’s service manual and standards all the time. Any misbehavior or unsatisfactory performance of the Group’s teachers will hurt our reputation and potentially the Group’s operation results and financial performance. Any improper behavior of the Group’s teachers, whether actual or perceived, would result in negative publicity and adversely affect the Group’s business and brand. If the Group is unable to protect the confidential information of its users and adapt to the relevant regulatory framework as to protection of such information, the Group’s business and operations may be adversely affected. The Group collects, store and process certain personal and other sensitive data from its users, which makes the Group an attractive target and potentially vulnerable to cyber-attacks, computer viruses, physical or electronic break-ins or similar disruptions. While the Group has taken steps to protect the confidential information that it has access to, the Group’s security measures could be breached. Because techniques used to sabotage or obtain unauthorized access to systems change frequently and generally are not recognized until they are launched against a target, the Group may be unable to anticipate these techniques or to implement adequate preventative measures. Any accidental or willful security breaches or other unauthorized access to the Group’s system could cause confidential user information to be stolen and used for criminal purposes. Security breaches or unauthorized access to confidential information could also expose the Group to liability related to the loss of the information, time-consuming and expensive litigation and negative publicity. If security measures are breached because of third-party action, employee error, malfeasance or otherwise, or if design flaws in the Group’s technology infrastructure are exposed and exploited, the Group’s relationships with users could be severely damaged, the Group could incur significant liability and its business and operations could be adversely affected. For example, there have been media reports alleging that former employees of the Group have misappropriated and sold borrower data. The Group is not aware of any former employee who has been identified by law enforcement authorities to have engaged in such misconduct, and we do not believe such allegations have had a material impact on the Group’s business. However, future allegations of data breaches, whether perceived or actual, could materially and adversely affect the Group’s reputation and business. In addition, PRC government authorities have enacted a series of laws and regulations in regard of the protection of personal information, under which internet service providers and other network operators are required to comply with the principles of legality, justification and necessity, to clearly indicate the purposes, methods and scope of any information collection and usage, and to obtain the consent of users, as well as to establish user information protection system with appropriate remedial measures. The Group has obtained the consents from its users to use their personal information within the scope of authorization and the Group has taken technical measures to ensure the security of such personal information and prevent the personal information from being divulged, damaged or lost. However, there is uncertainty as to the interpretation and application of such laws which may be interpreted and applied in a manner inconsistent with the Group’s current policies and practices or require changes to the features of the Group’s system. We cannot assure you that the Group’s existing user information protection system and technical measures will be considered sufficient under applicable laws and regulations. If the Group is unable to address any information protection concerns, or to comply with the then applicable laws and regulations, it may incur additional costs and liability and the Group’s 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 43 Table of Contents year ending December 31, 2018, we must perform system and process evaluation and testing of our internal controls over financial 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, as required by Section 404 of the Sarbanes-Oxley Act. In addition, beginning at the same time, our independent registered public accounting firm must attest to and report on the effectiveness of our internal control over financial reporting. As of December 31, 2021, our management has concluded that our internal control over financial reporting is effective. See “Item 15. Controls and Procedures—Management’s Annual Report on Internal Control over Financial Reporting.” Our independent registered public accounting firm has issued a report, which has concluded that we maintained, in all material respects, effective internal control over financial reporting as of December 31, 2021. However, our internal control over financial reporting may not prevent or detect all errors and all fraud for a variety of reasons. Among others, the Group operates its business in China, an emerging market where the overall internal control environment may not be as strong as in more established markets. In addition, a control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud will be detected. If we are unable to maintain proper and effective internal controls, we may not be able to produce timely and accurate financial statements. If that were to happen, the trading price of our ADSs could decline and we could be subject to sanctions or investigations by the NYSE, SEC or other regulatory authorities. The Group may not be able to prevent others from unauthorized use of its intellectual property, which could harm its business and competitive position. We regard the Group’s trademarks, domain names, copyrights, know-how, proprietary technologies and similar intellectual property as critical to the Group’s success, and the Group relies on trademark and trade secret law and confidentiality, invention assignment and non-compete agreements with the Group’s employees and others to protect the Group’s proprietary rights. See “Item 4. Information on the Company—B. Business Overview— Regulation—Regulations Related to Intellectual Property Rights.” However, we cannot assure you that any of the Group’s intellectual property rights would not be challenged, invalidated or circumvented, or such intellectual property will be sufficient to provide the Group with competitive advantages. In addition, other parties may misappropriate the Group’s intellectual property rights, which would cause the Group to suffer economic or reputational damages. Because of the rapid pace of technological change, nor can we assure you that all of the Group’s proprietary technologies and similar intellectual property will be patented in a timely or cost-effective manner, or at all. Furthermore, parts of the Group’s business rely on technologies developed or licensed by other parties, or co-developed with other parties, and the Group’s may not be able to obtain or continue to obtain licenses and technologies from these other parties on reasonable terms, or at all. It is often difficult to register, maintain and enforce intellectual property rights in China. Statutory laws and regulations are subject to judicial interpretation and enforcement and may not be applied consistently due to the lack of clear guidance on statutory interpretation. Confidentiality, invention assignment and non-compete agreements may be breached by counterparties, and there may not be adequate remedies available to the Group for any such breach. Accordingly, the Group may not be able to effectively protect its intellectual property rights or to enforce the Group’s contractual rights in China. Preventing any unauthorized use of the Group’s intellectual property is difficult and costly and the steps the Group takes may be inadequate to prevent the misappropriation of its intellectual property. In the event that the Group resorts to litigation to enforce its intellectual property rights, such litigation could result in substantial costs and a diversion of our managerial and financial resources. We can provide no assurance that the Group will prevail in such litigation. In addition, the Group’s trade secrets may be leaked or otherwise become available to, or be independently discovered by, our competitors. To the 44 Table of Contents extent that the Group’s employees or consultants use intellectual property owned by others in their work for the Group, disputes may arise as to the rights in related know-how and inventions. Any failure in protecting or enforcing the Group’s intellectual property rights could have a material adverse effect on the Group’s business, financial condition and results of operations. The Group may be subject to intellectual property infringement claims, which may be expensive to defend and may disrupt its business and operations. We cannot be certain that the Group’s operations or any aspects of the Group’s 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. The Group may be from time to time in the future subject to legal proceedings 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 the Group’s products or other aspects of the Group’s business without the Group’s awareness. Holders of such intellectual property rights may seek to enforce such intellectual property rights against the Group in China, the United States or other jurisdictions. If any infringement claims are brought against the Group, the Group may be forced to divert management’s time and other resources from its business and operations to defend against these claims, regardless of their merits. Additionally, the application and interpretation of China’s intellectual property right laws and the procedures and standards for granting trademarks, copyrights, know-how, proprietary technologies or other intellectual property rights in China are still evolving and are uncertain, and we cannot assure you that PRC courts or regulatory authorities would agree with our analysis. If the Group were found to have violated the intellectual property rights of others, the Group may be subject to liability for its infringement activities or may be prohibited from using such intellectual property, and it may incur licensing fees or be forced to develop alternatives of its own. As a result, the Group’s business and results of operations may be materially and adversely affected. The Group may be required to segregate its own assets from those assets of the institutional funding partners and borrowers. Pursuant to the Circular of the General Office of the PRC State Council on Issuing the Implementing Proposals for the Special Rectification of Internet Financial Risks adopted in April 2016, online finance institutions are required to segregate assets of the institutional funding partners and borrowers in a custodian bank from their own assets. However, there is uncertainty as to the implementation of such regulations, and the scope of online finance institutions which are subject to such assets segregation liabilities remains unclear. In addition, commercial banks in the PRC currently only provide custodian services to online lending information intermediary institutions as defined under the Interim Online Lending Information Intermediary Measures. We do not consider the Group as an online lending information intermediary institution as defined under the Interim Online Lending Information Intermediary Measures, and the Group currently does not engage commercial banks in the PRC to provide such custodian services to the Group. The Group uses its best efforts to separate its own assets from those assets of the institutional funding partners to whom the Group transfers credit drawdowns by setting up separate bank accounts to monitor the assets of such institutional funding partners. However, since such bank accounts are still under the Group’s names and all the assets are therefore considered to be owned by the Group from a PRC legal perspective, if any person enforces a judgment against the Group’s assets, the assets of the institutional funding partners and borrowers will be enforced against as well. In addition, if the Group is deemed as an online lending information intermediary institution by the applicable regulatory authorities under the Interim Online Lending Information Intermediary Measures in the future, the Group may be subject to regulatory measures, such as warnings, fines and other measures permitted under the law, for the Group’s current practices. 45 Table of Contents Any failure by the Group, institutional funding partners or payment processors to comply with applicable anti-money laundering and anti-terrorist financing laws and regulations could damage our reputation, expose the Group’s to significant penalties, and decrease the Group’s revenues and profitability. The Group has implemented various policies and procedures in compliance with all applicable anti-money laundering and anti-terrorist financing laws and regulations, including internal controls and “know-your-customer” procedures, for preventing money laundering and terrorist financing. In addition, the Group relies on its institutional funding partners and payment processors, in particular online payment companies that handle the transfer of funds from institutional funding partners to the Group and the borrowers, to have their own appropriate anti-money laundering policies and procedures. Certain of the Group’s institutional funding partners and online payment companies are subject to anti-money laundering obligations under applicable anti-money laundering laws and regulations and are regulated in that respect by the PBOC. The Group has adopted commercially reasonable procedures for monitoring its institutional funding partners and payment processors. The Group has not been subject to fines or other penalties, or suffered business or other reputational harm, as a result of actual or alleged money laundering or terrorist financing activities in the past. However, the Group’s policies and procedures may not be completely effective in preventing other parties from using the Group, any of the Group’s institutional funding partners, or payment processors as a conduit for money laundering (including illegal cash operations) or terrorist financing without the Group’s knowledge. If the Group were to be associated with money laundering (including illegal cash operations) or terrorist financing, our reputation could suffer and the Group could become subject to regulatory fines, sanctions, or legal enforcement, including being added to any “blacklists” that would prohibit certain parties from engaging in transactions with the Group, all of which could have a material adverse effect on the Group’s financial condition and results of operations. Even if the Group, the Group’s institutional funding partners and payment processors comply with the applicable anti-money laundering laws and regulations, the Group, institutional funding partners and payment processors may not be able to fully eliminate money laundering and other illegal or improper activities in light of the complexity and the secrecy of these activities. Any negative perception of the industry, such as that arises from any failure of other online consumer finance service 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 the Group’s 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-money laundering requirements, including the establishment of a customer identification program, the monitoring and reporting of suspicious transactions, the preservation of customer information and transaction records, and the provision of assistance to the public security department and judicial authority in investigations and proceedings in relation to anti-money laundering matters. The PBOC will formulate implementing rules to further specify the anti- money laundering obligations of Internet finance service providers. We cannot assure you that the anti-money laundering policies and procedures we have adopted will be deemed to be in compliance with applicable anti-money laundering implementing rules if and when adopted. We may continue to repurchase our shares, and such repurchases may be at prices that exceed the trading price of our ADSs. We cannot guarantee that our share repurchase program will enhance long-term shareholder value, and it may fail to deliver the intended benefits. We announced a share repurchase program approved by our board of directors in November 2017, under which we may repurchase up to US$300 million worth of our outstanding ADSs/or ordinary shares over a period of twelve months. We further announced a share repurchase program in December 2018, under which we may repurchase up to US$300 million worth of our outstanding ADSs/or ordinary shares over a period of twelve months, in addition to any further repurchases that may be made under the program announced in November 2017. In January 2020, we announced a new share repurchase program, under which we may repurchase up to US$500 million worth of our outstanding ADSs/or ordinary shares over a period of 30 months. 46 Table of Contents Under the new share repurchase program, we are authorized to repurchase our ADSs and/or ordinary shares on the open market from time to time, in privately negotiated transactions, tender offers or any combination thereof. Our management is authorized to determine the terms and conditions relating to the program, including, among others, the quantity, timing, price and purpose of share repurchases. In the future, we plan to continue to make share repurchases, and such repurchases may be at prices that differ from the trading price of our ADSs. For example, upon obtaining approval from our board of directors, we purchased all 18,173,885 of our Class A ordinary shares then held by Kunlun Group Limited, or Kunlun, at a premium to the then prevailing trading price of our ADSs on April 29, 2019. While we believe our share repurchases in the past helped us stabilize share price and promote shareholders’ interests, there can be no assurance that we will achieve the intended benefit of any future share repurchase to enhance value to shareholders. The Group’s 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 their present positions, our business may be severely disrupted. The Group’s 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 the Group’s business and operations and the development of our strategic direction. While we have provided different incentives to our management, we cannot assure you that we can continue to retain their services. If one or more of our key executives were unable or unwilling to continue in their present positions, we may not be able to replace them easily or at all, the Group’s future growth may be constrained, the Group’s business may be severely disrupted and the Group’s financial condition and results of operations may be materially and adversely affected, and we may incur additional expenses to recruit, train and retain qualified personnel. In addition, although we have entered into confidentiality and non-competition agreements with our management, there is no assurance that any member of our management team will not join our competitors or form a competing business. If any dispute arises between our current or former officers and us, we may have to incur substantial costs and expenses in order to enforce such agreements in China or we may be unable to enforce them at all. Competition for employees is intense, and the Group may not be able to attract and retain the qualified and skilled employees needed to support the Group’s business. We believe the Group’s success depends on the efforts and talent of the Group’s employees, including technology and product development, risk management, operation management and finance personnel. The Group’s future success depends on its continued ability to attract, develop, motivate and retain qualified and skilled employees. Competition for highly skilled technical, risk management, operation management and financial personnel is extremely intense. The Group may not be able to hire and retain these personnel at compensation levels consistent with its existing compensation and salary structure. Some of the companies with which the Group competes for experienced employees have greater resources than the Group has and may be able to offer more attractive terms of employment. In addition, the Group invests significant time and expenses in training the Group’s employees, which increases their value to competitors who may seek to recruit them. If the Group fails to retain its employees, the Group could incur significant expenses in hiring and training their replacements, and the quality of the Group’s services and the Group’s ability to serve borrowers and investors could diminish, resulting in a material adverse effect to the Group’s business. Increases in labor costs in the PRC may adversely affect the Group’s 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 to continue to increase. In addition, the Group is required by PRC laws and regulations 47 Table of Contents to pay various statutory employee benefits, including pension, housing fund, medical insurance, work-related injury insurance, unemployment insurance and maternity insurance to designated government agencies for the benefit of the Group’s employees. The relevant government agencies may examine whether an employer has made adequate payments to the statutory employee benefits, and those employers who fail to make adequate payments may be subject to late payment fees, fines and/or other penalties. We expect that the Group’s labor costs, including wages and employee benefits, will continue to increase. Unless the Group is able to control its labor costs or pass on these increased labor costs, the Group’s financial condition and results of operations may be adversely affected. If the Group cannot maintain its corporate culture as it grows, it could lose the innovation, collaboration and focus that contribute to the success of the Group’s business. We believe that a critical component of the Group’s success is its corporate culture, which we believe cultivates efficiency, fosters innovation, encourages teamwork and embraces changes and development. As the Group develops the infrastructure of a public company and continues to grow, we may find it difficult to maintain these valuable aspects of the Group’s corporate culture. Any failure to preserve the Group’s culture could negatively impact the Group’s future success, including the Group’s ability to attract and retain employees, encourage innovation and teamwork and effectively focus on and pursue the Group’s corporate objectives. The Group does 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 developed economies. Currently, the Group does not have any business liability or disruption insurance to cover the Group’s operations. We have determined that the costs of insuring for these risks and the difficulties associated with acquiring such insurance on commercially reasonable terms make it impractical for the Group to have such insurance. Any uninsured business disruptions may result in the Group’s incurring substantial costs and the diversion of resources, which could have an adverse effect on the Group’s results of operations and financial condition. We could be adversely affected by political tensions between the United States and China. Political tensions between the United States and China have escalated in recent years due to, among other things, • • • • • • • • the trade war between the two countries since 2018; the COVID-19 pandemic; the PRC National People’s Congress’ passage of Hong Kong national security legislation; the imposition of U.S. sanctions on certain Chinese officials from China’s central government and the Hong Kong Special Administrative Region by the U.S. government, and the imposition of sanctions on certain individuals from the U.S. by the Chinese government; various executive orders issued by the U.S. government, which include, among others, the executive order issued in August 2020, as supplemented and amended from time to time, that prohibits certain transactions with ByteDance Ltd., Tencent Holdings Ltd. and the respective subsidiaries of such companies; the executive order issued in November 2020, as supplemented and amended from time to time, including, among others, by an executive order issued in June 2021, that prohibits U.S. persons from transacting publicly traded securities of certain Chinese companies named in such executive order; the executive order issued in January 2021, as supplemented and amended from time to time, that prohibits such transactions as are identified by the U.S. Secretary of Commerce with certain “Chinese connected software applications,” including Alipay and WeChat Pay; and 48 Table of Contents • the imposition and application of sanction blocking statutes by the Chinese government, including the Rules on Counteracting Unjustified Extra-territorial Application of Foreign Legislation and Other Measures promulgated by the MOFCOM, on January 9, 2021, which will apply to Chinese individuals or entities that are purportedly barred by a foreign country’s law from dealing with nationals or entities of a third country. Rising political tensions between China and the U.S. could reduce levels of trades, investments, technological exchanges and other economic activities between the two major economies, which would have a material adverse effect on global economic conditions and the stability of global financial markets. The measures taken by the U.S. and Chinese governments may have the effect of restricting our ability to transact or otherwise do business with entities within or outside of China and may cause investors to lose confidence in Chinese companies and counterparties, including us. If the Group was unable to conduct its business as it is currently conducted as a result of such regulatory changes, the Group’s business, results of operations and financial condition would be materially and adversely affected. Furthermore, the U.S. government has imposed measures regarding limiting or restricting China-based companies from accessing U.S. capital markets, and delisting China-based companies from U.S. national securities exchanges. For further information, see “—Risks Related to Doing Business in China—The audit report included in this annual report is prepared by an auditor who is not inspected by the U.S. Public Company Accounting Oversight Board and, as such, our investors are deprived of the benefits of such inspection.” In January 2021, after reversing its own delisting decision, the NYSE ultimately resolved to delist China Mobile, China Unicom and China Telecom in compliance with the executive order issued in November 2020, after receiving additional guidance from the U.S. Department of Treasury and its Office of Foreign Assets Control. In addition, the NYSE announced in February 2021 that it has determined to commence proceedings to delist CNOOC Limited in light of the same executive order. These delistings have introduced greater confusion and uncertainty about the status and prospects of Chinese companies listed on the U.S. stock exchanges. If any further such deliberations were to materialize, the resulting legislation may have a material and adverse impact on the stock performance of China- based issuers listed in the United States such as us, and we cannot assure you that we will always be able to maintain the listing of our ADSs on a national stock exchange in the U.S., such as the NYSE or the Nasdaq Stock Market, or that you will always be allowed to trade our shares or ADSs. A severe or prolonged downturn in the Chinese or global economy could affect borrowers’ willingness to seek credit and institutional funding partners’ ability and willingness to fund credit drawdowns facilitated by the Group, which could materially and adversely affect the Group’s business and financial condition. Any prolonged slowdown in the Chinese or global economy may have a negative impact on the Group’s business, results of operations and financial condition. In particular, general economic factors and conditions in China or worldwide, including the general interest rate environment and unemployment rates, may affect borrowers’ willingness to seek credit and institutional funding partners’ ability and willingness to fund credit drawdowns facilitated by the Group. Economic conditions in China are sensitive to global economic conditions. The COVID-19 pandemic has resulted in declines in economic activities in China and other parts of the world and raised concerns about the prospects of the global economy. As of the date of this annual report, we are unable to assess the full impact of the pandemic on the Group’s business, result of operations and financial condition. In addition, there is considerable uncertainty over the long-term effects of the expansionary monetary and fiscal policies adopted by the central banks and financial authorities of some of the world’s leading economies, including the United States and China. There have also been concerns over conflicts in North Korea, Ukraine, the Middle East and Africa, which have resulted in volatility in financial and other markets. There have also been concerns about the economic effect of the tensions in the relationship between China and surrounding Asian countries, as well as trade tensions between China and the United States. If present Chinese and global economic uncertainties persist, the Group may have difficulty in obtaining funding sources to fund the credit utilized by borrowers. Adverse economic conditions could also reduce the number of quality borrowers seeking credit from the Group, as well as their ability to make payments. Should any of these situations occur, the amount 49 Table of Contents of transactions facilitated to borrowers and the Group’s revenue will decline, and the Group’s business and financial condition will be negatively impacted. Additionally, continued turbulence in the international markets may adversely affect our ability to access the capital markets to meet liquidity needs. User growth and activity on mobile devices depends upon effective use of mobile operating system, networks and standards, which we do not control. The Group’s products are typically offered through mobile apps. As new mobile devices and platforms are released, it is difficult to predict the problems the Group may encounter in developing applications for these new devices and platforms, and the Group may need to devote significant resources to the development, support and maintenance of such applications. In addition, the Group’s future growth and its results of operations could suffer if the Group experiences difficulties in the future in integrating the Group’s products into mobile devices or if problems arise with the Group’s relationships with providers of mobile operating systems or mobile app stores, or if the Group faces increased costs to distribute or have users utilize the Group’s products on mobile devices. The Group is further dependent on the interoperability of providing the Group’s products on popular mobile operating systems that we do not control, such as iOS and Android, and any changes in such systems that degrade the accessibility of the Group’s products or give preferential treatment to competing products could adversely affect the usability of the Group’s products on mobile devices. In the event that it is more difficult for the Group’s users to access and utilize the Group’s products on their mobile devices, or if the Group’s users choose not to access or utilize the Group’s products on their mobile devices or to use mobile operating systems that do not offer access to the Group’s products, the Group’s user growth could be harmed and its business, financial condition and operating results may be adversely affected. The Group’s 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 and regulatory supervision of the MIIT. The Group’s systems infrastructure is currently deployed and the Group’s data is currently maintained on customized cloud computing services. The Group’s cloud computing service provider may rely on a limited number of telecommunication service providers to provide it with data communications capacity through local telecommunications lines and Internet data centers to host its servers. Such service provider may have limited access to alternative networks or services in the event of disruptions, failures or other problems with China’s Internet infrastructure or the fixed telecommunications networks provided by telecommunication service providers. With the expansion of the Group’s business, it may be required to upgrade its technology and infrastructure to keep up with increasing traffic. We cannot assure you that the Group’s cloud computing service provider and the underlying Internet infrastructure and the fixed telecommunications networks in China will be able to support the demands associated with the continued growth in Internet usage. In addition, we have no control over the costs of the services provided by telecommunication service providers which in turn, may affect the Group’s costs of utilizing customized cloud computing services. If the prices the Group pays for customized cloud computing services rise significantly, the Group’s results of operations may be adversely affected. Furthermore, if Internet access fees or other charges to Internet users increase, the Group’s user traffic may decline and the Group’s business may be harmed. The Group faces risks related to natural disasters, health epidemics and other outbreaks, which could significantly disrupt the Group’s operations. The Group is 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 or corruption of data or malfunctions of software or hardware as well as adversely affect the Group’s ability to provide its products. 50 Table of Contents The COVID-19 pandemic has materially and adversely affected the Group’s business, results of operations and financial condition. The Group’s business could also be adversely affected by the effects of Ebola virus disease, H1N1 flu, H7N9 flu, avian flu, Severe Acute Respiratory Syndrome, or SARS, or other epidemics. The Group’s business operations could be disrupted if any of its employees is suspected of having COVID-19 coronavirus, Ebola virus disease, H1N1 flu, H7N9 flu, avian flu, SARS or other epidemic, since it could require the Group’s employees to be quarantined and/or the Group’s offices to be disinfected. In addition, the Group’s results of operations could be adversely affected to the extent that any of these epidemics harms the Chinese economy in general. Risks Related to Our Corporate Structure If the PRC government deems that the contractual arrangements in relation to the Group VIEs do not comply with PRC regulatory restrictions on foreign investment in the relevant industries, or if these regulations or the interpretation of existing regulations change in the future, we could be subject to severe penalties or be forced to relinquish our interests in those operations. The PRC government regulates telecommunications-related businesses through strict business licensing requirements and other government regulations. These laws and regulations also include limitations on foreign ownership of PRC companies that engage in telecommunications-related businesses. Specifically, foreign investors are not allowed to own more than a 50% equity interest in any PRC company providing value-added telecommunications services, or VATS, with certain exceptions relating to e-commerce, domestic multi-party, communication, store-and-forward and call center. 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 and Xiamen Youxiang Times Technology Co., Ltd., or Xiamen Youxiang, are foreign-invested enterprises, or FIEs. To comply with PRC laws and regulations, we conduct our business, including the provision of VATS, in China through the Group VIEs and their affiliates. Investors in our ADSs may never hold equity interests in these PRC operating companies. Ganzhou Qufenqi and Xiamen Youxiang have entered into a series of contractual arrangements with the applicable Group VIEs and their shareholders. In addition, pursuant to the resolutions of all shareholders of Qudian Inc. and the resolutions of the board of directors of Qudian Inc., the board of directors of Qudian Inc. or any officer authorized by such board shall cause Ganzhou Qufenqi and Xiamen Youxiang to exercise their rights under the applicable power of attorney agreements entered into among Ganzhou Qufenqi or Xiamen Youxiang, the applicable Group VIEs and the nominee shareholders of the applicable Group VIEs and the rights of Ganzhou Qufenqi and Xiamen Youxiang under the applicable exclusive call option agreements between Ganzhou Qufenqi or Xiamen Youxiang, as applicable and the applicable Group VIEs. As a result of these resolutions and the provision of unlimited financial support from the Company to each of the Group VIEs, Qudian Inc. has been determined to be most closely associated with each of the Group VIEs within the group of related parties and was considered to be the primary beneficiary of each of the Group VIEs and its subsidiaries for accounting purposes. We believe that our corporate structure and contractual arrangements comply with the current applicable PRC laws and regulations. Our PRC legal counsel, based on its understanding of the relevant laws and regulations, is of the opinion that each of the contracts among our wholly-owned PRC subsidiary, the Group VIEs and their shareholders is valid, binding and enforceable in accordance with its terms. However, this structure involves unique risks to investors. As there are substantial uncertainties regarding the interpretation and application of PRC laws and regulations, including the Regulations on Mergers and Acquisitions of Domestic Enterprises by Foreign Investors, or the M&A Rules and the Telecommunications Regulations and the relevant regulatory measures concerning the telecommunications industry, there can be no assurance that the PRC government authorities, such as the Ministry of Commerce, or the MOFCOM, or the MIIT, or other authorities that regulate online consumer finance platforms and other participants in the telecommunications industry, would agree that our corporate structure or any of the above contractual arrangements comply with PRC licensing, registration or other regulatory requirements, with existing policies or with requirements or policies that may be adopted in the future. PRC laws and regulations governing the validity of these contractual arrangements are uncertain and the relevant government authorities have broad discretion in interpreting these laws and regulations. 51 Table of Contents If our corporate structure and contractual arrangements are deemed by the MIIT or the MOFCOM or other regulators having competent authority to be illegal, either in whole or in part, we may lose control of the Group 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 contractual arrangements are found to be in violation of any existing or future PRC laws or regulations, the relevant regulatory authorities would have broad discretion in dealing with such violations, including: • • • • • • • • • revoking the Group’s business and operating licenses; levying fines on the Group; confiscating any of the Group’s income that they deem to be obtained through illegal operations; shutting down the Group’s services; discontinuing or restricting the Group’s operations in China; imposing conditions or requirements with which the Group may not be able to comply; requiring us to change our corporate structure and contractual arrangements; restricting or prohibiting the use of the proceeds from overseas offering to finance the Group VIEs’ business and operations; and taking other regulatory or enforcement actions that could be harmful to the Group’s business. Furthermore, new PRC laws, rules and regulations may be introduced to impose additional requirements that may be applicable to our corporate structure and contractual arrangements. If the imposition of any of these penalties or requirement to restructure our corporate structure causes us to lose the rights to direct the activities of the Group VIEs or our right to receive their economic benefits, we would no longer be able to consolidate the financial results of the Group VIEs in the Group’s consolidated financial statements. Furthermore, if the PRC government determines that our contractual arrangements do not comply with PRC regulations, or if these regulations change or are interpreted differently in the future, our ADSs may decline in value or become worthless, and the Group’s operations would be materially and adversely affected, if we are unable to assert contractual control rights over the assets of the Group VIEs. See “Item 4. Information on the Company—B. Business Overview—Overview—Our Contractual Arrangements with the Group VIEs and Their Shareholders.” Our contractual arrangements with the Group VIEs may result in adverse tax consequences to the Group. The Group could face material and adverse tax consequences if the PRC tax authorities determine that our contractual arrangements with the Group VIEs were not made on an arm’s length basis and adjust the Group’s income and expenses for PRC tax purposes by requiring a transfer pricing adjustment. A transfer pricing adjustment could adversely affect the Group by (i) increasing the tax liabilities of the Group VIEs without reducing the tax liability of our subsidiaries, which could further result in late payment fees and other penalties to the Group VIEs for underpaid taxes; or (ii) limiting the ability of the Group VIEs to obtain or maintain preferential tax treatments and other financial incentives. We rely on contractual arrangements with the Group VIEs and their shareholders to operate the our business, which may be less effective as direct ownership in providing operational control and otherwise have a material adverse effect as to our business. Qudian Inc. is not a Chinese operating company but a Cayman Islands holding company with operations primarily conducted through contractual arrangements with certain variable interest entities, or the Group VIEs, based in China. For a description of these contractual arrangements, see “Item 4. Information on the Company—B. Business Overview—Overview—Our Contractual Arrangements with the Group VIEs and Their Shareholders.” All of the Group’s revenue are attributed to the Group VIEs. These contractual arrangements may be less effective as direct ownership in providing us with control over the Group VIEs. Investors in our ADSs are 52 Table of Contents not purchasing equity interest in the Group’s operating entities in China, but instead are purchasing an equity interest in Qudian Inc., a Cayman Islands holding company. The Group VIEs are consolidated with our results of operations for accounting purposes. However, we do not own a majority equity interest in the Group VIEs. Furthermore, Qudian Inc., as our holding company, does not conduct operating activities. If the Group VIEs or their shareholders fail to perform their respective obligations under these contractual arrangements, our recourse to the assets held by the Group VIEs is indirect and we may have to incur substantial costs and expend significant resources to enforce such arrangements in reliance on legal remedies under PRC law. These remedies may not always be effective, particularly in light 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 the Group VIEs, including such equity interest, may be put under court custody. As a consequence, we cannot be certain that the equity interest will be disposed pursuant to the contractual arrangement or ownership by the record holder of the equity interest. All of these contractual arrangements are governed by PRC law and provide for the resolution of disputes through arbitration in the PRC. Accordingly, these contracts would be interpreted in accordance with PRC laws and any disputes would be resolved in accordance with PRC legal procedures. However, these contracts have not been tested in the PRC legal procedures. 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 PRC legal system could limit our ability to enforce these contractual arrangements. In the event that we are unable to enforce these contractual arrangements, or if we suffer significant time delays or other obstacles in the process of enforcing these contractual arrangements, it would be very difficult to exert effective control over the Group VIEs, and our ability to conduct our business and our financial condition and results of operations may be materially and adversely affected. See “—Risks Related to Doing Business in China—There are uncertainties regarding the interpretation and enforcement of PRC laws, rules and regulations. In addition, rules and regulations in China can change quickly with little advance notice.” Ganzhou Qudian and Xiamen Qudian became Group VIEs in 2017. Xiamen Weipujia also became a Group VIE in 2018. Xiamen Qu Plus Plus also became a Group VIE in 2019. Min Luo, our founder, chairman and chief executive officer, and Mr. Lianzhu Lv, our head of user experience department, are the only shareholders of Ganzhou 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. Mr. Min Luo and Mr. Long Xu are the only shareholders of Xiamen Qu Plus Plus. We believe such shareholding structure will enhance our administrative efficiency and reduce uncertainties associated with the enforcement of the relevant contractual arrangements entered into with the new Group 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 Group VIE and would only 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 new Group VIEs will deliver the expected benefits. If any of the shareholders of the new Group VIEs breaches his obligations under the applicable contractual arrangements, our business, financial condition and results and operations could be materially and adversely affected. The shareholders of the Group VIEs may have potential conflicts of interest with us, which may materially and adversely affect our business and financial condition. In connection with our operations in China, we rely on the shareholders of the Group VIEs to abide by the obligations under such contractual arrangements. The interests of these shareholders in their individual capacities as the shareholders of the Group VIEs may differ from the interests of our company as a whole, as what is in the best interests of the Group VIEs, including matters such as whether to distribute dividends or to make other distributions 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, these individuals may breach or cause the Group VIEs and their subsidiaries to breach or refuse to renew the existing contractual arrangements with us. 53 Table of Contents Currently, we do not have arrangements to address potential conflicts of interest the shareholders of the Group VIEs may encounter, on one hand, and as a beneficial owner of our company, on the other hand. We, however, could, at all times, exercise our option under the exclusive call option agreement to cause them to transfer all of their equity ownership in the Group VIEs to a PRC entity or individual designated by us as permitted by the then applicable PRC laws. In addition, if such conflicts of interest arise, we could also, in the capacity of attorney-in-fact of the then existing shareholders of the Group VIEs as provided under the power of attorney agreements, directly appoint new directors of the Group VIEs. We rely on the shareholders of the Group VIEs to comply with PRC laws and regulations, which protect contracts and provide that directors and executive officers owe a duty of loyalty to our company and require them to avoid conflicts of interest and not to take advantage of their positions for personal gains, and the laws of the Cayman Islands, which provide that directors have a duty of care and a duty of loyalty to act honestly in good faith with a view to our best interests. However, the legal frameworks of China and the Cayman Islands do not provide guidance on resolving conflicts in the event of a conflict with another corporate governance regime. If we cannot resolve any conflicts of interest or disputes between us and the shareholders of the Group VIEs, we would have to rely on legal proceedings, which could result in disruption of our business and subject us to substantial uncertainty as to the outcome of any such legal proceedings. Our corporate actions will be substantially controlled by our founder, chairman and chief executive officer, Mr. Min Luo, who will have the ability to control or exert significant influence over important corporate matters that require approval of shareholders, which may deprive you of an opportunity to receive a premium for your ADSs and materially reduce the value of your investment. Mr. Min Luo, our founder, chairman of the board and chief executive officer, beneficially owns all the Class B ordinary shares issued and outstanding, representing 77.1% of our aggregate voting power as of March 31, 2022. As a result, Mr. Min Luo has the ability to control or exert significant influence over important corporate matters, investors may be prevented from affecting important corporate matters involving our company that require approval of shareholders, including: • • • • the composition of our board of directors and, through it, any determinations with respect to the Group’s 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 the Group’s 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 of ownership may also discourage, delay or prevent a change in control of our company, which could have the dual effect of depriving our shareholders of an opportunity to receive a premium for their shares as part of a sale of our company and reducing the price of the ADSs. As a result of the foregoing, the value of your investment could be materially reduced. If the custodians or authorized users of our controlling non-tangible assets, including chops and seals, fail to fulfill their responsibilities, or misappropriate 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 our business 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 and filed with the relevant local branch of the SAIC. We generally execute legal documents by affixing chops or seals, rather than having the designated legal representatives sign the documents. We have three major types of chops—corporate chops, contract chops and finance chops. We use corporate chops generally for documents to be submitted to government agencies, such as applications for changing 54 Table of Contents business scope, directors or company name, and for legal letters. We use contract chops for executing leases and commercial contracts. We use finance chops generally for making and collecting payments, including issuing invoices. Use of corporate chops and contract chops must be approved by our legal department and administrative department, and use of finance chops must be approved by our finance department. The chops of our subsidiaries and the Group VIEs are generally held by the relevant entities so that documents can be executed locally. Although we usually utilize chops to execute contracts, the registered legal representatives of our subsidiaries and the Group VIEs have the apparent authority to enter into contracts on behalf of such entities without chops, unless such contracts set forth otherwise. In order to maintain the physical security of our chops, we generally have them stored in secured locations accessible only to the designated key employees of our legal, administrative or finance departments. Our designated legal representatives generally do not have access to the chops. Although we have approval procedures in place and monitor our key employees, including the designated legal representatives of our subsidiaries and the Group 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 representatives could abuse their authority, for example, by binding our subsidiaries and the Group VIEs with contracts against our interests, as we would be obligated to honor these contracts if the other contracting party acts in good faith in reliance on the apparent authority of our chops or signatures of our legal representatives. If any designated legal representative obtains control of the chop in an effort to obtain control over the relevant entity, we would need to have 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 chop with the relevant authorities, or otherwise seek legal remedies for the legal representative’s misconduct. If any of the designated legal representatives obtains and misuses or misappropriates our chops and seals or other controlling intangible assets for whatever reason, we could experience disruption to our normal business operations. We may have to take corporate or legal action, which could involve significant time and resources to resolve while distracting management from the Group’s operations, and the Group’s business and operations may be materially and adversely affected. Substantial uncertainties exist with respect to how the 2019 Law of Foreign Investment (including its implementation regulations) may affect our current corporate structure, corporate governance and business and financial condition. On March 15, 2019, the Standing Committee of the National People’s Congress, or SCNPC, promulgated the Law of Foreign Investment of the PRC, or the 2019 Law of Foreign Investment, which became effective on January 1, 2020. On December 26, 2019, the State Council issued the Regulations on Implementing the Law of Foreign Investment of the PRC, which came into effect on January 1, 2020. The 2019 Law of Foreign Investment and its implementation regulations replaced the trio of laws regulating foreign investment in China, namely, the Sino-foreign Equity Joint Venture Enterprise Law, the Sino-foreign Cooperative Joint Venture Enterprise Law and the Wholly Foreign-invested Enterprise Law, together with their implementation rules and ancillary regulations. The 2019 Law of Foreign Investment stipulates four forms of foreign investment, namely, (1) a foreign investor, individually or collectively with other investors, establishes a foreign-invested enterprise within China; (2) a foreign investor acquires stock shares, equity shares, interests in assets, or other like rights and interests of an enterprise within China; (3) a foreign investor, individually or collectively with other investors, invests in a new project within China; and (4) foreign investments in other forms as provided by law, administrative regulations, or by the State Council. As mentioned above, the 2019 Law of Foreign Investment and its implementation regulations do not mention concepts including “de facto control” and “controlling through contractual arrangements,” nor does it specify the regulation on controlling through contractual arrangements. Specifically, it does not incorporate contractual arrangements as a form of foreign investment, the contractual arrangements as a whole and each of the arrangements comprising the contractual arrangements will not be materially affected and will continue to be legal, valid and binding on the parties. 55 Table of Contents However, the 2019 Law of Foreign Investment stipulates that “foreign investment includes foreign investors invest in China through any other methods 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 contractual arrangements would be regarded as foreign investment correspondingly. If that is the case, whether our contractual arrangements will be deemed to be in violation of the foreign investment access requirements and how our contractual arrangements will be handled are subject to uncertainties. Therefore, there is no guarantee that the contractual arrangements and the business of the Group VIEs will not be materially and adversely affected in the future due to changes in PRC laws and regulations. If future laws, administrative regulations or provisions prescribed by the State Council mandate further actions to be completed by companies with existing contractual arrangements, we may face substantial uncertainties as to whether we can complete such actions timely, or at all. Risks Related to Doing Business in China Changes in the political and economic policies of the PRC government may materially and adversely affect the Group’s business, financial condition and results of operations and may result in the Group’s inability to sustain its growth and expansion strategies. Substantially all of the Group’s operations are conducted in the PRC and all of the Group’s revenue is sourced from the PRC. Accordingly, the Group’s financial condition and results of operations are affected to a significant extent by economic, political and legal developments in the PRC. The PRC economy differs from the economies of most developed countries in many respects, including the extent of government involvement, level of development, growth rate, and control of foreign exchange and allocation of resources. Although the PRC government has implemented measures emphasizing the utilization of market forces for economic reform, the reduction of state ownership of productive assets, and the establishment of improved corporate governance in business enterprises, a substantial portion of productive assets in China is still owned by the government. In addition, the PRC government continues to play a significant role in regulating industry development by imposing industrial policies. The PRC government also exercises significant control over China’s economic growth by allocating resources, controlling payment of foreign currency- denominated obligations, setting monetary 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 among various sectors of the economy. The PRC government has implemented various measures to encourage economic growth and guide the allocation of resources. Some of these measures may benefit the overall PRC economy, but may also have a negative effect on the Group. The Group’s financial condition and results of operations could be materially and adversely affected by government control over capital investments or changes in tax regulations that are applicable to the Group. The PRC government also has significant authority to exert influence on the ability of a China-based issuer, such as our company, to conduct its business. The PRC government may intervene or influence the Group’s operations at any time, which could result in a material change in the Group’s operations and/or the value of our ADSs. In particular, there have been recent statements by the PRC government indicating an intent to exert more oversight and control over offerings that are conducted overseas and/or foreign investment in China-based issuers. Any such regulatory oversight or control could significantly limit or completely hinder our ability to offer or continue to offer securities to investors and cause the value of our securities to significantly decline or become worthless. Recent statements and regulatory actions by the PRC government, such as those related to the use of VIEs, data security and anti-monopoly concerns, may give rise to regulatory restrictions on the Group’s ability to conduct its business and/or accept foreign investments. In addition, the PRC government has implemented in the past certain measures to control the pace of economic growth. These measures may cause decreased economic activity, which 56 Table of Contents in turn could lead to a reduction in demand for the Group’s services and consequently have a material adverse effect on the Group’s businesses, financial condition and results of operations. There are uncertainties regarding the interpretation and enforcement of PRC laws, rules and regulations. In addition, rules and regulations in China can change quickly with little advance notice. Substantially all of the Group’s operations are conducted in the PRC, and are governed by PRC laws, rules and regulations. Our PRC subsidiaries and the Group VIEs are subject to laws, rules and regulations applicable to foreign investment in China. The PRC legal system is a civil law system based on written statutes. Unlike the common law system, prior court decisions may be cited for reference but have limited precedential value. In 1979, the PRC government began to promulgate a comprehensive system of laws, rules and regulations governing economic matters in general. The overall effect of legislation over the past three decades has significantly enhanced the protections afforded to various forms of foreign investment in China. However, China has not developed a fully integrated legal system, and recently enacted laws, rules and regulations may not sufficiently cover all aspects of economic activities in China or may be subject to significant degrees of interpretation by PRC regulatory agencies. In particular, because these laws, rules and regulations are relatively new, and because of the limited number of published decisions and the nonbinding nature of such decisions, and because the laws, rules and regulations often give the relevant regulator significant discretion in how to enforce them, the interpretation and enforcement of these laws, rules and regulations involve uncertainties and can be inconsistent and unpredictable. In addition, the PRC legal system is based in part on government policies and internal rules, some of which are not published on a timely basis or at all, and which may have a retroactive effect. As a result, we may not be aware of our violation of these policies and rules until after the occurrence of the violation. Any administrative and court proceedings in China may be protracted, resulting in substantial costs and diversion of resources and management attention. Since PRC administrative and court authorities have significant discretion in interpreting and implementing statutory and contractual terms, it may be more difficult to evaluate the outcome of administrative and court proceedings and the level of legal protection we enjoy than in more developed legal systems. These uncertainties may impede the Group’s ability to enforce the contracts it has entered into and could materially and adversely affect the Group’s business, financial condition and results of operations. The opinions on supervision of illegal securities activities issued by the General Office of the Central Committee of the Communist Party of China and the General Office of the State Council may subject us to additional compliance requirements in the future. The General Office of the Central Committee of the Communist Party of China and the General Office of the State Council jointly issued the Opinions on Severely Cracking Down on Illegal Securities Activities According to Law, or the Opinions, which were made available to the public on July 6, 2021. The Opinions emphasized the need to strengthen the administration over illegal securities activities and the supervision on overseas listings by China-based companies. These opinions proposed to take effective measures, such as promoting the construction of relevant regulatory systems, to deal with the risks and incidents facing China-based overseas-listed companies and the demand for data security and cross-border data flows. The aforementioned policies and any related implementation rules to be enacted may subject us to additional compliance requirements in the future. As the official guidance and interpretation of the Opinions still remain unclear in several respects at this time, we cannot assure you that we will remain fully compliant with all new regulatory requirements of the Opinions or any future implementation rules on a timely basis, or at all. 57 Table of Contents The China Securities Regulatory Commission, or the CSRC, has released for public consultation the draft rules to exert more oversight and control over offerings that are conducted overseas and foreign investment in China-based issuers, which could significantly limit or completely hinder our ability to offer our securities to overseas investors and could cause the value of our ADSs to significantly decline. On December 24, 2021, the China Securities Regulatory Commission, or the CSRC, released the Administrative Provisions of the State Council Regarding the Overseas Issuance and Listing of Securities by Domestic Enterprises (Draft for Comments), or the Draft Administrative Provisions, and the Measures for the Overseas Issuance of Securities and Listing Record-Filings by Domestic Enterprises (Draft for Comments) (the “Draft Filing Measures,” collectively with the Draft Administrative Provisions, the “Draft Rules Regarding Overseas Listing”), both of which have a comment period that expires on January 23, 2022. The Draft Rules Regarding Overseas Listing comprehensively improved and reformed the regulatory system for overseas offering and listing of domestic companies, and brought all overseas listing activities including both direct and indirect overseas offering and listing under regulation by adopting a filing-based administration system. The Draft Rules Regarding Overseas Listing apply to overseas offerings by domestic companies of equity shares, depository receipts, convertible corporate bonds, or other equity-like securities, and overseas listing of the securities for trading. Domestic companies that seek to offer and list securities in overseas markets shall fulfill the filing procedure with the securities regulatory agency under the State Council and report relevant information. As supporting rules, the Draft Filing Measures aims to specify the filing procedures and regulatory requirements on direct and indirect overseas offering and listing activities by domestic companies and standardize companies’ filings activities to ensure the smooth and effective implementation of the filing requirement. For example, if an issuer makes refinancing after having been listed in an overseas market, filings shall be made within three working days after the securities offering is completed. The Draft Filing Measures also requires domestic companies that have been listed overseas report to the CSRC within three working days once the following material events occurred: (i) material change of control, (ii) investigations or sanctions imposed by overseas securities regulatory authorities, (iii) voluntary or compulsory delisting, to strengthen interim and ex-post regulation. The Draft Rules Regarding Overseas Listing, if enacted in its current form, may subject us to additional compliance requirement in the future, and we cannot assure you that we will be able to get the clearance of filing procedures under the Draft Rules Regarding Overseas Listing on a timely basis, or at all. Any failure of us to fully comply with new regulatory requirements may significantly limit or completely hinder our ability to offer our securities to overseas investors, cause significant disruption to our business operations, and severely damage our reputation, which would materially and adversely affect our financial condition and results of operations and cause our ADSs to significantly decline in value. PRC regulations relating to investments in offshore companies by PRC residents may subject our PRC-resident beneficial owners or our PRC subsidiaries to liability or penalties, limit our ability to inject capital into our PRC subsidiaries or limit our PRC subsidiaries’ ability to increase their registered capital or distribute profits. The SAFE promulgated the Circular on Relevant Issues Concerning Foreign Exchange Control on Domestic Residents’ Offshore Investment and Financing and Roundtrip Investment through Special Purpose Vehicles, or SAFE Circular 37, on July 4, 2014, which replaced the former circular commonly known as “SAFE Circular 75” promulgated by the SAFE on October 21, 2005. SAFE Circular 37 requires PRC residents to register with local branches of the SAFE in connection with their direct establishment or indirect control of an offshore entity, for the purpose of overseas investment and financing, with such PRC residents’ legally owned assets or equity interests in domestic enterprises or offshore assets or interests, referred to in SAFE Circular 37 as a “special purpose vehicle.” SAFE Circular 37 further requires amendment to the registration in the event of any significant 58 Table of Contents changes with respect to the special purpose vehicle, such as increase or decrease of capital contributed by PRC individuals, share transfer or exchange, merger, division or other material event. In the event that a PRC shareholder holding interests in a special purpose vehicle fails to fulfill the required SAFE registration, the PRC subsidiaries of that special purpose vehicle may be prohibited from making profit distributions to the offshore parent and from carrying out subsequent cross-border foreign exchange activities, and the special purpose vehicle may be restricted in its ability to contribute additional capital into its PRC subsidiary. Moreover, failure to comply with the various SAFE registration requirements described above could result in liability under PRC law for evasion of foreign exchange controls. According to the Notice on Further Simplifying and Improving Policies for the Foreign Exchange Administration of Direct Investment released on February 13, 2015 by the SAFE, local banks will examine and handle foreign exchange registration for overseas direct investment, including the initial foreign exchange registration 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 ordinary shares 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 are PRC 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 comply with SAFE Circular 37 and subsequent implementation rules, and there is no assurance that the registration under SAFE Circular 37 and any amendment will be completed in a timely manner, or will be completed at all. The failure of our beneficial owners who are PRC residents to register or amend their foreign exchange registrations in a timely manner pursuant to SAFE Circular 37 and subsequent implementation rules, or the failure of future beneficial owners of our company who are PRC residents to comply with the registration procedures set forth in SAFE Circular 37 and subsequent implementation rules, may subject such beneficial owners or our PRC subsidiaries to fines and legal sanctions. Failure to register or comply with relevant requirements may also limit our ability to contribute additional capital to our PRC subsidiaries and limit our PRC subsidiaries’ ability to distribute dividends to our company. These risks may have a material adverse effect on the Group’s 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 other legal or administrative sanctions. Pursuant to SAFE Circular 37, PRC residents who participate in share incentive plans in overseas non-publicly-listed companies due to their position as director, senior management or employees of the PRC subsidiaries of the overseas companies may submit applications to SAFE or its local branches for the foreign exchange registration with respect to offshore special purpose companies. Our directors, executive officers and other employees who are PRC residents and who have been granted options may follow SAFE Circular 37 to apply for the foreign exchange registration before our company becomes an overseas listed company. After our company became an overseas listed company since the completion of our initial public offering, we and our directors, executive officers and other employees who are PRC residents and who have been granted options have been subject to the Notice on Issues Concerning the Foreign Exchange Administration for Domestic Individuals Participating in Stock Incentive Plan of Overseas Publicly Listed Company, issued by SAFE in February 2012, according to which, employees, directors, supervisors and other management members participating in any stock incentive plan of an overseas publicly listed company who are PRC residents are required to register with SAFE through a domestic qualified agent, which could be a PRC subsidiary of such overseas listed company, and complete certain other procedures. We will continue to make efforts to comply with these requirements. However, there can be no assurance that they can successfully register with SAFE in full compliance with the rules. Failure to complete the SAFE registrations may subject them to fines and legal sanctions and may also limit the ability to make payment under our share incentive plans or receive dividends or sales proceeds related thereto, or our ability to contribute additional capital into our wholly- foreign owned enterprises in China and limit our wholly-foreign owned enterprises’ ability to distribute dividends to us. We also face regulatory uncertainties that could restrict our ability to adopt additional share incentive plans for our directors and employees under PRC law. 59 Table of Contents We rely to a significant extent on dividends and other distributions on equity paid by our principal operating subsidiaries to fund offshore cash and financing requirements. We are a holding company and rely to a significant extent on dividends and other distributions on equity paid by our principal operating subsidiaries and on remittances from the Group VIEs, for our offshore cash and financing requirements, including the funds necessary to pay dividends and other cash distributions to our shareholders, fund inter-company loans, service any debt we may incur outside of China and pay our expenses. When our principal operating subsidiaries or the Group VIEs incur additional debt, the instruments governing the debt may restrict their ability to pay dividends or make other distributions or remittances to us. Furthermore, the laws, rules and regulations applicable to our PRC subsidiaries, Group VIEs and their subsidiaries permit 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, the Group VIEs and their subsidiaries is required to set aside at least 10% of its net income each year to fund certain statutory reserves until the cumulative amount of such reserves reaches 50% of its registered capital. These reserves, together with the registered capital, are not distributable as cash dividends. As a result of these laws, rules and regulations, our subsidiaries incorporated in China, the Group VIEs and their subsidiaries are restricted in their ability to transfer a portion of their respective net assets to their shareholders as dividends, loans or advances. Certain of our subsidiaries, the Group VIEs and their subsidiaries did not have any retained earnings available for distribution in the form of dividends as of December 31, 2021. In addition, registered share capital and capital reserve accounts are also restricted from withdrawal in the PRC, up to the amount of net assets held in each operating subsidiary. Furthermore, we intend to reinvest our undistributed earnings from our operating subsidiaries in the PRC to fund future operations. Limitations on the ability of the Group VIEs to make remittance to the wholly-foreign owned enterprise and on the ability of our subsidiaries to pay dividends to us could limit our ability to access cash generated by the operations of those entities, including to make investments or acquisitions that could be beneficial to our businesses, pay dividends to our shareholders or otherwise fund and conduct our business. We may be treated as a resident enterprise for PRC tax purposes under the PRC Enterprise Income Tax Law, and we may therefore be subject to PRC income tax on our global income. Under the PRC Enterprise Income Tax Law and its implementing rules, enterprises established under the laws of jurisdictions outside of 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 enterprise income tax at the rate of 25% on their global income. “De facto management body” refers to a managing body that exercises substantive and overall management and control over the production and business, personnel, accounting books and assets of an enterprise. The State Administration of Taxation issued the Notice Regarding the Determination of Chinese-Controlled Offshore-Incorporated Enterprises as PRC Tax Resident Enterprises on the Basis of De Facto Management Bodies, or Circular 82, on April 22, 2009. Circular 82 provides certain specific criteria for determining whether the “de facto management body” of a Chinese-controlled offshore-incorporated enterprise is located in China. Although Circular 82 only applies to offshore enterprises controlled by PRC enterprises, not those controlled by foreign enterprises or individuals, the determining criteria set forth in Circular 82 may reflect the State Administration of Taxation’s general position on how the “de facto management body” test should be applied in determining the tax resident 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 be subject 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 a result 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 resident enterprise for PRC tax purposes. However, the tax resident status of an enterprise is subject to determination by the PRC tax authorities and uncertainties remain with respect to the interpretation of the term “de facto management body.” 60 Table of Contents 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 to PRC tax. Under the Enterprise Income Tax Law and its implementation regulations issued by the State Council, a 10% PRC withholding tax is applicable to dividends payable to investors that are non-resident enterprises, which do not have an establishment or place of business in the PRC or which have such establishment or place of business but the dividends are not effectively connected with such establishment or place of business, to the extent such dividends are 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 to PRC tax at a current rate of 10%, subject to any reduction or exemption set forth in applicable tax treaties or under applicable tax arrangements between jurisdictions, 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 Class A ordinary shares or ADSs, and any gain realized from the transfer of our Class A ordinary shares or ADSs, would be treated as income derived from sources within the PRC and would as a result be subject to PRC taxation. Furthermore, if we are deemed a PRC resident enterprise, dividends payable to individual investors 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 at a current rate of 20%, subject to any reduction or exemption set forth in applicable tax treaties or under applicable tax arrangements between jurisdictions. If we or any of our subsidiaries established outside China are considered a PRC resident enterprise, it is unclear whether holders of our ADSs or Class A ordinary shares would be able to claim the benefit of income tax treaties or agreements entered into between China and other countries or areas. If dividends payable to our non-PRC investors, or gains from the transfer of our ADSs or Class A ordinary shares by such investors, are deemed as income derived from sources within the PRC and thus are subject to PRC tax, the value of your investment 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 a Chinese establishment of a non-Chinese company, or immovable properties located in China owned by non-Chinese companies. On February 3, 2015, the State Administration of Taxation, or the SAT, issued the Bulletin on Issues of Enterprise Income Tax on Indirect Transfers of Assets by Non-PRC Resident Enterprises, or Bulletin 7, which partially replaced and supplemented previous rules under the Notice on Strengthening Administration of Enterprise Income Tax for Share Transfers by Non-PRC Resident Enterprises, or SAT Circular 698, issued by the State Administration of Taxation, on December 10, 2009. Pursuant to Bulletin 7, an “indirect transfer” of assets, including equity interests in a PRC resident enterprise, by non-PRC resident enterprises may be re-characterized and treated as a direct transfer of PRC taxable assets, if such arrangement does not have a reasonable commercial purpose and was established for the purpose of avoiding payment of PRC enterprise income tax. As a result, gains derived from such indirect transfer may be subject to PRC enterprise income tax. According to Bulletin 7, “PRC taxable assets” include assets attributed to an establishment in China, immovable properties 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 the transaction arrangement, features to be taken into consideration include: whether the main value of the equity interest of the relevant offshore enterprise derives from PRC taxable assets; whether the assets of the relevant offshore enterprise mainly consists of direct or indirect investment in China or if its income mainly derives from China; whether the offshore enterprise and its subsidiaries directly or indirectly holding PRC taxable assets have real commercial nature which is evidenced by their actual function and risk exposure; the duration of existence of the business model and organizational structure; the replicability of the transaction by direct transfer of PRC taxable assets; and the tax situation of such indirect transfer and applicable tax treaties or similar arrangements. In respect of an indirect offshore transfer of assets of a PRC establishment, the resulting gain is to be included with the enterprise income tax filing of the PRC establishment or place of business being transferred, and would consequently be subject to PRC enterprise 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 PRC resident enterprise, which is not related to a PRC 61 Table of Contents establishment or place of business of a non-resident enterprise, a PRC enterprise income tax of 10% would apply, subject to available preferential tax treatment under applicable tax treaties or similar arrangements, and the party who is obligated to make the transfer payments 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 the tax authority by itself within the statutory time limit. Late payment of applicable tax will subject the transferor to default interest. Bulletin 7 does not apply to transactions of sale of shares by investors through a public stock exchange where such shares were acquired from a transaction through a public stock exchange. On October 17, 2017, the SAT issued the Announcement of the State Administration of Taxation on Issues Relating to Withholding at Source of Income Tax of Non-resident Enterprises, or SAT Circular 37, which was revised on June 15, 2018, 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 by the 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 of acquisition 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 of certain past and future transactions where PRC taxable assets are involved, such as offshore restructuring, sale of the shares in our offshore subsidiaries or investments. Our company may be subject to filing obligations or taxed if our company is transferor in such transactions, and may be subject to withholding obligations 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 are non-PRC resident enterprises, our PRC subsidiaries may be requested to assist in the filing under SAT Circular 37 and Bulletin 7. As a result, we may be required to expend valuable resources to comply with SAT Circular 37 and Bulletin 7 or to request the relevant transferors from whom we purchase taxable assets 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 on our financial condition and results of operations. We are subject to restrictions on currency exchange. All of the Group’s 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, including loans we may secure from our onshore subsidiaries or the Group VIEs. Currently, certain of our PRC subsidiaries, may purchase foreign currency for settlement of “current account transactions,” including payment of dividends to us, without the approval of the SAFE by complying with certain procedural requirements. However, the relevant PRC governmental authorities may limit or eliminate our ability to purchase foreign currencies in the future for current account 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 substantially all of the Group’s future net income and cash flow will be denominated in Renminbi, any existing and future restrictions on currency exchange may limit our ability to utilize cash generated in Renminbi to fund our business activities outside of the PRC or pay dividends in foreign currencies to our shareholders, including holders of our ADSs, and may limit our ability to obtain foreign currency through debt or equity financing for our subsidiaries and the Group 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 and economic conditions and the monetary or fiscal policies adopted by the PRC government. On July 21, 2005, the PRC government changed its policy of pegging the value of the 62 Table of Contents Renminbi to the U.S. dollar. Following the removal of the U.S. dollar peg, the Renminbi appreciated more than 20% against the U.S. dollar over the following three years. Between July 2008 and June 2010, the exchange rate between the Renminbi and the U.S. dollar had been stable and traded within a narrow band. In June 2010, the PRC government indicated that it would make the foreign exchange rate of the Renminbi more flexible, which increases the possibility of sharp fluctuations of the Renminbi’s value in the near future and the unpredictability associated with the Renminbi’s exchange rate. Since then, the Renminbi has fluctuated against the U.S. dollar, at times significantly and unpredictably. On November 30, 2015, the Executive Board of the International Monetary Fund (IMF) completed the regular five-year review of the basket of currencies that make up the Special Drawing Right, or the SDR, and decided that with effect from October 1, 2016, Renminbi is determined to be a freely usable currency and will be included in the SDR basket as a fifth currency, along with the U.S. dollar, the Euro, the Japanese yen and the British pound. In the fourth quarter of 2016, the Renminbi has depreciated significantly in the backdrop of a surging U.S. dollar and persistent capital outflows of China. In 2017, however, the RMB appreciated approximately 6.7% against the U.S. dollar. In 2018, the RMB depreciated approximately 5.7% against the U.S. dollar. In 2018, the value of the Renminbi depreciated by approximately 5.7% against the U.S. dollar; and in 2019, the Renminbi further depreciated by approximately 1.3% against the U.S. dollar. In 2020, the value of the Renminbi appreciated by approximately 6.3% against the U.S. dollar. In 2021, the value of the Renminbi appreciated by approximately 1.4% against the U.S. dollar. With the development of the foreign exchange market and progress towards interest rate liberalization and Renminbi internationalization, the PRC government may in the future announce further changes to the exchange rate system, and we cannot assure you that the Renminbi will not appreciate or depreciate significantly in value against the U.S. dollar in the future. It is difficult to predict how market forces or PRC or U.S. government policy may impact the exchange rate between the Renminbi and the U.S. dollar in the future. All of the Group’s revenue and substantially all of the Group’s costs are denominated in Renminbi. We are a holding company and we rely on dividends paid by our operating subsidiaries in China for our cash needs. Any significant revaluation of Renminbi may materially and adversely affect our results of operations and financial 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 the extent that we need to convert U.S. dollars we receive from our initial public offering into Renminbi for the Group’s operations, appreciation of the Renminbi against the U.S. dollar would have an adverse effect on the Renminbi amount we would receive. Conversely, if we decide to convert our Renminbi into U.S. dollars for the purpose of making payments for dividends on our ordinary shares or ADSs or for other business purposes, appreciation of the U.S. dollar against the Renminbi would have a negative effect on the U.S. dollar amount. PRC regulations establish more complex procedures for acquisitions conducted by foreign investors which could make it more difficult for us to pursue growth through acquisitions. The M&A Rules promulgated by six PRC regulatory agencies on August 8, 2006 established new procedures and requirements that could make merger and acquisition activities by foreign investors more time-consuming and complex, including requirements in some instances that the Ministry of Commerce be notified in advance of any change-of-control transaction in which a foreign investor takes control of a PRC domestic enterprise. 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 Domestic Enterprises by Foreign Investors, or the M&A Security Review Notice, which became effective on March 6, 2011. The M&A Security Review Notice provides for 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&D capacity for key technologies related to national security. On August 25, 2011, the Ministry of Commerce of PRC promulgated the Regulation of Ministry of Commerce on Implementation of the Security Review System for Mergers and Acquisitions of Domestic Enterprises by Foreign Investors, or the M&A Security Review Regulation, which became effective on September 1, 2011. The M&A Security Review Regulation stipulates the requirements of 63 Table of Contents application documents and security review procedures of the Ministry of Commerce. In the future, we may grow the Group’s business in part by acquiring complementary businesses. Complying with the requirements of the M&A Rules, the M&A Security Review Notice and the M&A Security Review Regulation to complete such transactions could be time-consuming, and any required approval processes, including obtaining approval from the Ministry of Commerce or its provincial affiliates, may delay or inhibit our ability to complete such transactions, which could affect our ability to expand the Group’s business or maintain the Group’s market share. The enforcement of the laws on Employment Contracts and other labor-related regulations in the PRC may adversely affect the Group’s business and its results of operations. On June 29, 2007, the National People’s Congress of China enacted the laws on Employment Contracts, or the Employment Contract Law, which became effective on January 1, 2008, amended on December 28, 2012. The Employment Contract Law established new restrictions and increased costs for employers to dismiss employees, including specific provisions related to fixed-term employment contracts, temporary employment, probation, consultation with the labor union and employee assembly, employment without a contract, dismissal of employees, compensation upon 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 an employee if the employer continues to hire the employee after the expiration of two consecutive fixed-term labor contracts subject to certain conditions or after the employee has worked for the employer for ten consecutive years. The employer also has to pay compensation to an employee if the employer terminates an unlimited-term labor contract. Such compensation is also required when the employer refuses to renew a labor contract that has expired, unless it is the employee who refuses to extend the expired contract or resign. In addition, under the Regulations on Paid Annual Leave for Employees, which became 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 five to 15 days, depending on their accumulative total length of service. Employers who fail to allow for such vacation time must compensate their employees three times their regular salaries for each vacation day disallowed, unless such employers can provide evidence, such as a copy of a written notice provided to their employees, that suggests the employers made arrangements for their employees to take such annual leaves, but such employees voluntarily waived taking their leaves or such employees waived 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 U.S. Public Company Accounting Oversight Board and, as such, our investors are deprived of the benefits of such inspection. Our independent registered public accounting firm that issues the audit report included in our annual report filed with the SEC, as auditors of companies that are traded publicly in the U.S. and a firm registered with the U.S. Public Company Accounting Oversight Board, or the PCAOB, is required by the laws of the U.S. to undergo regular inspections by the PCAOB to assess its compliance with the laws of the U.S. and professional standards. According to Article 177 of the PRC Securities Law which became effective in March 2020, no overseas securities regulator is allowed to directly conduct investigation or evidence collection activities within the territory of the PRC. Accordingly, without the consent of the competent PRC securities regulators and relevant authorities, no organization or individual may provide the documents and materials relating to securities business activities to overseas parties. Because our auditors are located in the People’s Republic of China, a jurisdiction where the PCAOB is currently unable to conduct inspections without the approval of the Chinese authorities, our auditors are not currently inspected by the PCAOB. On May 24, 2013, PCAOB announced that it had entered into a Memorandum of Understanding on Enforcement Cooperation with the CSRC and the Ministry of Finance, which establishes a cooperative framework between the parties for the production and exchange of audit documents relevant to investigations in 64 Table of Contents the United States and China. PCAOB continues to be in discussions with the CSRC and the Ministry of Finance to permit joint inspections in the PRC of audit firms that are registered with PCAOB and audit Chinese companies that trade on U.S. exchanges. On December 7, 2018, the SEC and the PCAOB issued a joint statement highlighting continued challenges faced by the U.S. regulators in their oversight of financial statement audits of U.S.- listed companies with significant operations in China. The joint statement reflects the U.S. regulators’ heightened interest in this issue. In a statement issued on December 9, 2019, the SEC reiterated concerns over the inability of the PCAOB to conduct inspections of the audit firm work papers with respect to U.S.-listed companies that have operations in China, and emphasized the importance of audit quality in emerging markets, such as China. On April 21, 2020, the SEC and the PCAOB issued a new joint statement, reminding the investors that in investing in companies that are based in or have substantial operations in many emerging markets, including China, there is substantially greater risk that disclosures will be incomplete or misleading, and there is also a greater risk of fraud. In the event of investor harm, there is substantially less ability to bring and enforce SEC, DOJ and other U.S. regulatory actions, in comparison to U.S. domestic companies, and the joint statement reinforced past SEC and PCAOB statements on matters including the difficulty to inspect audit work papers in China and its potential harm to investors. Inspections of other firms that the PCAOB has conducted outside China have identified deficiencies in those firms’ audit procedures and quality control procedures, which may be addressed as part of the inspection process to improve future audit quality. The inability of the PCAOB to conduct inspections of auditors in China makes it more difficult to evaluate the effectiveness of our auditor’s audit procedures or quality control procedures as compared to auditors outside of China that are subject to PCAOB inspections. As a result, we and investors in our ADSs are deprived of the benefits of such PCAOB inspections. Investors may lose confidence in our reported financial information and procedures and the quality of Group’s consolidated financial statements. Our ADSs will be prohibited from trading in the United States under the Holding Foreign Companies Accountable Act, or the HFCA Act, in 2024 if the PCAOB is unable to inspect or fully investigate auditors located in China, or 2023 if proposed changes to the law are enacted. The delisting of our ADSs, or the threat of their being delisted, may materially and adversely affect the value of your investment. The Holding Foreign Companies Accountable Act, or the HFCA Act, was signed into law on December 18, 2020. The HFCA Act states that if the SEC determines that we are an issuer that has filed audit reports issued by a registered public accounting firm that has not been subject to inspection for the PCAOB, or a covered issuer, for three consecutive years beginning in 2021, the SEC shall prohibit our shares or ADSs from being traded on a national securities exchange or in the over-the-counter trading market in the United States. The SEC and the PCAOB have adopted new rules to implement the HFCA Act. Specifically, on November 5, 2021, the SEC announced the approval of the PCAOB’s new rule related to the PCAOB’s responsibilities under the HFCA Act, which provides a framework for the PCAOB to use when determining, as contemplated under the HFCA Act, whether it is unable to inspect or investigate completely registered public accounting firms located in a foreign jurisdiction because of a position taken by one or more authorities in that jurisdiction. On December 2, 2021, the SEC announced the adoption of final amendments to implement the submission and disclosure requirement of the HFCA Act following its interim final amendments announced in March 2021. The adopting release establishes the SEC’s procedures for identifying covered issuers and for prohibiting the trading of covered issuers’ securities. The SEC will identify covered issuers as early as possible after companies file their annual reports for fiscal years beginning after December 18, 2020 and on a rolling basis. The final amendments also include requirements to disclose information, including the auditor name and location, the percentage of shares of the issuer owned by governmental entities, whether governmental entities in the applicable foreign jurisdiction with respect to the auditor has a controlling financial interest with respect to the issuer, the name of each official of the Chinese Communist Party who is a member of the board of the issuer, and whether the articles of incorporation of the issuer contains any charter of the Chinese Communist Party. Furthermore, pursuant to the HFCA Act, the PCAOB issued a report on December 16, 2021 notifying the SEC of its determination that it is unable to inspect or investigate completely registered public accounting firms 65 Table of Contents headquartered in mainland China or Hong Kong. The PCAOB identified our auditor as one of the registered public accounting firms that the PCAOB is unable to inspect or investigate completely. In March 2022, the SEC issued its first “conclusive list of issuers identified under the HFCA Act” indicating that those companies are now formally subject to the delisting provisions if they remain on the list for three consecutive years, and the SEC has subsequently updated such list. We anticipate being added to the list shortly after the filing of this annual report on Form 20-F. Enactment of the HFCA Act and other efforts to increase the U.S. regulatory access to audit information could cause investor uncertainty as to China-based issuers’ ability to maintain their listings on the U.S. national securities exchanges, including us, and the market price of the Class A ordinary shares and/or ADSs could be adversely affected. We cannot assure you that, once we have a “non-inspection” year, we will be able to take remedial measures in a timely manner. Whether the PCAOB will be able to conduct inspections of our auditor before the issuance of our financial statements on Form 20-F for the year ending December 31, 2023, which is due by April 30, 2024, or at all, is subject to substantial uncertainty and depends on a number of factors out of our and our auditor’s control. If our auditor is unable to be inspected and we are unable to meet the PCAOB inspection requirement in time, we could be delisted from the NYSE and our ADSs will not be permitted for trading “over-the-counter” either. If our shares and ADSs are prohibited from trading in the United States, there is no certainty that we will be able to list on a non-U.S. exchange or that a market for our shares will develop outside of the United States. Such a prohibition would substantially impair your ability to sell or purchase our ADSs when you wish to do so, and the risk and uncertainty associated with delisting would have a negative impact on the price of our ADSs. Also, such a prohibition would significantly affect our ability to raise capital on terms acceptable to us, or at all, which would have a material adverse impact on our business, financial condition, and prospects. On June 22, 2021, the U.S. Senate passed the Accelerating Holding Foreign Companies Accountable Act which would reduce the number of consecutive non-inspection years required for triggering the prohibitions under the HFCA Act from three years to two. On February 4, 2022, the U.S. House of Representatives passed a bill which contained, among other things, an identical provision. If this provision is enacted into law and the number of consecutive non-inspection years required for triggering the prohibitions under the HFCA Act is reduced from three years to two, then our shares and ADSs could be prohibited from trading in the U.S. and delisted from the NYSE in 2023. 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 the production 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 affected by 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 PCAOB sought to obtain from the Chinese accounting firms access to their audit work papers and related documents. The firms were, however, advised and directed that under Chinese law they could not respond directly to the U.S. regulators on those requests, and that requests by foreign regulators for access to such papers in China had to be channeled through the CSRC. In late 2012, this impasse led the SEC to commence administrative proceedings under Rule 102(e) of its Rules of Practice and also under the Sarbanes-Oxley Act of 2002 against the Chinese accounting firms, including our independent registered public accounting firm. In January 2014, the administrative law judge reached an initial decision to impose penalties on the firms including a temporary suspension of their right to practice before the SEC. The accounting firms filed a petition for review of the initial decision. On February 6, 2015, before a review by the commissioners of the SEC had taken place, the firms reached a settlement with the SEC. Under the settlement, the SEC accepts that future requests by the SEC for the production of documents will normally be made to the CSRC. The firms will receive matching Section 106 requests, and are required to abide 66 Table of Contents by a detailed set of procedures with respect to such requests, which in substance require them to facilitate production via the CSRC. If they fail to meet specified criteria, the SEC retains authority to impose a variety of additional remedial measures on the firms depending on the nature of the failure. Remedies for any future noncompliance could include, as appropriate, an automatic six-month bar on a single firm’s performance of certain audit work, commencement of a new proceeding against a firm, or in extreme cases the resumption of the current proceeding against all four firms. Our audit committee is aware of the policy restriction and regularly communicated with our independent auditor to ensure compliance. If additional remedial measures are imposed on the China-based “big four” accounting firms, including our independent registered public accounting firm, in administrative proceedings brought by the SEC alleging the firms’ failure to meet specific criteria set by the SEC with respect to requests for the production of documents, we could be unable to timely file future financial statements in compliance with the requirements of the Exchange Act. The settlement did not require the firms to admit to any violation of law and preserves the firms’ legal defenses in the event the administrative proceeding is restarted. In the event that the SEC restarts the administrative proceedings, depending upon the final outcome, listed companies in the United States with major PRC operations may find it difficult or impossible to retain auditors in respect of their operations in the PRC, which could result in financial statements being determined to not be in compliance with the requirements of the Exchange Act, including possible delisting. Moreover, any negative news about any such future proceedings against these audit firms may cause investor uncertainty regarding China-based, United States-listed companies and the trading price of our ADSs may be adversely affected. If our independent registered public accounting firm were denied, even temporarily, the ability to practice before the SEC and we were unable to timely find another registered public accounting firm to audit and issue an opinion on the Group’s consolidated financial statements, the Group’s consolidated financial statements could be determined not to be in compliance with the requirements of the Exchange Act. Such a determination could ultimately lead to the delisting of our ADSs from the NYSE or deregistration from the SEC, or both, which would substantially reduce or effectively terminate the trading of our ADSs in the United States. The ability of U.S. authorities to bring actions for violations of U.S. securities law and regulations against us, our directors, executive officers or the expert named in this annual report may be limited and therefore you may not be afforded the same protection as provided to investors in U.S. domestic companies. The SEC, U.S. Department of Justice (“DOJ”) and other authorities often have substantial difficulties in bringing and enforcing actions against non-U.S. companies such as us, and non-U.S. persons, such as our directors and executive officers in China. Due to jurisdictional limitations, matters of comity and various other factors, the SEC, DOJ and other U.S. authorities may be limited in their ability to pursue bad actors, including in instances of fraud, in emerging markets such as China. The Group conducts substantially all of its operations in China and substantially all of the Group’s assets are located in China. In addition, a majority of our directors and executive officers reside within China. There are significant legal and other obstacles for U.S. authorities to obtain information needed for investigations or litigation against us or our directors, executive officers or other gatekeepers in case we or any of these individuals engage in fraud or other wrongdoing. In addition, local authorities in China may be constrained in their ability to assist U.S. authorities and overseas investors more generally. As a result, if we have any material disclosure violation or if our directors, executive officers or other gatekeepers commit any fraud or other financial misconduct, the U.S. authorities may not be able to conduct effective investigations or bring and enforce actions against us, our directors, executive officers or other gatekeepers. Therefore, you may not be able to enjoy the same protection provided by various U.S. authorities as it is provided to investors in U.S. domestic companies. 67 Table of Contents Privacy concerns relating to the Group’s products and services and the use of user information could damage our reputation, deter current and potential users and customers from using the Group’s products. The Group may collect personal data while providing products, services and solutions to the Group’s customers. Our reputation may be damaged due to the collection, use, disclosure or security of personal information or other privacy-related matters, even if unfounded, which will cause the Group to lose users and other customers and adversely affect the Group’s operations. The Group strives to comply with applicable laws and regulations on data protection, as well as the Group’s privacy policies and data protection obligations in accordance with its terms of use and other obligations the Group may have. However, any non-compliance or perceived non-compliance with these laws, regulations or policies may lead to investigations and other lawsuits against the Group by government agencies or other individuals. This will have a negative impact on our reputation and brand image, may cause the Group to lose users and customers, and have a negative impact on the Group’s business. In addition, any system failure or breach of the Group’s privacy policy by the Group’s current or former employees that may compromise of the Group’s security and result in an unauthorized access to or release of the Group’s users’ or other customers’ data could greatly limit the user engagement of the Group’s products and services, harm our reputation and brand image, as well as affect the Group’s business operations. PRC government authorities have promulgated laws and regulations to protect personal information from any abuse or unauthorized disclosure. In November 2016, the SCNPC promulgated the Cybersecurity Law of the People’s Republic of China, or the Cybersecurity Law, which took effect as of June 1, 2017. The Cybersecurity Law is the first special law establishing the overall regulatory regime of personal information protection at the digital age. Since the Cybersecurity Law came into effect, a series of legislative and administrative actions in connection with personal information protection have been taken by the PRC government. The newly adopted legislature includes laws, judicial interpretations, national standards and governmental regulations related to personal information protection, while governmental agencies such as the Central Cyberspace Affairs Commission, the Ministry of Industry and Information Technology, the Ministry of Public Security, and the State Administration for Market Regulation have taken a series campaigns to enhance and tighten the supervision of collection, usage, storage and transfer practices of personal information by internet service providers. For instance, pursuant to the Order for the Protection of Telecommunication and Internet User Personal Information issued by the Ministry of Industry and Information Technology 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, the Information Security Technology-Personal Information Security Specification (GB/T 35273-2017), or the Specification, was issued by the General Administration of Quality Supervision, Inspection and Quarantine of the PRC and the Standardization Administration of the PRC, or the Standardization Administration, on December 29, 2017 and has been replaced by Information Security Technology Personal Information Security Specification (GB/T 35273-2020), or the 2020 Specification, issued by the State Administration for Market Regulation and the Standardization Administration jointly which took effect on October 1, 2020. Pursuant to the Specification, product and service providers should take technical and other necessary measures to ensure the safety of personal information, clearly demonstrate the purpose, approaches and scope of processing the personal information to the individual and acquire the authorization. In addition, according to the 2020 Specification, personal biometric information should be stored separately from personal identity information and in principle, the original personal biometric information should not be stored; besides, it further requires that main function of privacy policy is to disclose the scope and rules of personal information collection and use by the personal information controller, which should not be regarded as a contract signed by the subject of personal information. Furthermore, on August 20, 2021, the SCNPC, promulgated the Personal Information Protection Law of the PRC, or the Personal Information Protection Law, which took effect in November 2021. As the first systematic and comprehensive law specifically for the protection of personal information in the PRC, the Personal Information Protection Law provides, among others, that (i) an individual’s consent shall be obtained to use sensitive personal information, such as biometric characteristics and individual location tracking, (ii) personal information operators using sensitive personal information shall notify individuals of the necessity of such use and impact on the individual’s rights, and (iii) where personal information operators reject an individual’s request to exercise his or her rights, 68 Table of Contents the individual may file a lawsuit with a People’s Court. In particular, in 2019, operators of hundreds of Apps, including many popular and well-known Apps such as Douyu, YY, Meituan and Alipay, have been consulted or ordered by government agencies to rectify their practices of personal information protection; since September 2019, the so-called “big data” companies have caught regulatory attentions for the suspect of illegal collection and abuse of personal information through internet crawling practices, while Hangzhou Moxie Data Technology Co., Ltd. and Shanghai Xinyan Artificial Intelligence Technology Co., Ltd. have even been officially investigated. As laws and regulations on data protection evolve, the Group’s practices may be deemed to be inconsistent with such laws or regulations. In addition to the potential fines, such non-compliances could result in an order requiring the Group to change its practices, which may adversely affect the Group’s business and operation. The greater oversight by the Cyberspace Administration of China, or the CAC, over data security, particularly for companies seeking to list on a foreign exchange, could adversely impact our business and our offering. The regulatory framework for data security in the PRC is rapidly evolving. On June 10, 2021, the SCNPC promulgated the Data Security Law to regulate data processing activities and security supervision in the PRC, which took effect in September 2021. On October 29, 2021, the CAC has publicly solicited opinions on the Measures for the Security Assessment of Data Cross-border Transfer (Draft for Comments), which requires that any data processor who provides to an overseas recipient important data collected and generated during operations within the territory of the PRC or personal information that should be subject to security assessment shall conduct security assessment. On November 14, 2021, the CAC published the Draft Regulations on the Network Data Security Administration (Draft for Comments), or the Security Administration Draft, which provides that data processing operators engaging in data processing activities that affect or may affect national security must be subject to network data security review by the relevant Cyberspace Administration of the PRC. According to the Security Administration Draft, data processing operators who possess personal data of at least one million users or collect data that affects or may affect national security must be subject to network data security review by the relevant Cyberspace Administration of the PRC. The Security Administration Draft also stipulates that a data processor listed overseas must conduct an annual data security review by itself or by engaging a data security service provider and submit the annual data security review report for a given year to the municipal cybersecurity department before January 31 of the following year. If the Security Administration Draft is enacted in the current form, we, as an overseas listed company, will be required to carry out an annual data security review and comply with the relevant reporting obligations. The Security Administration Draft has not been enacted as of the date of this annual report. On December 28, 2021, the CAC, together with 12 other governmental departments of the PRC, jointly promulgated the Cybersecurity Review Measures, which became effective on February 15, 2022. The Cybersecurity Review Measures provides that, in addition to critical information infrastructure operators, or the CIIOs, that intend to purchase Internet products and services, online platform operators engaging in data processing activities that affect or may affect national security must be subject to cybersecurity review by the Cybersecurity Review Office of the PRC. According to the Cybersecurity Review Measures, online platform operators that possess personal data of at least one million users must apply for a review by the Cybersecurity Review Office of the PRC before conducting listings in foreign countries. However, given the recency of the issuance of the Cybersecurity Review Measures, there is a general lack of guidance and substantial uncertainties exist with respect to their interpretation and implementation. For example, it is unclear whether the requirement of cybersecurity review applies to follow-on offerings by an “online platform operator” that is in possession of personal data of more than one million users where the offshore holding company of such operator is already listed overseas. As of the date of this annual report, we have not received any notice from any authorities identifying us as a CIIO or requiring us to go through cybersecurity review or network data security review by the CAC. However, 69 Table of Contents as there remains uncertainty regarding how the Cybersecurity Review Measures will be interpreted, how the Security Administration Draft and Measures for the Security Assessment of Data Cross-border Transfer (Draft for Comments) will be implemented and interpreted, and whether the PRC regulatory agencies, including the CAC, may adopt any other new laws, regulations, rules, or detailed implementation and interpretation related to the Cybersecurity Review Measures and the Security Administration Draft. If any such new laws, regulations, rules, or implementation and interpretation come into effect, we will take all reasonable measures and actions to comply and to minimize the adverse effect of such laws on us. But we cannot guarantee that we will not be subject to cybersecurity review or network data security review in the future. During such reviews, we may be required to suspend our operation or experience other disruptions to our operations. Cybersecurity review and network data security review could also result in negative publicity with respect to our Company and diversion of our managerial and financial resources, which could materially and adversely affect our business, financial conditions, and results of operations. Uncertainties exist with respect to the interpretation and implementation of the Foreign Investment Law and its implementing rules and how they may impact our business, financial condition and results of operations. The VIE structure through contractual arrangements has been adopted by many PRC-based companies, including us, to obtain necessary licenses and permits in the industries that are currently subject to foreign investment restrictions in China. The MOFCOM published a discussion draft of the proposed Foreign Investment Law in January 2015, or the 2015 Draft FIL, according to which, variable interest entities that are controlled via contractual arrangements would also be deemed as foreign-invested entities, if they are ultimately “controlled” by foreign investors. In March 2019, the PRC National People’s Congress promulgated the Foreign Investment Law, and in December 2019, the State Council promulgated the Implementing Rules of Foreign Investment Law, or the Implementing Rules, to further clarify and elaborate the relevant provisions of the Foreign Investment Law. The Foreign Investment Law and the Implementing Rules both became effective from January 1, 2020 and replaced the major previous laws and regulations governing foreign investments in the PRC. Pursuant to the Foreign Investment Law, “foreign investments” refer to investment activities conducted by foreign investors (including foreign natural persons, foreign enterprises or other foreign organizations) directly or indirectly in the PRC, which include any of the following circumstances: (i) foreign investors setting up foreign-invested enterprises in the PRC solely or jointly with other investors, (ii) foreign investors obtaining shares, equity interests, property portions or other similar rights and interests of enterprises within the PRC, (iii) foreign investors investing in new projects in the PRC solely or jointly with other investors, and (iv) investment in other methods as specified in laws, administrative regulations, or as stipulated by the State Council. The Foreign Investment Law and the Implementing Rules do not introduce the concept of “control” in determining whether a company would be considered as a foreign-invested enterprise, nor do they explicitly provide whether the VIE structure would be deemed as a method of foreign investment. However, the Foreign Investment Law has a catch-all provision that includes into the definition of “foreign investments” made by foreign investors in China in other methods as specified in laws, administrative regulations, or as stipulated by the State Council, and as the relevant government authorities may promulgate more laws, regulations or rules on the interpretation and implementation of the Foreign Investment Law, the possibility cannot be ruled out that the concept of “control” as stated in the 2015 Draft FIL may be embodied in, or the VIE structure adopted by us may be deemed as a method of foreign investment by, any of such future laws, regulations and rules. If any Group VIEs were deemed as a foreign-invested enterprise under any of such future laws, regulations and rules, and any of the businesses that we operate would be in any “negative list” for foreign investment and therefore be subject to any foreign investment restrictions or prohibitions, further actions required to be taken by us under such laws, regulations and rules may materially and adversely affect our business, financial condition and results of operations. Furthermore, if future laws, administrative regulations or provisions mandate further actions to be taken by companies with respect to existing contractual arrangements, we may face substantial uncertainties as to whether we can complete such actions in a timely manner, or at all. Failure to take timely and appropriate measures to cope with any of these or similar regulatory compliance challenges could materially and adversely affect our current corporate structure, business, financial condition and results of operations. 70 Table of Contents Risks Related to Our Ordinary Shares and ADSs The trading price of our ADSs may be volatile, which could result in substantial losses to you. 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 or deteriorating financial results of other listed companies based in China. The securities of some of these companies have experienced significant volatility since their initial public offerings, including, in some cases, substantial price declines in the trading prices of their securities. The trading performances of other Chinese companies’ securities after their offerings, including Internet companies, online retail and mobile commerce platforms and consumer finance service providers, may affect the attitudes of investors toward Chinese companies listed in the United States, which consequently may impact the trading performance of our ADSs, regardless of the Group’s actual operating performance. In addition, any negative news or perceptions about inadequate corporate governance practices or fraudulent accounting, corporate structure or matters of other Chinese companies may also negatively affect the attitudes of investors towards companies that have major operations based in China in general, including us, regardless of whether we have conducted any inappropriate activities. Furthermore, securities markets may from time to time experience significant price and volume fluctuations that are not related to the Group’s operating performance, such as the large decline in share 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 and adverse effect on the trading price of our ADSs. In addition to the above factors, the price and trading volume of our ADSs may be highly volatile due to multiple factors, including the following: • • • • • • • • • • • regulatory developments affecting the Group’s or its industry; announcements of studies and reports relating to the quality of the Group’s product 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 the Group’s quarterly results of operations and changes or revisions of the Group’s 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, capital raisings or capital commitments; additions to or departures of our senior management; fluctuations of exchange rates between the Renminbi and the U.S. dollar; release or expiry of lock-up or other transfer restrictions on our outstanding shares or ADSs; and sales or perceived potential sales of additional Class A ordinary shares or ADSs. If securities or industry analysts do not publish research or publish inaccurate or unfavorable research about our business, the market price for our ADSs and trading volume could decline. The trading market for our ADSs will depend in part on the research and reports that securities or industry analysts publish about us or the Group’s business. If research analysts do not establish and maintain adequate research coverage or if one or more of the analysts who covers us downgrades our ADSs or publishes inaccurate or unfavorable research about the Group’s business, the market price for our ADSs would likely decline. If one 71 Table of Contents or more of these analysts cease coverage of our company or fail to publish reports on us regularly, we could lose visibility in the financial markets, which, in turn, could cause the market price or trading volume for our ADSs to decline. Because 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 the Group’s business. As a result, we do not expect to pay any cash dividends in the foreseeable future. Therefore, you should not rely on an investment in our ADSs as a source for any future dividend income. Our board of directors has complete discretion as to whether to distribute dividends. Even if our board of directors decides to declare and pay dividends, the timing, amount and form of future dividends, if any, will depend on, among other things, the Group’s future results of operations and cash flow, the Group’s capital requirements and surplus, the amount of distributions, if any, received by us from our subsidiaries, our financial condition, contractual restrictions and other factors deemed relevant by our board of directors. Accordingly, the return on your investment in our ADSs will likely depend entirely upon any future price appreciation of our ADSs. There is no guarantee that our ADSs will appreciate in value 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 decline significantly. The total number of ordinary shares outstanding as of March 31, 2022 was 252,474,803, comprising 188,983,631 Class A ordinary shares and 63,491,172 Class B ordinary shares. All ADSs representing our Class A ordinary shares sold in our initial public offering will be freely transferable by persons other than our “affiliates” without restriction or additional registration under the U.S. Securities Act of 1933, as amended, or the Securities Act. All of the other ordinary shares outstanding are available for sale, subject to volume and other restrictions as applicable under Rules 144 and 701 under the Securities Act. We cannot predict what effect, if any, market sales of securities held by our significant shareholders or any other shareholder or the availability of these securities 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, subject to the applicable lock-up periods in connection with our initial public offering. Registration of these shares under the Securities Act would result in ADSs representing these shares becoming freely tradable without restriction under the Securities Act immediately upon the effectiveness of the registration. Sales of these registered shares in the form of ADSs in the public market could cause the price of our ADSs to decline significantly. We have fallen below the continued listing requirements of the New York Stock Exchange, and if we cannot regain compliance in time, our ADSs may be delisted and the liquidity and the trading price of our ADSs could be materially and adversely affected. We were notified by the NYSE on February 7, 2022 of our company’s non-compliance with the continued listing standard because the average closing price of our ADSs was less than US$1.00 per ADS over a consecutive 30 trading-day period. Pursuant to Section 802.01C of the NYSE’s Listed Company Manual, our company has six months, or the Cure Period, following receipt of the notice to regain compliance with the minimum share price requirement. We can regain compliance at any time during the Cure Period if on the last trading day of any calendar month during the Cure Period we have a closing share price of at least US$1.00 and 72 Table of Contents an average closing share price of at least US$1.00 over the 30 trading-day period ending on the last trading day of that month. In the event that at the expiration of the six-month Cure Period, both a US$1.00 closing share price on the last trading day of the Cure Period and a US$1.00 average closing share price over the 30 trading-day period ending on the last trading day of the Cure Period are not attained, the NYSE will commence suspension and delisting procedures. To address this issue, we intend to monitor the market conditions of our ADSs and are still considering our options. As required by the NYSE rules, we notified the NYSE on February 10, 2022 of our intent to cure the ADSs’ price deficiency within the applicable time period required by the NYSE. During the Cure Period, our ADSs will continue to be listed and traded on the NYSE, subject to our compliance with other NYSE continued listing standards and other rights of the NYSE to delist the ADSs. Should we fail to regain compliance with NYSE’s continued listing requirements during the Cure Period or encounter any additional non-compliance, our ADSs may be delisted from the NYSE, and the liquidity and the trading price of our ADSs could be materially and adversely affected. We have been named as a defendant in a putative shareholder class action lawsuit that could have a material adverse impact on the Group’s business, financial condition, results of operation, cash flows and reputation. We will have to defend against the pending putative shareholder class action lawsuit described in “Item 8. Financial Information—A. Consolidated Statements and Other Financial Information – Legal and Administrative Proceedings.” We are currently unable to estimate the possible loss or possible range of loss, if any, associated with the resolution of this lawsuit. There can be no assurance that we will prevail in defense of this lawsuit. Any adverse outcome of these cases could have a material adverse effect on the Group’s business, financial condition, results of operation, cash flows and reputation. In addition, there can be no assurance that the Group’s insurance carriers will cover all or part of the defense costs, or any liabilities that may arise from this matter. The litigation process may utilize a significant portion of our resources and divert management’s attention from the day-to-day operations of the Group’s, all of which could harm the Group’s business. We also may be subject to claims for indemnification related to this matter, and we cannot predict the impact that indemnification claims may have on the Group’s 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 A ordinary shares in accordance with the provisions of the deposit agreement. Under our second amended and restated articles of association, the minimum notice period required to convene a general meeting will be 10 days. When a general meeting is convened, you may not receive sufficient notice of a shareholders’ meeting to permit you to withdraw your Class A ordinary shares to allow you to cast your vote with respect to any 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 all reasonable 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 voting materials 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 any failure 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 to exercise your right to vote and you may lack recourse if your ADSs are not voted as you requested. In addition, in your capacity as an ADS holder, you will not be able to call a shareholders’ meeting. Your right to participate in any future rights offerings may be limited, which may cause dilution to your holdings. We may from time to time distribute rights to our shareholders, including rights to acquire our securities. However, we cannot make rights available to you in the United States unless we register both the rights and the 73 Table of Contents securities to which the rights relate under the Securities Act or an exemption from the registration requirements is available. Under the deposit agreement, the depositary will not make rights available to you unless both the rights and the underlying securities to be distributed to ADS holders are either registered under the Securities Act or exempt from registration under the Securities Act. We are under no obligation to file a registration statement with respect to any such rights or securities or to endeavor to cause such a registration statement to be declared effective and we may not be able to establish a necessary exemption from registration under the Securities Act. Accordingly, you may be unable to participate in our rights offerings 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 other deposited securities, and we do not have any present plan to pay any cash dividends in the foreseeable future. See “Item 8. Financial Information —A. Consolidated Statements and Other Financial Information—Dividend Policy” To the extent that there is a distribution, the depositary of our ADSs has agreed to pay to you the cash dividends or other distributions it or the custodian receives on our Class A ordinary shares or other deposited securities after deducting its fees and expenses. You will receive these distributions in proportion to the number of Class A ordinary shares your ADSs represent. However, the depositary may, at its discretion, decide that it is inequitable or impractical to make a distribution available to any holders of ADSs. For example, the depositary may determine that it is not practicable to distribute certain property through the mail, or that the value of certain distributions may be less than the cost of mailing them. In these cases, the depositary may decide not to distribute such property to you. Conversion of our convertible notes may dilute the ownership interest of existing shareholders. In July 2019, we issued US$345 million aggregate principal amount of convertible senior notes due 2026. As of March 31, 2022, we have repurchased US$297.5 million aggregate principal amount of convertible notes, and the outstanding principal amount was US$47.5 million. The conversion of some or all of the convertible notes may dilute the ownership interests of existing shareholders. Any sales in the public market of the ADSs issuable upon such conversion could adversely affect prevailing market prices of our ADSs. In addition, the existence of the convertible notes may encourage short selling by market participants because the conversion of the convertible notes could depress the market price of our ADSs. You may be subject to limitations on transfer of your ADSs. Your ADSs are transferable on the books of the depositary. However, the depositary may close its transfer books at any time or from time to time when it deems expedient in connection with the performance of its duties. In addition, the depositary may refuse to deliver, transfer or register transfers of ADSs generally when our books or the books of the depositary are closed, or at any time if we or the depositary deems it advisable to do so because of any requirement of law or of any government or governmental body, or under any provision of the deposit agreement, or for any other reason. Certain judgments obtained against us by our shareholders may not be enforceable. We are an exempted company incorporated under the laws of the Cayman Islands. We conduct the Group’s operations outside the United States and substantially all of the Group’s assets are located outside the United States. In addition, substantially all of our directors and executive officers and the experts named in this annual report reside outside the United States, and most of their assets are located outside the United States. As a result, it may be difficult or impossible for you to bring an action against us or against them in the United States in the event that you believe that your rights have been infringed under the U.S. federal securities laws or otherwise. Even if you are successful in bringing an action of this kind, the laws of the Cayman Islands, China or other relevant jurisdiction may render you unable to enforce a judgment against the Group’s assets or the assets of our directors and officers. 74 Table of Contents There is no statutory recognition in the Cayman Islands of judgments obtained in the United States, although the Cayman Islands will generally recognize 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 of money is payable (other than a sum of money payable in respect of multiple damages, taxes or other charges of a like nature or in respect of a fine or other penalty), or, in certain circumstances, an in personam judgment for non-monetary relief, and would give a judgment based thereon provided that (i) such courts 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) no new 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 due compliance with the correct procedures under the laws of the Cayman Islands. There is uncertainty as to whether a judgment obtained from the United States courts 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 a determination is made, the courts of the Cayman Islands will not recognize or enforce the judgment against a Cayman Islands company. Because the courts of the 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 the Cayman Islands. The recognition and enforcement of foreign judgments are provided for under the PRC Civil Procedure Law. PRC courts may recognize and enforce foreign judgments in accordance with the requirements of the PRC Civil Procedure Law based either on treaties between China and the country where the judgment is made or on principles of reciprocity between jurisdictions. Under PRC law, a foreign judgment, which does not otherwise violate basic legal principles, state sovereignty, safety or social public interest, may be recognized and enforced by a PRC court, based either on treaties between China and the country where the judgment is made or on principles of reciprocity between jurisdictions. As there existed no treaty or other form of reciprocity between China and the United States, the United Kingdom, Japan or most other western countries governing the recognition and enforcement of judgments as of the date of this annual report, including those predicated upon the liability provisions of the United States federal securities laws, recognition and enforcement in China of judgments of a court in any of these jurisdictions may be difficult or impossible. In addition, you may not be able to bring original actions in China based on the U.S. or other foreign laws against us, our directors, executive officers or the expert named in this annual report either. As a result, shareholder claims that are common in the U.S., including class action securities law and fraud claims, are difficult or impossible to pursue as a matter of law and practicality in China. Therefore, you may not be able to effectively enjoy the protection offered by the U.S. laws and regulations that intend to protect public investors. You may face difficulties in protecting your interests, and your ability to protect your rights through U.S. courts may be limited, because we are incorporated under Cayman Islands law. We are an exempted company limited by shares incorporated under the laws of the Cayman Islands. Our corporate affairs are governed by our memorandum and articles of association, the Companies Law, Cap. 22 (Law 3 of 1961, as consolidated and revised) of the Cayman Islands and the common law of the Cayman Islands. The rights of shareholders to take action against the directors, actions by minority shareholders and the fiduciary duties of our directors to us under Cayman Islands law are to a large extent governed by the common law of the Cayman Islands. The common law of the Cayman Islands is derived in part from comparatively limited judicial precedent in the Cayman Islands as well as from the common law of England, the decisions of whose courts are of persuasive authority, but are not binding, on a court in the Cayman Islands. The rights of our shareholders and the fiduciary duties of our directors under Cayman Islands law are not as clearly established as they would be under statutes or judicial precedent in some jurisdictions in the United States. In particular, the Cayman Islands 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. 75 Table of Contents Shareholders of Cayman Islands exempted companies like us have no general rights under Cayman Islands law to inspect corporate records or to obtain copies of lists of shareholders of these companies. Our directors have discretion under the second amended and restated memorandum and articles of association to determine whether or not, and under what conditions, our corporate records may be inspected by our shareholders, but are not obliged to make them available to our shareholders. This may make it more difficult for you to obtain the information needed to establish any facts necessary for a shareholder resolution or to solicit proxies from other shareholders in connection with a proxy contest. As a result of all of the above, our public shareholders may have more difficulty in protecting their interests in the face of actions taken by management, members of the board of directors or controlling shareholders than they would as public shareholders of a company incorporated in the United States. The Companies Law is modeled after that of England and Wales but does not follow recent statutory enactments in England. In addition, the Companies Law differs from laws applicable to United States corporations and their shareholders. Our second amended and restated memorandum and articles of association contain anti-takeover provisions that could discourage a third party from acquiring us, which could limit our shareholders’ opportunity to sell their shares, including Class A ordinary shares represented by our ADSs, at a premium. We have adopted the second amended and restated memorandum and articles of association, which became effective immediately prior to the completion 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 in change-of-control transactions. These provisions could have the effect of depriving our shareholders of an opportunity to sell their shares at a premium over prevailing market prices by discouraging third parties from seeking to obtain control of our company in a tender offer or similar transaction. For example, our board of directors has the authority, without further action by our shareholders, to issue preferred shares in one or more series and to fix their designations, powers, preferences, privileges, and relative participating, optional or special rights and the qualifications, limitations or restrictions, including dividend rights, conversion rights, voting rights, terms of redemption and liquidation preferences, any or all of which may be greater than the rights associated with our Class 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 in control of our company or make removal of management more difficult. If our board of directors decides to issue preferred shares, the price of our ADSs may fall and the voting and other rights of the holders of our Class A ordinary shares and ADSs may be materially and adversely affected. In addition, our second amended and restated memorandum and articles of association contain other provisions that could limit the ability of third parties to acquire control of our company or cause us to engage in a transaction resulting in a change of control, including a provision that entitles each Class B ordinary share to 10 votes in respect of all matters subject to a shareholders’ vote. These provisions could have the effect of depriving our shareholders of an opportunity to sell their shares at a premium over prevailing market prices by discouraging third parties from seeking to obtain control of our company in a tender offer or similar transaction. We are a foreign private issuer within the meaning of the rules under the Exchange Act, and as such we are exempt from certain provisions applicable to U.S. domestic public companies. Because we qualify as a foreign private issuer under the Exchange Act, we are exempt from certain provisions of the securities rules and regulations in the United States that are applicable to U.S. domestic issuers, including: • • the rules under the Exchange Act requiring the filing with the SEC of quarterly reports on Form 10-Q or current reports on Form 8-K; the sections of the Exchange Act regulating the solicitation of proxies, consents, or authorizations in respect of a security registered under the Exchange Act; 76 Table of Contents • • the sections of the Exchange Act requiring insiders to file public reports of their stock ownership and trading activities and liability for insiders who profit from trades made in a short period of time; and the selective disclosure rules by issuers of material nonpublic information under Regulation FD. We 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 the Group’s results on a quarterly basis as press releases, distributed pursuant to the rules and regulations of the NYSE. Press releases relating to financial results and material events will also be furnished to the SEC on Form 6-K. However, the information we are required to file with or furnish to the SEC will be less extensive and less timely compared to that required to be filed with the SEC by U.S. domestic issuers. As a result, you may not be afforded the same protections or information that would be made available to you were you investing in a U.S. domestic issuer. As a company incorporated in the Cayman Islands, we are permitted to adopt certain home country practices in relation to corporate governance matters that differ significantly from the NYSE corporate governance listing standards; these practices may afford less protection to shareholders than they would enjoy if we complied fully with the NYSE corporate governance listing standards. As a Cayman Islands company listed on the NYSE, we are subject to the NYSE corporate governance listing standards. However, the NYSE market rules permit a foreign private issuer like us to follow the corporate governance practices of its home country. Certain corporate governance practices in the Cayman Islands, which is our home country, may differ significantly from 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 Exchange Act); have a compensation committee or a nominating and corporate governance committee consisting entirely of independent directors; obtain shareholders’ approval for issuance of securities in certain situations; or have regularly scheduled executive sessions with only independent directors each year. We have relied on and intend to continue to rely on all of these exemptions. As a result, you may not be provided with the benefits of certain corporate 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 tax consequences to United States investors. The determination of whether or not we are a PFIC is made on an annual basis and will depend on the composition of our income and assets from time to time. Specifically, for any taxable year, we will be classified as a PFIC for United States federal income tax purposes if either (i) 75% or more of our gross income in that taxable year is passive income or (ii) the average percentage of our assets (which includes cash) by value in that taxable year which produce, or are held for the production of, passive income is at least 50%. For this purpose, passive income generally includes dividends, interest, royalties and rents (other than royalties and rents derived in the active conduct of a trade or business and not derived from a related person). The calculation of the value of our assets will be based, in part, on the quarterly market value of 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.” We consider the Group as a service provider with the primary business purpose of focusing on the Group’s data technology. However, the Group has historically funded, and may continue to fund, credit drawdowns with 77 Table of Contents its own capital. In such case, the fees received from borrowers may be treated as interest for purposes of the PFIC rules. Given the foregoing and based on the past and projected composition and classification of the Group’s income and assets, we believe that we may have been classified as a PFIC in 2020, there is a significant risk that we were classified as a PFIC for United States federal income tax purposes for 2021, and we may be classified as a PFIC for the current or future taxable years. If we are a PFIC for any taxable year during which you hold our ADSs or Class A ordinary shares, our PFIC status could result in adverse United States federal income tax consequences to you if you are a United States Holder, as defined under “Item 10. Additional Information—E. Taxation—Certain United States Federal Income Tax Considerations.” For example, if we are or become a PFIC, you may become subject to increased tax liabilities under United States federal 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 were not a PFIC for 2021 or will not be a PFIC in 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- Oxley Act of 2002, as well as rules subsequently implemented by the SEC and the New York Stock Exchange, impose various requirements on the corporate governance practices of public companies. These rules and regulations increase our legal and financial compliance costs and make some corporate activities more time-consuming and costly. We expect to continue to incur significant expenses and devote substantial management effort toward ensuring compliance with 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 becoming a public company, we have increased the number of independent directors and adopted policies regarding internal controls and disclosure controls and procedures. We also expect that operating as a public company will continue to make it more difficult and more expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. In addition, we incur additional costs associated with our public company reporting requirements. It may also be more difficult for us to find qualified persons to serve on our board of directors or as executive officers. ITEM 4. INFORMATION ON THE COMPANY A. History and Development of the Company The Group was founded in April 2014 and operated its business through Beijing Happy Time Technology Development Co., Ltd., or Beijing Happy Time. The Group initially operated its business by facilitating credit solutions to college students on campuses across China. Starting from November 2015, the Group shifted its focus to a broader base of young consumers in China, and the Group has terminated its on-campus business. Since July 2016, the Group has engage all borrowers as to its credit products through online channels. In September 2016, Qufenqi (Ganzhou) Information Technology Co., Ltd., or Ganzhou Qufenqi, was incorporated as a wholly foreign owned entity in China. In November 2016, we incorporated Qudian Inc. under the laws of the Cayman Islands as our offshore holding company, and subsequently, we established a wholly-owned subsidiary in the British Virgin Islands, QD Technologies Limited, in November 2016, and a wholly- owned subsidiary in Hong Kong, QD Data Limited, to be our intermediate holding company in December 2016, to facilitate our initial public offering in the United States. The entire equity interest of Ganzhou Qufenqi was transferred from its former holding company to QD Data Limited. As a result of the restructuring in 2016, we hold equity interest in Ganzhou Qufenqi through our current offshore structure. At the same time, Ganzhou Qufenqi entered into a series of contractual arrangements with Beijing Happy Time and its shareholders. In addition, pursuant to the resolutions of all shareholders of Qudian Inc. and the resolutions of the board of directors of Qudian Inc., the board of directors of Qudian Inc. or any officer authorized by such board will cause Ganzhou Qufenqi to exercise its rights under such contractual arrangements. As a result of these resolutions and 78 Table of Contents the provision of unlimited financial support from the Company to Beijing Happy Time, Qudian Inc. has been determined to be most closely associated with Beijing Happy Time within the group of related parties and was considered to be the primary beneficiary of Beijing Happy Time and its subsidiaries for accounting purposes. Ganzhou Qudian and Xiamen Qudian became Group VIEs in 2017. Xiamen Weipujia became a Group VIEs in 2018. Xiamen Qu Plus Plus became a Group VIE in 2019. We have entered into a series of contractual arrangements with each new Group VIE and its shareholders, which allows us to exercise effective control over each new Group VIE and realize substantially all of the economic risks and benefits arising from such new Group VIE. The contractual arrangements for each Group VIE, including those as to the new Group VIEs, contain substantively identical provisions that afford us, through our wholly-owned subsidiary Ganzhou Qufenqi, the right to control all of the Group VIEs in the same manner and degree. Mr. Min Luo, our founder, chairman and chief executive officer, and Mr. Lianzhu Lv, our head of user experience department, are the only shareholders of Ganzhou 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. Mr. Min Luo and Mr. Long Xu are the only shareholders of Xiamen Qu Plus Plus. We believe such shareholding structure will enhance our administrative efficiency and reduce uncertainties associated with the enforcement of the relevant contractual arrangements entered into with the Group 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 Group VIE and would only need to enforce against such shareholder(s) in the event of a breach. The establishment of any of these Group VIEs is not intended to, and will not, have an adverse impact on the rights of our ADS holders. For more information, see “Item 3. Key Information on the Company—D. Risk Factors—Risks Related to Our Corporate Structure—We rely on contractual arrangements with the Group VIEs and their shareholders to operate our business, which may be less effective as direct ownership in providing operational control and otherwise have a material adverse effect as to our business.” We currently conduct business in China mainly through the Group VIEs and their subsidiaries. Xiamen Weipujia does not currently engage in material business operations. Hunan Qudian Technology Development Co., Ltd., or Hunan Qudian, became a VIE of the Group in 2017. In January 2021, we completed the dissolution of Hunan Qudian and terminated the contractual arrangements with Hunan Qudian and its shareholders. The Group launched Wanlimu Kids Clubs, an early childhood education business, in January 2021. The Group currently operates the early childhood education business through Xiamen Wanlimu Growth, a subsidiary of Ganzhou Qudian. The Group plans to significantly downsize its Wanlimu Kids Clubs business. The Group launched QD Food, a ready-to-cook meals business in March 2022. The Group currently operates the ready-to-cook meals business through Xiamen Qudian and Shenzhen Qudian Supply Chain Co., Ltd., a subsidiary of Xiamen Qudian that was incorporated in February 2022. In July 2019, we issued US$345 million aggregate principal amount of 1.00% convertible senior notes due 2026 (including full exercise of the initial purchasers’ option to purchase additional notes), raising US$334.2 million in net proceeds to us after deducting underwriting discounts and commissions and other offering expenses. In connection with the offering of the convertible senior notes, we entered into capped call transactions with the initial purchasers and/or their respective affiliates and used approximately US$28.2 million of the net proceeds of the offering to pay the cost of such transactions. Our principal executive offices are located at Tower A, AVIC Zijin Plaza, Siming District, Xiamen, Fujian Province 361000, People’s Republic of China, 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 this annual report. The SEC also maintains a website at www.sec.gov that contains reports, proxy statements and other information regarding registrants that file electronically 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. 79 Table of Contents B. Business Overview Overview The Group is a consumer-oriented technology company in China. The Group historically focused on providing credit solutions to consumers. The Group has been exploring innovative consumer products and services to satisfy the fundamental and daily needs of Chinese consumers by leveraging its technology capabilities. The Group launched its ready-to-cook meal business, or “QD Food,” in March 2022. We believe there is vast market demand for ready-to-cook meals in China. Catering to working-class families, QD Food products are designed to offer a convenient cooking experience, fresh ingredients, flavorful tastes and value-for-money pricing. Consumers order QD Food products on their smartphones through the Group’s WeChat mini-program and Douyin. The recipes for QD Food products are primarily designed in-house, and the Group engages third-party facilities for food preparation. QD Food products are currently available in Guangdong province, and the Group plans to expand its product offerings to other cities in China. As of April 15, 2022, QD Food offered more than 30 stock keeping units, or SKUs, and over 80 thousand unique users have placed orders since the Group launched the service in March 2022. The typical price range of QD Food products is between RMB12.9 and RMB44.9 per SKU before discounts. Besides QD Food, the Group also operates a loan book business, whereby the Group offers small credit products to consumers and undertakes the related credit risk. In the three months ended December 31, 2021, the small credit products under the Group’s loan book business had an average size of approximately RMB2,800 (US$445) and weighted average term of approximately 3.9 months. In addition, the Group operated a transaction services business until the third quarter of 2021, whereby the Group offers loan recommendation and referral services to third-party financial service providers and assume no credit risk. In 2021, the Group facilitated RMB15,117.3 billion (US$2,372.2 billion) in transactions, 97.7% of such transactions were facilitated under the Group’s loan book business, and 2.3% were facilitated under the Group’s transaction services business. In light of the regulatory uncertainties in China’s online consumer finance market and to maintain its asset quality, the Group has implemented stringent credit standards for its credit business, which has led to a significant decrease in the amount of transactions facilitated in the first quarter of 2022. As a result, the Group expects its revenue to decline sequentially in the first quarter of 2022, compared with the fourth quarter of 2021. In addition, the Group expects further decreases in the total amount of transactions and related revenue in the second quarter of 2022. The Group will continue to evaluate conditions in the online consumer finance market and relevant regulatory developments. Based on this ongoing assessment, the Group may wind down its credit business. The Group generates (i) financing income, loan facilitation income and other related income and guarantee income from cash credit products and (ii) sales income from the QD Food business. The Group historically generated (i) financing income and sales commission fee from merchandise credit products and (ii) transaction services fee and other related income from the Group’s transaction services business. The Group also generated sales income from merchandise sales on the Wanlimu e-commerce platform, which the Group is in the process of winding down. In addition, the Group historically offered budget auto financing products, from which the Group generated sales income and financing income. The Group started to wind down its budget auto financing business in the second quarter of 2019. The Group’s total revenues decreased from RMB8,840.0 million in 2019 to RMB3,688.0 million in 2020, and decreased to RMB1,654.0 million (US$259.6 million) in 2021. The Group recorded net income of RMB3,264.3 million, RMB958.8 million and RMB585.9 million (US$91.9 million) in 2019, 2020 and 2021, respectively. 80 Table of Contents QD Food The Group launched its ready-to-cook meal business, or “QD Food,” in March 2022. Catering to working-class families, QD Food products are designed to offer a convenient cooking experience, fresh ingredients, flavorful tastes and value-for-money pricing. Consumers receive packaged ingredients and condiments, along with easy-to-follow cooking instructions. As of April 15, 2022, QD Food offered more than 30 SKUs, including both iconic dishes from major regional cuisines in China and popular family-style dishes. The broad product offerings enable the Group to meet diverse consumer preferences in China. The typical price range of QD Food products is between RMB12.9 and RMB44.9 per SKU before discounts. The Group has implemented a rigorous evaluation procedure for new dishes. Each new dish is subject to several rounds of tasting by the Group’s employees and external parties before being offered to consumers. The Group plans to periodically introduce new dishes to broaden consumers’ choices and enhance their experience. The Group has engaged several third parties to procure packaged ingredients and condiments. To maintain consistent product quality, the Group standardizes its products by providing detailed specifications for its suppliers to follow. The ingredients for the Group’s products include both meat products, which typically have shelf lives of up to 12 months, and fresh vegetables, which typically have shelf lives of a few days. To reduce waste, the Group places purchase orders for supplies based on prudent forecasts of consumer demand and aims to continuously optimize inventory management. Food safety is the Group’s top priority. The Group applies a comprehensive set of criteria to evaluate each prospective food supplier. Such criteria include, among other things, quality and safety of products, market reputation, qualifications, production capacities and pricing. The Group conducts site visits of food suppliers’ facilities both before engagement and periodically afterwards. During such site visits, the Group assesses whether the equipment and production environment at the facilities meet its food safety standards. The Group currently operates a fulfillment facility in Shenzhen. Packaged ingredients and condiments, which are shipped from suppliers, are assembled and packaged at the facility for delivery to consumers. The Group collaborates with third-party logistic service providers to deliver its products. QD Food products are currently available in Shenzhen, and the Group plans to expand its product offerings to other cities in China. The Group promotes QD Food through both popular social media platforms and offline advertising. Consumers order QD Food products on their smartphones through the Group’s WeChat mini-program. They have the option to receive the products either one or two days after ordering. As of April 15, 2022, over 80 thousand unique users have placed orders since the Group launched the service in March 2022. Credit Business The Group currently operates a loan book business, whereby the Group offers small cash credit products to consumers and undertakes the related credit risk. Loan Book Business Small Credit Products Under the Group’s loan book business, the Group offers small cash credit products to consumers and undertakes the related credit risk. Users can access the Group’s small credit products through the Group’s mobile apps. Small credit products typically have short durations, enabling the Group to quickly understand a borrower’s behavior and further refine the Group’s data analytics and credit assessment model. Small credit products also enjoy favorable risk characteristics compared to larger credit products. A borrower is more likely to repay a smaller amount on time to maintain the quality of his or her credit profile, which may impact future borrowing activities. Benefits to fraudulent borrowers are also limited given the small amount of money borrowed. 81 Table of Contents The Group’s cash credit products comprise short-term, unsecured lines of credit that can be drawn down at any time, subject to the Group’s approval at the time of each drawdown request. Prospective borrowers complete an application and receive a decision on their application in as quick as a few seconds. When a credit is drawn, the money is deposited directly into the borrower’s specified digital account and can be used anywhere such digital account is accepted. Borrowers are typically charged financing service fees for cash credit drawdowns. In the three months ended December 31, 2021, the Group’s cash credit products had an average size of approximately RMB2,900 (US$452) and weighted average term of approximately 3.9 months. Historically, the Group also offered merchandise credit products to finance borrowers’ direct purchase of merchandise offered on the Qudian marketplace on installment basis. The Qudian marketplace connected consumers with merchandise suppliers. The Group neither sold merchandise nor held inventory for the Qudian marketplace. Customers accessed the Qudian marketplace through mobile apps. Only customers with approved merchandise credit limits could make purchases, and the Group required a minimum amount of each purchase to be funded by utilizing the Group’s credit product. In the event the credit drawdown were insufficient to purchase the relevant merchandise, borrowers needed to pay for the portion that was not covered by the credit products using their own funds. A borrower could also voluntarily pay a portion of the purchase price with his or her own funds. The Group collaborated with merchandise suppliers to offer a broad variety of merchandise covering primarily consumer electronics, home appliances, watches and accessories, sports and outdoor merchandise and luggage. Borrowers were typically charged financing service fees for merchandise credit drawdowns. The Group also earned sales commission fee from its merchandise suppliers for the intermediary services rendered. The Group ceased to provide merchandise credit products in January 2022. The Group utilizes its proprietary data analytics and credit assessment model to determine the amount of credit available for each borrower. For information regarding credit assessment, see “—Credit Approval and Servicing Process—Stage 3: Credit Assessment.” Borrowers’ credit limits are not the same as revolving lines of credit which can be utilized and paid down and utilized again because the Group has the right to not approve any additional draw downs. Upon receipt of a drawdown request, the Group’s credit assessment model and risk management system 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, they may choose between several installment plans of different durations and financing service fees. The terms of the credit products are clearly stated in the electronic borrowing agreements borrowers enter into with the Group upon drawdowns: • • • • • Installments. Borrowers are generally required to make fixed weekly or monthly payments. The combined total represents the loan principal and financing service fees charged to borrowers. Durations. Durations of credit products facilitated typically range from one to 18 months for cash credit products as of the date of this annual report. Prepayments. Borrowers may pay off their account balance in full at any time, and the amount of repayment will be calculated based on actual duration of the loan prior to the prepayment. 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 amount past due. Repayment method. Repayments are made through the borrower’s specified digital 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 are unused credit remaining, subject to the Group’s approval at the time of each drawdown request. Borrowers are not allowed to roll over cash credit products upon maturity or otherwise change the terms of the transactions. 82 Table of Contents Budget Auto Financing Products The Group historically offered budget auto financing products in the form of sales-type finance leases and vehicle sales with guarantee under the Dabai Auto brand. The Group started to wind down its budget auto financing business in the second quarter of 2019. In the case of sales-type finance leases, the Group purchased cars on its inventory and leased them to creditworthy car buyers. Each car buyer was required to make a down payment and pay installments throughout the term of the lease. The legal title of the car was transferred to the car buyer upon full repayment. In the case of vehicle sales with guarantee, the Group sold vehicles to buyers and provided loan facilitation services to funding partners who provided financing to the vehicle buyers. The buyer obtained control of the vehicle when the borrower physically possessed the vehicle and when the Group received cash consideration for the vehicle from the buyer. The Group received recurring service fees from the financial institution for the Group’s loan facilitation services and post-origination services throughout the term of the loan. In addition, the Group provided a guarantee on the principal and accrued interest repayments of the defaulted loans to the financial institution. Risk Management To maintain healthy credit performance, the Group developed a rigorous credit assessment model and robust risk management system. Fraud Prevention The Group’s fraud prevention system identifies suspicious activities effectively and accurately with minimum friction in user experience. Machine learning enables the Group 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. The Group aggregates data from both internal and external sources and undertake multiple steps to identify frauds: • • Information Authentication. The Group uses information from external databases to match the information provided by the prospective borrower. If the relevant information does not match, such application will be declined. Restricted List Search. The Group collaborates with other institutions to screen prospective borrowers who are on restricted lists maintained by such institutions. The Group utilizes such lists which contain individuals whose records indicate higher risk of fraud. Credit Assessment The Group’s credit assessment system consists of multiple modules: Admission Module. Under this module, the Group assesses applicants based on their basic background information, such as age and the geographical regions where they are located; Redline Module. Under this module, the Group excludes certain ineligible applicants, such as students and applicants on restricted lists maintained by other institutions that the Group collaborates with; Enhanced Rule Module. Under this module, the Group identifies high risk applicants, such as applicants with a history of severe delinquency or have a record of borrowing from a large number of lenders. QD score is also one of the key factors the Group considers under the enhanced rule module to assess applicants; • • • QD Score QD score analyzes a large number of variables for each transaction and enable the Group to better differentiate between creditworthy borrowers and lower quality borrowers. For repeat borrowers, the Group uses 83 Table of Contents borrowers’ transaction data on the Group’s platform. The large number of credit transactions facilitated on the Group’s platform gives the Group 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 0 to 1,000. The Group offers borrowers with better credit quality progressively higher credit limits. In 2021, credit limits assigned to eligible borrowers ranged approximately from RMB500 to RMB25,000. The Group’s Risk Management Team The Group has established a risk management team comprising of 87 employees as of December 31, 2021. The Group’s risk management team meets regularly to examine the credit and enterprise risks of the Group, and is intimately involved in portfolio management, credit model development, validation and optimization. Tasks performed by the Group’s risk management team includes reporting on origination trends, monitoring of portfolio performance and stability, risk concentrations, building and maintaining credit models, performing economic stress tests on the Group’s portfolio, optimizing credit decisioning processes and conducting peer benchmarking and exogenous risk assessments. A majority of the Group’s risk management team members are responsible for credit management and collection. The Group has implemented payment and collection policies and practices, included through automated repayment process in which borrowers authorize deduction from their specified digital accounts for the amount of scheduled repayments. These policies and practices are designed to optimize regulatory compliant repayment, while also providing superior borrower experience. The Group’s collections teams are trained to help borrowers to understand the value of their credit profile, explore available payment alternatives and make reasonable arrangements to repay outstanding balances. The Group’s employees contact borrowers following the first missed payment and periodically thereafter. The Group’s primary methods of contacting past due borrowers are to send reminders through text, voice and instant messages, phone calls, letters and emails. The Group applies a machine learning algorithm to better allocate collection resources based on more detailed grouping of larger delinquency risk. The algorithm places delinquent borrowers into different groups based on internal blacklist check, credit history and QD score. Higher risk groups are allocated with more collection resources as the likelihood of their outstanding balance becoming longer-term delinquent or even uncollectable is generally higher. We expect to both improve the Group’s collection efficiency and reduce delinquency under this algorithm. Pricing Credit limits for small credit products are determined based on assessments performed by the Group’s proprietary credit assessment model and risk management system. The Group’s credit assessment model takes into account factors such as identity characteristics, credit history, payment overdue history, payment capacity, behavioral characteristics and online social network activity, and assign each borrower a personalized credit limit based on his or her credit profile. The Group continually reviews and assesses 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 build credit histories with the Group. Based on the credit histories, the Group’s artificial intelligence-based credit assessment model enables the Group to continually re-evaluate borrowers’ credit profiles and provide more personalized credit limits. The Group offers borrowers with stronger credit profiles higher credit limits and longer repayment durations, thereby driving higher engagement with them. Pricing for credit drawdowns borrowed under cash credit products are quoted in the form of the size of each installment payment and the number of installments required. For cash credit products, the combined total 84 Table of Contents represents the loan principal and financing service fees charged to borrowers. A credit product with duration of one week only requires a one-time payment upon maturity. A penalty fee for late payment is imposed as a daily penalty rate of the amount past due. All fees are clearly disclosed to the borrower upfront when the transaction is facilitated. In an effort to comply with potentially applicable laws and regulations, the Group adjusted the pricing of its credit products in April 2017 to ensure that the annualized fee rates charged on all credit drawdowns do not exceed 36%. The financing service fee of a credit product is determined by its size and duration. Credit products of larger size and longer duration generally correspond to higher amount of financing service fees. For borrowers with strong credit profiles, the Group may offer them discounts as to financing service fees. In addition, the Group hold promotional campaigns from time to time and charge lower financing service fees during such campaigns. Transaction Services Business In the fourth quarter of 2018, the Group launched an open platform for transaction services business. The transaction services business allowed the Group to monetize its user base and mitigate its credit risk exposure. The Group performed credit assessment on users applying for credit on its platform, following which the Group referred users that met the Group’s credit requirements to licensed institutional funding partners that participated on the platform. The Group received commissions from the institutional funding partners for such referrals. The Group ceased to provide transaction services through its open platform in the third quarter of 2021. Borrowers The Group targets hundreds of millions of young, tech-savvy and mobile-active consumers in China who are underbanked and underserved but eager to access small credit for their discretionary spending. As the Group has been focused on providing credit products to young consumers across China, the Group has gained extensive experience and understanding into the behavior and consumption preference of such demographic of users since its inception. The Group primarily engages borrowers through its mobile applications. In response to the uncertainties that came with the COVID-19 pandemic, the Group adopted a more conservative business strategy and implemented more stringent credit approval standards, as the Group has only provided credit products to customers with better credit histories since early 2020. As of December 31, 2019, 2020 and 2021, approximately 33.8 million, 33.8 million and 33.8 million registered users were approved with credit, respectively. As of December 31, 2019, 2020 and 2021, the Group’s outstanding borrower base was 6.1 million, 3.5 million and 2.8 million, respectively. Funding The Group collaborates with institutional funding partners to fund transactions under the loan book business. Historically, the Group also collaborated with institutional funding partners in connection with the transaction services business. While the Group bears credit risk for transactions under the loan book business, the Group did not bear credit risk for transactions under the transaction services business. 85 Table of Contents The table below sets forth a breakdown by funding sources for total amount of transactions in the periods presented: On-balance sheet transactions: Credit drawdowns that were funded by institutional funding partners Credit drawdowns transferred to institutional funding partners Credit drawdowns funded through trusts(1) Credit drawdowns that were funded by the Group’s own capital Total on-balance sheet transactions Off-balance sheet transactions Transactions under the loan book business Transactions under the transaction services business Total Year Ended December 31, 2019 RMB 2020 RMB 2021 RMB US$ (in thousands) 6,827,311 477,200 6,350,111 611,751 — 611,751 15,933,116 17,683,191 22,760,427 18,294,942 38,080,279 97,879 60,840,706 18,392,821 — — — 14,636,497 14,636,497 128,368 14,764,865 23,683,642 4,020,778 84,524,348 22,413,599 352,402 15,117,267 — — — 2,296,786 2,296,786 20,144 2,316,929 55,300 2,372,229 (1) Excludes credit drawdowns funded by the Group’s 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 On-balance sheet transactions: Credit drawdowns that were funded by institutional funding partners Credit drawdowns transferred to institutional funding partners Credit drawdowns funded through trusts(1) Credit drawdowns that were funded by the Group’s own capital Total on-balance sheet transactions Off-balance sheet transactions Transactions under the loan book business Transactions under the transaction services business Total Year Ended December 31, 2019 2020 2021 % 2.7 — 2.7 78.9 81.6 0.5 82.1 — — — 96.8 96.8 0.8 97.7 8.1 0.6 7.5 18.9 26.9 45.1 72.0 28.0 17.9 2.3 100.0 100.0 100.0 (1) Excludes credit drawdowns funded by the Group’s own capital through trusts. The Group selects funding sources to fund credit facilitated by the Group based on various factors, including the fees charged by such funding sources, amount of the credit drawdowns to be funded, the credit drawdown requirement of the funding sources at that time and the timing of the availability of fund from the funding 86 Table of Contents sources. Under the loan book business, the financing service fee of a small credit product is determined by its size and duration, instead of the funding arrangement related to the transaction. For more information, see “—Pricing.” Under the transaction services business, the pricing terms for the transactions were determined by the relevant financial service providers. Funding Provided Directly by Institutional Funding Partners and Guaranteed by Us The Group has entered into cooperative agreements with certain banks in China and fund credit drawdowns to borrowers under such arrangements. The banks are able to utilize the Group’s data-driven credit assessment model to screen potential borrowers who are traditionally underserved by banks due to the lack of credit data. Under such agreements, the Group refers to such banks qualified credit applications from borrowers, including the Group’s assessment of their credit profiles and the Group’s suggested credit limits. They will then review the credit applications independently in accordance with their credit assessment standards 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 fees directly 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 the Group as its loan facilitation fees. When the borrower defaults, the Group is obligated to repay the full overdue amount to the relevant banks. The Group also entered into collaborations with consumer finance companies and small credit companies pursuant to which the consumer finance companies and small credit companies funded the credit the Group facilitated for the borrower directly. Such arrangements with the consumer finance companies and small credit companies were similar to those entered into with banks. In 2021, the amount of transactions facilitated under these arrangements with institutional funding partners for the Group’s cash credit products were RMB128.4 million (US$20.1 million). The Group recognizes loan facilitation fees earned from institutional funding partners as loan facilitation income and other related income, which were RMB39.5 million (US$6.2 million) in 2021. Subsequent to January 1, 2020, the non-contingent aspect of the risk assurance liability is subsequently recognized as guarantee income over the term of the arrangement as the Group is released from the stand ready obligation based on the borrower’s repayment of the loan principal, which were RMB3.9 million(US$0.6 million) in 2021. At the inception of each credit drawdown directly funded by institutional funding partners, the Group records the fair value of (i) guarantee liabilities, which represent the present value of the Group’s expected payout based on the estimated delinquency rate and the applicable discount rate for time value; or (ii) risk assurance liabilities, which considers the premium required by a third-party market participant to issue the same risk assurance in a standalone transaction, as applicable. The contingent loss rising from risk assurance liabilities is recognized when borrower default is probable, and the amount of loss is estimable. Subsequent to January 1, 2020, the contingent liability relating to the expected credit losses arising from the contingent aspect of the risk assurance liability is initially measured under the CECL model in accordance with ASC 326. As of December 31, 2021, guarantee liabilities and risk assurance liabilities under the Group’s arrangement with institutional funding partners was RMB0.9 million (US$0.1 million). Funding Provided through Trusts Institutional funding partners, including banks, asset management companies and other institutions, also historically provided credit indirectly to borrowers through trusts the Group established in collaboration with trust companies. Each trust has a specified term. The Group consolidates the trusts’ financial results in its consolidated financial statements in accordance with U.S. GAAP. Institutional funding partners invested in the Group’s trusts in the form of trust units, which entitled the institutional funding partner to a fixed rate of return on the investment. 87 Table of Contents The Group currently funds trusts with its own capital. In 2021, the amount of transactions facilitated through trusts was RMB14,459.3 million (US$2,269.0 million), all of which was funded with the Group’s own capital. Since the trust company administering such trusts has been licensed by financial regulatory authorities to lend, credit drawdowns funded under such arrangement are not private lending transactions within the meaning of the Second Revised Private Lending Judicial Interpretation issued by the Supreme People’s Court of the PRC in December 2020. As a result, under such arrangement, the Group will not be deemed as a lender or a provider of financial services by the PRC regulatory authorities or becoming subject to supervision and restrictions on lending under the applicable laws and regulations. Funding Arrangements with Banks Involving the Group’s Own Capital In 2020, the Group entered into arrangements with certain banks whereby such financial institutions act as channels for the Group to fund credit drawdowns with the Group’s own capital. The Group bears the full credit risk for such credit drawdowns, and the Group records such credit drawdowns on its balance sheet. In 2021, there was no capital funded under such arrangements. The Group historically funded certain credit drawdowns with its two small credit companies. Funding Arrangements under the Transaction Services Business In the fourth quarter of 2018, the Group launched an open platform for transaction services business. The Group performed credit assessment on users applying for credit on its platform, following which the Group primarily referred users that meet the Group’s credit requirements to licensed institutional funding partners that participated on the platform. The Group received commissions from the institutional funding partners for such referrals. The Group ceased to provide transaction services through its open platform in the third quarter of 2021. The financial service providers performed independent credit assessment for the transactions facilitated under the Group’s transaction services business, and the Group did not bear credit risk for the transactions. In 2021, the Group facilitated RMB352.4 million (US$55.3 million) of transactions under its transaction services business. The Group’s Collaboration with Ant Financial In September 2015, Ant Financial’s wholly owned subsidiary API (Hong Kong) Investment Limited became a shareholder of Qufenqi Inc., a former holding company of Beijing Happy Time. The Group started to engage prospective borrowers through the Alipay consumer interface in November 2015. Since then, the Group has continued to collaborate with Ant Financial in certain areas of the Group’s business. In connection with the Group’s restructuring in 2016, API (Hong Kong) Investment Limited became one of the principal shareholders of Qudian Inc., and it ceased to be our principal shareholder in April 2019. In addition, the Group ceased to engage borrowers through the Alipay consumer interface in July 2019. Payment Processing and Settlement. Borrowers receive proceeds from credit drawdowns as well as make repayments through their Alipay accounts. For on-balance sheet transactions, the Group disburses funds to, and collect repayments from, borrowers through the Group’s Alipay accounts. For off-balance sheet transactions, the Group’s institutional funding partners utilize their own Alipay accounts and transact with borrowers directly. The Group has entered into agreements with Ant Financial for payment processing and settlement services in connection with the Group’s Alipay accounts. Pursuant to such agreements, the Group is charged a fixed amount for each credit drawdown funded by the Group’s Alipay accounts as well as a percentage of each repayment made to the Group’s Alipay accounts. The payment processing and settlement agreements typically provide for an initial term of one year, which can be automatically renewed unless either party provides notice to the other of its decision not to renew 30 days prior to the expiration of the relevant agreement. 88 Table of Contents Historical Collaborations. The Group used to cooperate with Zhima Credit for their credit service and credit analysis collaboration. Under the Group’s agreements with Zhima Credit, Zhima Credit would provide the Group with credit analysis information of prospective users and the Group would also share insights into the application of data technology to the Group’s own credit analysis models with Zhima Credit. The Group has ceased to collaborate with Zhima Credit as the relevant agreements expired in September 2018. The Group also used to engage borrowers through different channels on the Alipay consumer interface, and the Group ceased to engage borrowers through such interface in July 2019. In October 2016 the Group formed a joint venture with Ant Financial, QuCampus, a company organized under the laws of the PRC. In September 2020, Ant Financial transferred its equity interests in QuCampus to the Group for a consideration of RMB3.2 million. We had completed the dissolution of QuCampus in August 2021. Credit Approval and Servicing Process We believe that the Group provides a convenient and user-friendly credit application process, a credit assessment mechanism that accurately determines an applicant’s creditworthiness and a superior overall user experience. The Group’s proprietary credit assessment model and risk management system enables the Group to provide an automated online application process that aims to provide a simple, seamless and efficient experience to users. Prospective borrowers may complete the application and receive a decision on their application as quick as a few seconds. Approved borrowers are then able to draw down on their cash credit with funds available in their specified digital accounts within a few minutes. The Group has created a simple and quick process for users to apply for small credit products under the loan book business as described below. Stage 1: Online Credit Application The Group’s online credit application process begins with the submission of a credit application by a prospective borrower. A typical prospective borrower is a 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 mobile phone number for authentication. Given the significant coverage of Alipay in China, we believe most of the targeted borrowers have completed this part of registration process before applying for credit from the Group. A registered Alipay user can apply for credit through the Group’s mobile apps. As part of the credit application process, the prospective borrower is asked to provide basic personal information that typically includes their name, PRC identity card information, mobile phone number and their authorization for the Group to run a credit background check and access to their GPS location while in use. Stage 2: Data Aggregation and Verification Upon receiving a completed application by a prospective borrower, the Group’s proprietary risk management system and fraud prevention system are populated with information from the submitted credit application, including, with authorization of the relevant users, credit analysis for such prospective borrower provided by third parties. For borrowers who have established certain credit histories with the Group, the Group’s credit assessment model places a strong focus on data from internal sources, such as such borrowers’ repayment and delinquency record. This data is then used to verify applicants’ identity and for fraud detection. The Group utilizes restricted list searches provided by third-parties as well as the Group’s proprietary machine learning algorithms to screen for fraudulent applications. Applicants identified to present higher risk of fraud are declined by the Group’s fraud prevention system. 89 Table of Contents Stage 3: Credit Assessment After completion of the data aggregation and verification process, the prospective borrower’s application either proceeds to the next phase of the application process or the prospective borrower is notified of the decision that the application is declined. The Group’s proprietary credit assessment model has been powered by the Group’s massive database. The Group’s proprietary data analytics and credit assessment model is optimized to fit the realities of the Chinese market and tailored for each channel through which the Group engages prospective borrowers, using big data and fast data from sources that target borrowers in China. The Group’s credit assessment model uses the Group’s own scoring criteria, and is routinely monitored, tested, updated and validated by the Group’s risk management team. Following credit evaluation, the Group’s credit determination system makes a determination as to whether the applicant is qualified, and a qualified borrower receives short-term, unsecured amount of credit. Unqualified applicants are notified of the decision of their applications being declined, although such applicants are not prohibited from applying again in the future. Building on the experience and data the Group has gained since its inception, the Group has developed a new credit assessment system, QD score. Continuously refined by machine learning algorithms and the high volume of transaction data the Group collects, QD score analyzes a large number of variables for each transaction and enables the Group to better differentiate between creditworthy borrowers and lower quality borrowers. Stage 4: Credit Utilization Once the credit application is approved, borrowers can request drawdowns under their respective credit limits. Upon receipt of a drawdown request, the Group’s credit assessment model and risk management system normally review the application and re-evaluate the creditworthiness of such borrower to ensure that he or 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 the borrower 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 the Group’s approval at the time of each drawdown request. Once the drawdown request is approved, the Group or the Group’s 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 the Group does not approve a drawdown request, the Group aims to notify the relevant customer of such decision within ten minutes after the request is made. Stage 5: Servicing and Collection The Group utilizes an automated process to help borrowers to make their scheduled payments. Upon origination, the Group establishes a payment schedule with payment occurring on a set business day each month or week. Borrowers then make scheduled repayments online, or authorize deduction from their specified digital accounts the amount of scheduled repayments. In 2021, most of the scheduled repayments were made automatically from the borrowers’ specified digital accounts. For borrowers who do not use the automated repayment process, the Group provides payment reminder services, such as sending reminders through text and instant messages on the day a repayment is due. Once a repayment is past due, the Group also sends additional reminder text and instant messages during the first two calendar days of delinquency. The Group’s collection efforts extend to every delinquent borrower under the Group’s loan book business. The Group’s collection strategies are divided into different categories, which dictate the types of collection methods the Group uses, based on the severity of delinquency and the borrower’s “C card score.” The C card 90 Table of Contents score analyzes borrowers’ personal information, such as gender, age, residence, education, occupation and marriage status, QD score and other credit history and related information. The Group uses different collection methods tailored to borrowers with different C card scores to optimize the efficiency of the Group’s collection effort. For example, the Group’s collection system may determine whether to remind borrowers through text, instant messages, automated voice calls or phone calls and the frequency of such reminders. The Group informs the relevant borrowers of the adverse impact of delinquencies on their credit histories, which may convince such borrowers to pay the amounts past due. The Group may stop collection efforts when credit drawdowns are 180 calendar days overdue and collection attempts have reached a certain number. In the event of (i) death of the borrower, (ii) identification of fraud, and the fraud is officially reported to and filed with relevant law enforcement departments or (iii) the amount remained outstanding 180 calendar days past due and therefore deemed uncollectible, the Group will charge off the relevant outstanding amount. Substantially all of the Group’s charge-offs since the Group’s inception were due to amounts that remain outstanding 180 calendar days past due and therefore deemed uncollectible. Marketing and Borrower Engagement The Group’s marketing efforts are primarily online, and the Group uses an array of online marketing channels to attract borrowers. In addition to engaging borrowers through the Group’s mobile applications, the Group also utilizes other leading Internet and mobile platforms in China, including leading Android app stores in China and Apple App Store, to obtain qualified leads for prospective new borrowers. The Group does not currently pay any fees to acquire leads through Android app stores and Apple App Store. The Group employs and continually optimizes the relevant key words associated with the Group’s apps to enhance users’ ability to find the Group’s apps in such stores. Early Childhood Education Business The Group launched Wanlimu Kids Clubs, an early childhood education business in January 2021. The Group offers various early childhood education services for young children to participate in. The Group operated six Wanlimu education centers as of February 28, 2022. Due to the negative impact of the COVID-19 pandemic and the tightened regulations concerning the education industry, the Group has significantly downsized its Wanlimu Kids Clubs business. E-commerce Business The Group launched the Wanlimu e-commerce platform, which offers online luxury fashion products, in March 2020. The Group is in the process of winding down this business to focus on its other service offerings. The Group’s Information Technology and Security Overview The Group’s network is configured with multiple layers of security modules to isolate the Group’s databases from unauthorized access. The Group uses sophisticated security protocols for communication among applications and the Group encrypts private information, such as an applicant’s identification number. The Group’s technology infrastructure is fully deployed, and the Group’s data is entirely maintained, on a customized cloud computing system. The Group has multiple layers of redundancy to ensure reliability of its systems and services. The Group also has a working data redundancy model with comprehensive backups of its databases and software. The Group’s technology and product development department, which comprised 78 employees as of December 31, 2021, including core team members with extensive experiences with leading Internet, online retail 91 Table of Contents and mobile commerce and fintech companies in China, focuses on the following that support the Group’s long-term business growth: • • maintaining and strengthening the Group’s proprietary data and analytics systems, including the Group’s decisioning engine, proprietary risk management system and fraud prevention system; and ensuring the Group’s technology system, including front-end and back-end management systems, collection systems, financial systems, security protocols and business continuity plans are well established, reviewed, tested and continuously strengthened. Technology System The Group’s proprietary technology system, which supports all key aspects of the Group’s online platform, is designed to optimize for scalability and flexibility. The system is designed to handle the large volume of data required to evaluate a large number of prospective borrower applications quickly and accurately and to manage a large number of borrowers yet flexible enough to capitalize on changing user preferences, market trends and technological advances. The Group’s software development life cycle is rapid and iterative to increase the efficiency and capacity of the Group’s system. The Group is able to implement software updates while maintaining the Group’s system stability. The Group continually employs technological innovations to improve its technology system, which performs a variety of integrated and core functions, including: • Financial systems. Systems that manage the external interface for funds transfers, including integration of the Group’s system with those of the institutional funding partners to ensure a seamless experience for the borrowers and the institutional funding partners, as well as for the management of daily financial and accounting, reconciliation and reporting functions. Such systems include, among others: • Transaction syndication and clearing system. The Group has developed a highly automated transaction syndication and clearing system that is capable of rapidly facilitating a massive number of transactions under a diverse array of funding arrangements. The system has been seamlessly integrated with the systems of the Group’s licensed institutional funding partners, including banks. For a small credit application that can be funded by a single funding source, it automatically selects the proper funding source for each credit drawdown based on the large number of funding criteria specified by the Group’s institutional funding partners. For a large credit application, it can syndicate the credit commitment among the Group and its institutional funding partners based on their funding criteria. The system also separates payments from borrowers into the relevant categories, namely, principals, financing service fees, fees payable to institutional funding partners and penalty fees on a real-time basis and settles with the relevant funding partners on a same-day basis. The system adapts to new funding arrangements quickly. For example, it typically takes two days to complete the configuration for a new trust and two weeks to do so for a new off-balance sheet funding arrangement with a bank. The advanced and efficient system allows the Group to quickly match demand with institutional funding with appropriate risk appetite, thereby providing credit to consumer instantaneously. • Liquidity forecast system. The system provides real-time forecasts on the Group’s funding needs by monitoring the fund inflows and outflows, and such forecasts are valuable information for the Group to manage liquidity. • Security. The Group collects and stores personally identifiable user information, including names, addresses, identification information and financial accounts information for the sole purpose of individual credit assessment. The Group retrieves this information with user’s consent and have safeguards designed to protect such information, including the application of Advanced Encryption Standard, or AES. The Group stores its data in encrypted form, which offers an additional layer of protection. The Group also verifies data interchange with its institutional funding partners using digital signatures, which enhances the security of such interchange. The Group also has created controls to limit employee access to such information and to monitor access. 92 Table of Contents • • • Front-end systems. Include external interfaces and mobile apps that users use when applying for credit and managing their accounts. Back-end management systems. The Group’s back-end systems include, among other things, the Group’s 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 phone system. Competition The online consumer finance industry in China is intensely competitive and the Group competes with other consumer finance service providers in general. The Group competes with other financial products and companies that attract borrowers, institutional funding partners or both. For example, with respect to borrowers, the Group competes with other consumer finance service providers, including online consumer finance services, as well as traditional financial institutions, such as banks and consumer finance companies. Principal methods of competition include enhancing data analytics capabilities, engaging borrowers cost effectively and strengthening funding sources. 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 believe that the Group’s brands, scale, network effects, historical data and performance record provide the Group with competitive advantages over existing and potential competitors. The markets in which the QD Food business competes are rapidly evolving and intensely competitive, and the Group faces an array of competitors from different industry sectors. The Group’s current and potential competitors include, among others, (1) other online food and meal delivery companies, (2) a wide array of food retailers, such as supermarkets and convenience stores, (3) e-commerce platforms and (4) casual dining and quick- service restaurants. We believe that the principal competitive factors upon which QD Food competes include: product quality, customer satisfaction, convenience, food safety, price and value perception, brand recognition, as well as reliable and timely fulfillment. Intellectual Property We regard the Group’s trademarks, domain names, copyrights, know-how, proprietary technologies and similar intellectual property as critical to the Group’s success, and the Group relies on trademark and trade secret law and confidentiality, invention assignment and non-compete agreements with the Group’s employees and others to protect the Group’s proprietary rights. The Group has registered 383 trademarks in the PRC for “趣店”, “Qufenqi” and other trademarks. The Group also has 169 trademarks under application in the PRC. The Group is the registered holder of 174 domain names in the PRC that include qudian.com and laifenqi.com. The Group was also granted 74 copyrights that corresponding to the Group’s proprietary techniques in connection with its systems. Seasonality The Group experiences seasonality in its credit business, reflecting a combination of seasonality patterns of the retail market and the Group’s promotional activities. In recent years, many online and offline retailers in China hold promotions on November 11 and December 12 of each year, which drives significant increase in retail sales. Higher retail sales during the shopping seasons may generate greater demand for the Group’s credit products. As a result, the Group may record higher total revenues during the fourth quarter of each year 93 Table of Contents compared to other quarters. On the other hand, the Group’s total revenues for the first quarter tend to be lower due to the Chinese New Year holiday that generally reduces borrowing activities. Overall, the historical seasonality of the Group’s business has been mild. Due to the Group’s limited operating history, the seasonal trends that it has experienced in the past may not apply to, or be indicative of, its future operating results. The Group may experience seasonality in the QD Food business. However, as the Group only launched the business recently, it has not observed any seasonal trends relating to QD Food. Insurance The Group provides social security insurance including pension insurance, unemployment insurance, work-related injury insurance and medical insurance for its employees. The Group also purchased employer’s liability insurance and additional commercial health insurance to increase insurance coverage of its employees. The Group does not maintain property insurance policies covering its equipment and other property that are essential to the Group’s business operation to safeguard against risks and unexpected events. The Group does not maintain business interruption insurance or general third-party liability insurance, nor does the Group maintain product liability insurance or key-man insurance. We consider the Group’s insurance coverage to be sufficient for the Group’s business operations in China. Licenses and Permissions Requirements The below table sets forth material permissions and/or licenses the Group has obtained for its operations in China. The Group has received all material permissions that are, or may be, required for its operations in China, and no material permission has been denied from the Group by relevant authorities in China. However, the Group is subject to risks relating to the regulatory environment in China. See “Item 3. Key Information—D. Risk Factors— Risks Related to Doing Business in China—There are uncertainties regarding the interpretation and enforcement of PRC laws, rules and regulations. In addition, rules and regulations in China can change quickly with little advance notice.” Company Name Xiamen Youxiang Time Technology Co., Ltd.(厦门优享时代科技服务有限公司) Company Status Our PRC subsidiary Xiamen Qu Plus Plus Technology Development Co., Ltd.(厦门趣加加科技发 展有限公司) Group VIE Name of Permission/License Business License Business License ICP License Beijing Happy Time Technology Development Co., Ltd.(北京快乐时代科技 发展有限公司) Qufenqi (Ganzhou) Information Technology Co., Ltd.(趣分期（赣州）信息 技术有限公司) Xiamen Happy Time Technology Co., Ltd.(厦门快乐时代科技有限公司) Group VIE Business License Our PRC subsidiary Business License Our PRC subsidiary Business License 94 Governing Government Authority Administration for Market Regulation of Xiamen City Administration for Market Regulation Tong An District of Xiamen City Fujian Communications Administration Administration for Market Regulation Haidian District of Beijing City Administration for Market Regulation of Ganzhou City Administration for Market Regulation of Xiamen City Table of Contents Company Name Company Status Name of Permission/License Governing Government Authority Xiamen Qudian Financial Lease Ltd.(厦门 趣店融资租赁有限公司) Our PRC subsidiary Business License Ganzhou Qudian Technology Co., Ltd.(赣 州趣店科技有限公司) Xiamen Qudian Technology Co., Ltd.(厦 门趣店科技有限公司) Group VIE Business License Group VIE Business License Service Provider License ICP License ODPTP License Xiamen Weipujia Technology Co., Ltd.(厦 门唯谱家科技有限公司) Tianjin Happy Time Technology Development Co., Ltd.(天津快乐时代科技 发展有限公司) Tianjin Qufenqi Technology Co., Ltd.(天 津趣分期科技有限公司) Qufenqi (Beijing) Information Technology Co., Ltd. (趣分期（北京）信 息技术有限公司) Group VIE Business License Subsidiary of a Group VIE Business License Subsidiary of a Group VIE Business License Subsidiary of a Group VIE 95 Business License ICP License Administration for Market Regulation of Xiamen City Administrative Examination and Approval Bureau of Ganzhou Economic Technological Development Zone Administration for Market Regulation of Xiamen City Ministry of Industry and Information Technology of the PRC Fujian Communications Administration Fujian Communications Administration Administration for Market Regulation of Xiamen City Administration for Market Regulation of Sino-Singapore Tianjin Eco-City Administration for Market Regulation of Sino-Singapore Tianjin Eco-City Administration for Market Regulation Haidian District of Beijing City Beijing Communications Administration Table of Contents Company Name Company Status Name of Permission/License Governing Government Authority Ganzhou Happy Fenqi Network Service Co., Ltd.(赣州快乐分期网络服务有限公司) Subsidiary of a Group VIE Food Production License Business License Fuzhou High-tech Zone Microcredit Co., Ltd.(抚州高新区趣分期小额贷款有限公司) Fuzhou Happy Time Technology Development Co., Ltd.(抚州快乐时代科技 发展有限公司) Fuzhou Happy Time Technology Co., Ltd. (赣州快乐时代电子商务有限公司) Yihuang Qudian Technology Development Co., Ltd. (宜黄县趣店科技发 展有限公司) Xiamen Youqi Technology Co., Ltd.(厦门 友契科技有限公司) Xiamen Youdun Technology Co., Ltd. (厦 门友盾科技有限公司) Xiamen Xincheng Youda Financing Guarantee Ltd.(厦门信诚友达融资担保有 限公司) Subsidiary of a Group VIE Business License Subsidiary of a Group VIE Business License Subsidiary of a Group VIE Business License Subsidiary of a Group VIE Business License Our PRC subsidiary Business License Our PRC subsidiary Business License Our PRC subsidiary Business License Financing Guarantee Business Permit Xinjiang Qudian Technology Co., Ltd.(新 疆趣店科技有限公司) Subsidiary of a Group VIE Business License 96 Food and Drug Administration of Ganzhou Economic Technological Development Zone of Ganzhou City Administration for Market Regulation of Ganzhou City Administration for Market Regulation of Fuzhou City Administration for Market Regulation of Fuzhou City Administration for Market Regulation of Ganzhou City Administration for Market Regulation of Yihuang County Administration for Market Regulation of Siming District of Xiamen City Administration for Market Regulation of Canghai District of Xiamen City Administration for Market Regulation of Xiamen City Local Financial Supervision and Administration of Xiamen City Administration for Market Regulation of Khorgas City Table of Contents Company Name Company Status Xiamen Wanlimu Growth Technologies Co., Ltd.(厦门万里目成长科技有限公司) Subsidiary of a Group VIE Name of Permission/License Business License ICP License Network Culture Business Permit Governing Government Authority Administration for Market Regulation of Xiamen City Fujian Communications Administration Department of Culture and Tourism of Fujian Province Permit to Produce or Operate Radio and Television Programs Fujian Radio and Television Commercials Bureau Xiamen Qudian Commercial Factoring Co., Ltd.(厦门趣店商业保理有限公司) Xiamen Junda Network Technology Co., Ltd.(厦门均达网络科技有限公司) Subsidiary of a Group VIE Business License Subsidiary of a Group VIE Business License Xiamen Wanlimu Technology Co., Ltd.(厦 门万里目科技有限公司) Subsidiary of a Group VIE Business License ICP License Xiamen Wanlimu Luxuries Co., Ltd.(厦门 万里目奢侈品有限公司) Subsidiary of a Group VIE Business License Xiamen Wanlimu Children’s Growth Education Technology Co., Ltd.(厦门万里 目少儿成长教育科技有限公司) Business License Subsidiary of a Group VIE Food Production License Administration for Market Regulation of Xiamen City Administration for Market Regulation of Siming District of Xiamen City Administration for Market Regulation of Xiamen City Fujian Communications Administration Administration for Market Regulation of Xiamen City Administration for Market Regulation of Siming District of Xiamen City Administration for Market Regulation of Siming District of Xiamen City Licensing for Operation of High-risk Sports Projects Culture and Tourism Bureau of Siming District of Xiamen City Hygiene License Health Bureau of Siming District of Xiamen City 97 Table of Contents Company Name Company Status Shenzhen Qudian Supply Chain Co., Ltd. (深圳趣店供应链有限公司) Subsidiary of a Group VIE Name of Permission/License Business License Filing for selling ready-to-cook meals Governing Government Authority Administration for Market Regulation of Shenzhen City Administration for Market Regulation of Nanshan District of Shenzhen City Regulation The following is a summary of the most significant rules and regulations that affect the Group’s business activities in China or the rights of our shareholders to receive dividends and other distributions from the Group. Regulation Related to Foreign Investment Restrictions The 2019 Law of Foreign Investment was adopted at the second meeting of the thirteenth National People’s Congress on March 15, 2019, which became effective on January 1, 2020. On December 26, 2019, the State Council issued the Regulations on Implementing the Law of Foreign Investment of the PRC, which came into effect on January 1, 2020. The 2019 Law of Foreign Investment and its implementation regulations replaced the trio of laws regulating foreign investment in China, namely, the Sino-foreign Equity Joint Venture Enterprise Law, the Sino-foreign Cooperative Joint Venture Enterprise Law and the Wholly Foreign-invested Enterprise Law, together with their implementation rules and ancillary regulations. The 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 sectors prohibited in the market access negative list for foreign investment. Foreign investors that intend to invest in the fields subject to access restrictions stipulated in market access negative list for foreign investment shall satisfy the conditions stipulated in such negative list. The PRC government’s policies supporting enterprise development are equally applicable to foreign-invested enterprises. The PRC government does not impose expropriation on foreign investment. Under special circumstances, if it requires imposing expropriation on foreign investment due to the need of public interest, expropriation shall be imposed according to legal procedures, and the foreign-invested enterprises concerned shall receive fair and reasonable compensation. Foreign-invested enterprises can 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 Provisions for Guiding the Foreign Investment Direction, or the Guiding Provisions promulgated by the State Council on February 11, 2002. According to the Guiding Provisions, industries in the PRC are classified into four categories namely, “permitted foreign investment industries”, “encouraged foreign investment industries”, “restricted foreign investment industries” and “prohibited foreign investment industries”. The “encouraged foreign investment industries”, “restricted foreign investment industries” and “prohibited foreign investment industries” are stipulated in the Guidance Catalog of Industries for Foreign Investment, or the Catalog, which was promulgated and is amended from time to time by the Ministry of Commerce and the National Development and Reform Commission. Those industries which do not fall within any of these three categories stipulated in the Catalog are regarded as “permitted foreign investment industries” and open to foreign investment unless specifically restricted by other PRC regulations. Industries such as VATS (other than e-commerce, domestic multi- party, communication, store-and-forward and call center) are restricted to foreign investment. The Special Administrative Measures for Access of Foreign Investment (Negative List) ( 2021 Edition), or the List, which was promulgated jointly by the MOFCOM and the NDRC on December 27, 2021 and became effective on January 1, 2022, and replaced the Special Administrative Measures for Access of Foreign Investment (Negative List) (2020 Edition), has listed the special administrative measures for foreign investment in certain industries in the PRC, including requirements on ownership percentage, senior management and etc. The industries that do not fall within the List are administered under uniform principles for domestic and foreign investment. According to the List, the value-added telecommunications services business (excluding e-commerce 98 Table of Contents business, domestic multi-party communications, store-and-forward and call center) is subject to restrictions on percentage of foreign ownership (not exceeding 50 percent). 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 the form 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-added telecommunications enterprise to have a good track record and operational experience in the VATS industry. In July 2006, the predecessor, the MIIT issued the Circular of the Ministry of Information Industry on Strengthening the Administration of Foreign Investment in Value-added Telecommunications Business, or the MIIT Circular, according to which, a foreign investor in the telecommunications service industry of China must establish a foreign invested enterprise and apply for a telecommunications businesses operation license. The MIIT Circular further requires that: (i) PRC domestic telecommunications business enterprises must not, through any form, lease, transfer or sell a telecommunications businesses operation license to a foreign investor, or provide resources, offices and working places, facilities or other assistance to support the illegal telecommunications services operations of a foreign investor; (ii) value-added telecommunications enterprises or their shareholders must directly own the domain names and trademarks used by such enterprises in their daily operations; (iii) each value-added telecommunications enterprise must have the necessary facilities for its approved business operations and maintain such facilities in the regions covered by its license; and (iv) all VATS providers are required to maintain network and Internet security in accordance with the standards set forth in relevant PRC regulations. If a license holder fails to comply with the requirements in the MIIT Circular and cure such non-compliance, the MIIT or its local counterparts have the discretion to take measures against such license holder, including revoking its license for value-added telecommunications business, or the VATS License. In light of the above restrictions and requirements, we conduct the value-added telecommunications businesses through the Group VIEs. Regulations Related to VATS Among all of the applicable laws and regulations, the Telecommunications Regulations of the People’s Republic of China, or the Telecom Regulations, promulgated by the PRC State Council in September 25, 2000 and amended on July 29, 2014 and February 6, 2016 respectively, is the primary governing law, and sets out the general framework for the provision of telecommunications services by domestic PRC companies. Under the Telecom Regulations, telecommunications service providers are required to procure operating licenses prior to their commencement of operations. The Telecom Regulations distinguish “basic telecommunications services” from “VATS.” VATS are defined as telecommunications and information services provided through public networks. The Telecom Catalog was issued as an attachment to the Telecom Regulations to categorize telecommunications services as either basic or value-added. In February 2003, December 2015 and June 2019, the Telecom Catalog was updated respectively, categorizing online data and transaction processing, information services, among others, as VATS. The Administrative Measures on Telecommunications Business Operating Licenses, promulgated by the MIIT in 2009 and most recently amended in July 2017, which set forth more specific provisions regarding the types of licenses required to operate VATS, the qualifications and procedures for obtaining such licenses and the administration and supervision of such licenses. Under these regulations, a commercial operator of VATS must first obtain a VATS License, from the MIIT or its provincial level counterparts, otherwise such operator might be subject to sanctions including corrective orders and warnings from the competent administration authority, fines and confiscation of illegal gains and, in the case of significant infringements, the websites may be ordered to close. In September 2000, the State Council issued the Administrative Measures on Internet Information Services, which was amended in January 2011. Internet information service is a kind of information service categorized as a VATS in the current Telecom Catalog attached to the Telecommunications Regulation as most recently updated in December 2019. Pursuant to these measures, “Internet information services” refers to the 99 Table of Contents provision of information through the Internet to online users, and are divided into “commercial Internet information services” and “non-commercial Internet information services.” A commercial Internet information services operator must obtain a VATS license for Internet information services, or the ICP license, from the relevant government authorities before engaging in any commercial Internet information services operations in China, while the ICP license is not required if the operator will only provide Internet information on a non-commercial basis. According to the Administrative Measures on Telecommunications Business Operating Licenses, the ICP license has a term of five years and can be renewed within 90 days before expiration. Beijing Happy Time, one of the Group VIEs, and Qufenqi Beijing, a subsidiary of Beijing Happy Time, have both obtained ICP licenses for provision of commercial Internet information services issued by Beijing Telecommunication Administration in February 2019 and March 2019, respectively. In September 2020, the ICP license of Beijing Happy Time expired and we did not renew such license due to adjustments to our business structure. In addition, Xiamen Qudian Culture and Technology, Xiamen Qudian, Xiamen Qu Plus Plus and Xiamen Wanlimu Growth have obtained ICP licenses for provision of Internet information services issued by Fujian Telecommunication Administration in December 2018, September 2019, November 2019 and January 2021, respectively. As the implementing rules of the Administrative Measures on Telecommunications Business Operating Licenses 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 the Group will be deemed as commercial Internet information service operator, or operators of online data and transaction processing, therefore there is uncertainty as to whether any or all of the Group VIEs, or the subsidiaries of the Group VIEs need to obtain ICP licenses, or VATS license for online data and transaction processing services, or any other VATS licenses in order to be in full compliance with regulatory requirements with respect to VATS. In addition to the Telecommunications Regulations of the People’s Republic of China and other regulations above, provision of commercial Internet information 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 are subject to requirements under the Administrative Provisions on Information Services of Mobile Internet Applications, including acquiring relevant qualifications required by laws and regulations and being responsible for management of information security. Regulations Related to Internet Information Security, Privacy Protection and Cybersecurity PRC government authorities have enacted laws and regulations with respect to Internet information security and protection of personal information from any abuse or unauthorized disclosure. Internet information in China is regulated and restricted from a national security standpoint. The SCNPC, 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 state secrets or a spread of socially destabilizing content. If an Internet information service provider violates these measures, the Ministry of Public Security and the 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 Internet information service provider may not collect any user personal information or provide any such information to third parties without the consent of a user and it must expressly inform the users of the method, content and purpose of the collection and processing of such user personal information and may only collect such information necessary for the provision of its services. An Internet information service provider is also required to properly maintain the user personal information, and in case of 100 Table of Contents any leak or likely leak of the user personal information, the Internet information service provider must take immediate remedial measures and, in severe circumstances, make an immediate report to the telecommunications regulatory authority. In addition, pursuant to the Decision on Strengthening the Protection of Online Information issued by the SCNPC in December 2012 and the Order for the Protection of Telecommunication and Internet User Personal Information issued by the MIIT 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. 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 required to take technical and other measures to prevent the collected personal information from any unauthorized disclosure, damage or loss. Any violation of these laws 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 Punishing Criminal Activities Infringing upon the Personal Information of Citizens, issued in 2013, and the Interpretation of the Supreme People’s Court and the Supreme People’s Procuratorate on Several Issues regarding Legal Application in Criminal Cases Infringing upon the Personal Information of Citizens, which was 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 personal information: (i) providing a citizen’s personal information to specified persons or releasing a citizen’s personal information online or through other methods in 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 of applicable rules and regulations when performing a duty or providing services; or (iv) collecting a citizen’s personal information by purchasing, accepting or exchanging such information in violation of applicable rules and regulations. The Internet Finance Guidelines jointly released by ten PRC regulatory agencies in July 2015 purport, among other things, to require Internet finance service providers to improve technology security standards, and safeguard customer and transaction information. The Internet Finance Guidelines also prohibit Internet finance service providers from illegally selling or disclosing customers’ personal information. The PBOC and other relevant regulatory authorities will jointly adopt the implementing rules. Pursuant to the Ninth Amendment to the Criminal Law issued by the SCNPC in August 2015, which became effective in November 2015, any Internet service provider that fails to fulfill the obligations related to Internet information security administration as required by applicable laws and refuses to rectify upon orders is subject to criminal penalty for the result of (i) any dissemination of illegal information in large scale; (ii) any severe effect due to the leakage of the client’s information; (iii) any serious loss of criminal evidence; or (iv) other severe situation, and any individual or entity that (i) sells or provides personal information to others in a way violating the applicable law, or (ii) steals or illegally obtain any personal information is subject to criminal penalty in severe situation. The Cybersecurity 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 other organizations, and requires that a network operator, which includes, among others, Internet information services providers, take technical measures and other necessary measures in accordance with the provisions of applicable laws and regulations as well as the compulsory requirements of the national and industrial standards to safeguard the safe and stable operation of the networks, effectively respond to the cybersecurity incidents, prevent illegal and criminal activities, and maintain the integrity, confidentiality and availability of network data. The Cybersecurity Law emphasizes that any individuals and organizations that use networks is required to comply with the PRC Constitution and laws, abide by public order and cannot endanger cybersecurity or make use of networks to engage in unlawful activities such as endangering national security, economic order and social order, and infringing the reputation, privacy, intellectual property rights and other lawful rights and interests of other people. The Cybersecurity Law has reaffirmed the basic principles and requirements as specified in other 101 Table of Contents existing laws and regulations on personal information protections, such as the requirements on the collection, use, processing, storage and disclosure of personal information, and internet service providers being required to take technical and other necessary measures 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 Cybersecurity Law may subject the Internet service provider to warnings, fines, confiscation of illegal gains, revocation of licenses, cancellation of filings, closedown of websites or even criminal liabilities. On December 29, 2017, the Information Security Technology Personal Information Security Specification (GB/T 35273-2017), or the Specification, was issued by the General Administration of Quality Supervision, Inspection and Quarantine of the PRC and the Standardization Administration and has been replaced by the 2020 Specification issued by the State Administration for Market Regulation and the Standardization Administration jointly which has taken effect on October 1, 2020. Pursuant to the Specification, product and service providers should take technical and other necessary measures to ensure the safety of personal information, clearly demonstrate the purpose, approaches and scope of processing the personal information to the individual and acquire the authorization. In addition, according to the 2020 Specification, personal biometric information should be stored separately from personal identity information and in principle, the original personal biometric information should not be stored; besides, it further requires that the privacy policy is to disclose the scope and rules of personal information collection and use by the personal information controller, which should not be regarded as a contract signed by the subject of personal information. On January 23, 2019, the Office of the Central Cyberspace Affairs Commission, the Ministry of Public Security, the State Administration for Market Regulation and the MIIT jointly issued the Announcement of Launching Special Crackdown Against Illegal Collection and Use of Personal Information by Apps, or the Announcement. According to the Announcement, from January to December 2019, four authorities abovementioned shall organize special crackdown against the illegal collection and use of personal information all over the country. App operators shall strictly fulfill their obligations regulated in the Cybersecurity Law when collecting and using personal information, and they shall be responsible for the security of personal information obtained and take effective measures to strengthen personal information protection. The App operators shall, by following the principles of lawfulness, legitimacy and necessity, not collect personal information that is not related to the services provided; when collecting personal information, they shall display the rules for the collection and use of personal information in an easy-to-understand, simple and clear manner, and personal information subjects shall independently choose consents; they shall not force the users to make authorization in the forms of default, bundling, stopping installation and use, etc., and may not collect personal information in violation of laws and regulations or against the agreements with users. It is advocated for App operators to provide users with the options to refuse to receive targeted pushes when they push news, current affairs and advertisements to targeted users. On March 13, 2019, the State Administration for Market Regulation and the Office of the Central Cyberspace Affairs Commission jointly issued the Announcement on Launching the Security Certification of Apps, which encourages app operators to voluntarily pass the security certification of apps, and encourages search engines and app stores to clearly identify and give priority to recommending those certified Apps. On November 28, 2019, the Cyberspace Administration of PRC and other three authorities jointly issued the Announcement on Identification method of App Collecting and Using Personal Information in Violation of Laws and Regulations, which provides reference for determining the unlawful collection and usage of personal information via Apps. On April 10, 2019, the Ministry of Public Security issued the Guide for Internet Personal Information Security Protection, which sets out the management mechanism, security technical measures and business processes for personal information security protection. This Guide is applicable for personal information holders to carry out security protection work during personal information life cycle processing. It is applicable to enterprises that provide services through the Internet, and also to organizations or individuals who use a private or non-networked environment to control and process personal information. 102 Table of Contents On February 13, 2020, the People’s Bank of China issued the Personal Financial Information Protection Technical Specification, which is an industry standard, to specify the security protection requirements for all aspects of personal financial information life cycle processing, including collection, transmission, storage, use, deletion, and destruction. This standard is applicable for financial industry institutions to provide financial products and services, and also provides a reference for security assessment agencies to conduct security inspections and assessments. According to the potential impact caused by unauthorized viewing or unauthorized change of financial information, this standard classifies personal financial information into three categories of C3, C2, and C1 from high to low sensitivity, and different requirements are put forward for the whole life cycle processing of all kinds of information according to different categories. On August 20, 2021, the SCNPC promulgated the Personal Information Protection Law, which took effect in November 2021. As the first systematic and comprehensive law specifically for the protection of personal information in the PRC, the Personal Information Protection Law provides, among others, that (i) an individual’s consent shall be obtained to use sensitive personal information, such as biometric characteristics and individual location tracking, (ii) personal information operators using sensitive personal information shall notify individuals of the necessity of such use and impact on the individual’s rights, and (iii) where personal information operators reject an individual’s request to exercise his or her rights, the individual may file a lawsuit with a People’s Court. On November 14, 2021, the CAC published the Draft Regulations on the Network Data Security Administration (Draft for Comments), or the Security Administration Draft, which provides that data processing operators engaging in data processing activities that affect or may affect national security must be subject to network data security review by the relevant Cyberspace Administration of the PRC. According to the Security Administration Draft, data processing operators who possess personal data of at least one million users or collect data that affects or may affect national security must be subject to network data security review by the relevant Cyberspace Administration of the PRC. The Security Administration Draft also stipulates that a data processor listed overseas must conduct an annual data security review by itself or by engaging a data security service provider and submit the annual data security review report for a given year to the municipal cybersecurity department before January 31 of the following year. If the Security Administration Draft is enacted in the current form, we, as an overseas listed company, will be required to carry out an annual data security review and comply with the relevant reporting obligations. The Security Administration Draft has not been enacted as of the date of this annual report. On December 28, 2021, the Cybersecurity Review Measures was promulgated and became effective on February 15, 2022, which requires that the purchase of network products and services by critical information infrastructure operator and the data processing activities carries out online platform operators, which affects or may affect national security, shall be subject to cybersecurity review. Besides, any “online platform operators” controlling personal information of more than one million users which seeks to list on a foreign stock exchange should also be subject to cybersecurity review. On June 10, 2021, the SCNPC promulgated the PRC Data Security Law, which became effective on September 1, 2021. The PRC Data Security Law sets forth the data security protection obligations for entities and individuals handling personal data, including that no entity or individual may acquire such data by stealing or other illegal means, and the collection and use of such data should not exceed the necessary limits. On October 29, 2021, the CAC published the Security Assessment of Data Cross-border Transfer (Draft for Comments), which specify the circumstances in which data handlers providing data outbound shall apply for outbound data transfer security assessment with the Cyberspace Administration, including, among others, the operators of critical information infrastructure provide personal information outbound collected and generated by them. The costs of compliance with, and other burdens imposed by, Cybersecurity Law and any other cybersecurity, data security and related laws may limit the use and adoption of our products and services and could have an adverse impact on our business. Further, if the enacted version of the Security Assessment of Data Cross-border Transfer (Draft for Comments) and/or the Security Administration Draft mandate clearance of 103 Table of Contents cybersecurity review and other specific actions to be completed by companies like us, we face uncertainties as to whether such clearance can be timely obtained, or at all. In providing the Group’s online consumer finance service, the Group collects certain personal information from borrowers, and also need to share the information with our business partners such as institutional funding partners for the purpose of facilitating credit to borrowers. The Group has obtained consent from borrowers to collect and use their personal information, and have also established information security systems to protect the user information and to abide by other cybersecurity requirements under such laws and regulations. The Group has not received any investigation or punishment for data breach issues from the PRC regulatory agencies except for one notification from an APP Special Crackdown Working Group consisted of the Office of the Central Cyberspace Affairs Commission, the MIIT, the Ministry of Public Security and the State Administration for Market Regulation in July 2019. The notice required Beijing Happy Time to make rectification to conduct certain corrections to the private policy of the Laifenqi APP to be in compliance with the Announcement. On acceptance of the notice, the Group has since carried out improvements and corrections as required, including correcting the private policy of Laifenqi APP, updating Laifenqi App and submitting the rectification report to APP Special Crackdown Working Group to comply with certain requirements under the Announcement. Since, there is uncertainty as to how the cybersecurity requirements for maintaining cybersecurity and protecting customers’ personal information will be interpreted and implemented, we cannot assure you that the Group’s existing policies and procedures will be deemed to be in full compliance with any laws and regulations that are applicable, or may become applicable to the Group in the future. Regulations Related to Loans and Intermediation The PRC Civil Code governs the formation, validity, performance, enforcement and assignment of contracts. The PRC Civil Code requires that the interest rates charged under a loan agreement must not violate the applicable provisions of the PRC laws and regulations. In accordance with the Second Revised Private Lending Judicial Interpretations issued by the Supreme People’s Court of the PRC in December, 2020, which came into effect on January 1, 2021, private lending is defined as financing between individuals, legal entities and other organizations. Loans funded by financial institutions which are licensed by financial regulatory authorities are not private lending transactions. When private loans between individuals are paid by wire transfer, the loan contracts between individuals came into effect upon the deposit of funds to the borrower’s account. In the event that the loans are made through an online consumer finance lending platform and the platform only provides intermediary services, the courts will dismiss the claims of the parties concerned against the platform demanding the repayment of loans by the platform as guarantors. However, if the online consumer finance service provider 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 claim alleging that the online consumer service provider assumes the obligations of a guarantor will be upheld by the courts. The Second Revised Private Lending Judicial Interpretations also provide that the lender could request the borrower to pay the interest according to the interest rate agreed in the contract, except that the interest rate agreed upon by the parties exceeds four times the market interest rate for one-year loan at the conclusion of the contract. The “market interest rate for one-year loan” mentioned above refers to the market interest rate for one-year loan released every month by the National Interbank Funding Center with the authorization of the People’s Bank of China from August 20, 2019. However, according to the Second Revised Private Lending Judicial Interpretation and Reply by Supreme People’s Court to Issues Concerning the Scope of Application of the New Judicial Interpretation on Private Lending, the interest rate cap “market interest rate for one-year loan” is not applicable to the lending business of financial institutions and their branches that have been established with the approval of financial regulatory authorities. The agreements between the lender which is a financial institution and borrower on loans with interest rates below 24% per annum are valid and enforceable. As to 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 has not 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 the interest payment. If the annual interest rate of a loan is higher than 36%, the excess will be void and will not be enforced by the courts. 104 Table of Contents Pursuant to the PRC Civil Code, a creditor may assign its rights under an agreement to a third party, provided that the debtor is notified. Upon due assignment of the creditor’s rights, the assignee is entitled to the creditor’s rights and the debtor must perform the relevant obligations under the agreement for the benefit of the assignee. In addition, according to the PRC Civil Code, an intermediation contract is a contract whereby an intermediary presents to its 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. The Group’s business practice of connecting the Group’s institutional funding partners, certain of which are online lending information intermediaries, with individual borrowers may constitute intermediary service, and the Group’s service agreements with borrowers and investors may be deemed as intermediation contracts under the PRC Civil Code. Pursuant to the PRC Civil Code, an intermediary must provide true information relating to the proposed contract. If an intermediary conceals any material fact intentionally or provides false information in connection with the conclusion 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 the damages caused. Regulations Related to Cash Loan Lending The Office of the Leading Group for Specific Rectification against Online Finance Risks and the Office of the Leading Group for Specific Rectification against P2P Online Lending Risks jointly issued the Circular on Regulating and Rectifying Cash Loan Business on December 1, 2017, or Circular 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 by the Supreme People’s Court of the PRC regarding interest rates in private lending; according to the Private Lending Judicial Interpretations, if the annual interest rate of a private loan is higher than 36%, the excess will be void and will not be enforced by the courts; • • • • A provider of cash loan shall not deduct interests, service fees, management fees or deposits from the loan principal or set excessive overdue interest, late fee or penalty interest; A bank may not outsource its core business functions, such as credit assessment and risk management, to third parties; A bank participating in loan facilitation transactions may not accept credit enhancement services from a third party which has not obtained any 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. On July 12, 2020, Provisional Measures for Administration of Internet Lending by Commercial Banks was issued. Under this regulation, the regulatory range was broadened from the supervision on a lending entity to the supervision on such lending behavior. Moreover, this document sets detailed regulation on the duty of confidentiality of lending entities. Any online entity should bear the responsibility of information confidentiality. Leaking clients’ information including names, ages, phone numbers will bring severe punishment for the relevant entity. This regulation also makes it clear that when conducting lending business online, entities must have their service information fully exposure to clients, including and not limited to the amount of each lending, the interest, termination clause, etc. On September 7, 2020, Notice of General Office of the China Banking and Insurance Regulatory Commission on Strengthening the Supervision and Administration of Microlending Companies was promulgated. Under this regulation, lending entities should adhere to the principle of petty sum and decentralization. Microlending companies shall, by following the principle of petty sum and decentralization, reasonably determine the amount and term of loans based on the income level, overall liabilities, asset status, 105 Table of Contents actual needs and other factors of borrowers, so as to ensure that the repayment amount of the borrowers does not exceed their repayment capacity. The balance of the loans provided by a microlending company to the same borrower shall not exceed 10% of the company’s net assets; and the balance of the loans provided by a microlending company to the same borrower and its affiliated parties shall not exceed 15% of the company’s net assets. Local financial regulatory authorities may, in light of regulatory needs, lower the maximum balance of the aforesaid loans. On November 11, 2020, Interim Measures for the Administration of Network Small-sum Loan Business (Trial) was issued. Under this regulation, lending entities have the duty of major-risk reporting. Upon the occasion where major risks are incurred, especially when it is an inter-provincial case, entities must report such major-risk event to regulatory bodies. On December 19, 2020, Alert to the Risk of Over-borrowing Induced by Internet Platform was issued. Under this document, the regulatory bodies asked the market to be alarmed of over-advertising and false-advertising, over-self-dragging and various traps of internet loaning platforms. On December 29, 2020, Reply by Supreme People’s Court to Issues Concerning the Scope of Application of the New Judicial Interpretation on Private Lending was issued. Under this regulation, upon the matter of the scope of private lending, after soliciting the opinions of financial regulatory authorities, seven types of local financial organizations, including small-sum loan companies, financing guarantee companies, regional equity markets, pawnshops, financing lease companies, commercial factoring companies and local asset management companies under the regulation of local financial regulatory authorities, are financial institutions established upon approval by financial regulatory authorities. The new judicial interpretation on private lending is not applicable to disputes arising from their engagement in relevant financial businesses. On February 19, 2021, Notice of General Office of the China Banking and Insurance Regulatory Commission on Further Regulating the Internet Lending Business of Commercial Banks. Under this regulation, if a commercial bank and a cooperative agency jointly contribute to the issuance of Internet loans, the management requirements for the range of capital contribution proportion shall be strictly implemented, and the capital contribution proportion of the cooperative party in a single loan shall not be less than 30%. If a commercial bank and a cooperative agency jointly contribute to the issuance of Internet loans, the bank’s balance of loans granted with a single cooperative party (including its affiliated parties) shall not exceed 25% of the net tier 1 capital of the bank. The balance of Internet loans jointly issued by a commercial bank and all cooperative agencies shall not exceed 50% of the bank’s balance of total loans granted by the bank. Also, this regulation imposes strict control over cross-regional operations. A local corporate bank that engages in Internet lending business shall provide services for local clients and shall not carry out Internet lending business beyond the jurisdiction of its registration place. However, a corporate bank that has no physical business outlets, mainly carries out its business online, and meets other conditions prescribed by the China Banking and Insurance Regulatory Commission is excluded. On February 24, 2021, Notice on Further Standardizing the Supervision and Administration of Internet Consumer Loans for College Student was issued. Under this regulation, loaning entities are strictly banned from false-advertising towards college students. Entities must have a pre-loaning research on the way how college students would use this sum of loaning. On March 15, 2021, Measures for the Supervision and Administration of Network Transactions was issued. Under this regulation, other than individuals whose transaction sum is under RMB10,000 a year, online platforms and business entities must register themselves under regulations of related regulatory bodies. Moreover, online business bodies shall secure clients’ information by not revealing clients’ privacy, moreover, online business entities are forbidden from sending advertising messages to clients. The Group adjusted the pricing of certain of its credit products in April 2017 to ensure that the annualized fee rates charged on all credit drawdowns do not exceed 36%. The Group has entered into arrangements with several banks which directly fund credit drawdowns to borrowers. When a borrower defaults, the Group is obligated to repay the full overdue amount to the relevant 106 Table of Contents bank. It remains uncertain how the regulatory authorities will interpret and enforce the requirements of Circular 141 under various circumstances. The Group has engaged in discussions with the banks, and the Group will assist them in satisfying their compliance needs as the regulatory framework evolves. Regulations Related to Illegal High-interest Lending On July 23, 2019, the Supreme People’s Court of the PRC, the Supreme People’s Procuratorate of the PRC, the Ministry of Public Security and Ministry of Justice of the PRC jointly issued the Opinions on Several Issues Concerning Handling Illegal Lending Criminal Cases, or the Illegal Lending Opinions. According to the Illegal Lending Opinions, providing loans to unspecified public regularly (meaning more than ten borrowers in any given two years) without necessary governmental approvals will constitute illegal lending practices, of which the provision of loans of annual interest rate (including nominal interest and fees charged to borrowers in combination) higher than 36%, under serious or very serious circumstances, is criminally punishable (“Illegal High-interest Lending”). The Illegal Lending Opinions also provides specific definition of “serious” and “very serious” Illegal High-Lending. In comparison to previous administrative and judicial practices, the Illegal Lending Opinions criminalizes Illegal High-interest Lending practices at the first time. In addition, under the Illegal Lending Opinions, the collection of debts by means of violence is forbidden. Whoever gathers, instigates or hires others to forcibly collect debts by disturbing, pestering, beguiling, gathering a crowd to create momentum or otherwise, which does not constitute a crime independently, but the illegal lending has constituted the crime of illegal operation, shall be imposed a heavier punishment as the case may be in accordance with the provisions on the crime of illegal operation. In an effort to comply with potentially applicable laws and regulations, the Group adjusted the pricing of its credit products in April 2017 to ensure that the annualized fee charged on all credit drawdowns rates (including interest and fees combined) do not exceed 36%. We do not believe the regulatory change represented by the Illegal Lending Opinions will materially affect its business. Regulations Related to Online Peer-to-Peer Lending On July 18, 2015, ten PRC regulatory agencies, including the PBOC, the MIIT and the CBRC, jointly issued the Guidelines on Promoting the Healthy Development of Internet Finance, or the Internet Finance Guidelines. The Internet Finance Guidelines define “online peer-to-peer lending” as direct loans between parties through an Internet platform, which is under the supervision of CBRC, and governed by the PRC Civil Code, the General Principles of the Civil Law of the PRC, and related judicial interpretations promulgated by the Supreme People’s Court. Online peer-to-peer lending institutions are required to specify their nature as information intermediaries, mainly provide information services for the direct lending between borrowers and lenders, and can neither provide credit enhancement services nor engage in illegal fund-raising. On April 12, 2016, the General Office of the State Council issued the Implementing Scheme of Special Rectification of Risks in the Internet Finance Sector, which emphasizes that P2P platforms shall specify their nature as information intermediaries and can never engage in certain activities, including but not limited to, setting up capital pool, extending loans and illegal fund raising. In addition, without approval from competent regulator, P2P platforms shall not engage in financial business activities such as asset management, debt or equity transfer, and high-risk allocation in security markets. Furthermore, P2P platforms 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 for Administration of the Business Activities of Online Lending Information Intermediary Institutions, or the Interim Online Lending Information Intermediary Measures, to regulate the business activities of online lending information intermediary institutions. The “online lending” as specified in the Interim Online Lending 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 107 Table of Contents equivalent to the “online peer-to-peer lending” as defined in the Internet Finance Guidelines. According to the Interim Online Lending Information Intermediary Measures, “online lending information intermediary institution” refer to financial information intermediaries that are engaged in the lending information business and directly provide peers, which can be natural persons, legal persons or other organizations, with lending information services, such as information collection and publication, credit rating, information interaction and loan facilitation between borrowers and lenders for them to form direct peer-to-peer lending relationships. The Interim Online Lending Information Intermediary Measures are only applicable to private lending transactions according to relevant interpretations by the China Banking Regulatory Commission. Loans funded by financial institutions which are licensed by financial regulatory authorities are not private lending transactions within the meaning of the Private Lending Judicial Interpretation issued by the Supreme People’s Court of the PRC in August 2015, which has been amended in December 2020. The Interim Online Lending Information Intermediary Measures generally require that online lending information intermediary institutions shall not engage in credit enhancement services, direct or indirect cash concentration or illegal fundraising, and stipulate a supervisory system and list the administrative responsibilities of different supervisory authorities, among others, the banking regulatory authority of the State Council and its dispatching offices are responsible for formulating a regulatory and administrative system for the business activities of online lending information intermediary institutions and to regulate the behaviors thereof, and the provincial-level governments are responsible for institutional regulation of the online lending information intermediary institutions within their respective jurisdictions. Furthermore, an online lending information intermediary institution and its branches are required, within 10 working days after obtaining the business license, to complete record-filing and registration with the local financial regulatory department of the place of the industrial and commercial registration by presenting relevant materials. After completing the record-filing and registration with the local financial regulatory authority, they are required to apply for an appropriate telecommunication business operation permit in accordance with relevant provisions of competent communication departments, and to include serving as an Internet lending information intermediary in its business scope. An intermediary institution that fails to apply for telecommunication business operation permit as required cannot carry out an online lending information intermediary business. According to these Interim Online Lending Information Intermediary Measures, online lending information intermediary institutions cannot directly or indirectly engage in the following activities: (1) financing their own operations with the funds of lenders; (2) accepting or collecting directly or indirectly the funds of lenders; (3) providing lenders with a guarantee or promise to guarantee principal and interest thereon directly or in disguised form; (4) publicizing or promoting financing 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 company asset management, fund, insurance or trust products and other financial products; (8) conducting asset securitization business or transferring of creditors’ rights in the forms of assets packaging, asset securitization, trust asset, fund shares etc.; (9) engaging in any form of mixture, bundling or agency with other institutions in investment, agency in sale, brokerage and other business except as permitted by laws, regulations and relevant regulatory provisions on online lending; (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 financing with the borrowed funds to be used for investment in stocks, over-the-counter fund distribution, futures contracts, structured funds and other derivative products; (12) engaging in a business such as crowd-funding in equity; and (13) other activities prohibited by laws and regulations. The Interim Online Lending Information Intermediary Measures also stipulate the following obligations as the business principles of online lending information intermediary institutions: (1) providing, in accordance with laws, regulations and contracts, lenders and borrowers with collection, arrangement, identification, screening and online publication of direct lending 108 Table of Contents 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 behaviors and announcing and terminating relevant network-based lending activities in a timely manner upon discovery of any fraudulent behaviors or any other circumstances impairing the interests of lenders; (4) conducting continuously the activities for popularization of the knowledge and education of the risks of network-based lending, strengthening risk disclosure, guiding lenders to participate in network-based lending in small-amount and scattered manner and ensuring that lenders are fully aware of lending risks; (5) submitting relevant information in accordance with laws, regulations and relevant regulatory provisions on network- based lending, of which the information on creditors’ rights and liabilities in connection with network-based lending shall be submitted to and registered with the relevant data statistical departments in a timely manner; (6) keeping proper custody of the data and transaction information of lenders and borrowers without deleting, tampering with, illegally selling or divulging the basic information and transaction information of lenders and borrowers; (7) performing according to law the anti-money laundering and anti-terrorist financing obligations, such as client identity identification, suspicious transaction reporting, keeping the identity data and transaction records of clients, etc.; (8) cooperating with relevant departments in properly handling the work relating to preventing, investigating and punishing the finance-related illegal activities and crimes; (9) ensuring the work relating to the Internet information content management as well as network and information security pursuant to the relevant requirements; and (10) other obligations prescribed by the banking regulatory authority of the State Council and the provincial people’s governments of the places of industrial and commercial registration. Furthermore, in offline physical locations, online lending information intermediary institutions shall not operate businesses other than risk management and necessary business processes such as information collection and confirmation, post-loan tracking and pledge management in accordance with online-lending regulations. Online lending information intermediary institutions shall, based on their risk management capabilities, set upper limits on the loan balance of a single borrower borrowing both from one online lending intermediary and from all online lending information intermediary institutions. In the case of natural persons, this limit shall not be more than RMB200,000 for one online lending intermediary and not more than RMB1 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 lending intermediary and not more than RMB5 million in total from all platforms. For the protection of investors and borrowers, the Interim Online Lending Information Intermediary Measures require that online lending information intermediary institutions (i) separate their own capital from funds received from lenders and borrowers and (ii) select a qualified banking financial institution as their funding depository institution, which shall perform depository and administration responsibilities as required. In addition, the Interim Online Lending Information Intermediary Measures provide for other miscellaneous requirements for online lending information intermediary institutions, including but not limited to, risk assessment and disclosure, auditing and authentication, industry association, reporting obligations, information security and disclosure and legal liabilities. Online lending information intermediary institutions established prior to the effectiveness of the Interim Online Lending Information Intermediary Measures have a transition period of twelve months to rectify any activities that are non-compliant with the Interim Online Lending Information Intermediary Measures, except with respect to criminal activity, which must be terminated immediately. In February 2017, the CBRC released the Guidance on Depositary Business of Online Lending Funds, or Depositary Guidance, to regulate funds depositories for online lending information intermediary institutions. The Depositary Guidance defines depositories as commercial banks that provide online lending fund depository services, and stipulates that the depositories shall not be engaged in offering any guarantee, including: (i) offering guarantees for lending transaction activities conducted by online lending information intermediary institutions, or undertaking any liability for breach of contract related to such activities; (ii) offering guarantees to lenders, guarantying principal and dividend payments or bearing the risks associated with fund lending operations for lenders. The Depositary Guidance also stipulates certain conditions that must be met before depositories are entitled to develop an online lending fund depository business, including: (i) having a good credit record and not having been included on the List of Enterprises with Abnormal Operations or the List of Enterprises with Serious 109 Table of Contents Illegal and Dishonest Acts; (ii) satisfying various requirements relating to the technological systems of such entity’s depository fund business and general operations, including but not limited to assuming fund administration responsibilities and not outsourcing or assigning such entity’s responsibilities to third parties to set up accounts, process trading information or verify trading passwords; and (iii) setting up special deposit accounts to hold online lending capital and sub-accounts for online lenders and borrowers as well as guarantors, and in order to assure fund security, use separate accounts to hold private capital of online lending information intermediary institutions. In addition, the Depositary Guidance prohibits depositories from outsourcing or assigning their responsibilities to set up capital accounts, deal with transaction information, verify trading passwords and various other services to third parties, provided, however, that certain cooperation regarding payment services with third-party payment companies and depository banks is permitted in accordance with clarifications by the CBRC. Apart from the requirements set forth in the Interim Online Lending Information Intermediary Measures and the Registration Guidance, the 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 independent auditing on funds depository accounts of borrowers and investors and various other services. The Depositary Guidance requires online lending information intermediary institutions to perform various obligations, and prohibits them advertising their services with the information of their depository except for in accordance with necessary exposure requirements. The Guidance also raises other business standards and miscellaneous requirements for depositories and online lending information intermediary institutions as well. Online lending information intermediary institutions and commercial banks conducting the online depository services prior to the effectiveness of the Guidance have a six-month grace period to rectify any activities not in compliance with the Guidance. It has been reported that in May 2017, the PBOC and other PRC regulatory agencies issued the Notice on Further Effectively Conducting the Special Campaign on Reorganizing and Rectification in Respect of Risks Related to the Internet Finance Market, or Circular 119, which classified enterprises in the Internet finance market into “compliant enterprises,” “enterprises to conduct rectifications” and “enterprises to be suspended.” Circular 119 further stipulates various procedures to be taken with respect to these three types of enterprises, namely compliant enterprises, enterprises to conduct rectifications and enterprises to be suspended. According to the Circular 119 (as reported, same below), provincial government agencies should identify key market players engaged in internet financing and conduct on-site inspections. If finding business institutions involving in illegal operations, provincial government agencies should issue rectification notice to the institutions and require them to put together rectification plan and submit for review. An enterprise that has received rectification notices 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 outstanding non-compliant business contracts and operations, which schedule in principal shall be no longer than one year, except if other specific regulations stipulate otherwise. Enterprise to conduct rectifications should report regularly to the government agencies of its rectification process, finish the rectification in accordance 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 process of the Special Campaign, provincial government agencies shall ensure that the number of enterprises in the Internet finance market and relevant business scale 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 exits of certain peer-to-peer direct lending marketplaces without inducing systematic risk in the financial system or causing significant social turbulence until only those 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 to operate their businesses and (ii) marketplaces that 110 Table of Contents have not been involved in such incidents, and the latter is further classified, based on the scale of their business operations, into (a) shell companies with zero loan balance or loan origination for more than three months and marketplaces that no longer facilitate loan application and investment, or are otherwise not in operation, (b) small-scale marketplaces, which shall be determined based on factors including outstanding 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, for instance, marketplaces that fund loans to themselves or facilitate sham loans, marketplaces with unclear fund flows, marketplaces with massive negative publicity and complaints, marketplaces that refuse to or are reluctant to rectify non-compliant operations. Pursuant to Circular 175, except for Normal Marketplaces, other marketplaces shall exit the peer-to-peer lending industry or cease operation. Even for the Normal Marketplaces, Circular 175 requires to limit 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 119 and 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 government agencies, and therefore there are uncertainties as to the accuracy of the media reports, as well as the authenticity, meaning and application of Circular 119 and Circular 175. On December 8, 2017, the Office of the Leading Group for Specific Rectification against P2P Online Lending Risks issued the Circular on Specific Rectification and Inspection Relating to P2P Online Lending Risks, or Circular 57. Circular 57 requires local regulatory authorities to jointly inspect and evaluate as to whether an online lending information intermediary has complied with in the Interim Online Lending Information Intermediary Measures. An online lending information intermediary may not complete record-filing and registration until it receives joint approval from the local financial regulator and the local branch of the CBRC as to its rectification measures. Circular 57 prohibits four forms of credit transfers: (i) asset securitization or transfer creditor’s rights in form of packaged assets, securitized assets, trust assets or fund shares; (ii) loans initially funded by a management member of related party and subsequently transferred to lenders on the P2P platform; (iii) wealth management products (whether with fixed terms or redeemable on demand) that are matched with transferred loans; and (iv) using creditor’s rights from P2P platforms as pledge to borrow funds from other lenders. On the other hand, Circular 57 provides that infrequent transfers of loans among lenders are deemed to be in compliance with the relevant laws and regulations. On November 28, 2019, the Office of the Leading Group for Specific Rectification against Online Finance Risks and the Office of the Leading Group for Specific Rectification against P2P Online Lending Risks jointly issued the Guidance of Transformation of Online Lending Information Intermediaries to Small Credit Companies, or Guidance 83, which further signals the fundamental goal of the PRC government to end of P2P business. The regulatory actions under such stringent regulation on P2P lending platforms have decimated P2P lending platforms, including many well-known or listed companies such as Yidai, LuFax, and China Rapid Finance (NYSE: XRF). As of December 31, 2020, all P2P lending platforms have been exited or have completed their business transformation. The Group does not engage in direct loan facilitation between peers, which can be natural persons, legal persons or other organizations. While the Group facilitates loans that are directly funded by certain institutional funding partners such as banks, such companies are financial institutions licensed by financial regulatory authorities to lend. Facilitation of loans pursuant to the Group’s arrangements with such licensed financial institutions is not subject to the regulation set forth in the Interim Online Lending Information Intermediary Measures. As such, we do not consider our company as an “online lending information intermediary institution” regulated under the above regulations. However, we cannot assure you that the CBRC or other PRC regulatory authorities would not expand the applicability of the Interim Online Lending Information Intermediary Measures and regard the Group as an “online lending information intermediary institution.” In the event that the Group is deemed as an online lending information intermediary institution by the PRC regulatory authorities in the future, the Group may have to make registration with the local financial regulatory authority and apply for telecommunication business operating licenses if required by the competent 111 Table of Contents authorities, and the Group’s current business practice may be considered to be not in compliance with the Interim Online Lending Information Intermediary Measures, and accordingly, the Group’s business, results of operations and financial position will be materially and adversely affected. Regulations Related to Illegal Fund-Raising Raising funds by entities or individuals from the general public must be conducted in strict compliance with applicable PRC laws and regulations to avoid administrative and criminal liabilities. The Measures for the Banning of Illegal Financial Institutions and Illegal Financial Business Operations promulgated by the State Council in July 1998, latest revised on January 8, 2011, and the Notice on Relevant Issues Concerning the Penalty on Illegal Fund-Raising issued by the General Office of the State Council in July 2007 explicitly prohibit illegal public fund-raising. The main features of illegal public fund-raising include: (i) illegally soliciting and raising funds from the general public by means of issuing stocks, bonds, lotteries or other securities without obtaining the approval of relevant authorities, (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) using a legitimate form to disguise the unlawful purpose. To further clarify the criminal charges and punishments relating to illegal public fund-raising, the Supreme People’s Court promulgated the Judicial Interpretations to Issues Concerning Applications of Laws for Trial of Criminal Cases on Illegal Fund-Raising, or the Illegal Fund-Raising Judicial Interpretations, which came into force in January 2011. The Illegal Fund-Raising Judicial Interpretations provide that a public fund-raising will constitute a criminal 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 solicitation or advertising such as social media, promotion meetings, leafleting and short message service, or SMS, advertising; (iii) the fundraiser promises to repay, after a specified period of time, the capital and interests, or investment returns in cash, property in kind and other forms; and (iv) the fund-raising targets the general public as opposed to specific individuals. Pursuant to the Illegal Fund-Raising Judicial Interpretations, an offender that is an entity will be subject to criminal liabilities, if it illegally solicits deposits from the general public or illegally solicits deposits in disguised form (i) with the amount of deposits involved exceeding RMB1,000,000, (ii) with over 150 fund-raising targets involved, or (iii) with the direct economic loss caused to fund-raising targets exceeding RMB500,000, or (iv) the illegal fund-raising activities have caused baneful influences to the public or have led to other severe consequences. An individual 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 of the 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 Public Security on Several Issues concerning the application of Law in the Illegal Fund- Raising Criminal Cases, administrative proceedings for determining the nature 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 trial of cases concerning the crime of illegal fund-raising. Regulation Related to Finance Lease The Measures on the Administration of Foreign Investment in the Leasing Industry, or the Measures, were promulgated by the MOFCOM on February 3, 2005 and amended on October 28, 2015 to regulate the operations of foreign-invested finance lease businesses. The Measures apply to the establishment of foreign-invested enterprises by foreign investors such as foreign companies, enterprises and other economic organizations in the form of Sino-foreign equity joint ventures, Sino-foreign cooperative joint ventures and wholly foreign-owned enterprises in the PRC to engage in the finance lease business as well as to carry out business activities. Under the Measures, the total assets of the foreign investors of a foreign-funded finance lease company may not be less 112 Table of Contents than five million U.S. dollars. Foreign-invested finance lease enterprises must satisfy the following conditions: (i) the term of operation of a foreign- invested finance lease company in the form of a limited liability company shall not normally exceed 30 years; and (ii) it shall be staffed by appropriate 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, the condition referred to in condition (i) above no longer applies to us as we have ceased to be a limited liability company. Foreign-invested finance lease enterprises may conduct the following businesses: (i) finance lease business; (ii) leasing business; (iii) purchasing properties to be leased from PRC or overseas; (iv) residual disposal of and maintenance of leased properties; (v) consultancy and guarantee of lease transactions and (vi) other businesses approved by the examination and approval authority. “Finance lease business” refers to the trading activities in which a lessor, based on a lessee’s designation with respect to the seller and the leased object, agrees to purchase the assets underlying the leases from a seller and makes the leased object available to the lessee for use and collects rent thereon from the lessee. Foreign-invested finance lease enterprises may carry out finance lease activities by way of direct leasing, sub-leasing, sale-leaseback, leveraged leasing, entrusted leasing and joint leasing transactions. For the purpose of the Measures, the leasing property includes: (i) movable properties such as manufacturing equipment, telecommunication equipment, medical devices, scientific and research equipment, inspection and testing equipment, engineering and 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 transportation equipment mentioned above, provided that the value of such attached intangible properties shall not exceed half of the value of the leased properties that can qualify as leased properties under a finance lease. For the purposes of risk prevention and guaranteeing the security of business operations, generally, the risk assets of a finance lease company shall not exceed 10 times of the total amount of its net assets. The risk assets shall be determined based on residual assets, namely, the result 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 previous year audited by an accounting firm to the MOFCOM no later than March 31 of each year. The Administrative Measures of Supervision on Finance Lease Enterprises, or the Administrative Measures, was formulated by the MOFCOM and became effective on October 1, 2013. According to the Administrative Measures, the MOFCOM and the provincial-level commerce authorities are in charge of the supervision and administration of finance lease enterprises. A finance lease company shall report, according to the requirements of the MOFCOM, the relevant data in a timely and truthful manner through the National Finance Lease Company Management Information System. Specifically, a finance lease enterprise shall, submit, within 15 business days after the end of each quarter, the statistics on and summary of its operation in the preceding quarter, and statistics on and summary of its operations in the preceding year as well as its financial and accounting report (including appended notes thereto) audited by an auditing firm for the preceding year prior to April 30 of each year. In the event of a change of name, a relocation to another region, an increase or decrease of registered capital, a change of organizational form, an adjustment of ownership structure or other changes, a finance lease company shall report to the competent provincial-level commerce authority in advance. A foreign-invested finance lease company that undergoes such changes shall go through approval 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 finance lease business. Finance lease enterprises shall not engage in deposits, loans, entrusted loans or other financial services or inter-bank borrowing unless permission has been granted 113 Table of Contents from the relevant departments. Finance lease enterprises must not carry out illegal fund-raising activities under the name of a finance lease company. According to the Administrative Measures, finance lease enterprises shall strengthen their internal risk controls, and establish effective systems for classifying at risk assets, and adopt a credit appraisal system for the lessee, a post recovery and disposal system and a risk alert mechanism. A finance lease company shall also establish an affiliated transaction management system, and exclude persons related to the affiliated transactions from the voting or decision-making process for affiliated transactions where the lessee is an affiliate. In the event of any purchase of equipment from an affiliated production company, the settlement price for such equipment shall not be lower than the price offered by such company to any third party of such equipment or equipment of the 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 not accept any property to which a lessee has no title, or on which any mortgage has been created, or which has been sealed up or seized by any judicial organ, or whose ownership has any other defects as the subject matter of a sale-leaseback transaction. A finance lease company shall give adequate consideration to and objectively evaluate assets leased back, set purchasing prices for subject matter thereof with reference to reasonable pricing basis in compliance with accounting principles, and shall not purchase any subject matter at a price in excess of the value thereof. Pursuant to the Circular of the General Office of the Ministry of Commerce on Strengthening and Improving the Approval and Administration over Foreign-invested Finance Lease Companies, or the Circular, foreign-invested finance lease companies that failed to conduct substantive finance lease business 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 local authority to make rectifications and report the information on such rectification to the MOFCOM. Foreign-invested finance lease companies shall not engage in deposits, loans, entrusted loans or inter-bank borrowing and equity investment unless permission has been granted from relevant departments. The Circular specifies that foreign-invested finance lease companies are not allowed to provide direct or indirect financing to local governmental financing companies which undertake public welfare project in any form in order to prevent fiscal and financial risks. The Guiding Opinions on Accelerating the Development of Finance Lease Industry, or the Guiding Opinion, was promulgated by the General Office of the State Council of the PRC on August 31, 2015; the Guiding Opinion’s main task is to accelerate the development of the finance lease industry in four aspects: 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 side business which is related to its main business, private capital and independent third-party service providers are encouraged to incorporate the finance lease company and applications for filing or obtaining a license for business deals in medical devices for the finance lease company will be facilitated. The PRC Civil Code was, promulgated by the National People’s Congress on May 28, 2020 and became effective from January 1, 2021, and the PRC Civil Code regulates the civil contractual relationship among natural persons, legal persons and other organizations. Chapter 15 of the Part III Contracts of PRC Civil Code sets forth mandatory rules about finance lease contracts including that finance lease contracts shall be in written form and shall include terms such as the name, quantity, specifications, technical performance and inspection method of the leased property, the lease term, the composition, payment term, payment method and currency of the rent and the ownership of the leased property upon expiration of the lease. Under finance lease contracts, the lessor shall conclude a purchase contract based on the lessee’s selections in respect of the seller and the leased property, 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 leased property. 114 Table of Contents Without the consent of the lessee, the lessor may not modify relevant details related to the lessee of the purchase contract that has been concluded based on the lessee’s selections in respect of the seller and the leased property. The lessor is not liable for injury to the body or damage to the property of a third party caused by the leased property while in the possession of the lessee. However, the ownership of the leased property vests in the lessor. If they have not stipulated in which party ownership shall vest upon expiration, if such stipulation is not clear, or if ownership cannot be determined in accordance with the PRC Civil Code, the ownership of the leased property shall vest in the lessor. Pursuant to the PRC Civil Code, unless otherwise agreed upon by the parties, the rental shall be determined according to the major part or whole of the costs for the purchasing the leased property and reasonable profits of the lessor. Our subsidiary Xiamen Qudian Financial Lease Ltd. has obtained the approval to operate finance lease business as issued by the MOFCOM. Anti-money Laundering Regulations The PRC Anti-money Laundering Law, which became effective in January 2007, sets forth the principal anti-money laundering requirements applicable to financial institutions as well as non-financial institutions with anti-money laundering obligations, including the adoption of precautionary and supervisory measures, establishment of various systems for client identification, retention of clients’ identification information and transactions records, and reports on large transactions and suspicious transactions. According to the PRC Anti-money Laundering Law, financial institutions subject to the PRC Anti-money Laundering Law include banks, credit unions, trust investment companies, stock brokerage companies, futures brokerage companies, insurance companies and other financial institutions as listed and published by the State Council, while the list of the non-financial institutions with anti-money laundering obligations will be published by the State Council. The PBOC and other governmental authorities issued a series of administrative rules and regulations 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 Internet finance service providers to comply with certain anti-money laundering requirements, including the establishment of a customer identification program, the monitoring and reporting of suspicious transactions, the preservation of customer information and transaction records, and the provision of assistance to the public security department and judicial authority in investigations and proceedings in relation to anti-money laundering matters. The PBOC will formulate implementing rules to further specify the anti-money laundering obligations of Internet finance service providers. The Group has implemented various policies and procedures, such as internal controls and “know-your-customer” procedures, for anti-money laundering purposes. However, as the implementing rules of the Internet Finance Guidelines have not been published, there is uncertainty as to how the anti-money laundering requirements in the Guidelines will be interpreted and implemented, and whether online consumer finance service providers like the Group must abide by the rules and procedures set forth in the PRC Anti-money Laundering Law that are applicable to non-financial institutions with anti-money laundering obligations. We cannot assure you that the Group’s 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 the Food Industry The Food Safety Law of the PRC, or the Food Safety Law, was promulgated by the Standing Committee on February 28, 2009, became effective on June 1, 2009 and most recently amended on April 24, 2021, and the 115 Table of Contents Implementing Regulations for the Food Safety Law of the PRC, were promulgated by the State Council on July 20, 2009, became effective on the same day and most recently amended October 11, 2019. The Food Safety Law and its implementing regulations require: (i) food producing, food distributing or catering services to obtain a permit; however, provided that only ready-to-cook food is sold, it is not subject to a permit but shall be filed with the local food safety regulatory department for the record; (ii) food production and operation to comply with food-safety standards and certain other requirements. Food producers shall not purchase or use raw food materials, food additives or food related products which do not meet food-safety standards; (iii) each food producer or trader to establish and implement a personnel health management system. Each worker who engages in food production or trading worker is required to take a physical examination each year and obtain health certificate prior to working; (vi) food producers to check the licenses and food eligibility certification documents of their suppliers before purchasing raw food materials, food additives and food-related products from them. Each food production enterprise shall establish a procurement check record system and a food ex-factory check record system and ensure the records are authentic and retained for at least two years; and (v) the packages of pre-packed food to bear labels. The labels shall state matters including the name, specifications, net content, date of production, list of ingredients or components, producer’s name, address and contact information, shelf life, product standard code, storage conditions, the general name of the food additives used in the national standards, category number of the food production license, and other content acquired by laws, regulations or food safety standards. As for the entrustment of food producing, the Implementing Regulations for the Food Safety Law of the PRC further stipulates that business operators of foods who entrust others with the manufacturing of foods shall entrust manufacturers who have obtained a food manufacturing permit, supervise their manufacturing activities, and be responsible for the safety of the foods produced under entrustment. In the event of any breach of the Food Safety Law, relevant authorities may confiscate any illegal gains and food products, issue warnings and impose rectification orders and monetary penalties ranging from two to ten times the value of the illegal products, as well as revoke the food safety certificate and impose criminal liability in severe cases. The PRC has established a food recall system. According to Administrative Measures for Food Recall which was promulgated by the State Administration for Market Regulation and became effective on October 23, 2022, when a food producer finds that the food produced by it does not comply with food safety standards, it shall immediately stop production, recall the food on the market, notify the relevant producers, traders and consumers, and record the recall and notification. When a food trader finds that the food traded by it does not comply with food safety standards, it shall immediately stop trading such food, notify the relevant producers, traders and consumers, and record the cessation of trading and the notification. The food producers shall take measures to safely recall and destroy the affected food, and report the recall and treatment of the recalled food to the quality supervision authority at or above the county level. Where the food producers or traders fail to recall or stop producing or trading the food which are not in compliance with food safety standards under Article 53 of the Food Safety Law, the quality supervision, administration for industry and commerce, food and drug supervision and administration authorities at or above the county level shall order them to recall or stop production or trading. Regulations Related to Intellectual Property Rights The SCNPC the State Council and the National Copyright Administration, or the NCAC, 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, and 2020 respectively, with its implementation rules adopted in 1991 and revised in 2002 and 2013 respectively, and the Regulations for the Protection of Computer Software as promulgated on June 4, 1991 and revised on December 20, 2001, January 30, 2013, respectively. 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 process to enjoy the better protections afforded to registered software rights. The PRC Trademark Law, adopted in 1982 and revised in 1993, 2001, 2013 and 2019 respectively, with its implementation rules adopted in 2002 and revised in 2014, protects registered trademarks. The PRC Trademark 116 Table of Contents Office of the State Administration for Industry and Commerce, or the SAIC, handles trademark registrations and grants a protection term of ten years to registered trademarks. Domain names are protected under the Administrative Measures on Internet Domain Names, which was promulgated by the MIIT on August 24 and became effective on November 1, 2017. The MIIT is in charge of the overall administration of domain names in China. The registration of domain names in PRC is on a “first-apply-first-registration” basis. A domain name applicant will become the domain name holder upon the completion of the application procedure. Regulations Related to Employment On June 29, 2007, the SCNPC, adopted the Employment Contract Law, or ECL, which became effective as of January 1, 2008 and was revised in 2012. The ECL requires employers to enter into written contracts with their employees, restricts the use of temporary workers and aims to give employees long-term job security. Pursuant to the ECL, employment contracts lawfully concluded prior to the implementation of the ECL and continuing as of the date of its implementation will continue to be performed. Where an employment relationship was established prior to the implementation of the ECL but no written employment contract was concluded, a contract must be concluded within one month after the ECL’s implementation. According to the Social Insurance Law promulgated by SCNPC and effective from July 1, 2011 and was revised in 2018, 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 Up Basic Medical Insurance System for Staff Members and Workers in Cities and Towns, the Interim Regulation on the Collection and Payment of Social Insurance Premiums and the Interim Provisions on Registration of Social Insurance, an employer is required to contribute the social insurance for its employees 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 and March 24, 2019, an employer is required to make contributions to a housing fund for its employees. Regulations Related to Foreign Exchange Regulation on Foreign Currency Exchange The principal regulations governing foreign currency exchange in China are the Foreign Exchange Administration Regulations, most recently amended in August 2008. Under the PRC foreign exchange regulations, payments of current account items, such as profit distributions, interest payments and trade and service-related foreign exchange transactions, can be made in foreign currencies without prior approval from SAFE by complying with certain procedural requirements. By contrast, approval from or registration with appropriate government authorities is required where RMB is to be converted into foreign 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 Direct Investment, which substantially amends and simplifies the current foreign exchange procedure. Pursuant to this circular, the opening of various special purpose foreign exchange accounts, such as pre-establishment expenses accounts, foreign exchange capital accounts and guarantee accounts, the reinvestment of RMB proceeds derived by foreign investors in the PRC, and remittance of foreign exchange profits and dividends by a foreign-invested enterprise to its foreign shareholders no longer require the approval or verification of SAFE, and multiple capital accounts for the same entity may be opened in different provinces, which was not possible previously. In addition, SAFE promulgated another circular in May 2013, which specifies that the administration by SAFE or its local branches over direct investment by foreign investors in the PRC must be conducted by way of registration and banks must process foreign exchange business relating to the direct investment in the PRC based on the registration information provided by SAFE and its branches. On 117 Table of Contents February 13, 2015, SAFE promulgated the Notice on Further Simplifying and Improving the Administration of the Foreign Exchange Concerning Direct Investment, or SAFE Notice 13. After SAFE Notice 13 became effective on June 1, 2015, instead of applying for approvals regarding foreign exchange registrations of foreign direct investment and overseas direct investment from SAFE, entities and individuals may apply for such foreign exchange registrations from qualified banks. The qualified banks, under the supervision of SAFE, may directly review the applications and conduct the registration. On March 30, 2015, SAFE promulgated the Circular of the SAFE on Reforming the Management Approach regarding the Settlement of Foreign Capital of Foreign-invested Enterprise, or Circular 19, which expands a pilot reform of the administration of the settlement of the foreign exchange capitals of foreign-invested enterprises nationwide. Circular 19 came into force and replaced both the Circular of the State Administration of Foreign Exchange on Issues Relating to the Improvement of Business Operations with Respect to the Administration of Foreign Exchange Capital Payment and Settlement of Foreign-invested Enterprises, or Circular 142 and the Circular of the State Administration of Foreign Exchange on Issues concerning the Pilot Reform of the Administrative Approach Regarding the Settlement of the Foreign Exchange Capitals of Foreign-invested Enterprises in Certain Areas, or Circular 36 on June 1, 2015. Circular 19 allows all foreign-invested enterprises established in the PRC to use their foreign exchange capitals to make equity investment and removes certain other restrictions had been provided in Circular 142. However, Circular 19 continues to prohibit foreign- invested enterprises from, among other things, using RMB fund converted from its foreign exchange capitals for expenditure beyond its business scope and providing entrusted loans or repaying loans between non-financial enterprises. SAFE promulgated the Notice of the State Administration of Foreign Exchange on Reforming and Standardizing the Foreign Exchange Settlement Management Policy of Capital Account, or Circular 16, effective 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 settlement applies to foreign exchange capital, foreign debt offering proceeds and remitted foreign listing proceeds, and the corresponding RMB capital converted from foreign exchange are not restricted from extending loans to related parties or repaying the inter-company loans (including advances by third parties). However, there exist substantial uncertainties with respect to the interpretation and implementation in practice with respect to the Circular 16. Circular 19 or Circular 16 may delay or limit us from using the proceeds of offshore offerings to make additional capital contributions or loans to our PRC subsidiaries and any 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 Genuineness and Compliance Verification, or Circular 3, which stipulates several capital control measures with respect to the outbound remittance of profit from domestic entities to offshore entities, including (i) under the principle of genuine transaction, banks shall check board resolutions regarding profit distribution, the original version of tax filing records and audited financial statements; and (ii) domestic entities shall hold income to account for previous years’ losses before remitting the profits. Moreover, pursuant to Circular 3, domestic entities shall make detailed explanations of the sources of capital and utilization arrangements, and provide board resolutions, contracts and other proof when completing the registration procedures in connection with an outbound investment. Regulations on Foreign Exchange Registration of Overseas Investment by PRC Residents SAFE issued SAFE Circular on Relevant Issues Relating to Domestic Resident’s Investment and Financing and Roundtrip Investment through Special Purpose Vehicles, or SAFE Circular 37, that became effective in July 2014, replacing the Circular of the State Administration of Foreign Exchange on Issues Concerning the Regulation of Foreign Exchange in Equity Finance and Return Investments by Domestic Residents through Offshore Special Purpose Vehicles, or SAFE Circular 75. SAFE Circular 37 regulates foreign exchange matters in relation to the use of special purpose vehicles, or SPVs, by PRC residents or entities to seek offshore investment and financing or conduct round trip investment in China. Under SAFE Circular 37, a SPV refers to an offshore entity established or controlled, directly or indirectly, by PRC residents or entities for the purpose of seeking offshore financing or making offshore investment, using legitimate onshore or offshore assets or 118 Table of Contents interests, while “round trip investment” refers to direct investment in China by PRC residents or entities through SPVs, namely, establishing foreign- invested enterprises to obtain the ownership, control rights and management rights. SAFE Circular 37 provides that, before making contribution into an SPV, PRC residents or entities are required to complete foreign exchange registration with SAFE or its local branch. SAFE promulgated the Notice on Further Simplifying and Improving the Administration of the Foreign Exchange Concerning Direct Investment in February 2015, which took effect on June 1, 2015. This notice has amended SAFE Circular 37 requiring PRC residents or entities to register with qualified banks rather than SAFE or its local branch in connection with their establishment or control of an offshore entity established for the purpose of overseas investment or financing. PRC residents or entities who had contributed legitimate onshore or offshore interests or assets to SPVs but had not obtained registration as required before the implementation of the SAFE Circular 37 must register their ownership interests or control in the SPVs with qualified banks. An amendment to the registration is required if there is a material change with respect to the SPV registered, such as any change of basic information (including change of the PRC residents, name and operation term), increases or decreases in investment amount, transfers or exchanges of shares, and mergers or divisions. Failure to comply with the registration procedures set forth in SAFE Circular 37 and the subsequent notice, or making misrepresentation on or failure to disclose controllers of the foreign-invested enterprise that is established through round-trip investment, may result in restrictions being imposed on the foreign exchange activities of the relevant foreign-invested enterprise, including payment of dividends and other distributions, such as proceeds from any reduction in capital, share transfer or liquidation, to its offshore parent or affiliate, and the capital inflow from the offshore parent, and may also subject relevant PRC residents or entities to penalties under PRC foreign exchange administration regulations. Regulations Related to Stock Incentive Plans SAFE promulgated the Circular of the State Administration of Foreign Exchange on Issues concerning the Administration of Foreign Exchange Used for Domestic Individuals’ Participation in Equity Incentive Plans of Companies Listed Overseas, or the Stock Option Rules in February 2012, replacing the previous rules issued by SAFE in March 2007. Under the Stock Option Rules and other relevant rules and regulations, PRC residents who participate in stock incentive 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 publicly listed company or another qualified institution selected by the PRC subsidiary, to conduct the SAFE registration and other procedures with respect to the stock incentive plan on behalf of the participants. In addition, the PRC agent is required to amend the SAFE registration with respect to the stock incentive plan if there is any material change to the stock incentive plan, the PRC agent or other material changes. The PRC agent must, on behalf of the PRC residents who have the right to exercise the employee share options, apply to SAFE or its local branches for an annual quota for the payment of foreign currencies in connection with the PRC residents’ exercise of the employee share options. The foreign exchange proceeds received by the PRC residents from the sale of shares under the stock incentive plans granted and dividends distributed by the overseas listed companies must be remitted into the bank accounts in the PRC 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 eligible participants. See “Item 6. Directors, Senior Management and Employees—B. Compensation—2016 Equity Incentive Plan.” We have advised the recipients of awards under our 2016 Equity Incentive Plan to handle foreign exchange matters in accordance with the Stock Option Rules. However, we cannot assure you that they can successfully register with SAFE in full compliance with the Stock Option Rules. Any failure to complete their registration pursuant to the Stock Option Rules and other foreign exchange requirements may subject these PRC individuals to fines and legal or administrative sanctions, and may also limit our ability to contribute additional capital to our PRC subsidiary, limit our PRC subsidiary’s ability to distribute dividends to us or otherwise materially adversely affect our business. 119 Table of Contents Regulations Related to Dividend Distribution Under our current corporate structure, our Cayman Islands holding company may rely on dividend payments from Ganzhou Qufenqi and Xiamen Youxiang, which are wholly foreign-owned enterprises incorporated in China, to fund any cash and financing requirements we may have. Prior to January 1, 2020 when the 2019 Law of Foreign Investment came into effect, the principal regulations governing distribution 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 these regulations, foreign investment enterprises in the PRC may pay dividends only out of their accumulated profits, if any, determined in accordance with PRC accounting standards and regulations. In addition, a wholly foreign-owned enterprise shall, upon payment of income tax on its profits pursuant to the provisions of China tax laws, make apportionment to its reserve fund as well as employees’ bonus and welfare fund. The percentage to be apportioned to the reserve fund shall not be less than 10% of the after-tax profits; when the cumulative apportioned amount attains 50% of the registered capital, the enterprise may stop making apportionment. The percentage of apportionment to the employees’ bonus and welfare fund shall be determined by the wholly foreign- owned enterprise. These reserves are not distributable as cash dividends. A PRC company is not permitted to distribute any profits until any losses from prior fiscal years have been offset. 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 became effective on January 1, 2020. On December 26, 2019, the State Council issued the Regulations on Implementing the Law of Foreign Investment of the PRC, which came into effect on January 1, 2020. The 2019 Law of Foreign Investment and its implementation rule replaced the trio of laws regulating foreign investment in China, namely, the Sino-foreign Equity Joint Venture Enterprise Law, the Sino-foreign Cooperative Joint Venture Enterprise Law and the Wholly Foreign-invested Enterprise Law, together with their implementation rules and ancillary regulations. The regulations mentioned above in the Wholly Foreign-invested Enterprise Law will be no longer applicable. Under the 2019 Law of Foreign Investment, the organization form and structure and operating rules of foreign-funded enterprises are subject to the provisions of the Company Law of the People’s Republic of China, the Partnership Enterprise Law of the People’s Republic of China and other applicable laws. Therefore, under PRC laws and regulations, any companies within the PRC may pay dividends only out of its respective accumulated profits as determined in accordance with PRC accounting standards and regulations. In addition, a PRC company is required to set aside at least 10% of its annual after-tax profits, if any, to fund the statutory reserve fund, until the aggregate amount of such fund reaches 50% of its registered capital. At its discretion, a wholly foreign-owned enterprise may or may not allocate certain portion of its after-tax profits to the discretional reserve fund. The statutory reserve fund and discretional reserve fund (if any) are not distributable as cash dividends. Regulations Related to Taxation Enterprise Income Tax Under the Enterprise Income Tax Law, effective on January 1, 2008 and last amended on December 29, 2018, 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 be subject to PRC enterprise income tax at the rate of 25% on their worldwide income. The Implementing Rules of the Enterprise Income Tax Law, which took effect on January 1, 2008 and were last amended on April 23, 2019, further define the term “de facto management body” as the management body that exercises substantial and overall management and control over the production and operations, personnel, accounts and properties of an enterprise. If an enterprise organized under the laws of jurisdiction outside China is considered a PRC resident enterprise for PRC enterprise income tax purposes, a number of unfavorable PRC tax consequences could follow. First, it 120 Table of Contents would be subject to the PRC enterprise income tax at the rate of 25% on its worldwide income. Second, a 10% withholding tax would be imposed on dividends it pays to its non-PRC enterprise shareholders and with respect 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 its foreign enterprise investors are subject to a 10% withholding tax, unless any such foreign investor’s jurisdiction of incorporation has a tax treaty with China that provides for a preferential withholding arrangement. Furthermore, the State Administration of Taxation, or the SAT, promulgated the Announcement on Issues Concerning “Beneficial Owners” in Tax Treaties in February 2018, which stipulates that non-resident enterprises that cannot provide valid supporting documents as “beneficial owners” may not be approved to enjoy tax treaty benefits. Specifically, it expressly excludes an agent or a “conduit company” from being considered as a “beneficial owner” and a “beneficial owner” analysis is required to be conducted on a case-by-case basis. This announcement also stipulates that where an applicant has the identity as a “beneficial owner,” but the tax authority finds that the primary purpose test clause in tax treaties or the general rules on anti-tax avoidance in domestic tax laws shall apply, the general anti-tax avoidance investigation procedures may apply. On October 17, 2017, the SAT issued the Announcement of the State Administration of Taxation on Issues Relating to Withholding at Source of Income Tax of Non-resident Enterprises, or SAT Circular 37, which was revised on June 15, 2018, 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-characterized and 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 of avoiding payment of PRC enterprise income tax. As a result, gains derived from such indirect transfer may be subject to PRC enterprise income tax. 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 by the 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 of acquisition of such equity to the original transferor of such equity. Pursuant to the Arrangement between the Mainland of China and the Hong Kong Special Administrative Region for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income, the withholding tax rate with respect to the payment of dividends by a PRC enterprise to a Hong Kong enterprise may be reduced to 5% from a standard rate of 10% if the Hong Kong enterprise directly holds at least 25% of the PRC enterprise. Pursuant to the Notice on the Issues concerning the Application of the Dividend Clauses of Tax Agreements issued by the SAT on February 20, 2009, or SAT Circular 81, a Hong Kong resident enterprise must meet the following conditions, among others, in order to apply the reduced withholding tax rate: (i) it must be a company; (ii) it must directly own the required percentage of equity interests and voting rights in the PRC resident enterprise; and (iii) it must have directly owned such required percentage in the PRC resident enterprise throughout the 12 months prior to receiving the dividends. On August 27, 2015, the SAT promulgated the Administrative Measures for Non-Resident Taxpayers to Enjoy Treatment under Tax Treaties, or SAT Circular 60, which became effective on November 1, 2015. SAT Circular 60 provides that non-resident enterprises are not required to obtain pre-approval from the relevant tax authority in order to enjoy the reduced withholding tax. Instead, non-resident enterprises and their withholding agents may, by self-assessment and on confirmation that the prescribed criteria to enjoy the tax treaty benefits are met, directly apply the reduced withholding tax rate, and file necessary forms and supporting documents when performing tax filings, which will be subject to post-tax filing examinations by the relevant tax authorities. SAT Circular 60 has been replaced by the Measures for the Administration of Non-resident Taxpayers’ Enjoyment of Treaty Benefits, or SAT Circular 35, which was promulgated by the State Administration of Taxation on October 14, 2019 and became effective on January 1, 2020. SAT Circular 35 provides that non-resident taxpayers’ enjoyment of treaty benefits shall be handled in the manner of “self- assessment, claim for and enjoyment of treaty benefits, and retention of relevant materials for review.” If a non-resident taxpayer determines through self-assessment that he or she is eligible 121 Table of Contents for treaty benefits, he or she may, when filing tax returns, or when a withholding agent files withholding returns, enjoy tax treaty benefits, and collect and retain relevant materials for review in accordance with the provisions of SAT Circular 35 and accept the follow-up administration of tax authorities. According to SAT Circular 81, and SAT Circular 35, if the relevant tax authorities consider the transactions or arrangements we have are for the primary purpose of enjoying a favorable tax treatment, the relevant tax authorities may adjust the favorable withholding tax in the future. Value-Added Tax and Business Tax Pursuant to applicable PRC tax regulations, any entity or individual conducting business in the service industry is generally required to pay a business tax at the rate of 5% on the revenues generated from providing such services. However, if the services provided are related to technology development and transfer, such business tax may be exempted subject to approval by the relevant tax authorities. Whereas, pursuant to the Provisional Regulations on Value-Added Tax of the PRC and its implementation regulations, unless otherwise specified by relevant laws and regulations, any entity or individual engaged in the sales of goods, provision of processing, repairs 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 of products, 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 Tax to Replace Business Tax. In March 2016, the Ministry of Finance and the State Administration of Taxation further promulgated the Notice on Fully Promoting the Pilot Plan for Replacing Business Tax by Value-Added Tax, which became effective on May 1, 2016 and was amended in 2019. Pursuant to the pilot plan and relevant notices, VAT is generally imposed in lieu of business tax in the modern service industries, including the VATS, on a nationwide basis. VAT of a rate of 6% applies to revenue derived from the provision of some modern services. Unlike business tax, a taxpayer is allowed to offset the qualified input VAT paid on taxable 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 the Announcement on Issuing Relevant Policies for Deepening the Reform of Value-Added Tax, which became effective on April 1, 2019. According to the above-mentioned Announcement, the current VAT rate of 16% related to certain categories of sale and imported goods will be reduced to 13%, and the current 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 business VAT deductions will be expanded under the above-mentioned Announcement. Furthermore, the refund system of the period-end excess input VAT for trial implementation 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 you that the VAT rates will not be raised in the future, which could have a material adverse effect on the Group’s financial condition and results of operations. Regulations Relating to E-Commerce The Administrative Measures on Online Transactions issued by the State Administration for Market Regulation, or SAMR, on January 26, 2014 which became effective on March 15, 2014, or the Online Trading Measures. According to the Online Trading Measures, enterprises or other operators which engage in online commodities trading and other services and have been registered with SAMR or its local branches must make the information stated in their business licenses available to the public or provide links to their business licenses on their websites. Online distributors must adopt measures to ensure the safety of online transactions, protect online shoppers’ rights and prevent the sale of counterfeit goods. Information on products and transactions released by online distributors must be authentic, accurate, complete and sufficient. Under the Online Trading Measures, e-commerce platform operators are required to examine, register and archive the identity information of the merchants applying for access to their platforms as sellers, and verify and update such information regularly. The Online Trading Measures also provide that e-commerce platform operators must make publicly available (i) the link 122 Table of Contents to or the information contained in the business licenses of the merchants, in the case of business entities, or (ii) a label confirming the verified identity of the merchants, in the case of individuals. In addition, operators are prohibited from setting forth provisions in contracts or other terms that are not fair or reasonable to consumers such as those excluding or restraining consumers’ rights, relieving or exempting operators’ responsibilities, and increasing the consumers’ responsibilities, or conducting transactions in a forcible manner taking advantage of contractual terms or technical means. The Group is subject to such rules as a result of its online merchandise sales. In March 2016, the State Administration of Taxation, or SAT, the Ministry of Finance and the General Administration of Customs jointly issued the Circular on Tax Policy for Cross-Border E-Commerce Retail Imports, which took effect in April 2016. Pursuant to this circular, goods imported through the cross-border e-commerce retail are subject to tariff, import value-added tax, and consumption tax based on the types of goods. Individuals purchasing any goods imported through cross-border e-commerce retail are taxpayers, and e-commerce companies, companies operating e-commerce transaction platforms or logistic companies are required to withhold the taxes. On August 31, 2018, the Standing Committee of the National People’s Congress promulgated the E-Commerce Law, which became effective on January 1, 2019. The E-Commerce Law sets forth a series of requirements on e-commerce platform operators. According to the E-Commerce Law, e-commerce platform operators shall verify and register platform merchants, and cooperate with the market regulatory administrative department and tax administrative department to conduct industry and commerce registrations and tax registrations for merchants. The e-commerce platform operators shall also prepare a contingency plan for cybersecurity events and take technological measures and other measures to prevent online illegal and criminal activities. The E-Commerce Law also expressly requires platform operators to take necessary actions to ensure fair dealing on their platforms to safeguard the legitimate rights and interests of consumers, including to prepare platform service agreements and transaction information record-keeping and transaction rules, to prominently display such documents on the platform’s website, and to keep such information for no less than three years following the completion of a transaction. To legally handle intellectual property infringement disputes, upon receipt of the notice specifying preliminary evidence for alleged infringement, the platform operators are required to take necessary measures in a timely manner, such as deleting, blocking and disconnecting the hyperlinks, terminating transactions and services, and to forward notices to merchants on its platform. If an e-commerce platform operator fails to take necessary measures when it knows or should have known that a merchant on the platform infringes any third-party intellectual property rights, products or services provided by a merchant on its platform do not meet the requirements regarding personal or property safety, or any merchant otherwise impairs the lawful rights and interests of consumers, the e-commerce platform operator will be held jointly liable with the merchants on its platform. The Law of the People’s Republic of China on the Protection of Rights and Interests of Consumers, or the Consumer Protection Law, as amended on October 25, 2013, sets out the obligations of business operators and the rights and interests of the consumers. Pursuant to this law, business operators must guarantee that the commodities they sell satisfy the requirements for personal or property safety, provide consumers with authentic information about the commodities, and guarantee the quality, function, usage and term of validity of the commodities. The amendment in 2013 further strengthens the protection of consumers and imposes more stringent requirements and obligations on business operators, especially on the businesses operating through the Internet. For example, when a consumer purchases products (including cosmetics and food) or accepts services via an online trading platform and his or her interests are prejudiced, if the online trading platform provider fails to provide the name, address and valid contact information of the seller, the manufacturer or the service provider, the consumer is entitled to demand compensation from the online trading platform provider. Failure to comply with the Consumer Protection Law may subject business operators to civil liabilities such as refunding purchase prices, replacement of commodities, repairing or ceasing damages, compensation, and restoring reputation, and could subject the business operators or the responsible individuals to criminal penalties when personal damages are involved or if the circumstances are severe. 123 Table of Contents Regulations Relating to Cross-border Trading The Customs Law, effective as of July 1, 1987 and amended on July 8, 2000, June 29, 2013, December 28, 2013, November 17, 2016 and November 4, 2017, divides imported and exported items into “means of transports”, “goods” and “articles” based upon the nature and purpose of such items. Under the Customs Law, “goods” and “articles” are not defined, but these concepts are clarified in the Implementation Regulations of Administrative Punishments Under the Customs Law, effective as of November 1, 2004. The regulation describes “articles” as postal items and travelers’ luggage that are brought in and out of the PRC on an individual’s person or luggage. When the quantity of articles is higher than a reasonable amount for personal use, it will be regarded as “goods.” “Personal use” means that the traveler or consignee will use the items themselves or give the items as gifts, rather than selling or renting the items. “Reasonable amount” means the regular amount determined in accordance with the traveler or consignee’s situation, purpose of travel and duration of stay. The Foreign Trade Law, effective as of July 1, 2004 and amended on November 7, 2016, governs international trade in services and the import and export of goods and technologies. Under this law, goods and technologies are categorized as (i) permitted, which may be freely imported and exported, (ii) restricted, which require advance approval or (iii) prohibited, which may not be imported or exported at all. Furthermore, an “import and export trader”, or any company or individual engaging in the import or export of goods or technologies, must register with the administrative department of foreign trade under the State Council or any of its authorized bodies in order to be qualified as a foreign trade business operator. According to current foreign trade laws, the Ministry of Commerce and its competent local branches are the authorized bodies to conduct qualification filings and registrations for foreign trade business operators. The Customs Law requires that importers and exporters make true declarations of their goods and technologies to customs. The Imported and Exported Commodity Inspection Law, issued February 21, 1989 and amended on April 28, 2002, June 29, 2013, April 27, 2018 and December 29, 2018, also requires that certain items listed in the Catalog of Import and Export Commodities for Inspection, or the Customers Catalog, must be inspected by a commodity inspection organization authorized by the State Administration for Commodity Inspection before they can be exported. For import and export commodities not listed in the Customers Catalog, the commodity inspection authorities may conduct random inspections pursuant to the Measures for the Administration of Random Inspection of Import and Export Commodities, issued as of December 31, 2002 and amended as of April 28, 2018. Further, the Ministry of Commerce and the General Administration of Customs jointly adopted a mandatory licensing system for the export of certain merchandise, which exporters must comply with depending on the commodities they export. Further, the Administration for Industry promulgated Measures for Penalties for Infringement upon Rights and Interests of Consumers which requires strict compliance with the Law on Protection of Rights and Interest of Consumers and related laws and regulations for the purpose of stopping infringement upon rights and interests of consumers pursuant to the law, protecting the legitimate rights and interests of consumers, and safeguarding social and economic order. On October 23, 2020, under State Administration for Market Regulation Decree No. 31, Measures for Penalties for Infringement upon Rights and Interests of Consumers was revised and further focuses on the disclosure of its information to consumers. The information that must be disclosed includes but not limited to: (i) information on grant, alteration, or renewal or renewal of administrative permit; (ii) information on administrative punishment; (iii) other information to be announced pursuant to the law; (iv) registration and filing information; (v) registration information for chattel mortgage; (vi) registration information for pledge of equity; (vii) information on administrative punishment and (viii) other information to be announced pursuant to law. Violation against such requirements would constitute a direct violation of both Provisional Regulations on Enterprise Information Disclosure and Measures for Penalties for Infringement upon Rights and Interests of Consumers and would be punished severely. The customs declaration, clearance and inspection procedures for goods and articles are different. The declaration of import or export of goods may be made by the consignees or consigners themselves or by customs brokers that have registered with the permission of the customs. The consignees, consigners or customs brokers 124 Table of Contents shall make true declarations and submit the import or export license for restricted goods and relevant documentation to the customs for inspection. Where the commodities are imported or exported by means of express delivery, the consignees or consignor shall entrust an entry-exit express delivery enterprise with the inspection declaration, pursuant to the Regulations on the Implementation of the Law of the People’s Republic of China on Import and Export Commodity Inspection, effective as December 1, 2005 and amended on February 6, 2016, March 1, 2017 and March 2, 2019. In addition, a new information management system for express delivery consignments was established on November 30, 2018, according to the Announcement on Initiating the Application of the Information Management System for Inward and Outward Postal Items issued on November 8, 2018, requiring express delivery operators to collect data of each item of mail and submit it to the information management system. On November 24, 2015, the General Administration of Quality Supervision, Inspection and Quarantine of the People’s Republic of China issued the Work Norms for Cross-border E-commerce Business Entities and Commodity Record Management, which became effect on January 1, 2016. Pursuant to the work norms, if a cross-border e-commerce business entity develops a cross-border e-commerce business, it shall provide the inspection and quarantine institution with the business entity’s record information. On November 28, 2018, the Ministry of Commerce, National Development and Reform Commission, Ministry of Finance, General Administration of Customs, State Taxation Administration and State Administration for Market Regulation promulgated the Circular on Improving the Regulation of Cross-border E-Commerce Retail Imports, which took effect on January 1, 2019. Pursuant to this circular, cross-border e-commerce operator shall (i) engage a PRC-incorporated company as its domestic agent, (ii) be responsible for product quality and safety and its consumers’ rights and interests, (iii) provide adequate disclosures to consumers, (iv) establish a risk prevention and control system and a quality assurance system for products that are subject to bonded import procedure, and (v) transmit real-time electronic transaction data to the customs. The Announcement on Regulatory Matters Relating to Cross-border E-commerce Retail Imports and Exports, which was issued by General Administration of Customs on December 10, 2018 and has come into effect on January 1, 2019 requires that (i) enterprises participating in cross-border e-commerce retail importation and exportation business, such as cross-border e-commerce platform enterprises, logistics enterprises, payment enterprises, shall register with the customs at the locality pursuant to the relevant provisions on registration and administration of customs declaration; (ii) prior to declaration for cross-border e-commerce retail imports, the cross-border e-commerce platform enterprise or the domestic agent of cross- border e-commerce enterprise, the payment enterprise, and the logistics enterprise shall respectively transmit electronic information on transaction, payment and logistics through the international trade “single window” or the cross-border e-commerce customs clearance service platform to the customs, and bear the corresponding legal liability for veracity of the data; (iii) cross-border e-commerce platform enterprises carrying out cross-border e-commerce retail importation business and domestic agents of cross-border e-commerce enterprises shall verify the veracity of the transaction and the identity information of the consumer (purchaser), and bear the corresponding liability; where the identity information has not been authenticated by the state authorities in charge or the agency authorized thereby, the purchaser and the payor shall be the same person; (iv) for cross-border e-commerce retail imports, the customs shall levy customs duties and import value-added tax and consumption tax in accordance with state tax policies for cross-border e-commerce retail importation; the dutiable price shall be the actual transaction price, including the retail price of the goods, shipping fee and insurance premium, and the cross-border e-commerce platform enterprises, logistics enterprises or declaration enterprises registered with the customs shall be withholding agents, pay tax on behalf of the taxpayers, and bear the corresponding obligation to pay overdue tax and the relevant legal liability. Furthermore, on December 29, 2018, General Administration of Customs issued the Announcement on Matters Relating to Customs Registration and Administration for Cross-border E-commerce Enterprises, which has come into effect on January 1, 2019. Pursuant to the Announcement, cross-border e-commerce payment enterprises, logistics enterprises shall obtain the relevant qualification certificate pursuant to the provisions of the Announcement on Regulatory Matters Relating to Cross-border E-commerce Retail Imports and Exports and submit the relevant qualification certificate pursuant to the relevant provisions of the authorities in charge when completing customs registration formalities. 125 Table of Contents Regulations Related to M&A and Overseas Listings On August 8, 2006, six PRC regulatory agencies, including the Ministry of Commerce, the State-owned Assets Supervision and Administration Commission, the SAT, the SAIC, the China Securities Regulatory Commission, or CSRC, and the SAFE, jointly issued the Regulations on Mergers and Acquisitions 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 SPV overseas, 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’s approval 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 obtains CSRC approval before it lists overseas. The Anti-Monopoly Law promulgated by the Standing Committee of the National People’s Congress on August 30, 2007 and effective on August 1, 2008 requires that transactions which are deemed concentrations and involve parties with specified turnover thresholds must be cleared by MOFCOM before they can be completed. In addition, on February 3, 2011, the General Office of the State Council promulgated a Notice on Establishing the Security Review System for Mergers and Acquisitions of Domestic Enterprises by Foreign Lenders, or Circular 6, which officially established a security review system for mergers and acquisitions of domestic enterprises by foreign investors. Further, on August 25, 2011, MOFCOM promulgated the Regulations on Implementation of Security Review System for the Merger and Acquisition of Domestic Enterprises by Foreign Lenders, or the MOFCOM Security Review Regulations, which became effective on September 1, 2011, to implement Circular 6. Under Circular 6, a security review is required for mergers and acquisitions 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 the substance and actual impact of the transaction when deciding whether a specific merger or acquisition is subject to security review. If MOFCOM decides that a 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 led by 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. On December 24, 2021, the CSRC released the Administrative Provisions of the State Council Regarding the Overseas Issuance and Listing of Securities by Domestic Enterprises (Draft for Comments) , or the Draft Administrative Provisions, and the Measures for the Overseas Issuance of Securities and Listing Record-Filings by Domestic Enterprises (Draft for Comments) (the “Draft Filing Measures”, collectively with the Draft Administrative Provisions, the “Draft Rules Regarding Overseas Listing”), both of which have a comment period that expires on January 23, 2022. The Draft Rules Regarding Overseas Listing lay out the filing regulation arrangement for both direct and indirect overseas listing, and clarify the determination criteria for indirect overseas listing in overseas markets. The Draft Rules Regarding Overseas Listing apply to overseas offerings by domestic companies of equity shares, depository receipts, convertible corporate bonds, or other equity-like securities, and overseas listing of the securities for trading. Domestic companies that seek to offer and list securities in overseas markets shall fulfill the filing procedure with the securities regulatory agency under the State Council and report relevant information. As supporting rules, the Draft Filing Measures further stipulates that, if an issuer makes refinancing after having been listed in an overseas market, filings shall be made within three working days after the securities offering is completed. The Draft Filing Measures requires domestic companies that have been listed overseas report to the CSRC within three working days once the following material events occurred: (i) material change of control, (ii) investigations or sanctions imposed by overseas securities regulatory authorities, (iii) voluntary or compulsory delisting, to strengthen interim and ex-post regulation. The Draft Filing Measures also define the 126 Table of Contents legal liabilities of breaches thereto, as parallel orders commanded by the CSRC and the relevant competent authorities under State Council according to the seriousness of the violations, such as rectification demand, supervision conversations, notice of disciplinary outcome, or legal liabilities under applicable laws and regulations, if any, etc. Regulations Related to Education On March 18, 1995, the PRC National People’s Congress, or the NPC, promulgated the Education Law of the PRC, or the Education Law. The Education Law stipulates that the government formulates plans for the development of education, establishes and operates business of education, and in principle, enterprises, institution, social organizations and individuals are encouraged to operate various types of educational businesses. It is provided in the Education Law that no organization or individual may establish or operate a school or any other educational institution for commercial purposes. On December 27, 2015, the NPC Standing Committee, published the Decision on Amendment of the Education Law, which took effect on June 1, 2016. The NPC Standing Committee narrowed the provision prohibiting the establishment or operation of schools or other educational institutions for commercial purposes to only restricting a school or other educational institution founded with governmental funds or donated assets in the amended Education Law. On December 28, 2002, the NPC Standing Committee promulgated the Law for Promoting Private Education, and was last amended on December 29, 2018, the amendment of which also took effect on December 29, 2018. On March 5, 2004, the PRC State Council promulgated the Implementation Rules for the Law for Promoting Private Education, which became effective on April 1, 2004, or the Private Education Implementation Rules. On August 10, 2018, the Ministry of Justice has published Regulations on the Implementation of the Law of the People’s Republic of China on the Promotion of Private Education (Draft Revision) (Draft for Examination), or Regulations on the Implementation of the Law of the Promotion of Private Education (Draft Revision), for public comments. According to the Private Education Law, establishment of private institution for academic education, pre-school education, self-taught examination support and other cultural education shall be subject to approval by the authorities in charge of education. A duly approved private school will be granted operating permit, and shall be registered as a legal person at the competent registration authorities. Sponsors of private schools may set up, at their sole discretion, non-profit or commercial private schools. Nonetheless, sponsors may not establish commercial private schools providing compulsory education. Article 15(2) of Regulations on the Implementation of the Law of the Promotion of Private Education (Draft Revision) (Draft for Examination) provides that private training and education institutions that implement educational and teaching activities that contribute to quality improvement and personality development, such as language proficiency, art, sports, science and technology, research and study, as well as private training and education institutions that provide cultural education and non-academic continuing education for adults, may apply directly for registration as legal persons, and the approval by the authorities in charge of education is not required. On June 18, 2012, the Ministry of Education, or the MOE, issued the Implementation Opinions of MOE on Encouraging and Guiding the Entry of Private Capital in the Fields of Education and Promoting the Healthy Development of Private Education to encourage private investment and foreign investment in the field of education. According to these laws, regulations and opinions, the proportion of foreign capital in a PRC-foreign cooperative education institute shall be less than 50%. On December 27, 2020, the MOFCOM and the NDRC jointly promulgated the Catalog of Industries Encouraging Foreign Investment (2020 Version), or the 2020 Encouraged Catalog, which became effective on January 27, 2021 and replaced the previous list of the industries where foreign investment is encouraged under the 2019 Encouraged Catalog. According to the Catalogue of Industries Encouraging Foreign Investment (2020 Version), non-school-based vocational training institutions are among the industries encouraging foreign investment. 127 Table of Contents Regulation Relating to After-school Tutoring and Education On September 4, 1991, the 21st Session of the Standing Committee of the Seventh National People’s Congress issued the Law of the People’s Republic of China on the Protection of Minors, or the Law on Protection of Minors. On the October 17, 2020, the law was amended, focusing on time arrangement of the minors especially in terms of their lessons taken after class, which will take effect on the June 1, 2021. The amended Law on Protection of Minors orders that educational institutions shall not organize lessons such as English lessons that teach pre-school kids contents included in primary school education schedule in any forms. On February 13, 2018, the MOE, the Ministry of Civil Affairs, the Ministry of Human Resources and Social Security and the SAMR jointly promulgated the Circular on Alleviating After-school Burden on Primary and Secondary School Students and Implementing Inspections on After-school Training Institutions, pursuant to which the government authorities will carry out a series of inspections on after-school training institutions and order those with material potential safety risks to suspend business for self-inspection and rectification and those without proper establishment licenses or school operating permits to apply for relevant qualifications and certificates under the guidance of competent government authorities. After-school training institutions are prohibited from providing academic training services beyond the scope or above the level of school textbooks, or organizing any academic competitions (such as Olympiad competitions) or level tests for students of primary and secondary schools. In addition, primary and secondary schools may not reference the student’s performance in the after-school training institutions as one of admission criteria. On August 6, 2018, the General Office of the State Council issued Opinions of the State Council on regulating the development of out-of-school training institutions or the State Council Circular 80, with a view to effectively reduce the excessive extracurricular burden of primary and secondary school students and promote the standardized and orderly development of out-of-school training institutions. State Council Circular 80 sets out a number of operating standards for after-school tutoring institutions to adhere, including, among others, that: (i) an average student area of not less than 3 square meters during the same training period, to ensure that it is not crowded and easy to evacuate; they must meet national requirements on fire prevention, environmental protection, health, food operation and other management regulations.; (ii) through the purchase of personal safety insurance for the participants and other necessary ways to prevent and resolve the risk of safety accidents; (iii) in terms of teacher conditions, off-campus training institutions must have a relatively stable teaching staff, and may not employ primary or secondary school teachers in service ; (iv) training institutions should sign employment contracts, labor contracts or labor agreements with the personnel hired in accordance with the law. The employment of foreign personnel shall comply with the relevant national regulations. In addition, after-school training institutions are prohibited from carrying out exam- oriented training, training that goes beyond the school syllabus, training in advance of the corresponding school schedule or any training activities associated with student admission, and they are not allowed to organize any level test, rank examination or competition on academic subjects for primary and secondary students. The training content of after-school training institutions cannot exceed the corresponding national curricular standards and training progress shall not be more accelerated than the corresponding progress of local schools. According to State Council Circular 80, after- school training institutions are also required to disclose and file relevant information regarding the institution, including their training content, schedule, targeted students and school timetable to the relevant education authority, and their training classes may not end later than 8:30 p.m. each day or otherwise conflict with the teaching time of local primary and secondary schools. Course fees can only be collected for courses in three months or shorter installments. Moreover, State Council Circular 80 requests that competent local authorities formulate relevant local standards for after-school training institutions within their administrative area. If an overseas listed after-school training institution publicizes overseas any periodical report, or any interim report on material adverse effect on its operation, it must concurrently publish the information in Chinese on its official website (or on the disclosure platform for securities exchange information in the absence of an official website). On June 10, 2020, the General Office of MOE and the General Office of SAMR promulgated the Notice on Issuing the Form of Service Contract for After-school Training Provided to Primary and Secondary School 128 Table of Contents Students, which requires the local competent regulatory authorities to guide the relevant parties to use the form of service contract for after-school training activities provided to primary and secondary school students. The form of service contract covers the obligations and rights of parties involved in the after-school training, including detailed provisions on training fees, refund arrangement and default liabilities. Relating to after-school tutoring and education, (i) as Regulations on the Implementation of the Law of the Promotion of Private Education (Draft Revision) has not yet come into force, market administrative departments in each region have different understandings of whether various types of private for-profit training institutions need to obtain the operating permit by the authorities in charge of education, and even though Wanlimu Kids Club is not currently required by the competent authorities to obtain the license, it does not exclude the risk that it may be required to obtain the license in the future; (ii) the limited space and size of Wanlimu Kids Club’s educational facilities may lead to a drain of the Group’s students to its competitors; (iii) accidents or injuries suffered by the Group’s students, the Group’s employees or other people at Wanlimu Kids Club may adversely affect our reputation and subject us to liability; (iv) the Group is at risk of outbreaks related to the new coronavirus and other epidemics, which may result in reduced attendance or closures. 129 Table of Contents C. Organizational Structure The following diagram illustrates the Group’s organizational structure, and the place of formation, ownership interest and affiliation of each of our principal subsidiaries and affiliated entities as of December 31, 2021. It omits certain entities that are immaterial to the Group’s results of operations, business and financial condition, such as Xiamen Weipujia, Xiamen Qudian Financial Lease Ltd. and Xiamen Wanlimu Growth, which do not currently engage in material business operations. Except as otherwise specified, equity interests depicted in this diagram are held as to 100%. The relationships between each of Ganzhou Qudian, Xiamen Weipujia, Xiamen Qudian and Beijing Happy Time and Ganzhou Qufenqi, and the relationship between Xiamen Youxiang and Xiamen Qu Plus Plus are governed by contractual arrangements and do not constitute equity ownership. Investors in our ADSs hold equity interest in Qudian Inc., which does not conduct operations. (1) (2) Mr. Min Luo, our founder, chairman and chief executive officer, and Mr. Lianzhu Lv, our head of user experience department, respectively hold 99.0% and 1.0% of equity interests in Ganzhou Qudian. 130 Table of Contents (3) The following table sets forth the shareholders of Beijing Happy Time, their respective equity interests in Beijing Happy Time as of the date of this annual report. Shareholders Mr. Min Luo Phoenix Auspicious Internet Investment L.P. and Shenzhen Guosheng Qianhai Investment Co., Ltd. Beijing Kunlun Tech Co., Ltd. Ningbo Yuanfeng Venture Capital L.P.(a) Shanghai Yunxin Venture Capital Co., Ltd.(a) Jiaxing Blue Run Quchuan Investment L.P. and Tianjin Blue Run Xinhe Investment Center L.P.(a) Tianjin Happy Share Asset Management L.P., referred to as Tianjin Happy Share(b) Amount of Registered Capital RMB 5,025,579 4,596,670 4,587,496 3,757,355 2,985,744 1,681,366 1,251,742 Percentage of Equity Interests 21.0 19.2 19.2 15.7 12.5 7.0 5.2 (a) (b) Ningbo Yuanfeng Venture Capital L.P., Shanghai Yunxin Venture Capital Co., Ltd., Jiaxing Blue Run Quchuan Investment L.P. and Tianjin Blue Run Xinhe Investment Center L.P. entered into a series of agreements to transfer their respective equity interest in Beijing Happy Time to Mr. Min Luo in October 2020. We are still in the process of completing the registration of such share transfer with the relevant regulatory authorities. 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.” (4) Mr. Min Luo, our founder, chairman and chief executive officer, and Mr. Long Xu, our director, respectively hold 99.9% and 0.1% of equity interests in Xiamen Qu Plus Plus Technology Development Co., Ltd. (5) Main subsidiaries of Ganzhou Qudian include Xiamen Qudian Commercial Factoring Co., Ltd., Ganzhou Qudian Commerce Development Co., Ltd., Xiamen Junda Network Technology Co., Ltd., Xinjiang Qudian Technology Co., Ltd. and Xiamen Wanlimu Growth, which we expect to utilize to explore new business opportunities. (6) Main subsidiaries of Xiamen Qudian include Xiamen Wanlimu Technology Co., Ltd., Xiamen Qudian Culture and Technology Co., Ltd., Global Select (HK) Limited, Qu Plus Plus (HK) Limited and Xiamen Wanlimu Luxuries Co., Ltd. (7) Main subsidiaries of Beijing Happy Time include Fuzhou Happy Time Technology Development Co., Ltd., Tianjin Happy Time Technology Development Co., Ltd., Tianjin Qufenqi Technology Co., Ltd, Ganzhou Happy Fenqi Network Service Co., Ltd., Ganzhou and Fuzhou High-tech Zone Microcredit Co., Ltd. Bejing Happy Time currently operates the Group’s websites and mobile apps under the Laifenqi brand. Our Contractual Arrangements with the Group VIEs and Their Shareholders Due to PRC legal restrictions on foreign ownership and investment in, among other areas, VATS, which include the operations of Internet content providers, or ICPs, we currently conduct part of such operations through Beijing Happy Time and its subsidiaries. We established two additional Group VIEs, Ganzhou Qudian and Xiamen Qudian, in 2017. In addition, Xiamen Weipujia also became one of the Group VIEs in 2018 and Xiamen Qu Plus Plus became a Group VIE in 2019. We effectively control each Group VIE through a series of contractual arrangements with such Group VIE, its shareholders and Ganzhou Qufenqi or Xiamen Youxiang, as applicable, as described in more detail below, which collectively enables us to: • • exercise effective control over each of the Group VIEs and its subsidiaries; receive substantially all the economic benefits of each of the Group VIEs; and 131 Table of Contents • 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 the Group VIEs when and to the extent permitted by PRC law. 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 of directors of Qudian Inc. or any officer authorized by such board shall cause Ganzhou Qufenqi and Xiamen Youxiang to exercise their rights under the power of attorney agreements entered into among Ganzhou Qufenqi or Xiamen Youxiang, as applicable, each of the Group VIEs and the nominee shareholders of each of the Group VIEs and the rights of Ganzhou Qufenqi and Xiamen Youxiang under the exclusive call option agreement between Ganzhou Qufenqi or Xiamen Youxiang, as applicable, and each of the Group VIEs. As a result of these resolutions and the provision of unlimited financial support from the Company to each of the Group VIEs, Qudian Inc. has been determined to be most closely associated with each of the Group VIEs within the group of related parties and was considered to be the primary beneficiary of each of the Group VIEs for accounting purposes. We have consolidated their financial results in the Group’s 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, Xiamen Youxiang and the Group VIEs in China do not violate any applicable PRC law, regulation, or rule currently in effect; and the contractual arrangements among Ganzhou Qufenqi or Xiamen Youxiang, as applicable, each of the Group 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 not violate 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 and application of current and future PRC laws, rules and regulations. The 2019 Law of Foreign Investment became effective on January 1, 2020. The 2019 Law of Foreign Investment has replaced the trio of laws regulating foreign investment in China, namely, the Sino-foreign Equity Joint Venture Enterprise Law, the Sino-foreign Cooperative Joint Venture Enterprise Law and the Wholly Foreign-invested Enterprise Law, together with their implementation rules and ancillary regulations. The 2019 Law of Foreign Investment does not mention concepts including “de facto control” and “controlling through contractual arrangements,” nor does it specify the regulation on controlling through contractual arrangements. Specifically, it does not incorporate contractual arrangements as a form of foreign investment, our Contractual Arrangements as a whole and each of the arrangements comprising our Contractual Arrangements will not be materially affected and will continue to be legal, valid and binding on the parties. Notwithstanding the above, the 2019 Law of Foreign Investment stipulates that “foreign investment includes foreign investors invest in China through any other methods under laws, administrative regulations, or provisions prescribed by the State Council.” Therefore, there are possibilities that future laws, administrative regulations or provisions of the State Council may stipulate contractual arrangements as a way of foreign investment and our Contractual Arrangements will be regarded as foreign investment. If that is the case, whether our contractual arrangements will be deemed to be in violation of the foreign investment access requirements and how our Contractual Arrangements will be handled 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 our business do not comply with PRC government restrictions on foreign investment in the aforesaid business we engage in, we could be subject to severe penalties including being prohibited from continuing operations. See “Item 3. Key Information — D. Risk Factors — Risks Related to Our Corporate Structure.” 132 Table of Contents The following is a summary of the currently effective contractual arrangements by and among our wholly-owned subsidiary, Ganzhou Qufenqi or Xiamen Youxiang, as applicable, the applicable Group VIEs, and their respective shareholders. Equity Interest Pledge Agreements Pursuant to the equity interest pledge agreements, the shareholders of the Group VIEs have pledged all of their equity interest in the Group VIEs as a continuing first priority security interest, as applicable, to respectively guarantee the Group VIEs and their shareholders’ performance of their obligations under the relevant contractual arrangements, which include the exclusive business cooperation agreements, exclusive call option agreements and power of attorney agreements. If the Group VIEs or any of their shareholders breach their contractual obligations under these agreements, Ganzhou Qufenqi or Xiamen Youxiang, as applicable, as pledgee, will be entitled to certain rights regarding the pledged equity interests. In the event of such breaches, the rights of Ganzhou Qufenqi and Xiamen Youxiang include forcing the auction or sale of all or part of the pledged equity interests of the applicable Group VIE and receiving proceeds from such auction or sale in accordance with PRC law. Upon purchase of equity interests in the applicable the Group VIE by other persons, Ganzhou Qufenqi or Xiamen Youxiang, as applicable, and such persons will need to enter into contractual arrangements that are similar to existing ones in order for Ganzhou Qufenqi or Xiamen Youxiang, as applicable, to effectively control such Group VIE. Each of the shareholders of the Group 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 allow creation of any encumbrance on the pledged equity interests without the prior written consent of Ganzhou Qufenqi or Xiamen Youxiang, as applicable. Ganzhou Qufenqi and Xiamen Youxiang are entitled to all dividends and other distributions declared by the Group VIEs except as it agrees otherwise in writing. Each equity interest pledge agreement will remain effective until the applicable Group VIE and its shareholders discharge all their obligations under the contractual arrangements. We have registered pledges of equity interest in each of the Group VIEs with the relevant offices of the administration for industry and commerce in accordance with the PRC Property Rights Law. Power of Attorney Agreements Pursuant to the power of attorney agreements, each shareholder of the Group VIEs has irrevocably appointed the Ganzhou Qufenqi or Xiamen Youxiang, as applicable, to act as such shareholder’s exclusive attorney-in-fact to exercise all shareholder rights, including the right to attend and vote on shareholder’s meetings and appoint directors and executive officers. In the absence of contrary written instructions of Ganzhou Qufenqi or Xiamen Youxiang, as applicable, each power of attorney agreement will remain in force for so long as the shareholder remains a shareholder of the applicable Group VIE. Exclusive Business Cooperation Agreements Under the exclusive business cooperation agreements, Ganzhou Qufenqi and Xiamen Youxiang have the exclusive right to provide the Group VIEs and their subsidiaries that generate substantial income, including Ganzhou Happy Fenqi, Ganzhou Network, and Fuzhou Microcredit, or the profitable Group VIEs and their subsidiaries, with technical support, consulting services and other services. In exchange, Ganzhou Qufenqi is entitled to receive a service fee from each of the profitable Group VIEs on a monthly basis and at an amount equivalent to all of its net income as confirmed by Ganzhou Qufenqi; Xiamen Youxiang is entitled to receive a service fee from Xiamen Qu Plus Plus on a monthly basis and at an amount equivalent to all of its net income as confirmed by Xiamen Youxiang. Ganzhou Qufenqi and Xiamen Youxiang own the intellectual property rights arising out of the performance of the respective exclusive business cooperation agreement. In addition, each of the Group VIEs and their subsidiaries has granted Ganzhou Qufenqi or Xiamen Youxiang, as applicable, an exclusive right to purchase any or all of the business or assets of each of the profitable Group VIEs and their subsidiaries at the lowest price permitted under PRC law. Unless otherwise agreed by the parties, this agreement will continue remaining effective. 133 Table of Contents Exclusive Call Option Agreements Pursuant to the exclusive call option agreements, the Group VIEs and each of their shareholders have irrevocably granted Ganzhou Qufenqi or Xiamen Youxiang, as applicable, an exclusive option to purchase, or have its designated person or persons to purchase, at its discretion at any time, to the extent permitted under PRC law, all or part of such shareholder’s equity interests in the applicable, or any or all of the assets of such Group VIE. For reasons discussed in this section, there may be PRC legal restrictions on the ability of Ganzhou Qufenqi and Xiamen Youxiang to directly purchase such equity interests or assets. In the event such equity interests or assets are sold to persons designated by Ganzhou Qufenqi or Xiamen Youxiang, as applicable, Ganzhou Qufenqi or Xiamen Youxiang, as applicable, and such persons will need to enter into contractual arrangements that are similar to the existing ones in order for Ganzhou Qufenqi or Xiamen Youxiang, as applicable, to exercise effective control over and receive substantially all the economic benefits of such equity interests or assets. As for the equity interests in a Group VIE, the purchase price should be equal to the minimum price as permitted by PRC law. As for the assets of a Group VIE, the purchase price should be equal to the book value of the assets or the minimum price as permitted by applicable PRC law, whichever is higher. Without prior written consent of Ganzhou Qufenqi or Xiamen Youxiang, as applicable, each Group VIE and its shareholders have agreed that such Group VIE shall not amend its articles of association, increase or decrease the registered capital, sell or otherwise dispose of its assets or beneficial interest, create or allow any encumbrance on its assets or other beneficial interests, provide any loans or guarantees and etc. Ganzhou Qufenqi and Xiamen Youxiang are entitled to all dividends and other distributions declared by the applicable Group VIE except as they agree otherwise in writing, and the shareholders of the applicable Group VIE have agreed to pay any such dividends or distributions to Ganzhou Qufenqi and Xiamen Youxiang, respectively. Each agreement will remain effective until all equity interests of the applicable Group VIE held by its shareholders and all assets of such Group VIE have been transferred or assigned to Ganzhou Qufenqi or Xiamen Youxiang, as applicable, or its designated person(s). Financial Support Undertaking Letters We executed a financial support undertaking letter addressed to each Group VIE, pursuant to which we irrevocably undertake to provide unlimited financial support to such Group VIE to the extent permissible under the applicable PRC laws and regulations, regardless of whether such Group VIE has incurred an operational loss. The form of financial support includes but is not limited to cash, entrusted loans and borrowings. We will not request repayment of any outstanding loans or borrowings from a Group VIE if it or its shareholders do not have sufficient funds or are unable to repay such loans or borrowings. Each letter is effective from the date of the other agreements entered into among Ganzhou Qufenqi, or Xiamen Youxiang, as applicable, the applicable Group VIE and its shareholders until the earlier of (i) the date on which all of the equity interests of such Group VIE have been acquired by or its designated representative(s), and (ii) the date on which we in our sole and absolute discretion unilaterally terminates the applicable financial support undertaking letter. We expect to provide the financial support if and when required with a portion of the proceeds from our initial public offering and convertible senior notes and proceeds from the issuance of equity or debt securities in the future. D. Facilities The Group’s corporate headquarters are located in Xiamen, Fujian Province, China, where the Group leases approximately 9,977 square meters of office space pursuant to a series of lease expiring in the third quarter of 2023. The Group also maintains leased properties of approximately 607 square meters, 100 square meters, 2,000 square meters and 526 square meters in Beijing, Tianjin, Fuzhou and Ganzhou in Jiangxi Province, respectively. The Group also uses a property of 80 square meters and 701 square meters in Jiangxi Province and Xinjiang Autonomous Region provided by the local government without rent. In January 2018, the Group purchased the use rights with respect to a parcel of land of approximately 53,239 square meters located in Xiamen, Fujian Province for a price of RMB106 million. Pursuant to the contract 134 Table of Contents the Group signed with the local government authorities, the Group’s land lease right of use asset will last for 40 years. The Group has commenced construction of its innovation park on such parcel of land, and the construction is expected to be completed in the first quarter of 2023. We believe that the Group will be able to obtain adequate facilities to accommodate the Group’s future expansion plans. ITEM 4A. UNRESOLVED STAFF COMMENTS None. ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS You should read the following discussion and analysis of the Group’s financial condition and results of operations in conjunction with the Group’s consolidated financial statements and the related notes included elsewhere in this annual report. This discussion may contain forward-looking statements based upon current expectations that involve risks and uncertainties. The Group’s actual results may differ materially from those anticipated in these forward-looking statements as 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. For comparison of the Group’s results of operations for the years ended December 31, 2020 to December 31, 2019, refer to “Item 5. Operating and Financial Review and Prospects” in the 2021 Form 20-F, filed with the SEC on April 29, 2021. A. Operating Results Overview The Group is a consumer-oriented technology company in China. The Group historically focused on providing credit solutions to consumers. The Group has been exploring innovative consumer products and services to satisfy the fundamental and daily needs of Chinese consumers by leveraging its technology capabilities. The Group launched its ready-to-cook meal business, or “QD Food,” in March 2022. We believe there is vast market demand for ready-to-cook meals in China. Catering to working-class families, QD Food products are designed to offer a convenient cooking experience, fresh ingredients, flavorful tastes and value-for-money pricing. Consumers order QD Food products on their smartphones through the Group’s WeChat mini-program and Douyin. The recipes for QD Food products are primarily designed in-house, and the Group engages third-party facilities for food preparation. QD Food products are currently available in Guangdong province, and the Group plans to expand its product offerings to other cities in China. As of April 15, 2022, QD Food offered more than 30 stock keeping units, or SKUs, and over 80 thousand unique users have placed orders since the Group launched the service in March 2022. The typical price range of QD Food products is between RMB12.9 and RMB44.9 per SKU before discounts. Besides QD Food, the Group also operates a loan book business, whereby the Group offers small credit products to consumers and undertakes the related credit risk. In the three months ended December 31, 2021, the small credit products under the Group’s loan book business had an average size of approximately RMB2,800 (US$445) and weighted average term of approximately 3.9 months. In addition, the Group operated a transaction services business until the third quarter of 2021, whereby the Group offers loan recommendation and referral services to third-party financial service providers and assume no credit risk. In 2021, the Group facilitated RMB15,117.3 billion (US$2,372.2 billion) in transactions, 97.7% of such transactions were facilitated under the Group’s loan book business, and 2.3% were facilitated under the Group’s transaction services business. 135 Table of Contents In light of the regulatory uncertainties in China’s online consumer finance market and to maintain its asset quality, the Group has implemented stringent credit standards for its credit business, which has led to a significant decrease in the amount of transactions facilitated in the first quarter of 2022. As a result, the Group expects its revenue to decline sequentially in the first quarter of 2022, compared with the fourth quarter of 2021. In addition, the Group expects further decreases in the total amount of transactions and related revenue in the second quarter of 2022. The Group will continue to evaluate conditions in the online consumer finance market and relevant regulatory developments. Based on this ongoing assessment, the Group may wind down its credit business. The Group generates (i) financing income, loan facilitation income and other related income and guarantee income from cash credit products and (ii) sales income from the QD Food business. The Group historically generated (i) financing income and sales commission fee from merchandise credit products and (ii) transaction services fee and other related income from the Group’s transaction services business. The Group also generated sales income from merchandise sales on the Wanlimu e-commerce platform, which the Group is in the process of winding down. In addition, the Group historically offered budget auto financing products, from which the Group generated sales income and financing income. The Group started to wind down its budget auto financing business in the second quarter of 2019. The Group’s total revenues decreased from RMB8,840.0 million in 2019 to RMB3,688.0 million in 2020, and decreased to RMB1,654.0 million (US$259.6 million) in 2021. The Group recorded net income of RMB3,264.3 million, RMB958.8 million and RMB585.9 million (US$91.9 million) in 2019, 2020 and 2021, respectively. Key Factors Affecting the Group’s Results of Operations Scale of Credit Business The Group historically derived substantially all of its revenue from its credit business. The Group’s revenue is subject to the amount of transactions it facilitates. In light of the regulatory uncertainties in China’s online consumer finance market and to maintain its asset quality, the Group has significantly downsized its credit business. As a result, the Group expects to record decreases in its revenue over the first half of 2022. The Group will continue to evaluate conditions in the online consumer finance market and relevant regulatory developments. Based on this ongoing assessment, the Group may wind down its credit business, which could result in a further decrease to the Group’s revenue. New Business Initiatives The Group has been exploring innovative consumer products and services to satisfy the fundamental and daily needs of Chinese consumers by leveraging its technology capabilities. It launched QD Food in March 2022 and expects that QD Food will become an important revenue stream in 2022. The Group’s results of operations depends on its ability to execute its new business initiatives, particularly QD Food. The success of QD Food will depend on, among other things, the Group’s ability to • • • • • enhance brand recognition and acquire users in a cost-efficient manner; design and offer products that meet consumer demand; manage supply chain and inventory; enhance operational efficiency; and fulfill users’ orders in a timely manner. In the near term, the Group expects to offer discounts and incur significant marketing expenses to expand QD Food’s user base. As a result, the Group is likely to incur losses initially as a result of this new venture. To support the growth of QD Food, the Group may also make significant capital expenditures to establish food preparation and fulfillment facilities. 136 Table of Contents Risk Management The Group bears credit risk for transactions under the loan book business. Transactions under the loan book business consist of on-balance sheet transactions, as well as off-balance sheet transactions. The Group periodically adjusts its allowance for loan principal and financing service fee receivables when the Group believes that the future collection of the principal of on-balance sheet transactions is unlikely. The Group bases the allowance for loan principal and financing service fee receivables primarily on historical loss experience using a roll rate-based model applied to the Group’s principal and financing service fee receivables portfolios and, to a lesser extent, macroeconomic factors. As such, an increase in delinquency rates of on-balance sheet transactions will result in a higher allowance for loan principal and financing service fee receivables. The Group recognizes any increase in allowance for loan principal and financing service fee receivables as provision for loan principal and financing service fee receivables for the relevant period. The Group charges off loan principal and financing service fee receivables as a reduction to the allowance for loan principal and financing service fee receivables when the principal and financing service fee receivables are deemed to be uncollectible. At the inception of each off-balance sheet transaction, the Group records the fair value of (i) guarantee liabilities, which represent the present value of the Group’s expected payout based on the estimated delinquency rate and the applicable discount rate for time value; or (ii) risk assurance liabilities, which considers the premium required by a third-party market participant to issue the same risk assurance in a standalone transaction, as applicable. The contingent loss rising from risk assurance liabilities is recognized when borrower default is probable, and the amount of loss is estimable. The contingent liability related to the expected credit loss for the guarantee measured was recognized at inception in accordance with ASC 326. As such, an increase in expected delinquency rates of off-balance sheet transactions will result in an increase in the amount of guarantee liabilities and risk assurance liabilities, which is recognized as changes in guarantee liabilities and risk assurance liabilities in the Group’s results of operations. Major outbreaks of the Omicron variant of COVID-19 have occurred in many parts of China since March 2022. These outbreaks have caused severe hardships to countless consumers in China and adversely affected their ability to repay their borrowings. As a result, the Group is likely to experience increases in delinquency rates in the near term. Economic Conditions and Regulatory Environment in China The demand for credit from borrowers is dependent upon overall economic conditions in China. General economic factors, including the interest rate environment and unemployment rates, may affect borrowers’ willingness to seek credit. For example, significant increases in interest rates could cause prospective borrowers to defer obtaining credit as they wait for interest rates to decrease. Additionally, a slowdown in the economy, resulting in a rise in the unemployment rate and/or a decrease in real income, may affect individuals’ level of disposable income. This may affect borrowers’ repayment capability and their willingness to seek credit, which may potentially affect credit drawdowns and/or delinquency rates. The regulatory environment for the online consumer finance industry in China is developing and evolving, creating both challenges and opportunities that could affect the Group’s financial performance. Due to the relatively short history of online consumer finance industry in China, the PRC government has not adopted a clear regulatory framework governing our industry. We will continue to make efforts to ensure that the Group is compliant with the existing laws, regulations and governmental policies relating to our industry and to comply with new laws and regulations or changes under existing laws and regulations that may arise in the future. User Engage Metrics In connection with the Group’s credit business, we regularly review a number of user engagement metrics, including the following metrics, to evaluate the level of user engagement, monitor the size of the Group’s user base, identify trends, formulate financial projections and make strategic decisions. We believe that these user engagement metrics are useful to investors because they are frequently used by analysts, investors and other interested parties to evaluate companies in our industry. 137 Table of Contents The following table sets forth the Group’s registered users, outstanding borrowers and cumulative number of borrowers as of the dates indicated: Registered users Outstanding borrowers Cumulative number of borrowers We define “registered users” as individuals who have registered with the Group. 2019 79,463 6,116 19,037 As of December 31, 2020 (in thousands) 81,937 3,472 19,067 2021 83,668 2,793 19,071 We define “outstanding borrowers” as borrowers who have outstanding loans under either the loan book business or the transaction services business as of a specified date. We define “cumulative number of borrowers” as borrowers who have drawn down credit under either the loan book business or the transaction services business since the Group’s inception in April 2014. Transaction Volume Metrics In connection with the Group’s credit business, we regularly review a number of transaction volume metrics, including the following metrics, to monitor the size of the Group’s transaction volume, identify trends, formulate financial projections and make strategic decisions. We believe that these transaction volume metrics are useful to investors because they are frequently used by analysts, investors and other interested parties to evaluate companies in our industry. The table below sets forth a breakdown for the amount of transactions the Group facilitated in the periods presented: On-balance sheet transactions Off-balance sheet transactions Transactions under the loan book business Transactions under the transaction services business Total 2019 RMB 22,760,427 38,080,279 60,840,706 23,683,642 84,524,348 Year Ended December 31, 2020 RMB RMB (in thousands) 2021 US$ 18,294,942 97,879 18,392,821 4,020,778 22,413,599 14,636,497 128,368 14,764,865 352,402 15,117,267 2,296,785 20,144 2,316,929 55,300 2,372,229 We define “amount of transactions” as the aggregate principal amount of credit drawdowns that are provided to borrowers in the specified period, which are comprised of (i) credit drawdowns that are facilitated under the Group’s loan book business and (ii) credit drawdowns that are facilitated under the Group’s transaction services business. 138 Table of Contents The table below sets forth a breakdown for the outstanding principal of transactions the Group facilitated as of the dates presented: On-balance sheet transactions Off-balance sheet transactions Transactions under the loan book business Transactions under the transaction services business Total Credit Performance Metrics 2019 RMB Year Ended December 31, 2020 RMB 2021 RMB US$ (in thousands) 9,286,416 13,254,755 22,541,171 15,594,775 38,135,946 4,718,031 83,723 4,801,755 5,135,404 9,937,159 2,596,741 — 2,596,741 2,712,210 5,308,951 407,485 — 407,485 425,605 833,090 The credit performance of the transactions the Group facilitates under the loan book business directly affects the Group’s financial condition and results of operations. We regularly review a number of credit performance metrics, including the following metrics, to evaluate credit performance of the Group’s loan book business, identify trends, formulate financial projections and make strategic decisions. We believe that these credit performance metrics are useful to investors because they are frequently used by analysts, investors and other interested parties to evaluate companies in our industry. If one payment for a credit drawdown facilitated by the Group is past due, the remaining payments that are not yet due are also considered past due for the purpose of evaluating the performance of the credit drawdown. M1+ Delinquency Rate by Vintage Based on our experience, credit drawdowns past due 1 to 30 calendar days would be largely recovered by collection, therefore our focus on credit performance are those transactions for which any installment payment was more than 30 calendar days (“M1+”) past due. We closely monitor the credit performance measured by the M1+ delinquency rates by vintage, which track the lifetime performance of the credit drawdowns originated in a certain vintage and vintage charge-off rate. 139 Table of Contents The following chart displays M1+ delinquency rate by vintage. M1+ delinquency rate by vintage (with respect to on- and off-balance sheet transactions facilitated under the loan book business during a specified time period) refers to the total outstanding principal balance of the transactions of a vintage for which any repayment is overdue for more than 30 days, divided by the total initial principal of the transactions facilitated in such vintage. M1+ delinquency rate by vintage for transactions in 2020 reached 7.9% through March 31, 2021. M1+ delinquency rate by vintage for transactions in 2021 was less than 3.0% through March 31, 2022. Such changes were primarily due to the Group’s deployment of a conservative and prudent strategy in its cash credit business. Vintage Charge-off Rate The following charts display the vintage charge-off rate. Vintage charge-off (with respect to on- and off-balance sheet transactions facilitated under the loan book business during a specified time period) refers to the total outstanding principal balance of the transactions for which any repayment is overdue for more than 180 days during such period, divided by the total initial principal of the transactions facilitated in such vintage. 140 Table of Contents Outstanding Amounts Past Due The following table provides the total balance of outstanding principal for on-balance sheet transactions where the longest past due period of an installment payment was 1 to 30, 31 to 60, 61 to 90 and more than 90 calendar days as of the dates presented: As of December 31, 2019 December 31, 2020 December 31, 2021 1-30 calendar days RMB 31-60 calendar days RMB Delinquent for 61-90 calendar days RMB More than 90 calendar days RMB (in thousands) Total RMB US$ 314,330 212,627 185,994 629,975 1,342,926 192,899 62,179 51,673 45,871 53,291 254,885 30,711 91,017 43,285 32,716 28,694 405,720 195,712 The following table provides the balance of outstanding financing service fees for on-balance sheet transactions where the longest past due period of an installment payment was 1 to 30, 31 to 60 and 61 to 90 calendar days as of the dates presented(1): 1-30 calendar days Delinquent for 61-90 calendar days RMB RMB RMB RMB US$ (in thousands) 31-60 calendar days Total As of December 31, 2019 December 31, 2020 December 31, 2021 (1) Financing service fees are reversed post 90 calendar days. 6,233 8,118 10,669 25,019 3,594 1,109 1,551 2,557 5,217 800 927 2,398 376 651 821 The Group actively services and collects principal and financing service fees that are past due. The following table sets forth the amount of principal and financing service fees for on-balance sheet transactions that were recovered for the periods presented: Amount recovered past due payments for principal Amount recovered past due payments for financing service fees Year Ended December 31, 2019 RMB 2020 RMB 2021 RMB US$ (in thousands) 461,822 52,730 580,048 58,223 289,497 23,119 45,428 3,628 The following table sets forth the amount of loan principal and financing service fee receivables the Group charged off for the periods presented: Amount charged off 141 Year Ended December 31, 2019 RMB 2020 RMB 2021 RMB US$ (in thousands) 1,215,718 2,127,088 387,018 60,732 Table of Contents The Group charges off loan principal and financing service fee receivables if any of the conditions specified in the Group’s charge-off policy is satisfied, including the amount remain outstanding 180 calendar days past due and therefore deemed uncollectible. Provision Ratio We define “provision ratio” as the amount of provision for loan principal and financing service fee receivables incurred during a period as a percentage of the total amount of on-balance sheet transactions during such period. The following table sets forth the Group’s provision ratio for the periods presented: Provision ratio 2019 9.49% Year Ended December 31, 2020 7.84% 2021 (1.33%) The Group periodically adjust its allowance for loan principal and financing service fee receivables when the Group believes that the future collection of principal is unlikely. The Group bases the allowance for loan principal and financing service fee receivables primarily on historical loss experience using a roll rate-based model applied to the Group’s principal and financing service fee receivables portfolios and, to a lesser extent, macroeconomic factors. The Group recognizes any increase in allowance for loan principal and financing service fee receivables as provision for loan principal and financing service fee receivables for the relevant period. The Group’s provision ratio changed from 7.84% in 2020 to a reversal of 1.33% in 2021 primarily due to a decrease in M1+ overdue loan principals. M1+ Delinquency Coverage Ratio We 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 days past due as of the end of such period. M1+ delinquency coverage ratio 2019 1.5x As of December 31, 2020 2.4x 2021 1.8x M1+ delinquency coverage ratio was above 1.5x as of December 31, 2019, 2020 and 2021, indicating that the Group’s allowance for principal and financing service fee receivables was adequate to cover delinquency balance. Charge-Off Ratio We define “charge-off ratio” as the amount of loan principal receivables the Group charged off during a period, divided by the total amount of on-balance sheet transactions during such period. Charge-off ratio Components of Results of Operations Revenues 2019 Year Ended December 31, 2020 % 2021 5.34% 11.63% 2.64% The Group’s total revenues comprise financing income, sales commission fee, sales income, penalty fees, guarantee income, loan facilitation income and other related income and transaction services fee and other related 142 Table of Contents income. The Group’s total revenues are presented net of VAT. Financing income represents financing service fees that the Group collects from borrowers for on-balance sheet transactions, which the Group has facilitated since inception in April 2014. Sales commission fee represents fee earned from merchandise suppliers in connection with merchandise credit products. Sales income represents the sales price of cars the Group sells to car buyers in connection with the Group’s budget auto financing products and revenues from product sales through the Group’s Wanlimu e-commerce platform. Penalty fees represent fees the Group charges borrowers for late repayment. Guarantee income represents income earned from the Group’s obligation to provide risk assurance on the principal and accrued interest repayment of loans facilitated, which is recognized over the term of the arrangement as the Group is released from the stand ready obligation based on the borrower’s repayment of the loan principal. Loan facilitation income and other related income represent loan facilitation fees earned from certain institutional funding partners in connection with off-balance sheet transactions, a type of funding arrangement that started in September 2016. For more information, see “Item 5. Operating and Financial Review and Prospects — A. Operating Results — Critical Accounting Policies — Revenue Recognition.” Transaction services fee and other related income represent commissions and fees earned from financial service providers in connection with the Group’s transaction services business. The following table sets forth the breakdown of the Group’s total revenues, both in absolute amount and as a percentage of the Group’s total revenues, for the periods presented: 2019 RMB % of total revenues Year Ended December 31, 2020 % of total revenues RMB RMB (in thousands, except for percentages) 2021 US$ % of total revenues Revenues Financing income Sales commission fee Sales income and others Penalty fees Guarantee income Loan facilitation income and other related income Transaction services fee and other related income Total revenues Financing Income 3,510,055 356,812 431,946 44,354 39.7 2,102,665 4.0 80,992 4.9 610,793 72,235 0.5 — — 826,198 26.0 131,633 24.9 (136,542) 57.0 1,255,488 197,014 2.2 5,557 35,411 16.5 100,668 15,797 67,316 10,563 2.0 617 3,935 22.4 3.6 6,203 39,531 2,297,413 2,199,464 (3.7) 151,694 23,804 8,840,044 100.0 3,687,974 100.0 1,654,043 259,555 75.9 2.1 6.1 4.1 0.2 2.4 9.2 100.0 The Group charges financing service fees for facilitating on-balance sheet transactions. The financing service fees are recorded as 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 the borrowers in cash. These incentives are recorded as a reduction in financing service fees using the effective interest method. Sales Commission Fee Sales commission fee represents fee earned from merchandise suppliers when borrowers purchase their merchandise on the Qudian marketplace and comprise the difference between the retail prices of the merchandise sold to borrowers and the prices of the merchandise that the Group pays to the merchandise suppliers. 143 Table of Contents Sales income and others Sales income and others comprise (i) the sales price of cars, which consists of down payment and principal under the sales-type finance leases, (ii) the amount of consideration the Group receives from the buyer for the sale of the vehicle, net of value-added tax, in vehicle sales with guarantee transactions and (iii) the sales price of fashion products the Group sold on Wanlimu e-commerce platform. Penalty Fees Penalty fees represent fees the Group charges borrowers for late repayment. Penalty fees are recognized on a cash basis when the penalty fees will not be reversed. Guarantee Income Guarantee income represents the non-contingent aspect of the risk assurance liability that the Group recognizes over the term of the arrangement as the Group is released from the stand ready obligation on the borrowers’ repayment of the loan principal. Loan Facilitation Income and Other Related Income Loan facilitation income and others represent loan facilitation fees earned from certain institutional funding partners for credit directly funded by them and vehicle sales with guarantee. Revenues from loan facilitation services are recognized when the Group matches borrower with the funding partners and the funds are transferred to the borrower. Additionally, revenues from post-origination services are recognized evenly over the term of the loans as the services are performed. Transaction Services Fee and Other Related Income Transaction services fee and other related income represent commissions and fees earned from financial service providers in connection with the Group’s transaction services business. Revenues from transaction services are recognized when the Group matches borrower with the financial service provider and the funds are transferred to the borrower. Additionally, revenues from post-origination services are recognized evenly over the term of the loans as the services are performed. Cost of Revenues and Operating Expenses The Group’s cost of revenues and operating expenses consist of cost of revenues, sales and marketing expenses, general and administrative expenses, research and development expenses, changes in guarantee liabilities, changes in risk assurance liabilities and provision for receivables and other assets. The following table sets forth the Group’s cost of revenues and operating expenses, both in absolute amount and as a percentage of the Group’s total revenues, for the periods presented: 2019 RMB % Year Ended December 31, 2020 RMB % (in thousands, except for percentages) RMB 2021 US$ % Cost of revenues and operating expenses: Cost of revenues Sales and marketing General and administrative Research and development Changes in guarantee liabilities and risk assurance liabilities Provision for receivables and other assets Impairment loss from long-lived assets Total 901,788 10.2 280,616 3.2 286,059 3.2 204,781 2.3 1,143,427 12.9 2,283,126 25.8 1,641,362 44.5 (151,817) (23,823) — — 156,394 24,542 862,354 23.4 298,726 46,877 18.1 7.7 293,282 8.0 127,376 19,988 285,905 7.7 443,276 69,560 26.8 170,691 4.6 141,264 22,167 8.5 (87,894) (2.4) (201,602) (31,636) (12.2) (9.2) 9.5 5,099,797 57.6 3,165,700 85.8 813,617 127,675 49.2 — — 144 Table of Contents Cost of Revenues The Group’s cost of revenues represent cost of goods sold, which primarily consists of cost of goods sold on Wanlimu e-commerce platform, cost of cars the Group purchases, and cost of other revenues, which includes interest expense of borrowings, which are fees paid or payable to institutional funding partners and other lending related costs, which include payment processing and settlement fees, including those paid to Alipay. The following table sets forth components of the Group’s cost of revenues, both in absolute amount and as a percentage of the Group’s total revenues, for the periods presented: 2019 2020 Year Ended December 31, RMB % RMB % RMB (in thousands, except for percentages) 2021 US$ % Cost of revenues: Cost of goods sold Cost of other revenues Total 366,015 4.1 645,083 17.5 78,533 12,324 4.7 535,773 6.1 217,271 5.9 220,193 34,553 13.3 901,788 10.2 862,354 23.4 298,726 46,877 18.1 Interest expenses of borrowings depend on the institutional funding partners which the Group works with to fund the transactions the Group facilitates. The interests payable to institutional funding partners are lower than financing service fees the Group collects from borrowers on the credit drawdowns transferred. Certain institutional funding partners provide funds directly to borrowers for credit that the Group facilitates, and the Group does not recognize interest expenses of borrowings relating to such credit drawdowns. In addition, when utilizing the Group’s own capital to fund credit, the Group also does not incur interest expenses of borrowings. Sales and Marketing Sales and marketing expenses include expenses for (i) the Group’s core online consumer finance business and consist primarily of expenses related to borrower engagement and retention, salaries, benefits and share-based compensation related to the Group’s sales and marketing staff; and (ii) the Group’s Wanlimu e-commerce platform business and consist primarily of expenses related to marketing activities the Group conducted to promote the platform. General and Administrative General and administrative expenses consist primarily of share-based compensation, salaries and benefits related to accounting and finance, business development, legal, human resources and other personnel, as well as professional service fees related to various corporate activities. Research and Development Research and development expenses consist primarily of share-based compensation, salaries and benefits related to technology and product development personnel, as well as rental expenses related to offices for the Group’s technology and product development personnel. Changes in Guarantee Liabilities and Risk Assurance Liabilities At the inception of each off-balance sheet transaction, the Group records the fair value of (i) guarantee liabilities, which represent the present value of the Group’s expected payout based on the estimated delinquency rate and the applicable discount rate for time value; or (ii) risk assurance liabilities, which considers the premium required by a third-party market participant to issue the same risk assurance in a standalone transaction, as applicable. Prior to January 1, 2020, the release of the non-contingent aspect of the risk assurance liability is recognized in earnings as a reduction of changes in guarantee liabilities and risk assurance liabilities. The 145 Table of Contents contingent loss arising from the obligation to make future payments is recognized when borrower default is probable, and the amount of loss is estimable. Subsequent to January 1, 2020, the non-contingent aspect of the risk assurance liability is subsequently recognized as guarantee income over the term of the arrangement as the Group is released from the stand ready obligation based on the borrower’s repayment of the loan principal. The contingent liability relating to the expected credit losses arising from the contingent aspect of the risk assurance liability is initially measured under the CECL model. The subsequent changes in the contingent aspect of the risk assurance liability is adjusted through earnings as changes in guarantee liabilities and risk assurance liabilities. The service fees payable to the Group, net of guarantee liabilities and risk assurance liabilities which were deducted from the consideration in connection with such transaction, are recognized as loan facilitation income and other related income. Increases in the amount of guarantee liabilities and risk assurance liabilities are recognized as changes in guarantee liabilities and risk assurance liabilities in the Group’s results of operations. The Group recognized a loss of RMB940.0 million, a loss of RMB22.3 million and a gain of RMB53.0 million (US$8.3 million) from changes in guarantee liabilities in 2019, 2020 and 2021, respectively. The Group recognized a loss of RMB203.5 million, a gain of RMB110.2 million and a gain of RMB148.6 million (US$23.3 million) from changes in risk assurance liabilities in 2019, 2020 and 2021. Provision for Receivables and Other Assets The Group periodically adjusts its allowance for loan principal and financing service fee receivables when it believes that the future collection of principal is unlikely. The Group bases this allowance primarily on historical loss experience using a roll rate-based model applied to the Group’s principal and financing service fees receivables portfolios and, adjusted for various qualitative factors that reflect current conditions and reasonable and supportable forecasts of future economic conditions after the adoption of ASC 326. The allowance for finance lease receivables is calculated based on historical loss experience using probability of default and loss given default methods and adjusted for various qualitative factors that reflect current conditions and reasonable and supportable forecasts of future economic conditions after the adoption of ASC 326. The Group 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. For information regarding the Group’s accounting policy related to allowance for receivables, see “ — Critical Accounting Policies — Loan Principal and Financing Service Fee Receivables” and “Critical Accounting Policies Finance lease receivables.” The Group periodically adjusts its allowance for other receivables when it believes that the future collection of receivables is unlikely. The Group recognizes any increase in allowance for loan principal, financing service fee receivables and other receivables as provision for receivables for the relevant period. The following table sets forth the provision for receivables and other assets, both in an absolute amount and as a percentage of total revenues, for the periods presented. 2019 2020 2021 Year Ended December 31, Provision for receivables and other assets Impairment loss from long-lived assets RMB % % (in thousands, except for percentages) 2,283,126 25.8 1,641,362 44.5 (151,817) (23,823) (9.2) % RMB RMB US$ The Group reviews the impairment for long-lived assets in accordance with authoritative guidance for impairment or disposal of long-lived assets. Long-lived assets are reviewed for events or changes in circumstances, which indicate that their carrying value may not be recoverable. Long-lived assets are reported at the lower of carrying amount or fair value less cost to sell. The Group recorded the impairment loss from long-lived assets in 2021, mainly due to its plan to significantly downsize its Wanlimu Kids Clubs business. 146 Table of Contents Share-based Compensation The following table sets forth the effect of share-based compensation expenses on the Group’s operating expenses line items, both in an absolute amount and as a percentage of total revenues, for the periods presented. 2019 2020 2021 Year Ended December 31, Sales and marketing General and administrative Research and development Total RMB % RMB % RMB US$ % (in thousands, except for percentages) 0.1 1,727 271 1.1 29,684 4,658 617 0.1 3,934 0.1 4,482 0.3 74,312 8,505 0.1 87,299 1.0 45,634 1.3 35,345 5,546 0.5 0.1 1,912 0.8 40,895 0.1 2,827 See “— Critical Accounting Policies — Share-based Payments” for a description of what the Group accounts for the compensation cost from share-based payment transactions. Taxation Cayman Islands We are an exempted company incorporated in the Cayman Islands. Under the current laws of the Cayman Islands, we are not subject to tax based upon 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 by us to our shareholders, no Cayman Islands withholding tax will be imposed. Hong Kong Our 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 did not have assessable profit that was earned in or derived from the Hong Kong subsidiary during the periods presented. Hong Kong does not impose a withholding tax on dividends. China Generally, our subsidiary and the Group VIEs in China are subject to enterprise income tax on their taxable income in China at a rate of 25%. The enterprise income tax is calculated based on the entity’s global income as determined under PRC tax laws and accounting standards. Our subsidiaries in Ganzhou are entitled to preferential tax rate of 15%. Xinjiang Qudian Technology Co., Ltd. is a company established in a special economic development zone and is therefore entitled to an exemption from income tax from January 1, 2017 to December 31, 2020. Xiamen Qudian was qualified as a High and New Technology Enterprise and was subject to a preferential statutory tax rate of 15% in 2020. The Group is subject to VAT at a rate of 6% on the services the Group provides to borrowers, less any deductible VAT the Group has already paid or borne. The Group is subject to VAT at a rate of 13% on the budget auto financing services the Group provides to borrowers. The Group is also subject to surcharges on VAT payments in accordance with PRC law. Dividends paid by our wholly foreign-owned subsidiary in China to our intermediary holding company in Hong Kong will be subject to a withholding tax rate of 10%, unless the relevant Hong Kong entity satisfies all the requirements under the Arrangement between the PRC and the Hong Kong Special Administrative Region on the Avoidance of Double Taxation and Prevention of Fiscal Evasion with respect to Taxes on Income and Capital and receives approval from the relevant tax authority. If our Hong Kong subsidiary satisfies all the requirements under the tax arrangement and receives approval from the relevant tax authority, then the dividends paid to the Hong Kong subsidiary would be subject to withholding tax at the standard rate of 5%. 147 Table of Contents If our holding company in the Cayman Islands or any of our subsidiaries outside of China were deemed to be a “resident enterprise” under the PRC Enterprise Income Tax Law, it would be subject to enterprise income tax on its worldwide income at a rate of 25%. Critical Accounting Policies We prepare the Group’s 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 other assumptions that we believe to be reasonable under the circumstances. Since the use of estimates is an integral component of the financial reporting process, actual results could differ from our expectations as a result of changes in our estimates. Some of our accounting policies require a higher degree of judgment than others in their application and require us to make significant accounting estimates. The selection of critical accounting policies, the judgments and other uncertainties affecting application of those policies and the sensitivity of reported results to changes in conditions and assumptions are factors that should be considered when reviewing our financial statements. For further information on our critical accounting policies, see Note 2 to the Group’s consolidated financial statements. We believe the following accounting policies involve the most significant judgments and estimates used in the preparation of our financial statements. Revenue recognition The Group generates revenues primarily by providing borrowers with merchandise and cash installment credit services, credit facilitation services, transaction services, automobile financing services, e-commerce sales and educational services. Under ASC 606, revenue is recognized when control of the promised goods or services is transferred to the Group’s customers, in an amount that reflects the consideration that the Group expects to be entitled to in exchange for those goods or services, net of value-added tax. We determine 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 facilitation The Group entered into credit facilitation arrangements with various institutional funding partners. The Group: (i) matches borrowers with the institutional funding partners which directly fund the credit drawdowns to the borrowers and (ii) provides post-origination services, such as short messaging reminder services throughout the term of the loans. For each successful match, we receive a recurring service fee throughout the term of the loans. When borrowers make instalment repayments directly to the institutional funding partners, the institutional funding partners will then remit the recurring service fees to us on a periodic basis. In addition, the Group provides a guarantee on the principal and accrued interest repayments of the defaulted loans to the institutional funding partners. We consider the loan facilitation service, post-origination services and guarantee service as separate services, of which the guarantee service and the post origination service is accounted for in accordance with ASC 815, Derivatives and Hedging, (“ASC 815”), ASC 460, Guarantees, (“ASC 460”) (refer to “Guarantee liabilities” and “Risk Assurance Liabilities” for additional information) and ASC 860, Transfers and servicing of financial assets, respectively (“ASC 860”). 148 Table of Contents The transaction price is the amount of consideration to which the Group expects to be entitled in exchange for transferring the promised services to the customer, net of value-added tax. The transaction price allocated to loan facilitation income and post-origination services includes variable consideration which is contingent on the borrower making timely repayments. The amount of variable consideration is limited to the amount that is probable not to be reversed in future periods. We estimated the variable consideration using the expected value method, based on historical defaults, current and forecasted borrower repayment trends and assessed whether variable consideration should be 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 allocate the transaction price to the guarantee liabilities or risk assurance liabilities. The remaining transaction price is then allocated to the loan facilitation services and post-origination services on a relative standalone selling price basis. The Group does not have observable price for the loan facilitation services and post-origination services because the services are not provided separately. As a result, the estimation of standalone selling price involves significant judgement. We estimate the standalone 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 the Group matches borrowers with the institutional funding partners and the funds are provided to the borrower. Additionally, revenues from post-origination services are recognized evenly over the term of the loans as the services are performed. Vehicle sales with guarantee The Group sells vehicles to buyers and provide loan facilitation services to institutional funding partners who provide financing to the vehicle buyers. The buyer obtains control of the vehicle when the buyer physically possesses the vehicle and when the Group receives cash consideration for the vehicle from the buyer. The Group will receive recurring service fees from the institutional funding partners for the Group’s loan facilitation services and post-origination services throughout the term of the loan. In addition, the Group provides a guarantee on the principal and accrued interest repayments of the defaulted loans to the institutional funding partners. For vehicle sales, we determine the buyer to be the Group’s customer. The transaction price for the vehicle sale is the amount of consideration the Group receives from the buyer for the sale of the vehicle, net of value-added tax. The Group is the principal in the vehicle sale transaction and sales income is recognized on a gross basis when the title of the vehicle is transferred to the buyer. For the loan facilitation services, we determine both the institutional funding partners and the buyer to be the Group’s customers. We consider the loan facilitation service, post-origination services and guarantee service as separate services, of which the guarantee service and the post origination service is accounted for in accordance with ASC 815 and ASC 860, respectively. The transaction price is the amount of consideration to which the Group expects to be entitled in exchange for transferring the promised services to the customer, net of value-added tax. The transaction price of loan facilitation services 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 repayment 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 of variable consideration involves significant judgement. 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 allocate the transaction price to the guarantee liabilities at fair value in accordance with ASC 815. The remaining transaction price is then allocated to the loan facilitation services and post-origination services on a relative standalone selling price basis. The Group does not have observable price for the loan facilitation services and post-origination services because the services are not provided separately. As a result, the estimation of standalone selling price involves significant judgement. We estimate the standalone 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 the Group provides loan facilitation services to institutional 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. 149 Table of Contents E-commerce sales The Group recognizes revenue from product sales through our e-commerce platform. The Group’s single performance obligation is to sell products to customers. The Group is the principal and record revenue on a gross basis as the Group controls the products before transfer to the customers. Revenue is measured based on the amount of consideration the Group expects to receive reduced by value-added tax, discount and estimate for product returns. Product returns are estimated using the expected value method based on historical return patterns. Revenues are recognized at a point in time when the products are accepted by the customers. As of December 31, 2020 and 2021, estimated product returns were not material. Transaction services fee The Group entered into credit transaction arrangements with certain institutional funding partners. The Group refers borrowers to the institutional funding partners which directly fund the credit drawdowns to the borrowers and provides post-origination services, such as short messaging reminder services throughout the term of the loans. For each successful transaction, the Group typically receives a pre-agreed recurring service fee throughout the term of the loans. When borrowers make installment repayments directly to the institutional funding partners, the institutional funding partners will remit the recurring transaction services fees to the Group on a periodic basis. The referral services are considered to be the performance obligations in the arrangement. The transaction price is the amount of consideration to which the Group expects to be entitled to in exchange for transferring the promised service to the customer, net of value-added tax. The transaction price allocated to the referral services and post origination services includes variable service fees which are contingent on the borrower making timely repayments to the institutional funding partners. Variable consideration is estimated using the expected value method based on historical default rate, current and forecasted borrower repayment trends and is limited to the amount of variable consideration that is probable not to be reversed in future periods. We will update our estimate of the variable consideration at the end of each reporting period. The estimation of variable consideration (including the amount of variable consideration constrained) involves significant judgement. Revenues from transaction services are recognized when the Group successfully refers the borrower to the institutional funding partner and the institutional funding partner provides the funds to the borrower. Revenues from post-origination services are recognized evenly over the term of the loans as the services are performed. Financing income Borrowers can withdraw cash (“cash installment credit services”) or purchase products (e.g. personal consumer electronics) (“merchandise installment credit services”) up to their approved credit limit and elect the installment repayment period, ranging from one to eighteen installments repayment period (either weekly or monthly) through the our application (collectively “financing platform”) or via borrowers’ Alipay accounts. The Group charges financing service fees for facilitating the financing and managing the financing platform. The financing service fees are recorded as financing income in the consolidated statement of comprehensive income in accordance with ASC 310 Receivables (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 borrowers in cash. These incentives are recorded as a reduction in financing service fees using the effective interest method. Sales commission fees In addition to financing income, the Group earns a margin from its merchandise installment credit services on the products purchased from suppliers on behalf of the borrowers. The margin earned is fixed based on the retail sales price without considering the financing terms chosen by the borrower. 150 Table of Contents Sales commission fees are recognized and recorded net of the related cost on delivery date, as the Group is an agent and arrange for the goods to be provided by the suppliers. Penalty fee The Group charges borrowers and lessees penalty fee for late installment payments. The penalty fee is calculated based on the number of overdue days of unpaid outstanding balance of loan principals and lease receivables at the applicable late payment rate. The penalty fee is recognized on a cash basis, which coincides with the penalty fee being probable not to be reversed. Loan principal and financing service fee receivables Loan principal and financing service fee receivables represent payments due from borrowers that utilize the Group’s credit services. Loan principal and financing service fee receivables are recorded at amortized cost, net of allowance for loan principal and financing service fee receivables. 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 receivables We consider the loans to be homogenous as they are all unsecured consumer loans of similar principal amounts. The profiles of the borrowers are also similar i.e. age, credit histories and employment status. The allowance for loan principal and financing service fee receivables losses is calculated based on historical loss experience with the entire loan portfolio, 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 31-60 days 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 and financing service fee receivables types are captured, and the ending delinquency stratification serves as the beginning point of the next iteration. This process is repeated on a monthly rolling basis. The loss rate calculated for each delinquency stage is then applied to the respective loan principal and service fees balance. Prior to January 1, 2020, we apply a consistent credit risk management framework to the entire portfolio of loans in accordance with ASC 450-20, Loss Contingencies (“ASC 450-20”) and adjust the allowance that is determined by the roll rate-based model for various qualitative factors. These factors may include gross-domestic product rates, per capita disposable income, consumer price indexes, regulatory impact and other considerations. Each of these macroeconomic factors are equally weighted, and a score is applied to each factor based on year-on-year increases and decreases in that respective factor. Subsequent to January 1, 2020, we apply a consistent credit risk management framework to the entire portfolio of loans in accordance with Accounting Standards Update (“ASU”) No. 2016-13, Financial instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASC 326”) and adjust the allowance that is determined by the roll rate-based model for various qualitative factors that reflect current conditions and reasonable and supportable forecasts of future economic conditions. These factors may include gross-domestic product rates, consumer price indexes, per capita consumption expenditure and other considerations. We analyze a combination of qualitative factors to the change in roll rate using a regression model. Factors that had a strong correlation and economic and commercial significance were selected for the model. For all the years presented, 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 or when we determined the balance to be uncollectable. In general, we consider loan principal and financing service 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) loans that are 180 days past due. 151 Table of Contents Nonaccrual loan principal The Group does not accrue financing service fee on loan principals that are considered impaired or are more than 90 days past due. Prior to January 1, 2020, a corresponding allowance is determined under ASC 450-20. Subsequent to January 1, 2020, a corresponding allowance is determined under ASC 326. 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 to financing income thereafter. Financing service fee accrued but not received is generally reversed against financing income. Financing service fee receivables may be returned to accrual status after all of the borrower’s delinquent balances of loan principal and financing service fee have been settled and the borrower remains current for an appropriate period. Finance lease receivables Finance lease receivables are carried at amortized cost comprising of original financing lease and direct costs, net of unearned income and allowance for finance lease receivables. Allowance for finance lease receivables We consider the finance lease receivables to be homogenous as they are all automotive finance lease receivables collateralized by vehicle titles of similar principal amounts. The allowance for finance lease receivables is calculated based on historical loss experience using probability of default (PD) and loss given default (LGD) methods. We stratify PD and LGD by the recovered rate under different scenarios (i.e. cash collection, repossessing the leased vehicle or non-recovery), and calculate allowance balance by timing exposure at default under each scenario. This process is repeated on a monthly basis. LGD is projected based on historical experience of actual loss and considered proceeds from recovery of the repossessed assets. Prior to January 1, 2020, we apply a consistent credit risk management framework to the entire portfolio of finance lease receivables in accordance with ASC 450-20 and adjust the allowance that is determined by the PD and LGD methods for various qualitative factors. These factors may include gross-domestic product rates, per capita disposable income, consumer price indexes, regulatory impact and other considerations. Each of these macroeconomic factors are equally weighted, and a score is applied to each factor based on year-on-year increases and decreases in that respective factor. Subsequent to January 1, 2020, we apply a consistent credit risk management framework to the entire portfolio of finance lease receivables in accordance with ASC 326 and adjust the allowance that is determined by the PD and LGD methods for various qualitative factors that reflect reasonable and supportable forecasts of future economic conditions. These factors may include gross-domestic product rates, consumer price indexes, per capita consumption expenditure and other considerations. We analyze a combination of qualitative factors to the change in roll rate using a regression model. Factors that had a strong correlation and economic and commercial significance were selected for the model. For all the years presented, finance lease receivables are charged off when a settlement is reached for an amount that is less than the outstanding balance or when we determined the 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 finance lease receivables that are 180 days past due are therefore deemed uncollectible and charged-off; (iv) the vehicle is repossessed. Nonaccrual finance lease receivables 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 be unable to collect all amounts due according to the terms of the 152 Table of Contents contract. Factors such as payment history, compliance with terms and conditions of the underlying financing lease agreement and other subjective factors related to the financial stability of the borrower are considered when determining whether finance lease receivables are impaired. The Group does not accrue financing lease income on net investment of finance lease receivables that are considered impaired. Prior to January 1, 2020, a corresponding allowance is determined under ASC 450-20. Subsequent to January 1, 2020, a corresponding allowance is determined under ASC 326. Accrual of financing lease income is suspended on accounts that are impaired, 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 received payments bringing the impaired status to current. Long-term investments Long-term investments represent equity investments in privately-held companies without a readily determinable fair value and listed companies with readily determinable fair value. Equity securities with readily determinable fair values are measured at fair value, and any changes in fair value are recognized in earnings in accordance with ASC 321. The Group elected to measure equity securities without a readily determinable fair value that do not qualify for the net asset value practical expedient using the measurement alternative. Under the measurement alternative, the equity securities are measured at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer. For equity investments that the Group elects to use the measurement alternative, the Group makes a qualitative assessment considering impairment indicators to evaluate whether investments are impaired at each reporting date. Impairment indicators considered include, but are not limited to, a significant deterioration in the earnings performance or business prospects of the investee, including factors that raise significant concerns about the investee’s ability to continue as a going concern, a significant adverse change in the regulatory, economic, or technologic environment of the investee and a significant adverse change in the general market condition of either the geographical area or the industry in which the investee operates. If a qualitative assessment indicates that the investment is impaired, the entity has to estimate the investment’s fair value in accordance with the principles of ASC 820. If the fair value is less than the investment’s carrying value, the Group recognizes an impairment loss in earnings equal to the difference between the carrying value and fair value. As of December 31, 2021, the Group measured a long-term investment at fair value on a nonrecurring basis using valuation methodology under the market approach. The significant unobservable inputs (level 3) include enterprise value to revenue multiple which was determined based on the median of selected comparable companies at 3.8 times, and the discount for lack of marketability which was estimated at 33%. The fair value of the long-term investment was RMB172 million (US$27 million) as of December 31, 2021. Income taxes We account for income taxes using the liability approach and recognize deferred tax assets and liabilities for the expected future consequences of events that have been recognized in the consolidated financial statements or in the Group’s tax returns. Deferred tax assets and liabilities are recognized on the basis of the temporary differences that exist between the tax basis of assets and liabilities and their reported amounts in the consolidated financial statements using enacted tax rates in effect for the year in which the differences are expected to reverse. Changes in deferred tax assets and liabilities are recorded in earnings. Deferred tax assets are reduced by a valuation allowance through a charge to income tax expense when, in the opinion of management, it is more-likely-than-not that a portion of or all of the deferred tax assets will not be realized. Potential for recovery of deferred tax assets is evaluated by estimating the future taxable profits expected and considering prudent and feasible tax planning strategies. The components of the deferred tax assets and liabilities are classified as non-current. 153 Table of Contents We account for uncertainty in income taxes recognized in the consolidated financial statements by applying a two-step process to determine the amount of the benefit to be recognized. First, the tax position must be evaluated to determine the likelihood that it will be sustained upon external examination 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 the amount of benefits to recognize in the consolidated financial statements. The amount of the benefits that may be recognized is the largest amount that is more-likely-than not to be realized upon ultimate settlement. The Group’s estimated liability for unrecognized tax benefits which is included in the income tax payable in the consolidated balance sheets is periodically assessed for adequacy and may be affected by changing interpretations of laws, rulings by tax authorities, changes and/or developments with respect to tax audits, and expiration of the statute of limitations. Changes in recognition and measurement estimates are recognized in the period in which the changes occur. We elect 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 Group did not recognize any income tax due to uncertain tax position nor incurred any interest and penalties related to potential underpaid income tax expenses for the years ended December 31, 2019, 2020 and 2021. Share-based payments Share-based payment transactions with employees and independent directors, such as share options are measured based on the grant date fair value of the equity instrument. The Group recognizes the compensation costs net of estimated forfeitures using the accelerated recognition method, over the applicable vesting period for each separately vesting portion of the award. The estimate of forfeitures is adjusted over the requisite service period to the extent that actual forfeitures differ, or are expected to differ, from such estimates. Changes in estimated forfeitures are recognized through a cumulative catch-up adjustment in the 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. 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 the original option immediately before its terms are modified, measured based on the share price and other pertinent factors at the modification date. For vested options, the Group recognizes incremental compensation cost in the period the modification occurred. For unvested options, the Group recognizes, over the remaining requisite service period, the sum of the incremental compensation cost and the remaining unrecognized compensation cost for the original award on the modification date. 154 Table of Contents Results of Operations The following tables set forth a summary of the Group’s consolidated results of operations for the periods presented. The Group’s historical results presented below are not necessarily indicative of the results that may be expected for any future period. Revenues: Financing income Sales commission fee Sales income Penalty fees Guarantee income Loan facilitation income and other related income Transaction services fee and other related income Total revenues Cost of revenues and operating expenses: Cost of goods sold Cost of other revenues Total cost of revenues Operating expenses: Sales and marketing General and administrative Research and development Changes in guarantee liabilities and risk assurance liabilities Provision for receivables and other assets Impairment loss from long-lived assets Total operating expenses Other operating income Income from operations Interest and investment income, net Loss from equity method investments Unrealized gain on derivative instruments Foreign exchange gain/(loss), net Other income Other expenses Net income before income taxes Income tax expenses Net income 155 2019 RMB Year Ended December 31, 2020 RMB 2021 RMB US$ (in thousands, except for share and per share data) 3,510,055 2,102,665 1,255,488 197,014 356,812 5,557 80,992 431,946 15,797 610,793 44,354 10,563 72,235 — 617 826,198 2,297,413 6,203 131,633 23,804 2,199,464 (136,542) 8,840,044 3,687,974 1,654,043 259,555 35,411 100,668 67,316 3,935 39,531 151,694 (366,015) (535,773) (901,788) (645,083) (217,271) (862,354) (78,533) (220,193) (298,726) (12,324) (34,553) (46,877) — (293,282) (280,616) (285,905) (286,059) (170,691) (204,781) (1,143,427) 87,894 (2,283,126) (1,641,362) — (4,198,009) (2,303,346) 343,324 865,598 708,251 (370,039) — (107) 26,358 (9,263) 3,890,522 1,220,798 (261,979) 958,819 108,508 3,848,755 24,292 (3,420) — 6,635 24,583 (10,323) (626,234) 3,264,288 (127,376) (443,276) (141,264) 201,602 151,817 (156,394) (514,891) 82,273 (19,988) (69,560) (22,167) 31,636 23,823 (24,542) (80,798) 12,912 922,699 144,792 20,314 129,456 (34,805) (221,798) 2,727 17,375 (8) (51) 818 5,213 (1,018) (6,485) 846,409 132,820 (40,875) (260,482) 91,945 585,927 Table of Contents Revenues: Financing income Sales commission fee Sales income Penalty fees Guarantee income Loan facilitation income and other related income Transaction services fee and other related income Total revenues Cost of revenues and operating expenses: Cost of goods sold Cost of other revenues Total cost of revenues Operating expenses: Sales and marketing General and administrative Research and development Changes in guarantee liabilities and risk assurance liabilities Provision for receivables and other assets Impairment loss from long-lived assets Total operating expenses Other operating income Income from operations Interest and investment income, net Loss from equity method investments Unrealized gain on derivative instruments Foreign exchange gain/(loss), net Other income Other expenses Net income before income taxes Income tax expenses Net income 2019 Year Ended December 31, 2020 % 2021 39.7 4.0 4.9 0.5 — 26.0 24.9 100.0 57.0 2.2 16.5 2.0 22.4 3.6 (3.7) 100.0 75.9 2.1 6.1 4.1 0.2 2.4 9.2 100.0 (4.1) (6.1) (10.2) (17.5) (5.9) (23.4) (3.2) (3.2) (2.3) (12.9) (25.8) — (47.5) 1.2 43.5 0.3 (0.1) — 0.1 0.3 (0.1) 44.0 (7.1) 36.9 (8.0) (7.7) (4.6) 2.4 (44.5) — (62.4) 9.3 23.5 19.2 (10.0) — (0.0) 0.7 (0.3) 33.1 (7.1) 26.0 (4.8) (13.3) (18.1) (7.7) (26.8) (8.5) 12.2 9.2 (9.5) (31.1) 5.0 55.8 7.8 (13.4) 1.1 (0.0) 0.3 (0.4) 51.2 (15.7) 35.4 Comparison of Year Ended December 31, 2021 and Year Ended December 31, 2020 Total revenues. The Group’s total revenues in 2021 decreased by 55.2% to RMB1,654.0 million (US$259.6 million) from RMB3,668.0 million in 2020, primarily due to the decrease in the amount of transactions. Financing income decreased by 40.3% from RMB2,102.7 million in 2020 to RMB1,255.5 million (US$197.0 million) in 2021 primarily due to the decrease in the average on-balance sheet loan balance. Loan facilitation income and other related income decreased by 70.0% to RMB39.5 million (US$6.2 million) in 2021 from RMB131.6 million in 2020, primarily as a result of the decrease in the amount of off-balance sheet transactions. In 2021, the Group recorded an amount of RMB3.9 million (US$ 0.6 million) guarantee income with the non-contingent aspect of the risk assurance liability amortized over the term of the arrangement as the Group is released from the stand ready obligation based on the borrower’s repayment of the loan principal. The Group also recorded transaction services fee and other related income of RMB151.7 million (US$23.8 million) in 2021, compared to a loss of RMB136.5 million for 2020, primarily due to the change in estimate for variable consideration for the transactions facilitated in the past years. Sales income and others decreased to RMB100.7 million (US$15.8 million) in 2021 from RMB610.8 million for 2020 primarily due to the winding down of the Wanlimu e-commerce platform. 156 Table of Contents Total cost of revenues and operating expenses. Total cost of revenues and operating expenses decreased by 67.5% to RMB1,029.5 million (US$161.6 million) in 2021 from RMB3,165.7 million in 2020. • • • • • • Cost of revenues. The Group’s cost of revenues decreased by 65.4% to RMB298.7 million (US$46.9 million) from RMB862.4 million for 2020, primarily due to the decrease in costs related to the Dabai Auto business and the decrease in cost of goods sold related to the Wanlimu e-commerce platform. Sales and marketing expenses. The Group’s sales and marketing expenses decreased by 56.6% to RMB127.4 million (US$20.0 million) from RMB293.3 million for 2020. The decrease was primarily due to the decrease in marketing expenses incurred by the Wanlimu e-commerce platform. General and administrative expenses. The Group’s general and administrative expenses increased by 55.0% to RMB443.3 million (US$69.6 million) from RMB285.9 million for 2020, as a result of the increase in staff salaries primarily relating to our WLM Kids business. Research and development expenses. The Group’s research and development expenses decreased by 17.2% to RMB141.3 million (US$22.2 million) from RMB170.7 million for 2020. The decrease was primarily due to the decrease in staff salaries. Changes in guarantee liabilities and risk assurance liabilities. The Group recorded a gain from changes in guarantee liabilities and risk assurance liabilities of RMB201.6 million (US$31.6 million) in 2021, as compared to a gain from changes in guarantee liabilities and risk assurance liabilities of RMB87.9 million the Group recognized in 2020, primarily due to the decrease in off-balance sheet transactions. Provision for receivables and other assets. The Group’s provision for receivables and other assets was a reversal of RMB151.8 million (US$23.8 million) this year, compared with RMB1,641.4 million for 2020, primarily due to the decrease in past-due on-balance sheet outstanding principal receivables compared to 2020. Income from operations. The Group’s income from operations increased by 6.6% to RMB922.7 million (US$144.8 million) from RMB865.6 million for 2020. Income tax expenses. The Group’s income tax expenses decreased by 0.6% to RMB260.5 million (US$40.9 million) in 2021 from RMB262.0 million in 2020. Net income. The Group’s net income decreased by 38.9% to RMB585.9 million (US$91.9 million) in 2021 from RMB958.8 million in 2020. Net income attributable to the Company’s shareholders per diluted share was RMB2.27 (US$0.36), compared with RMB3.59 in the prior year. Adjusted net income attributable to Qudian Inc.’s shareholders. The Group’s adjusted net income attributable to Qudian Inc.’s shareholders, which excludes share-based compensation expenses and convertible senior notes buyback income, increased by 60.2% to RMB612.4 million (US$96.1 million) from RMB382.3 million in the prior year. Adjusted net income attributable to Qudian Inc, shareholders per diluted share decreased to RMB2.36 (US$0.37) from RMB1.49 in the prior year. Comparison of Year Ended December 31, 2020 and Year Ended December 31, 2019 For a discussion of the Group’s results of operations for the year ended December 31, 2020 compared with the year ended December 31, 2019, see “Item 5. Operating and Financial Review and Prospects — A. Operating Results — Comparison of Year Ended December 31, 2020 and Year Ended December 31, 2019” in our annual report on Form 20-F for the year ended December 31, 2020, filed with the SEC on April 29, 2021. 157 Table of Contents B. Liquidity and Capital Resources The Group’s primary sources of liquidity have been cash provided by operating activities and funds provided by our investors, including through the issuance of equity securities and convertible debt securities, which have historically been sufficient to meet the Group’s working capital and substantially all of the Group’s capital expenditure requirements. In October 2017, we completed our initial public offering in which we issued and sold an aggregate of 35,625,000 ADSs, representing 35,625,000 Class A ordinary shares, resulting in net proceeds to us of approximately US$799.6 million. In 2019, 2020 and 2021, the Group had net cash provided by operating activities of RMB5,503.4 million, RMB2,471.7 million and RMB922.1 million (US$144.7 million), respectively. As of December 31, 2021, the Group had cash and cash equivalents of RMB2,065.5 million (US$324.1 million), as compared to cash and cash equivalents of RMB1,537.6 million as of December 31, 2020. As of December 31, 2021, the Group had short-term amounts due from Alipay of RMB456.5 million (US$71.6 million), as compared to short- term amounts due from Alipay of RMB323.6 million as of December 31, 2020. These represent amounts deposited in the Group’s Alipay accounts, and are unrestricted as to withdrawal and use and readily available to the Group on demand. In July 2019, we issued US$345 million aggregate principal amount of convertible senior notes due 2026 (including full exercise of the initial purchasers’ option to purchase additional notes), raising US$334.2 million in net proceeds to us after deducting underwriting discounts and commissions and other offering expenses. In connection with the offering of the convertible senior notes, we entered into capped call transactions with the initial purchasers and/or their respective affiliates and used approximately US$28.2 million of the net proceeds of the offering to pay the cost of such transactions. The convertible notes bear interest at a rate of 1.00% per year, payable on July 1 and January 1 of each year, beginning on January 1, 2020. The convertible notes will mature on July 1, 2026, unless earlier redeemed, repurchased or converted in accordance with their terms. As of March 31, 2022, we have repurchased US$297.5 million aggregate principal amount of convertible notes, and the outstanding principal amount was US$47.5 million. The convertible notes may be converted into our ADSs, at the option of the holders, at an initial conversion rate of 106.2756 ADSs per US$1,000 principal amount of notes, or approximately 5,048,091 ADSs, assuming conversion at the initial conversion rate of the entire US$47.5 million aggregate principal amount outstanding as of March 31, 2022. In November 2019, Xiamen Qudian, a Group VIE, entered into an eight-year term and revolving syndicated facility agreement with China Construction Bank and Bank of China, pursuant to which Xiamen Qudian is entitled to borrow a secured loan of RMB1,200 million to be used in connection with the Group’s innovation park, a construction in progress, which is guaranteed by Xinjiang Qudian Technology Co., Ltd. and Qufenqi (Ganzhou) Information Technology Co., Ltd. and collateralized by the land-use-right with a carrying amount of RMB98 million (US$15 million) as of December 31, 2021. Outstanding borrowings will accrue interest at a rate equal to the loan prime rate of China plus 0.295%. Xiamen Qudian is required to comply with certain financial covenants, which had been met as of December, 31, 2021. As of December 31, 2021, the aggregate amount of unused lines of credit for such long-term loan was RMB1,054.7 million (US$165.5 million). The following table sets forth the Group’s total assets, total liabilities and total net assets as of the dates indicated. Total assets Total liabilities Total net assets As of December 31, 2019 RMB 2020 RMB 2021 RMB US$ (in thousands) 18,361,604 6,437,552 11,924,052 13,398,032 1,488,188 11,909,844 14,091,125 1,567,586 12,523,539 2,211,205 245,988 1,965,217 158 Table of Contents (1) Defined as total assets minus total liabilities. The Group’s total net assets decreased from RMB11,924.1 million as of December 31, 2019 to RMB11,909.8 million as of December 31, 2020. The Group’s total net assets increased to RMB12,523.5 million (US$1,965.2 million) as of December 31, 2021, primarily attributable to the increase of accumulated retained earnings. The table below sets forth certain balance sheet items related to credit products. The decrease in such line items since December 31, 2019 is in line with the Group’s increasingly stringent credit approval strategy. 2019 RMB As of December 31, 2020 RMB RMB 2021 US$ Short-term loan principal and financing service fee receivables Long-term loan principal and financing service fee receivables Short-term borrowings and interest payables Long-term borrowings and interest payables(1) (in thousands) 7,894,697 3,940,461 2,371,966 372,213 — — — — 22,803 102,415 424 1,049,570 — — — 145,312 (1) Long-term borrowings and interest payable as of December 31, 2021 represent borrowings in connection with the construction in progress and are not related to credit products. We anticipate the Group’s cash requirements in the near term will, to a significant extent, be related to its plan to expand the QD Food business. The Group expects to incur significant marketing expenses to expand QD Food’s user base. To support the growth of QD Food, the Group may also make significant capital expenditures to establish food preparation and fulfillment facilities. We believe that the cash we received from our initial public offering, the issuance of convertible senior notes and the anticipated cash flows from operating activities will be sufficient to meet the Group’s 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 the Group experiences changes in business conditions or other developments, or if we find and wish to pursue opportunities for investment, acquisition, capital expenditure or similar actions. If we determine that the Group’s cash requirements exceed the amount of cash and cash equivalents the Group has on hand at the time, we may seek to issue equity or debt securities or obtain credit facilities. The issuance and sale of additional equity would result in further dilution to our shareholders. The incurrence of indebtedness would result in increased fixed obligations and could result in operating covenants that would restrict the Group’s operations. We cannot assure you that financing will be available in amounts or on terms acceptable to us, if at all. See “Item 3. Key Information — D. Risk Factors — Risks Related to Our Business and Our Industry — We may need additional capital to pursue business objectives and respond to business opportunities, challenges or unforeseen circumstances, and financing may not be available on terms acceptable to us, or at all.” Our ability to manage the Group’s working capital, including receivables and other assets and accrued expenses and other liabilities, may materially affect the Group’s financial condition and results of operations. 159 Table of Contents The following table sets forth a summary of the Group’s cash flows for the periods presented: 2019 RMB Year Ended December 31, 2020 RMB 2021 RMB US$ (in thousands) Summary Consolidated Cash Flow Data: 922,065 144,692 Net cash provided by operating activities (38,694) (246,580) Net cash used in investing activities Net cash used in financing activities (13,212) (84,192) Cash and cash equivalents, and restricted cash and cash equivalent at beginning of period 2,841,015 4,118,587 1,672,962 262,524 Cash and cash equivalents, and restricted cash and cash equivalent at beginning of period 4,118,587 1,672,962 2,243,420 352,042 5,503,389 2,471,712 (929,559) (3,269,876) (3,372,335) (1,591,272) Operating Activities Net cash provided by operating activities was RMB922.1 million (US$144.7 million) in 2021, mainly attributable to net income of RMB585.9 million (US$91.9 million), adjusted for a reversal of the provision for receivables and other assets of RMB151.8 million (US$23.8 million). Net cash provided by operating activities was RMB2,471.7 million in 2020, mainly attributable to net income of RMB958.8 million, adjusted for (i) provision for receivables and other assets of RMB1,641.4 million, (ii) income from the repurchase of convertible senior notes of RMB622.1 million, (iii) share of loss from equity method investment of RMB370.0 million. Adjustment for changes in working capital primarily consisted of (i) a decrease in risk assurance liabilities of RMB2,328.0 million primarily due to a decrease in the off-balance sheet transaction for which the Group provides risk assurance, (ii) a decrease in contract assets of RMB2,899.5 million, (iii) a decrease in other current and non-current liabilities of RMB879.0 million and (iv) a decrease in other current and non-current assets of RMB438.9 million. Net cash provided by operating activities was RMB5,503.4 million in 2019, primarily due to net income of RMB3,264.3 million, adjusted for (i) provision for receivables and other assets of RMB2,283.1 million, (ii) share-based compensation expenses of RMB87.3 million, (iii) interest expense of convertible senior notes of RMB23.9 million, and (iv) changes in working capital. Adjustment for changes in working capital primarily consisted of (i) an increase in risk assurance liabilities of RMB1,254.4 million primarily due to an increase in the off-balance sheet transaction for which the Group provides risk assurance, (ii) an increase in other current and non-current liabilities of RMB439.7 million, (iii) a decrease in finance lease receivables of RMB330.2 million primarily as a result of the winding-down of Dabai Auto business and (iv) a decrease in deferred tax assets and liabilities of RMB132.1 million, which was partially offset by (i) an increase in contract assets of RMB2,096.5 million and (ii) an increase in other current and non-current assets of RMB119.6 million. Investing Activities Net cash used in investing activities was RMB246.6 million (US$38.7 million) in 2021, mainly due to the payments of deposit pledged as collateral for derivative instruments. Net cash used in investing activities was RMB3,269.9 million in 2020, mainly due to (i) investments in short-term wealth management products of RMB16,802.9 million, (ii) payments to originate loan principal of RMB18,294.9 million and (iii) purchase of equity method investment of RMB738.8 million, partially offset by (i) proceeds from redemption of short-term investments of RMB11,815.2 million and (ii) proceeds from collection of loan principal of RMB20,724.8 million. 160 Table of Contents Net cash used in investing activities was RMB929.6 million in 2019, which was attributable to (i) RMB22,760.4 million in payments to originate loan principal, (ii) RMB454.2 million in purchases of short-term investments and (iii) RMB222.7 million in purchases of long-term investments, which was partially offset by (i) RMB22,140.9 million in proceeds from collection of loan principal and (ii) RMB457.8 million in proceeds from redemption of short-term investments. Financing Activities Net cash used in financing activities was RMB84.2 million (US$13.2 million), mainly due to the repurchases of convertible senior notes. Net cash used in financing activities was RMB1,591.3 million in 2020, mainly due to repayments of borrowings of RMB1,038.7 million and repurchases of convertible senior notes of RMB859.2 million. Net cash used in financing activities was RMB3,372.3 million in 2019, which was primarily attributable to (i) repayments of borrowings of RMB5,402.4 million and (ii) repurchase of ordinary shares of RMB2,087.2 million, which was partially offset by (i) proceeds from convertible senior notes net of issuance cost of RMB2,289.6 million and (ii) proceeds from borrowings of RMB2,251.6 million. Capital Expenditures The Group made capital expenditures of RMB76.4 million, RMB221.8 million and RMB478.4 million (US$75.1 million) in 2019, 2020 and 2021, respectively. In these periods, the Group’s capital expenditures were mainly used for building construction and purchase of equipment and intangible assets and leasehold improvements. The Group will continue to make capital expenditures to meet the expected growth of its business. Contractual Obligations The following table sets forth the Group’s operating lease commitments and long-term borrowings and interest payable as of December 31, 2021. Operating lease commitments Long-term borrowings and interest payable Total RMB US$ Payment due by period Less than 1 Year 1- 3 Years 3- 5 Years RMB (million) More than 5 Years 253.7 170.9 39.8 26.8 40.3 7.2 56.3 69.8 49.0 64.0 108.1 29.9 Operating lease obligations represent leasing arrangements relating to the lease of the Group’s office premises. The Group’s capital commitments relate primarily to commitments in connection with the Group’s plan to build an office building and innovation center. Total capital commitments contracted but not yet reflected in the financial statements amounted to RMB546.0 million (US$85.7 million) as of December 31, 2021. All of the commitments relating to the construction will be settled in installments. Holding Company Structure Qudian Inc. is a holding company with no material operations of its own. We conduct our operations primarily through our subsidiaries, the Group VIEs and their subsidiaries in China. As a result, Qudian Inc.’s 161 Table of Contents ability to pay dividends depends upon dividends paid by our PRC subsidiaries. If our existing PRC subsidiaries or any newly formed ones incur debt on their own behalf in the future, the instruments governing their debt may restrict their ability to pay dividends to us. In addition, each of our PRC subsidiaries is permitted to pay dividends to us only out of its retained earnings, if any, as determined in accordance with PRC accounting standards and regulations. Under PRC law, each of our PRC subsidiaries, the Group VIEs and their subsidiaries in China is required to set aside at least 10% of its after-tax profits each year, if any, to fund certain statutory reserve funds until such reserve funds reach 50% of its registered capital. In addition, our PRC subsidiaries may allocate a portion of their after-tax profits based on PRC accounting standards to enterprise expansion funds and staff bonus and welfare funds at their discretion, and the Group VIEs and their subsidiaries may allocate a portion of their after-tax profits based on PRC accounting standards to a discretionary surplus fund at their discretion. The statutory reserve funds and the discretionary funds are not distributable as cash dividends. Remittance of dividends by a wholly foreign-owned company out of China is subject to examination by the banks designated by SAFE. Our PRC subsidiaries have not paid dividends and will not be able to pay dividends until they generate accumulated profits and meet the requirements for statutory reserve funds. Recent Accounting Pronouncements A list of recent accounting pronouncements that are relevant to us is included in note 2 to our consolidated financial statements, which are included in this annual report. Off-Balance Sheet Arrangements Since September 2016, the Group has entered into several arrangements with financial institutions that provides funding directly to borrowers for transactions that the Group facilitates. From April 2018 to the second quarter of 2019, the Group also entered into vehicle sales with guarantee arrangements with financial institutions that provides funding directly to car buyers. As of December 31, 2021, guarantee liabilities and risk assurance liabilities related to such arrangement were RMB0.9 million (US$0.1 million). As of December 31, 2021, the maximum potential undiscounted future payment the Group would be required to make was RMB37 million (US$6 million). See “Item 5. Operating and Financial Review and Prospects — A. Operating Results.” C. Research and Development, Patent and Licenses, etc. The Group has focused on and will continue to invest in its technology system, which supports all key aspects of the Group’s online platform and is designed to optimize for scalability and flexibility. See “Item 4. Information of the Company — B. Business Overview — The Group’s Information Technology and Security.” D. Trend Information Other than as disclosed elsewhere in this annual report, we are not aware of any trends, uncertainties, demands, commitments or events for the year ended December 31, 2021 that are reasonably likely to have a material effect on the Group’s total net revenues, income, profitability, liquidity or capital reserves, or that caused the disclosed financial information to be not necessarily indicative of future operating results or financial conditions. E. Critical Accounting Estimates See “Item 5. Operating and Financial Review and Prospectus — A. Operating Results — Critical Accounting Policies.” 162 Table of Contents ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES A. Directors and Senior Management Directors and Executive Officers The following table sets forth information regarding our directors and executive officers as of March 31, 2022. Name Min Luo Long Xu Yingming Li Shengwen Rong Yifan Li Yan Gao Position/Title Age 39 Chairman and Chief Executive Officer 39 Director and Senior Vice President 44 Director 54 Independent Director 55 Independent Director 41 Vice President of Finance 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 executive officer. Prior to founding our company, Mr. Luo served as a vice president of marketing of OkBuy.com, an online marketplace for apparel and shoe products in 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 in telecommunication engineering from Jiangxi Normal University in 2004. Mr. Long Xu has served as our director since November 2019. He joined our company in 2016 as the senior vice president. Mr. Xu has extensive management experience in start-up companies. Before joining us, Mr. Xu cofounded Quwan.com from 2009 to 2015, a retail platform focusing on creative life products. From 2007 to 2009, Mr. Xu and Mr. Min Luo founded Jiyiri.com, a reminder service for anniversary through Internet and mobile communication technology. Between 2005 and 2007, Mr. Xu founded Beijing Time Film Network Technology Co., Ltd., which provides resource liaisons between enterprises and campus, and Mr. Xu served as the chief executive officer. Mr. Xu received his bachelor’s degree in resource environment and urban and rural planning from Peking University in 2005. Mr. Yingming Li has served as our director since December 2019. Currently he holds the position of director and deputy general manager of Guosheng Financial Holding in charge of investments. Mr. Li has rich experience in enterprise consultancy, valuation, investment banking and equity investments. Mr. Li graduated from Fudan University with a master degree in economics. Mr. Shengwen Rong has served as our independent director since August 2018. From February 2017 to September 2018, Mr. Rong served as senior vice 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 Chain Co., Ltd., an NYSE-listed company, from 2010 to 2012. Currently Mr. Rong serves as an independent director and audit committee chair of Tarena International, Inc. (NASDAQ: TEDU), China Online Education (NYSE: COE), X Financial (NYSE: XYF), Mogu Inc. (NYSE: MOGU) and BlueCity Holdings Limited (Nasdaq: BLCT). Mr. Rong received a bachelor’s degree in international finance from Renmin University, a master’s degree in accounting from West Virginia University and an MBA degree from University of Chicago Booth School of Business. Mr. Rong is a Certified Public Accountant in the United States. Mr. Yifan Li has served as our independent director since October 2017. Mr. Li is Chief Financial Officer of Human Horizons Holdings Co. Ltd., a premium luxury electric vehicle manufacturer, since April 2021. Prior to that, he had served as a board director and a vice president of Geely Holding Group Co., Ltd., an automotive 163 Table of Contents manufacturing company, since October 2014. From May 2014 to September 2014, he was vice president and international chief financial officer of Sanpower Group Co., Ltd., a company in the technology and modern service industries. From December 2010 to February 2014, he served as vice president and chief financial officer of China Zenix Auto International Co., Ltd., a manufacturer of commercial vehicle wheels listed on the NYSE. 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. (NYSE: XIN), Sunlands Technology Group (NYSE: STG), 36Kr Holdings Inc. (NASDAW: KRKR). Mr. Li received his MBA from the University of Chicago Booth School of Business in 2000, his master’s degree in accounting from University of Texas at Dallas in 1994, and his bachelor’s degree in economics from Fudan University in 1989. Mr. Li is a Certified Public Accountant in the United States and a Chartered Global Management Accountant. His business address is 1339 Wanfang Road, Minhang District, Shanghai, PRC, 201112. Mr. Yan Gao has been our vice president of finance since March 2020 and has served as the financial director of our company since 2017. Prior to joining our company, Mr. Gao worked at PricewaterhouseCoopers from 2003 to 2016, where he rose to the position of senior manager. Mr. Gao received his master’s degree in Statistic from Dongbei University of Finance and Economic, and his bachelor’s degree in accounting from the Dongbei University of Finance and Economic. 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. Compensation In 2021, the Group paid aggregate cash compensation of approximately RMB2.7 million (US$0.4 million) to our directors and executive officers as a group. We did not pay any other cash compensation or benefits in kind to our directors and executive officers. We have not set aside or accrued any amount to provide pension, retirement or other similar benefits to our directors and executive officers. Our PRC subsidiaries and the Group VIEs are required by law to make contributions equal to certain percentages of each employee’s salary for his or her pension insurance, medical insurance, unemployment insurance and other statutory benefits and a housing provident fund. Our board of directors may determine compensation to be paid to the directors and the executive officers. The compensation committee will assist the directors in reviewing and approving the compensation structure for the directors and the executive officers. For information regarding share awards granted to our directors and executive officers, see “—2016 Equity Incentive Plan.” Employment Agreements and Indemnification Agreements We have entered into employment agreements with each of our executive officers. Under these agreements, each of our executive officers is employed 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 serious breach of duty of loyalty to us. We may also terminate an executive officer’s employment without cause upon three-month advance written notice. In such case of termination by us, we will provide severance payments to the executive officer as expressly required by applicable law of the jurisdiction where the executive officer 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, in strict confidence and not to use, except as required in the performance of his or her duties in connection with the employment or pursuant 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 proprietary information of any third party received by us and for which we have confidential 164 Table of Contents obligations. The executive officers have also agreed to disclose in confidence to us all inventions, designs and trade secrets which they conceive, 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 in obtaining and enforcing patents, copyrights and other legal rights for these inventions, designs and trade secrets. In addition, each executive officer has agreed to be bound by non-competition and non-solicitation restrictions during the term of his or her employment 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 representative of us for the purpose of doing business with such persons or entities that will harm our business relationships with these persons or entities; (ii) assume employment 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 of the executive officer’s termination, or in the year preceding such termination, without our express consent. We have entered into indemnification agreements with each of our directors and executive officers. Under these agreements, we may agree to indemnify our directors and executive officers against certain liabilities and expenses incurred by such persons in connection with claims made by reason of their being a director or officer of our company. 2014 Share Incentive Plan In August 2014, Qufenqi Inc., the former holding company of Beijing Happy Time, adopted the 2014 Share Incentive Plan, which allows us to grant share awards of such company to our employees, officers, directors and individual consultants who render services to us. The maximum number of shares that may be issued pursuant to all awards under the 2014 plan is 20,824,447 ordinary shares of the former holding company of Beijing Happy Time. On various dates 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 prices of 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 at exercise 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 Plan On December 26, 2015, Beijing Happy Time adopted the 2015 Share Incentive Plan, which allows us to grant equity awards of virtual shares of Tianjin Happy Share to employees, officers, directors and individual consultants. Tianjin Happy Share is a limited partnership established under the laws of PRC, which owns 5.24% of the equity interest in Beijing Happy Time as of the date of this annual report. We divided the partnership interest in Tianjin Happy Share into 15,814,019 virtual shares and awarded the options to purchase virtual shares to grantees of the 2015 Share Incentive Plan, which enabled the grantees to enjoy beneficial ownership of Beijing Happy Time through their respective virtual shares in Tianjin Happy Share. On December 26, 2015, all options 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 options granted 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 employees and a third party consultant. As part of our restructuring in 2016, Tianjin Happy Share, as a shareholder of Beijing Happy Time, entered into the contractual arrangements with Ganzhou Qufenqi and Beijing Happy Time and its other shareholders, according to which Ganzhou Qufenqi will exercise effective control over Beijing Happy Time and realize 165 Table of Contents substantially all of the economic risks and benefits arising from Beijing Happy Time and its subsidiaries in lieu of Tianjin Happy Share and other shareholders of Beijing Happy Time. See “Item 4. Information on the Company — B. Business Overview — Overview — Our Contractual Arrangements with the Group VIEs and Their Shareholders,” for more information. Furthermore, as part of the restructuring in 2016, Tianjin Happy Share entered into a share entrustment agreement with Qufenqi Holding Limited, pursuant to which Qufenqi Holding Limited holds 15,814,019 ordinary shares of Qudian Inc. as the nominal shareholder on behalf of Tianjin 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 interests of 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 shares of Tianjin Happy Share. As of December 2016, the 2015 Share Incentive Plan was terminated. In April 2017, Tianjin Happy Share and Qufenqi Holding Limited terminated the 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 Plan On December 9, 2016, Qudian Inc. adopted the 2016 Equity Incentive Plan, which allows us to grant share options, restricted shares, restricted share units and other share-based awards to our employees, directors and consultants. The maximum number of ordinary shares may be subject to equity awards pursuant to the 2016 Equity Incentive Plan is 15,814,019 initially. On January 1, 2018, and on every January 1 thereafter for eight years, the aggregate number of ordinary shares reserved and available for issuance pursuant to awards granted under the 2016 Equity Incentive Plan will be increased by 1.0% of the total number of ordinary shares outstanding on December 31 of preceding calendar year. Unless terminated earlier, the 2016 Equity Incentive Plan will terminate automatically in 2026. Administration The 2016 Equity Incentive Plan is administered by (i) the compensation committee, (ii) such other committee of the board to which the board delegates the power to administer the 2016 Equity Incentive Plan or (iii) the board. The administrator will determine the provisions and terms and conditions of each equity award. Change in Control In the event of a change in control, the administrator may provide for acceleration of equity awards, purchase of equity awards from holders or replacement of equity awards. Term Unless terminated earlier, the 2016 Equity Incentive Plan will continue in effect for a term of ten years from the date of its adoption. Award Agreements Generally, equity awards granted under the 2016 Equity Incentive Plan are evidenced by an award agreement providing for the number of ordinary shares subject to the award, and the terms and conditions of the award, which must be consistent with the 2016 Equity Incentive Plan. 166 Table of Contents Vesting Schedule The administrator determines the vesting schedule of each equity award granted under the 2016 Equity Incentive Plan, which vesting schedule will be set forth in the award agreement for such equity award. Amendment and Termination The board of directors may at any time amend or terminate the 2016 Equity Incentive Plan, subject to certain exceptions. Granted Options We have granted options to purchase our Class A ordinary shares to certain of our officers, directors, employees and a third-party consultant pursuant to the 2016 Equity Incentive Plan. Certain options previously granted were subsequently canceled. As of March 31, 2022, options to purchase 2,058,563 Class A ordinary shares remained outstanding. The table below summarizes, as of the date of this annual report, the options we have granted to our directors and executive officers. Name Long Xu Position Director Yifan Li Shengwen Rong Yan Gao Independent director Independent director Vice President of Finance Ordinary Shares Underlying Options Awarded Option Exercise Price Grant Date Option Expiration Date February 23, 2026 * US$ 0.0 February 23, 2016 * US$ 0.0 December 20, 2018 December 20, 2028 * US$ 0.0 September 22, 2019 September 22, 2029 * US$ 0.0 December 25, 2019 December 25, 2029 * US$ 0.0 March 26, 2020 * US$ 0.0 October 17, 2017 * US$ 0.0 * US$ 0.0 November 30, 2018 November 30, 2028 * US$ 0.0 March 26, 2030 December 8, 2026 June 14, 2029 June 14, 2019 June 14, 2029 June 14, 2019 * US$ 0.0 May 3, 2017 * US$ 0.0 March 12, 2018 * US$ 0.0 December 20, 2018 December 20, 2028 * US$ 0.0 September 22, 2019 September 22, 2029 * US$ 0.0 December 25, 2019 December 25, 2029 * US$ 0.0 March 26, 2020 May 3, 2027 March 12, 2028 March 26,2030 * Less than 1% of our outstanding shares, assuming conversion of our preferred shares into ordinary shares. Equity Incentive Trust The Qudian Inc. Equity Incentive Trust, or the Equity Incentive Trust, is a trust established by a deed dated December 30, 2016 between us and Ark Trust (Hong Kong) Limited, or Ark Trust, as trustee of the Equity Incentive Trust, through which our ordinary shares, dividends and other rights and interests under awards granted pursuant to our equity incentive plans may be provided to certain of recipients of equity awards granted pursuant to our share incentive plans. Participants in the Equity Incentive Trust transfer their equity awards to Ark Trust to be held for their benefit. Upon satisfaction of vesting conditions and request by grant recipients, Ark Trust will exercise the equity awards and transfer the relevant ordinary shares, dividends and other rights and interest under the equity awards to the relevant grant recipients. 167 Table of Contents 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 the Equity Incentive Trust. As of March 31, 2022, the Equity Incentive Trust held 4,208,108 Class A ordinary shares. The trust deed provides that Ark Trust shall not exercise the voting rights attached to such ordinary shares unless otherwise directed by the plan administrator, which is our board of directors as of the date of this annual report, or its authorized representative. Wanlimu Cayman Share Incentive Plan We have established a wholly-owned subsidiary under the laws of the Cayman Islands, WLM Kids Inc., or Wanlimu Cayman. Wanlimu Cayman is not used to operate or as a holding company for the Group’s early childhood education business. In April 2021, the board of directors of Qudian Inc. approved WLM Kids Inc. 2021 Share Incentive Plan, or the Wanlimu Plan, which allows Wanlimu Cayman to grant share options, restricted shares, restricted share units and other share-based awards to its employees, directors and consultants. The maximum number of ordinary shares of Wanlimu Cayman that may be subject to equity awards pursuant to the Wanlimu Plan is 400,000,000, which represents 50% of outstanding shares of Wanlimu Cayman on a diluted basis as of the date of this annual report. Mr. Min Luo has been granted options to purchase 100,000,000 ordinary shares of Wanlimu Cayman with an exercise price of US$0.00001 per share. The share options will be exercisable upon Wanlimu Cayman achieving valuation of US$3 billion. Mr. Min Luo has been appointed as the administrator with respect to the remaining 300,000,000 ordinary shares of Wanlimu Cayman reserved under the Wanlimu Plan, which have been allocated for equity awards to management members and other employees of Wanlimu Cayman and its consolidated entities. As the administrator, Mr. Luo has the power and authority to, among other things, (i) select individuals to whom awards may be granted, (ii) determine the type or types of awards to be granted to each grantee and (iii) determine the terms and conditions of each award. C. Board Practices Our 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. A director may vote with respect to any contract or any proposed contract or arrangement in which he is interested, and if he does so his vote shall be counted and he may be counted in the quorum at any meeting of our directors at which any such contract or proposed contract or arrangement is considered, provided (a) such director has declared the nature of his interest at the meeting of the 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 the first 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 or arrangement is a transaction with a related party, such transaction has been approved by the audit committee. The directors may exercise all the powers of the company to borrow money, to mortgage or charge its undertaking, property and uncalled capital, and to issue debentures or other securities whenever money is 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 contract with us that provides for benefits upon termination of service. Committees of the Board of Directors Our board of directors has established an audit committee, a compensation committee and a nominating and corporate governance committee. We have adopted a charter for each of the committees. Each committee’s members and functions are described below. 168 Table of Contents Audit Committee Our audit committee consists of Yifan Li and Shengwen Rong. Yifan Li is the chairperson of our audit committee. Yifan Li satisfies the criteria of an audit committee financial expert as set forth under the applicable rules of the SEC. Each of Yifan Li and Shengwen Rong satisfies the requirements for an “independent director” within the meaning of Section 303A of the NYSE Listed Company Manual and will meet the criteria for independence set forth in Rule 10A-3 of the Exchange Act. Our audit committee will consist solely of independent directors within one year 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 is responsible 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 issues raised by the most recent internal quality control review, or peer review, of the independent auditors and all relationships between the independent 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 financial statement 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 rating agencies; reviewing with management and the independent auditors the effect of regulatory and accounting initiatives, as well as off-balance sheet structures, on the Group’s financial statements; discussing policies with respect to risk assessment and risk management with management, internal auditors and the independent auditor; timely reviewing reports from the independent auditor regarding all critical accounting policies and practices to be used by our company, all alternative treatments of financial information within U.S. GAAP that have been discussed with management and all other material written communications between the independent auditor and management; establishing procedures for the receipt, retention and treatment of complaints received from the Group’s employees regarding accounting, internal accounting controls or auditing matters and the confidential, anonymous submission by the Group’s employees of concerns regarding questionable accounting 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; 169 Table of Contents • • meeting separately, periodically, with management, internal auditors and the independent auditor; and reporting regularly to the full board of directors. Compensation Committee Our compensation committee consists of Yifan Li and Shengwen Rong. Yifan Li is the chairperson of our compensation committee. Each of Yifan Li and Shengwen Rong satisfies the requirements for an “independent director” within the meaning of Section 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 specifically delegated to the remuneration committee by our board of directors from time to time. Nominating and Corporate Governance Committee Our nominating and corporate governance committee consists of Yifan Li and Min Luo. Min Luo is the chairperson of our nominating and corporate governance committee. Yifan Li satisfies the “independence” requirements of Section 303A of the NYSE Listed Company Manual. The nominating and corporate governance committee assists the board of directors in selecting individuals qualified to become our directors and in determining the composition of the board and its committees. The nominating and corporate governance committee is responsible for, among other things: • • • • selecting and recommending to the board nominees for election by the shareholders or appointment by the board; reviewing annually with the board the current composition of the board with regards to characteristics such as independence, knowledge, skills, experience and diversity; making recommendations on the frequency and structure of board meetings and monitoring the functioning of the committees of the board; and advising the board periodically with regards to significant developments in the law and practice of corporate governance as well as our compliance with applicable laws and regulations, and making recommendations to the board on all matters of corporate governance and on any remedial action to be taken. Duties of Directors Under 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 a duty to exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances. In fulfilling their duty of care to us, our directors must ensure compliance with our second amended and restated memorandum and articles of association. A shareholder has the right to seek damages if a duty owed by our directors is breached. 170 Table of Contents 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 of association. Terms of Directors and Executive Officers Our directors may be elected by a resolution of our board of directors, or by an ordinary resolution of our shareholders, pursuant to our second amended 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 her earlier death, resignation or removal or the expiration of his or her term as provided in the written agreement with our company, if any. A director will cease to be a director if, among other things, the director (i) dies, or becomes bankrupt or makes any arrangement or composition with his creditors; (ii) is found to be or becomes of unsound mind, (iii) resigns his office by notice in writing to the company, or (iv) without special leave of absence from our board, is absent from six consecutive board meetings and our directors resolve that his office be vacated. Our officers are elected by and serve at the discretion of the board of directors. Guosheng HK is a principal shareholder of our company. On April 25, 2020, Guosheng HK, its parent company Guosheng Financial Holding Inc. and Mr. Min Luo (solely in his capacity as our director and the chairman of our board of directors) entered into a deed of undertaking, or the deed. Pursuant to the deed, for a period of three years, Mr. Luo undertakes (i) not to remove the director designated by Guosheng HK and (ii) in the event such designee no longer serves our director, to nominate another designee of Guosheng HK to fill such vacancy and vote in favor of such nomination. Furthermore, for a period of three years, Mr. Luo undertakes to keep the number of directors designated by Guosheng HK equal to one sixth of the total number of directors of our company (rounded down the nearest whole number), provided that such number will in no event be less than one. Mr. Luo’s undertakings pursuant to the deed are subject to his duties and obligations as our director and the chairman of our board of directors. Currently, Mr. Yingming Li is the director designated by Guosheng HK. Guosheng HK is further described under “Item 6. Directors, Senior Management and Employees E. Share Ownership.” Pursuant to the deed, Guosheng Financial Holdings Inc. agrees to use its reasonable commercial efforts to establish comprehensive business cooperation with our Company. The scope of such cooperation will include, among other things, introduction of institutional funding partners for the Group’s consumer credit business. The undertakings by (i) Mr. Luo on the one hand and (ii) Guosheng Financial Holdings Inc, on the other hand are mutually conditioned upon the relevant counterparty’s compliance with its own undertakings under the deed. 171 Table of Contents D. Employees As of December 31, 2021, the Group had a total of 940 employees. The following table sets forth the breakdown of the Group’s employees as of December 31, 2021 by function: Number of Function Risk management Technology and product development Finance Operation management General administrative and others New businesses Sales and marketing Dabai Auto Wanlimu Kids project Total Employees 87 78 69 100 58 13 4 24 507 940 % of Total 9.3 8.3 7.3 10.6 6.2 1.4 0.4 2.6 53.9 100.0 As of December 31, 2021, a majority of the Group’s employees were based in Xiamen in Fujian Province and Fuzhou in Jiangxi Province. The remainders of the Group’s employees were based in various other locations across China. The number of the Group’s employees decreased from 1,047 as of December 31, 2020 to 940 as of December 31, 2021, primarily due to the winding down of the Wanlimu e-commerce platform. We believe the Group offers its employees competitive compensation packages and a dynamic work environment that encourages initiative and is based on merit. As a result, the Group has generally been able to attract and retain qualified personnel and maintain a stable core management team. As required by PRC regulations, the Group participates in various statutory employee benefit plans, including social insurance funds, namely a pension contribution plan, a medical insurance plan, an unemployment insurance plan, a work-related injury insurance plan and a maternity insurance plan, and a housing provident fund. The Group is required under PRC law to make contributions to employee benefit plans at specified percentages of the salaries, bonuses and certain allowances of the Group’s employees, up to a maximum amount specified by the local government from time to time. In addition, the Group purchased employer’s liability insurance and additional commercial health insurance to increase insurance coverage of the Group’s employees. The Group enters into standard labor, confidentiality and non-compete agreements with its employees. The non-compete restricted period typically expires two years after the termination of employment, and the Group agrees to compensate the employee with a certain percentage of his or her pre-departure salary during the restricted period. We believe that the Group maintains a good working relationship with its employees, and the Group has not experienced any major labor disputes. E. Share Ownership The following table sets forth information as of March 31, 2022 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 to receive the economic benefit of ownership of the securities. In 172 Table of Contents computing the number of shares beneficially owned by a person and the percentage ownership of 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 or the conversion of any other security. The total number of ordinary shares outstanding as of March 31, 2022 was 252,474,803, comprising 188,983,631 Class A ordinary shares and 63,491,172 Class B ordinary shares, excluding (i) ordinary shares represented by the ADSs repurchased by the Company, (ii) ordinary shares issuable upon the exercise of outstanding share options and (iii) ordinary shares reserved for future issuance under our share incentive plans: Directors and Executive Officers: Min Luo(1) Long Xu Yingming Li Shengwen Rong Yifan Li Yan Gao Directors and Executive Officers as a Group Principal Shareholders Qufenqi Holding Limited Guosheng HK(2) Class A ordinary shares Ordinary Shares Beneficially Owned Percentage of total ordinary shares Class B ordinary shares Percentage of aggregate voting power** — * — * * * 1,347,500 63,491,172 — — — — — 63,491,172 — 12,670,000 63,491,172 4,125,698 25.1 — * * * 25.7 25.1 6.7 77.1 * — * * * 77.2 77.1 6.5 * ** 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 by such person or group by the voting power of all of our Class A and Class B ordinary shares as a single class. In respect of all matters subject to a shareholders’ 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 one class. Each Class B ordinary share is convertible into one Class A ordinary share at any time by the holder thereof. Class A ordinary shares are not convertible into Class B ordinary shares under any circumstances. (1) Represents 63,491,172 Class B ordinary shares held by Qufenqi Holding Limited, a limited liability company established in the British Virgin Islands. 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 our founder, 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. Pursuant to a proxy and power of attorney dated April 25, 2020, or the Guosheng proxy, Qufenqi Holding Limited appointed Guosheng HK as its proxy and attorney-in-fact with respect to 4,125,698 Class B ordinary shares held by Qufenqi Holding Limited. The Guosheng proxy provides Guosheng HK with the power to exercise the voting rights relating to the 4,125,698 Class B ordinary shares. Guosheng HK is further described in footnote 2 below. (2) Represents (i) 12,670,000 Class A ordinary shares held by Guosheng (Hong Kong) Investment Limited, or Guosheng HK, and (ii) 4,125,698 Class B ordinary shares subject to the Guosheng proxy. The Guosheng proxy is further described in footnote 1 above. Information regarding beneficial ownership in Class A ordinary shares is reported as of December 31, 2020, based on the information contained in the Schedule 13G/A filed by Guosheng HK and its affiliates on March 10, 2021, or the Guosheng 13G/A. Guosheng HK is a limited liability company incorporated under the laws of Hong Kong and a subsidiary of Guosheng Financial Holding Inc., or Guosheng, a public company listed on the Shenzhen Stock Exchange. Based on Guosheng’s public filings, Mr. Li Du has control over Guosheng as of the date of this annual report. The registered address of Guosheng HK is Unit 606, 6th Floor, Alliance Building, 133 Connaught Road Central, Hong Kong. We are not aware of any of our shareholders being affiliated with a registered broker-dealer or being in the business of underwriting securities. 173 Table of Contents 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 rights of other shareholders. We are not aware of any arrangement that may, at a subsequent date, result in a change of control of our company. ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS A. Major Shareholders Please refer to “Item 6. Directors, Senior Management and Employees — E. Share Ownership.” B. Related Party Transactions Contractual Arrangements with the Group VIEs and Their Shareholders PRC laws and regulations currently restrict foreign ownership and foreign investment in VATS in China. As a result, we operate our relevant business through contractual arrangements among Ganzhou Qufenqi, our wholly-owned PRC subsidiary, Beijing Happy Time, a Group VIE, and the shareholders of Beijing Happy Time. We established three new Group VIEs, Ganzhou Qudian and Xiamen Qudian in 2017 and Xiamen Weipujia in 2018. Ganzhou Qufenqi has also entered into a series of contractual arrangements with the aforementioned four Group VIEs and its shareholders. In addition, we established a new Group VIE, Xiamen Qu Plus Plus in 2019 and control it through a series of contractual arrangements among Xiamen Youxiang, our wholly-owned PRC subsidiary, Xiamen Qu Plus Plus, and the shareholders of Xiamen Qu Plus Plus. For a description of these contractual arrangements, see “Item 4. Information on the Company — B. Business Overview — Overview — Our Contractual Arrangements with the Group VIEs and Their Shareholders.” Equity Incentive Plan See “Item 6. Directors, Senior Management and Employees—B. Compensation—2016 Equity Incentive Plan.” C. Interests of Experts and Counsel Not Applicable. ITEM 8. FINANCIAL INFORMATION A. Consolidated Statements and Other Financial Information We have appended consolidated financial statements filed as part of this annual report. Legal and Administrative Proceedings The Group may from time to time be subject to various legal or administrative claims and proceedings arising in the ordinary course of business. Litigation or any other legal or administrative proceeding, regardless of the outcome, is likely to result in substantial cost and diversion of the Group’s resources, including our management’s time and attention. We and certain of our directors and officers were named as defendants in four putative securities class actions filed in the United States District Court for the Southern District of New York: Ramnath v. Qudian Inc. et al., Civil Action No. 1:17-cv-09741-RA (S.D.N.Y.), Maia v. Min Luo et al., Civil Action No. 1:17-cv-09796-RA (S.D.N.Y.), Foat v. Qudian Inc. et al., Civil Action No. 1:17-cv-09875-RA (S.D.N.Y.), and Perez v. Qudian Inc. et al., Civil 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 persons who 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 of the United States Securities Act of 1933 in connection with our disclosure of business and regulatory risks. 174 Table of Contents On March 16, 2018, the Court entered an order consolidating the Federal Actions under master caption In re Qudian Inc. Securities Litigation, Master File No. 1:17-cv-09741-RA (S.D.N.Y.) and appointing lead plaintiffs and lead counsel for the consolidated case. On May 18, 2018, Plaintiffs filed a Consolidated Amended Complaint, and, on July 27, 2018, Plaintiffs filed a Second Amended Complaint. On October 12, 2018, we filed a motion to dismiss the Second Amended Complaint for failure to state a claim under the federal securities laws. On September 27, 2019, the Court issued an Order (the “Order”) granting in part and denying in part our motion to dismiss the Second Amended Complaint. The Order granted the motion to dismiss with leave to amend the Second Amended Complaint with respect to certain of Plaintiffs’ allegations, and denied the motion to dismiss with respect to the launch of the Company’s Dabai Auto business. On October 17, 2019, Plaintiffs filed a stipulation confirming that they will not seek to amend the Second Amended Complaint. On November 8, 2019, Plaintiffs filed a motion asking the court to reconsider the Order with respect to one of the dismissed allegations. On December 6, 2019, we filed an opposition to the motion for reconsideration, and Plaintiffs filed a reply on December 20, 2019. On July 10, 2020, the court denied Plaintiffs’ motion for reconsideration. On August 10, 2020, certain defendants filed an answer to the Second Amended Complaint. Certain remaining defendants separately moved to dismiss the Second Amended Complaint on additional grounds on the same date. Plaintiffs’ filed their opposition to the motion to dismiss on September 24, 2020. On November 13, 2020, Plaintiffs filed an unopposed motion requesting approval for settlement pursuant to the terms stipulated by the parties. On November 16, 2020, Judge Furman preliminarily approved the stipulated settlement, certified a settlement class, and set a settlement hearing for April 27, 2021. On November 18, 2020, certain absent class members filed a motion to compel vacatur and denial of the order preliminarily approving the settlement. On November 20, 2020, the Company and Plaintiffs filed oppositions to the motion to compel vacatur, and on November 23, 2020, Judge Furman denied the motion. On March 23, 2021, Plaintiffs filed a motion for final approval of the settlement. On April 9, 2021, the court continued the settlement hearing date to June 8, 2021. On June 8, 2021, the court entered judgment approving the class action settlement. We and certain of our directors and officers were also named as defendants in Song v. Qudian Inc. et al., Case No. 18CIV01425 (Cal. Supr. Ct., San Mateo Cty.), a putative securities class action filed in the Superior Court of California, County of San Mateo (the “California Action”). 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 to our 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 and regulatory 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 to stay 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, the court granted our motion to stay. On July 14, 2021, Plaintiff filed a voluntary dismissal of the suit in light of the settlement of the Federal Actions. The voluntary dismissal was granted on July 26, 2021. 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 class of persons who allegedly suffered damages as a result of their purchase of our ADSs pursuant and/or traceable to our IPO — similarly allege violations of Sections 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 175 Table of Contents Qudian Inc. Securities Litigation, Index No. 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 the actions 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. On January 24, 2020, Plaintiffs filed a motion to lift the stay and file an amended complaint. We filed an opposition to the motion on February 21, 2020, and Plaintiffs filed a reply on March 6, 2020. On April 28, 2020, the court denied Plaintiffs’ motion to lift the stay. Plaintiffs noticed an appeal from the court’s decision on May 15, 2020 and filed their opening brief on July 13, 2020. On August 12, 2020, we filed a responsive brief, and on August 21, 2020, Plaintiffs filed their reply brief. On December 3, 2020, the Appellate Division reversed the order denying Plaintiffs’ motion to lift the stay, and on December 9, 2020, Plaintiffs filed an amended complaint. On December 29, 2020, we filed a motion to dismiss the amended complaint for failure to state a claim or, alternatively, to stay the actions in light of the pending settlement hearing in the Federal Actions. On January 7, 2021, Plaintiffs filed an opposition to the motion, and we filed a reply on January 13, 2021. On June 10, 2021, Plaintiffs filed a stipulation and proposed order voluntarily dismissing the actions in light of the settlement in the Federal Actions. The court granted the stipulation and proposed order the same day. We and certain of our officers and directors were also named as defendants in a putative securities class action filed on January 22, 2020 in the United States District Court for the Southern District of New York, captioned Greco et al v. Qudian Inc. et al, Case 1:20-cv-00577-GHW (S.D.N.Y.) (the “Federal Exchange Act Action”). The Federal Exchange Act Action alleges violations of Sections 10(b) and 20(b) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder in connection with our FY19 financial guidance and certain related public statements. On April 7, 2020, the Court entered a stipulated order appointing Co-Lead Plaintiffs and Co-Lead Counsel. On June 17, 2020, Plaintiffs filed an Amended Class Action Complaint (“AC”). On September 4, 2020, we moved to dismiss the AC for failure to state a claim under the federal securities laws. Plaintiffs filed their opposition to our motion to dismiss on October 2, 2020, and we filed a reply on October 16, 2020. A decision on the motion is pending. For risks and uncertainties relating to the pending case against us, please see “Item 3. Key Information — D. Risk Factors — Risks Related to Our ADSs — We have been named as a defendant in a putative shareholder class action lawsuit that could have a material adverse impact on our business, financial condition, results of operation, cash flows and reputation.” Dividend Policy Since 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 A ordinary shares or ADSs in the foreseeable future. We intend to retain most, if not all, of our available funds and any future earnings to operate and expand the Group’s 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 the board of directors may deem relevant. If we pay any dividends, we will pay our ADS holders to the same extent as holders of our Class 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, will be paid in U.S. dollars. We are an exempted company incorporated in the Cayman Islands. In order for us to distribute any dividends to our shareholders and ADS holders, we may rely on dividends distributed by our PRC subsidiaries. 176 Table of Contents Certain payments from our PRC subsidiaries to us may be subject to PRC withholding income tax. In addition, regulations in the PRC currently permit payment of dividends of a PRC company only out of accumulated distributable after-tax profits as determined in accordance with its articles of association and the accounting standards and regulations in China. Each of our PRC subsidiaries is required to set aside at least 10% of its after-tax profit based on PRC accounting standards every year to a statutory common reserve fund until the aggregate amount of such 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 Changes The Group has not experienced any other significant changes since the date of the Group’s audited consolidated financial statements included in this annual report. ITEM 9. THE OFFER AND LISTING A. Offering and Listing Details Our ADSs, each representing one of our Class A ordinary share, have been listed on the New York Stock Exchange since October 18, 2017 under the symbol “QD.” B. Plan of Distribution Not Applicable. C. Markets See “ — A. Offering and Listing Details.” D. Selling Shareholders Not Applicable. E. Dilution Not Applicable. F. Expenses of the Issue Not Applicable. ITEM 10. ADDITIONAL INFORMATION A. Share Capital Not Applicable. B. Memorandum and Articles of Association We incorporate by reference into this annual report the description of our second amended and restated memorandum of association contained in our F-1 registration statement (File No. 333-220511), as amended, initially filed with the Securities and Exchange Commission on September 18, 2017. Our shareholders adopted our second amended and restated memorandum and articles of association by unanimous resolutions passed on May 3, 2017, and effective immediately prior to the completion of our initial public offering of common shares represented by our ADSs. 177 Table of Contents C. Material Contracts We have not entered into any material contracts other than in the ordinary course of business and other than those described in “Item 4. Information on the Company” or elsewhere in this annual report. D. Exchange Controls See “Item 4. Information on the Company — B. Business Overview — Regulation — Regulations Related to Foreign Exchange.” E. Taxation The following is a general summary of the material Cayman Islands, People’s Republic of China and United States federal income tax consequences relevant to an investment in our ADSs and Class A ordinary shares. The discussion is not intended to be, nor should it be construed as, legal or tax advice to any particular prospective purchaser. The discussion is based on laws and relevant interpretations thereof in effect as of the date of this annual report, all of which are subject to change or different interpretations, possibly with retroactive effect. The discussion does not address U.S. state or local tax laws, or tax laws of jurisdictions other than the Cayman Islands, the People’s Republic of China and the United States. You should consult your own tax advisors with respect to the consequences of acquisition, ownership and disposition of our ADSs and Class A ordinary shares. Cayman Islands Taxation The Cayman Islands currently levies no taxes on individuals or corporations based upon profits, income, gains or appreciations and there is no taxation in the nature of inheritance tax or estate duty or withholding tax applicable to us or to any holder of our ADSs and Class A ordinary shares. There are no other taxes likely to be material to us levied by the Government of the Cayman Islands except for stamp duties which may be applicable on instruments executed in, or after execution brought within the jurisdiction of the Cayman Islands. No stamp duty is payable in the Cayman Islands on transfers of shares of Cayman Islands companies except those which hold interests in land in the Cayman Islands. The Cayman Islands is a party to a double tax treaty entered with the United Kingdom in 2010 but is otherwise not party to any double tax treaties. There are no exchange control regulations or currency restrictions in the Cayman Islands. Pursuant to Section 6 of the Tax Concessions Law (2011 Revision) of the Cayman Islands, we have obtained an undertaking from the Governor-in-Cabinet: (1) (2) 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 apply to us or our operations; and 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 other obligations 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 Taxation In March 2007, the National People’s Congress of China enacted the Enterprise Income Tax Law, which became effective on January 1, 2008. The Enterprise Income Tax Law provides that enterprises organized under the laws of jurisdictions outside China with their “de facto 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 worldwide income. The Implementing Rules of the Enterprise Income Tax Law, which took effect on January 1, 2008 and was last amended on April 23, 2019, further defines the term “de facto management body” 178 Table of Contents as the management body that exercises substantial and overall management and control over the business, personnel, accounts and properties of an enterprise. While we do not currently consider our company or any of our overseas subsidiaries to be a PRC resident enterprise, there is a risk that the PRC tax authorities may deem our company or any of our overseas subsidiaries as a PRC resident enterprise since a substantial majority of the members of our management team as well as the management team of some of our overseas subsidiaries are located in China, in which case we or the overseas subsidiaries, as the case may be, would be subject to the PRC enterprise income tax at the rate of 25% on worldwide income. If the PRC tax authorities determine that our Cayman Islands holding company is a “resident enterprise” for PRC enterprise income tax purposes, a number of unfavorable PRC tax consequences could follow. One example is a 10% withholding tax would be imposed on dividends we pay to our non-PRC enterprise shareholders and with respect to gains derived by our non-PRC enterprise shareholders from transferring our shares or ADSs. It is unclear 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 or agreements 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 the prevention of tax evasion with respect to taxes on income, or the Sino-US Treaty. The Sino-US Treaty provides that, among others, subject to certain conditions and limitations, dividends paid by a company which is a resident enterprise of one Contracting State, to a resident (an individual citizen or a resident enterprise) of the other Contracting State, or interest arising in one Contracting State and paid to a resident of the other Contracting State, may be taxed in that other Contracting State, such dividend or interest may also be taxed in the Contracting State where the company paying the dividends is a resident, or the interest arises, according to the laws of such Contracting State, but if the recipient of dividend or interest is the beneficial owner of the dividend 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 several methods 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 United States 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 Chinese tax imposed on that resident. The amount of credit, however, shall not exceed the amount of the Chinese tax computed with respect to that income in accordance 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 a resident 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 the dividends 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 or citizen 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 United States 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 the dividends 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 the Sino-US Treaty shall be deemed to arise in that other Contracting State. Certain United States Federal Income Tax Considerations The following discussion describes certain United States federal income tax consequences of the purchase, ownership and disposition of our ADSs and Class A ordinary shares as of the date hereof. This discussion deals only with ADSs and Class A ordinary shares that are held as capital assets by a United States Holder (as defined below). In addition, the discussion set forth below is applicable only to United States Holders (i) who are residents of the United States for purposes of the Sino-US Treaty, (ii) whose ADSs or Class A ordinary shares are not, for purposes of the Sino-US Treaty, effectively connected with a permanent establishment in PRC and (iii) who otherwise qualify for the full benefits of the Sino-US Treaty. 179 Table of Contents 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 federal income tax purposes, any of the following: • • • • an individual who is a 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 laws of the United States, any state thereof or the District of Columbia; an estate the income of which is subject to United States federal income taxation regardless of its source; or a trust if it (1) is subject to the primary supervision of a court within the United States and one or more United States persons have the authority to control all substantial decisions of the trust or (2) has a valid election in effect under applicable United States Treasury regulations to be treated as a United States person. This discussion is based upon provisions of the Internal Revenue Code of 1986, as amended (the “Code”), and regulations, rulings and judicial decisions thereunder as of the date hereof. Those authorities may be changed, perhaps retroactively, so as to result in United States federal income tax consequences different from those summarized below. In addition, this discussion is based, in part, upon representations made by the depositary to us and assumes that the deposit agreement, and all other related agreements, will be performed in accordance with their terms. This discussion does not represent a detailed description of the United States federal income tax consequences applicable to you if you are subject to special treatment under the United States federal income tax laws, including if you are: • • • • • • • • • • • • • a dealer or broker 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 a straddle; 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 of such 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 or arrangement treated as a partnership for United States federal income tax purposes) holds our ADSs or Class A ordinary shares, the tax treatment of a partner will generally depend upon the status of the partner and the activities of the partnership. If you are a partnership or a partner of a partnership holding our ADSs or Class A ordinary shares, you should consult your tax advisors. 180 Table of Contents As discussed below under “—Passive Foreign Investment Company,” we believe that we may have been classified as a passive foreign investment company (a “PFIC”) for 2020, there is a significant risk that we were classified as a PFIC for 2021, and we may be classified as a PFIC for the current or future taxable years. Accordingly, you are urged to review the discussion below under “Passive Foreign Investment Company,” and to consult with your tax advisors regarding the tax consequences to you if we were or are classified as a PFIC. This discussion does not contain a detailed description of all the United States federal income tax consequences to you in light of your particular circumstances and does not address the Medicare tax on net investment income, United States federal estate and gift taxes or the effects of any state, local or non-United States tax laws. If you are considering the purchase of our ADSs or Class A ordinary shares, you should consult your own tax advisors concerning the particular United States federal income tax consequences to you of the purchase, ownership and disposition of our ADSs or Class A ordinary shares, as well as the consequences to you arising under other United States federal tax laws and the laws of any other taxing jurisdiction. ADSs If you hold ADSs, for United States federal income tax purposes, you generally will be treated as the owner of the underlying Class A ordinary shares that are represented by such ADSs. Accordingly, deposits or withdrawals of Class A ordinary shares for ADSs will not be subject to United States federal income tax. Passive Foreign Investment Company In general, we will be a passive foreign investment company (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 the production of passive income. For this purpose, passive income generally includes dividends, interest, royalties and rents (other than royalties and rents derived in the active conduct of a trade or business and not derived from a related person). In addition, cash and other assets readily convertible into cash are generally considered passive assets. If we own at least 25% (by value) of the stock of another corporation, for purposes of determining whether we are a PFIC, we will be treated as owning our proportionate share of the other corporation’s assets and receiving our proportionate share of the other corporation’s income. However, there is uncertainty as to the treatment of our corporate structure and ownership of the Group VIEs for United States federal income tax purposes. For United States federal income tax purposes, we consider ourselves to own the stock of the Group VIEs. If it is determined, contrary to our view, that we do not own the stock of the Group VIEs for United States federal income tax purposes (for instance, because the relevant PRC authorities do not respect these arrangements), we may be treated as a PFIC. We consider ourselves as a service provider with the primary business purpose of focusing on our data technology. However, we have historically funded, and may continue 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 PFIC rules. Given the foregoing and based on the past and projected composition and classification of our income and assets, we believe that there we may have been classified as a PFIC in 2020, there is a significant risk that we were classified as a PFIC for 2021, and we may be classified as a PFIC for current or future taxable years. However, there are uncertainties in the application of the PFIC rules to a company with our particular business operations, in particular related to the classification of our income as active or passive. 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 asset 181 Table of Contents or 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 to change. Therefore, a decrease in the price of our ADSs may also result in our becoming a PFIC. If we are a PFIC for any taxable year during which you hold our ADSs or Class A ordinary shares, you will be subject to special tax rules discussed below. If we are a PFIC for any taxable year during which you hold our ADSs or Class A ordinary shares and you do not make a timely mark-to-market election, 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 or other disposition, including a pledge, of ADSs or Class A ordinary shares. Distributions received in a taxable year will be treated as excess distributions to the extent that they are greater than 125% of the average annual distributions received during the shorter of the three preceding taxable years or your holding period for the ADSs or Class A ordinary shares. Under these special tax rules: • • • the excess distribution or gain will be allocated ratably over your holding period for the ADSs or Class A ordinary shares, the amount allocated to the current taxable year, and any taxable year prior to the first taxable year in which we were a PFIC, will be treated as 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 for individuals or corporations, as applicable, and the interest charge generally applicable to underpayments of tax will be imposed on the resulting tax attributable to each such year. As discussed above, we believe that we may have been classified as a PFIC for 2020, there is a significant risk that we were classified as a PFIC for 2021, and we may be classified as a PFIC for current or future taxable years. 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 A ordinary shares, you will generally be subject to the special tax rules described above for that year and for each subsequent year in which you hold the ADSs or Class A ordinary shares (even if we do not qualify as a PFIC in such subsequent years). However, if we cease to be a PFIC, you can avoid the continuing impact of the PFIC rules by making a special election to recognize gain as if your ADSs or Class A ordinary shares had been sold on the last day of the last taxable year during which we were a PFIC. You are urged to consult your own tax advisor about this election. 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 A ordinary shares provided such ADSs or Class A ordinary shares are treated as “marketable stock.” The ADSs or Class A ordinary shares generally will be treated 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 the applicable Treasury regulations). Under current law, the mark-to-market election may be available to holders of ADSs since the ADSs are listed on the NYSE which constitutes a qualified exchange, although there can be no assurance that the ADSs will be “regularly traded” for purposes of the mark-to-market election. It should also be noted that it is intended that only the ADSs and not the Class A ordinary shares will be listed on the NYSE. Consequently, if you are a holder of Class A ordinary shares that are not represented by ADSs, you generally will not be eligible to make 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 fair market value of your ADSs at the end of the year over your adjusted tax basis in the ADSs. You will be entitled to deduct as an ordinary loss in each such year the excess of your adjusted tax basis in the ADSs over their fair market value at the end of the year, but only to the extent of the net amount previously included in income as a result of the mark-to-market election. Your adjusted tax basis in the ADSs will be increased by the amount of any income inclusion and 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 we are a PFIC, (i) any gain will be treated as ordinary income and (ii) any loss will be treated as ordinary loss, but only to the extent of the net amount of previously included income as a result of the mark-to-market election. 182 Table of Contents 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 unless the 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. However, because a mark-to-market election cannot be made for any lower-tier PFICs that we may own (as discussed below), you will generally continue to be subject to the special tax rules discussed above with respect to your indirect interest in any such lower-tier PFIC. 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 your particular circumstances. Alternatively, you can sometimes avoid the special tax rules described above by electing to treat a PFIC as a “qualified electing fund” under Section 1295 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 make this election. If we are a PFIC for any taxable year during which you hold our ADSs or Class A ordinary shares and any of our non-United States subsidiaries is also a PFIC, you will be treated as owning a proportionate amount (by value) of the shares of the lower-tier PFIC for purposes of the application of 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 we are 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 A ordinary shares if we are considered a PFIC in any taxable year. Taxation of Dividends Subject to the discussion under “- Passive Foreign Investment Company” above, the gross amount of distributions on the ADSs or Class A ordinary shares (including any amounts withheld to reflect potential PRC withholding taxes, as discussed above under “- People’s Republic of China Taxation”) will be taxable as dividends to the extent paid out of our current or accumulated earnings and profits, as determined under United States federal income tax principles. To the extent that the amount of any distribution exceeds our current and accumulated earnings and profits for a taxable year, the distribution will first be treated as a tax-free return of capital, causing a reduction in the tax basis of the ADSs or Class A ordinary shares, and to the extent the amount of the distribution exceeds your tax basis, the excess will be taxed as capital gain recognized on a sale or exchange. We do not, however, expect to determine earnings and profits in accordance with United States federal income tax principles. Therefore, you should expect that a distribution will generally be reported as 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 or constructively 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 the dividends received deduction allowed to corporations under the Code. Subject to applicable conditions and limitations (including a minimum holding period requirement), dividends received by non-corporate United States investors from a qualified foreign corporation may be treated as “qualified dividend income” that is subject to reduced rates of taxation. A foreign corporation generally is treated as a qualified foreign corporation with respect to dividends paid by that corporation on shares (or ADSs backed by such shares) that are readily tradable on an established securities market in the United States. United States Treasury Department guidance indicates 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 expect that 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 our common shares that are not represented by ADSs currently meet the conditions required for these reduced tax rates. There also can be no assurance that our ADSs will be considered readily tradable on an established securities market in later years. A qualified foreign corporation also generally includes a foreign 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 resident enterprise under the Enterprise Income Tax Law, we may be 183 Table of Contents eligible for the benefits of the Sino-US Treaty, and if we are eligible for such benefits, dividends we pay on our Class A ordinary shares, regardless of whether such shares are represented by ADSs, may be eligible for reduced rates of taxation. See “Taxation - People’s Republic of China Taxation.” You should consult your own tax advisors regarding the application of these rules given your particular circumstances. In addition, notwithstanding the foregoing, non-corporate United States Holders will not be eligible for reduced rates of taxation on any dividends received from us if we are a PFIC in the taxable year in which such dividends are paid or in the preceding taxable year. As discussed above under “- Passive Foreign Investment Company,” we believe that we may have been classified as a PFIC for 2020, that there is a significant risk that we were classified as a PFIC for 2021, and that 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 be treated as foreign taxes eligible for credit against your United States federal income tax liability. For purposes of calculating the foreign tax credit, dividends paid on the ADSs or Class A ordinary shares will be treated as income from sources outside the United States and will generally constitute passive category income. The rules governing the foreign tax credit are complex. You are urged to consult your tax advisors regarding the availability of the foreign tax credit under your particular circumstances. Distributions of ADSs, Class A ordinary shares or rights to subscribe for ADSs or Class A ordinary shares that are received as part of a pro rata distribution to all of our shareholders generally will not be subject to United States federal income tax. Taxation of Capital Gains For United States federal income tax purposes, you will recognize taxable gain or loss on any sale, exchange or other taxable disposition of the ADSs or Class A ordinary shares in an amount equal to the difference between the amount realized for the ADSs or Class A ordinary shares and your tax basis in the ADSs or Class A ordinary shares. Subject to the discussion under “- Passive Foreign Investment Company” above, such gain or loss will generally be capital gain or loss and will generally be long-term capital gain or loss if you have held the ADSs or Class A ordinary shares for more than one year. Long-term capital gains of non-corporate United States Holders (including individuals) are eligible for reduced rates of taxation. The deductibility 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 of the Sino-US Treaty, you may elect to treat such gain as PRC source gain under the Sino-US Treaty. If you are not eligible for the benefits of the Sino-US Treaty or if you fail to make the election to treat any gain as PRC source, then you generally would not be eligible for a foreign tax credit arising from any PRC tax imposed on the disposition of ADSs or Class A ordinary shares unless such credit can be applied (subject to applicable limitations) against tax due on other income derived from foreign sources. However, pursuant to recently issued Treasury regulations that apply to taxes paid in taxable years beginning on or after December 28, 2021, any such PRC tax would generally not be a foreign income tax eligible for a foreign tax credit (regardless of any other income that you may have that is subject to foreign tax). You are urged to consult your tax advisors regarding the availability of the foreign tax credit under your particular circumstances. Information Reporting and Backup Withholding In general, information reporting will apply to dividends in respect of our ADSs or Class A ordinary shares and the proceeds from the sale, exchange or other disposition of our ADSs or Class A ordinary shares that are paid to you within the United States (and in certain cases, outside 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 or certification of exempt status or fail to report in full dividend and interest income. Backup withholding is not an additional tax and any amounts withheld under the backup withholding rules will be allowed as a refund or a credit against your United States federal income tax liability provided the required information is timely furnished to the Internal Revenue Service. 184 Table of Contents F. Dividends and Paying Agents Not Applicable. G. Statement by Experts Not Applicable. H. Documents on Display We 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, we incorporate by reference certain information we filed with the SEC. This means that we can disclose important information to you by referring you to another document filed separately with the SEC. The information incorporated by reference is considered to be part of this annual report. You may read and copy this annual report, including the exhibits incorporated by reference in this annual report, at the SEC’s Public Reference Room 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 request copies of this annual report, including the exhibits incorporated by reference in this annual report, upon payment of a duplicating fee, by writing information on the operation of the SEC’s Public Reference Room. The SEC also maintains a website at www.sec.gov that contains reports, proxy statements and other information regarding registrants that file electronically 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 and proxy statements, and officers, directors and principal shareholders are exempt from the reporting and short-swing profit recovery provisions contained in Section 16 of the Exchange Act. The Group’s financial statements have been prepared in accordance with U.S. GAAP. We will furnish our shareholders with annual reports, which will include a review of operations and annual audited consolidated financial statements prepared in conformity with U.S. GAAP. I. Subsidiary Information Not applicable. ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Foreign Exchange Risk All of the Group’s revenues and substantially all of Group’s expenses are denominated in Renminbi. The functional currency of our company, QD Technologies Limited and QD Data Limited is the U.S. dollar. The functional currency of our subsidiaries in the PRC, the Group VIEs and the Group 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 into the functional currency at the rates of exchange ruling at the balance sheet date. Transactions in currencies other than the functional currency during the year are converted into functional currency at the applicable rates of exchange prevailing when the transactions occurred. Transaction gains and losses are recognized in the statements of operations. Due to foreign currency translation adjustments, the Group had a foreign exchange loss, net, of RMB51 thousand (US$8 thousand) in 2021. 185 Table of Contents We do not believe that the Group currently has any significant direct foreign exchange risk and have not used any derivative financial instruments to hedge exposure to such risk. Although in general the Group’s exposure to foreign exchange risks should be limited, the value of your investment in our ADSs will be affected by the exchange rate between U.S. dollar and RMB because the value of the Group’s business is effectively denominated in Renminbi, while our ADSs will be traded in U.S. dollars. The conversion of Renminbi into foreign currencies, including U.S. dollars, is based on rates set by the PBOC. The PRC government allowed the Renminbi 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 rate between the Renminbi and the U.S. dollar had been stable and traded within a narrow band. In June 2010, the PRC government indicated that it would make the foreign exchange rate of the Renminbi more flexible, which increases the possibility of sharp fluctuations of the Renminbi’s value in the near future and the unpredictability associated with the Renminbi’s exchange rate. Since then, the Renminbi has fluctuated against the U.S. dollar, at times significantly and unpredictably. On November 30, 2015, the Executive Board of the International Monetary Fund (IMF) completed the regular five-year review of the basket of currencies that make up the Special Drawing Right, or the SDR, and decided that with effect from October 1, 2016, Renminbi is determined to be a freely usable currency and will be included in the SDR basket as a fifth currency, along with the U.S. dollar, the Euro, the Japanese yen and the British pound. In the fourth quarter of 2016, the Renminbi has depreciated significantly in the backdrop of a surging U.S. dollar and persistent capital outflows of China. 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 PRC government may in the future announce further changes to the exchange rate system, and we cannot assure you that the Renminbi will not appreciate or depreciate significantly in value against the U.S. dollar in the future. It is difficult to predict how market forces or PRC or U.S. government policy may impact the exchange rate between the Renminbi and the U.S. dollar in the future. To the extent that we need to convert U.S. dollars into Renminbi for the Group’s operations, appreciation of the Renminbi against the U.S. dollar would have an 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 of making payments for dividends on our ordinary shares or ADSs or for other business purposes, appreciation of the U.S. dollar against the Renminbi would have a negative effect on the U.S. dollar amounts available to us. Interest Rate Risk The Group has not been exposed to material risks due to changes in market interest rates, and the Group has not used any derivative financial instruments to manage its interest risk exposure. However, we cannot provide assurance that the Group will not be exposed to material risks due to changes in market interest rate in 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 in both fixed rate and floating rate interest earning instruments carry a degree of interest rate risk. Fixed rate securities may have their fair market value adversely impacted due to a rise in interest rates, while floating rate securities may produce less income than expected if interest rates fall. Inflation Since inception, inflation in China has not materially affected the Group’s results of operations. According to the National Bureau of Statistics of China, the year-over-year percent changes in the consumer price index for December 2019, December 2020 and December 2021 were increases of 4.5%, 0.2% and 1.5%, respectively. Although the Group has not been materially affected by inflation in the past, it may be affected if China experiences higher rates of inflation in the future. 186 Table of Contents ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES A. Debt Securities Not Applicable B. Warrants and Rights Not Applicable C. Other Securities Not Applicable D. American Depositary Shares Depositary Fees Under 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 certain taxes and governmental charges (in addition to any applicable fees, expenses, taxes and other governmental charges payable on the deposited securities represented by any of ADSs): Service • To any person to which ADSs are issued or to any person to which a distribution is made in respect of ADS distributions pursuant to stock dividends or other free distributions of stock, bonus distributions, stock splits or other distributions (except where converted to cash) • Up to US$0.05 per ADS issued Fees • Cancelation of ADSs, including the case of termination of the deposit • Up to US$0.05 per ADS canceled agreement Distribution of cash dividends Distribution of cash entitlements (other than cash dividends) and/or cash proceeds from the sale of rights, securities and other entitlements Distribution of ADSs pursuant to exercise of rights. Distribution of securities other than ADSs or rights to purchase • • • • • • • • Up to US$0.05 per ADS held Up to US$0.05 per ADS held Up to US$0.05 per ADS held Up to US$0.05 per ADS held additional ADSs • Depositary services Depositary Charges • Up to US$0.05 per ADS held on the applicable record date(s) established by the depositary An ADS holder will also be responsible to pay certain fees and expenses incurred by the depositary and certain taxes and governmental charges (in addition to any applicable fees, expenses, taxes and other governmental charges payable on the deposited securities represented by any of ADSs) such as: • • Fees for the transfer and registration of ordinary shares charged by the registrar and transfer agent for the ordinary shares in the Cayman Islands (i.e., upon deposit and withdrawal of ordinary shares). Expenses incurred for converting foreign currency into U.S. dollars. 187 Table of Contents • • • • • 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 to ordinary shares, deposited securities, ADSs and ADRs. Any applicable fees and penalties thereon. The depositary fees payable upon the issuance and cancelation of ADSs are typically paid to the depositary by the brokers (on behalf of 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. The brokers in turn charge these fees to their clients. Depositary fees payable in connection with distributions of cash or securities to ADS holders and the depositary services fee are charged by the depositary to the holders of record of ADSs as of the applicable ADS record date. The depositary fees payable for cash distributions are generally deducted from the cash being distributed or by selling a portion of distributable property 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 record date holders concurrent with the distribution. In the case of ADSs registered in the name of the investor (whether certificated or uncertificated in direct registration), the depositary sends invoices to the applicable record date ADS holders. In the case of ADSs held in brokerage and custodian accounts (via DTC), the depositary generally collects its fees through the systems provided by DTC (whose nominee is the registered holder of the ADSs held in DTC) from the brokers and custodians holding ADSs in their DTC accounts. The brokers and custodians who hold their clients’ ADSs in DTC accounts in turn charge their clients’ accounts the amount of the fees paid to the depositary. In the event of refusal to pay the depositary fees, the depositary may, under the terms of the deposit agreement, refuse the requested service until payment 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 upon such terms and conditions as we and the depositary may agree from time to time. Payments by Depositary In 2021, excluding withholding tax, we received US$0.77 million cash payment from Deutsche Bank Trust Company Americas, the depositary bank for our ADR program. 188 Table of Contents ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES None. PART II. ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS See “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 our initial public offering, which was declared effective by the SEC on October 17, 2017. In October 2017, we completed our initial public offering in which we issued and sold an aggregate of 35,625,000 ADSs, representing 35,625,000 Class A ordinary shares, resulting in net proceeds to us of approximately US$799.6 million. As of December 31, 2021, we had used a major portion of the net proceeds received from our initial public offering, which consisted of US$100 million for capital contribution to fund our Dabai Auto business, and US$100 million for investment in Secoo in June 2020, and US$574.0 million to repurchase our outstanding ADSs, including commission paid to brokers. ITEM 15. CONTROLS AND PROCEDURES Disclosure Controls and Procedures We maintain disclosure controls and procedures designed to provide reasonable assurance that information required to be disclosed in reports filed under the Exchange Act is recorded, processed, summarized and reported within the specified time periods and accumulated and communicated to our management, including our principal executive officer and principal accounting officer, as appropriate, to allow timely decisions regarding required disclosure. Our management, under the supervision and with the participation of our principal executive officer and our principal accounting officer, evaluated the effectiveness of our disclosure controls and procedures, as defined in Rules 13a-15€ or 15d-15(e) promulgated under the Exchange Act, as of December 31, 2021. Based on that evaluation, our principal executive officer and principal accounting officer have concluded that our disclosure controls and procedures are effective in ensuring that material information required to be disclosed in this annual report is recorded, processed, summarized and reported to them for assessment, and required disclosure is made within the time period specified in the rules and forms of the Commission. Management’s Annual Report on Internal Control over Financial Reporting. Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rules 13a-15(f) under the Exchange Act). Our internal control system was designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation and fair presentation of its published consolidated financial statements. All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective may not prevent or detect misstatements and can provide only reasonable assurance with respect to financial statement preparation and presentation. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. As required by Section 404 of the Sarbanes-Oxley Act of 2002 and 189 Table of Contents related rules promulgated by the Securities and Exchange Commission, our management conducted an assessment of the effectiveness of our internal control over financial reporting as of December 31, 2021. In making this assessment, it used the criteria established within the Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on this assessment, our management has concluded that, as of December 31, 2021, our internal control over financial reporting was effective. Attestation Report of the Independent Registered Public Accounting Firm Our independent registered public accounting firm, Ernst & Young Hua Ming LLP has audited the effectiveness of our internal control over financial reporting as of December 31, 2021, as stated in its report, which appears on page F-6 of this annual report on Form 20-F. Changes in Internal Control over Financial Reporting There were no changes in our internal controls over financial reporting that occurred during the period covered by this annual report on Form 20-F that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT Our Board of Directors has determined Yifan Li, who is an independent director, qualifies as an audit committee financial expert as defined in Item 16A of the instruction to Form 20-F. ITEM 16B. CODE OF ETHICS Our board of directors has adopted a code of ethics that applies to our directors, officers and employees. We have filed our code of business conduct and 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. We hereby 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 such person’s written request. ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES The 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 periods indicated below. Audit Fees(1) Tax Fees(2) Total For the Year Ended December 31, 2020 2021 (in thousands of RMB) 10,650 13,350 100 508 11,158 13,450 (1) Audit fees in 2020 include the aggregate fees billed in each of the fiscal period listed for professional services rendered by our independent public accountant for the audit and the agreed upon procedures of our financial statements. Audit fees in 2021 include the aggregate fees billed in each of the fiscal period listed for professional services rendered by our independent public accountant for the audit and the agreed upon procedures of our financial statements. Tax fees include the aggregated fees billed in each of the fiscal periods listed for professional services rendered by our independent public accountant for tax compliance, tax advice and tax planning. (2) 190 Table of Contents 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 public accountant, including audit services, audit-related services and other services as described above. All of the services of Ernst & Young Hua Ming LLP for 2021 and 2020 described above were in accordance with the audit committee pre-approval policy. ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES None. ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS We announced a share repurchase program in January 2020, under which we may repurchase up to US$500 million worth of our outstanding ADSs over a period of 30 months. The repurchases have been, and will be, through various means, including open market transactions, privately negotiated transactions, tender offers or any combination thereof. The repurchases have been, and will be, effected in compliance with Rule 10b5-1 under the Securities Exchange Act of 1934, as amended, and our insider trading policy. The number of ADSs repurchased and the timing of repurchases will depend on a number of factors, including, but not limited to, price, trading volume and general market conditions. We did not repurchase any of our ADSs or Class A ordinary shares in 2021. In December 2021, we announced that Mr. Min Luo, the Company’s founder, chairman and chief executive officer, intended to use personal funds to purchase up to US$10 million of our ADSs over the next 12 months. Mr. Min Luo did not repurchase any of our ADSs in 2021. The share purchases may be made from time to time in the open market at prevailing market prices, in privately negotiated transactions, in block trades and/or through other legally permissible means in accordance with applicable rules and regulations, including, but not limited to, Rule 10b5-1 and/or Rule 10b-18 under the Securities Exchange Act of 1934, as amended, as well as our insider trading policy. ITEM 16F. CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT Not Applicable. ITEM 16G. CORPORATE GOVERNANCE We 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 Exchange listed companies that are foreign private issuers are permitted to follow home country practice in lieu of the corporate governance provisions specified by the New 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 a majority of the board consisting of independent directors and have a compensation committee and a nominating/corporate governance committee, each composed entirely of independent directors, which are not required under the Companies Law (2018 Revision) of the Cayman Islands, our home country. Currently, our board of directors is composed of five members, only two of whom are independent directors. Our nominating and corporate governance committee is composed of two members, only one of whom is an independent director. The NYSE Manual also requires U.S. domestic listed companies to regularly hold executive sessions for non-management directors, or an executive session that only includes independent directors at least once a year. We are not subject to this requirement under the Cayman Islands law and have decided to follow our home country practice on this matter. In addition, the NYSE Manual requires shareholder approval for certain matters, such as requiring that shareholders must be given the opportunity to 191 Table of Contents vote on all equity compensation plans and material revisions to those plans, which is not required under the Cayman Islands law. We intend to follow the home country practice in determining whether shareholder approval is required. ITEM 16H. MINE SAFETY DISCLOSURE Not Applicable. ITEM 16I. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS Not Applicable. 192 Table of Contents PART III. ITEM 17. FINANCIAL STATEMENTS We have elected to provide financial statements pursuant to Item 18. ITEM 18. FINANCIAL STATEMENTS The consolidated financial statements of Qudian Inc. its subsidiaries and the Group VIEs are included at the end of this annual report. ITEM 19. EXHIBITS Exhibit Number 1.1 2.1 2.2 2.3 2.4 4.1 4.2 4.3 4.4 4.5 Description of Document Second Amended and Restated Memorandum and Articles of Association of the Registrant (incorporated herein by reference to Exhibit 3.3 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) Form of American Depositary Receipt evidencing American Depositary Shares (incorporated herein by reference to Exhibit (a) to the registration statement on Form F-6 (File No. 333-220779) filed with the Securities and Exchange Commission on October 3, 2017 with respect to American depositary shares representing our Class A ordinary shares) 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) Form of Deposit Agreement between the Registrant and Deutsche Bank Trust Company Americas, as depositary (incorporated herein by reference to Exhibit (a) to the registration statement on Form F-6 (File No. 333-220779) filed with the Securities and Exchange Commission on October 3, 2017 with respect to American depositary shares representing our Class A ordinary shares) Description of Securities Registered Pursuant to Section 12 of the Securities Exchange Act of 1934 (incorporated herein by reference to Exhibit 2.4 to the annual report on Form 20-F (File No. 001-38230), filed with the Securities and Exchange Commission on April 27, 2020) Form of Indemnification Agreement between the Registrant and its directors and executive officers (incorporated herein by reference to Exhibit 10.1 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) Form of Employment Agreement between the Registrant and its executive officers (incorporated herein by reference to Exhibit 10.2 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) 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) Amendment No. 1 to Qudian Inc. 2016 Equity Incentive Plan (incorporated herein by reference to Exhibit 10.4 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) Amendment No. 2 to Qudian Inc. 2016 Equity Incentive Plan (incorporated herein by reference to Exhibit 10.5 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) 193 Table of Contents 4.6 4.7 4.8 4.9 4.10 4.11 4.12 4.13 4.14 English Translation of Equity Interest Pledge Agreement concerning Beijing Happy Time, among Ganzhou Qufenqi, Mr. Min Luo, Tianjin Happy Share, Shanghai Yunxin Venture Capital Co., Ltd., Phoenix Auspicious Internet Investment L.P., Tianjin Blue Run Xinhe Investment Center L.P., Jiaxins Blue Run Quchuan Investment L.P., Ningbo Yuanfeng Venture Capital L.P., Shenzhen Guoshens Oianhai Investment Co., Ltd., Beijing Kunlun Tech Co., Ltd. and Beijing Happy Time, dated December 9, 2016 (incorporated herein by reference to Exhibit 10.6 to the registration statement on Form F-l (File No. 333-220511), as amended, initially filed with the Securities and Exchange Commission on September 18, 2017) 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), as amended, initially filed with the Securities and Exchange Commission on September 18, 2017) English translation of Power of Attorney Agreement concerning Beijing Happy Time, between Ganzhou Qufenqi and Shanghai Yunxin Venture 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) English translation of Power of Attorney Agreement concerning Beijing Happy Time, between Ganzhou Qufenqi and Phoenix Auspicious Internet 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) English translation of Power of Attorney Agreement concerning Beijing Happy Time, between Ganzhou Qufenqi and Tianjin Blue Run Xinhe Investment Center L.P., dated December 9, 2016 (incorporated herein by reference to Exhibit 10.10 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) English translation of Power of Attorney Agreement concerning Beijing Happy Time, between Ganzhou Qufenqi and Jiaxing Blue Run Quchuan 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) English translation of Power of Attorney Agreement concerning Beijing Happy Time, between Ganzhou Qufenqi and Ningbo Yuanfeng Venture 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) English translation of Power of Attorney Agreement concerning Beijing Happy Time, between Ganzhou Qufenqi and Shenzhen Guosheng Qianhai Investment Co., Ltd., dated December 9, 2016 (incorporated herein by reference to Exhibit 10.13 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) English translation of Power of Attorney Agreement concerning Beijing Happy Time, between Ganzhou Qufenqi and Beijing Kunlun Tech Co., 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) 194 Table of Contents 4.15 4.16 4.17 4.18 4.19 4.20 4.21 4.22 4.23 4.24 English translation of Power of Attorney Agreement concerning Beijing Happy Time, between Ganzhou Qufenqi and Mr. Min Luo, dated December 9, 2016 (incorporated herein by reference to Exhibit 10.15 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) English translation of Exclusive Business Cooperation Agreement among Ganzhou Qufenai, Beijing Happy Time, Ganzhou Network, Ganzhou Happy Fenqi and Fuzhou Happy Time Technology Co., Ltd., dated December 9, 2016 (incorporated herein by reference to Exhibit 10.16 to the registration statement on Form F-l (File No. 333-220511), as amended, initially filed with the Securities and Exchange Commission on September 18, 2017) English translation of Exclusive Call Option Agreement concerning Beijing Happy Time, among Ganzhou Qufenqi, Mr. Min Luo, Tianjin Happy Share, Shanghai Yunxin Venture Capital Co., Ltd., Phoenix Auspicious Internet Investment L.P., Tianjin Blue Run Xinhe Investment Center L.P., Jiaxing Blue Run Quchuan Investment L.P., Ningbo Yuanfeng Venture Capital L.P., Shenzhen Guosheng Qianhai Investment Co., Ltd., Beijing Kunlun Tech Co., Ltd. and Beijing Happy Time, dated December 9, 2016 (incorporated herein by reference to Exhibit 10.17 to the registration statement on Form F-1 (File No. 333-220511), as amended, initially filed with the Securities and Exchange Commission on September 18, 2017) Financial Support Undertaking Letter issued by the Registrant to Beijing Happy Time, dated February 15, 2017 (incorporated herein by reference to Exhibit 10.18 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) English translation of Equity Interest Pledge Agreement concerning Ganzhou Qudian, among Ganzhou Qufenqi, Mr. Min Luo, Mr. Lianzhu Lv and Ganzhou Qudian, dated May 1, 2017 (incorporated herein bv 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) 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) English translation of Power of Attorney Agreement concerning Ganzhou Qudian, between Mr. Lianzhu Lv and Ganzhou Qufenqi, dated May 1, 2017 (incorporated herein by reference to Exhibit 10.21 to the registration statement on Form F-1 (File No. 333-220511), as amended, initially filed with the Securities and Exchange Commission on September 18, 2017) English translation of Exclusive Business Cooperation Agreement between Ganzhou Qufenai 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, initially filed with the Securities and Exchange Commission on September 18, 2017) English translation of Exclusive Call Option Agreement concerning Ganzhou Qudian, among Ganzhou Qufenqi, Mr. Min Luo, Mr. Lianzhu Lv and Ganzhou Qudian, dated May 1, 2017 (incorporated herein by reference to Exhibit 10.23 to the registration statement on Form F-1 (File No. 333-220511), as amended, initially filed with the Securities and Exchange Commission on September 18, 2017) Financial Support Undertaking Letter issued by the Registrant to Ganzhou Qudian, dated May 1, 2017 (incorporated herein by reference to Exhibit 10.24 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) 195 Table of Contents 4.25 4.26 4.27 4.28 4.29 4.30 4.31 4.32 4.33 4.34 4.35 4.36 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) English translation of Equity Interest Pledge Agreement concerning Xiamen Qudian, among Ganzhou Qufenqi, Mr. Min Luo and Xiamen Qudian, dated June 20, 2017 (incorporated herein by reference to Exhibit 10.38 to the registration statement on Form F-1 (File No. 333-220511), as amended, initially filed with the Securities and Exchange Commission on September 18, 2017) English translation of Power of Attorney Agreement concerning Xiamen Qudian, between Ganzhou Qufenai and Mr. Min Luo, dated June 20, 2017 (incorporated herein by reference to Exhibit 10.39 to the registration statement on Form F-l (File No. 333-220511), as amended, initially Filed with the Securities and Exchange Commission on September 18, 2017) 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-l (File No. 333-220511), as amended, initially filed with the Securities and Exchange Commission on September 18, 2017) English translation of Exclusive Call Option Agreement concerning Xiamen Qudian, among Ganzhou Qufenai, Mr. Min Luo and Xiamen Qudian, dated June 20, 2017 (incorporated herein by reference to Exhibit 10.41 to the registration statement on Form F-1 (File No. 333-220511), as amended, initially filed with the Securities and Exchange Commission on September 18, 2017) Financial Support Undertaking Letter issued by the Registrant to Xiamen Qudian, dated June 20, 2017 (incorporated herein by reference to Exhibit 10.42 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) English translation of Equity Interest Pledge Agreement concerning Xiamen Qu Plus Plus, among Xiamen Youxiang, Mr. Min Luo, Mr. Long Xu and Xiamen Qu Plus Plus, dated July 1, 2019 (incorporated herein by reference to Exhibit 4.37 to the annual report on Form 20-F (File No. 001-38230), filed with the Securities and Exchange Commission on April 27, 2020) English translation of Power of Attorney Agreement concerning Xiamen Qu Plus Plus, between Mr. Min Luo and Xiamen Youxiang, dated July 1, 2019 (incorporated herein by reference to Exhibit 4.38 to the annual report on Form 20-F (File No. 001-38230), filed with the Securities and Exchange Commission on April 27, 2020) English translation of Power of Attorney Agreement concerning Xiamen Qu Plus Plus, between Mr. Long Xu and Xiamen Youxiang, dated July 1, 2019 (incorporated herein by reference to Exhibit 4.39 to the annual report on Form 20-F (File No. 001-38230), filed with the Securities and Exchange Commission on April 27, 2020) English translation of Exclusive Business Cooperation Agreement between Xiamen Youxiang and Xiamen Qu Plus Plus, dated July 1, 2019 (incorporated herein by reference to Exhibit 4.40 to the annual report on Form 20-F (File No. 001-38230), filed with the Securities and Exchange Commission on April 27, 2020) English translation of Exclusive Call Option Agreement concerning Xiamen Qu Plus Plus, among Xiamen Youxiang, Mr. Min Luo, Mr. Long Xu and Xiamen Qu Plus Plus, dated July 1, 2019 (incorporated herein by reference to Exhibit 4.41 to the annual report on Form 20-F (File No. 001-38230), filed with the Securities and Exchange Commission on April 27, 2020) Financial Support Undertaking Letter issued by the Registrant to Xiamen Qu Plus Plus, dated July 1, 2019 (incorporated herein by reference to Exhibit 4.42 to the annual report on Form 20-F (File No. 001-38230), filed with the Securities and Exchange Commission on April 27, 2020) 196 Table of Contents 4.37 4.38 8.1* 11.1 12.1* 12.2* 13.1** 13.2** 15.1* 15.2* Indenture, dated July 1, 2019, between the Registrant and Deutsche Bank Trust Company Americas, as Trustee, relating to the issuance of Registrant’s 1.00% Convertible Senior Notes due 2026 (incorporated herein by reference to Exhibit 4.43 to the annual report on Form 20-F (File No. 001-38230), filed with the Securities and Exchange Commission on April 27, 2020) WLM Kids Inc. 2021 Share Incentive Plan (incorporated herein by reference to Exhibit 4.44 to the annual report on Form 20-F (File No. 001-38230), filed with the Securities and Exchange Commission on April 29, 2021) List of Subsidiaries Code of Business Conduct and Ethics of the Registrant (incorporated herein by reference to Exhibit 99.1 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) Certification by Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 Certification by Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 Certification by Principal Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 Certification by Principal Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 Consent of Tian Yuan Law Firm Consent of Independent Registered Public Accounting Firm 101.INS* Inline XBRL Instance Document 101.SCH* Inline XBRL Taxonomy Extension Schema Document 101.CAL* Inline XBRL Taxonomy Extension Calculation Linkbase Document 101.DEF* Inline XBRL Taxonomy Extension Definition Linkbase Document 101.LAB* Inline XBRL Taxonomy Extension Label Linkbase Document 101.PRE* Inline XBRL Taxonomy Extension Presentation Linkbase Document 104 * ** Cover Page Interactive Data File (embedded within the Inline XBRL document) Filed herewith Furnished herewith 197 Table of Contents The 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 authorized the undersigned to sign this annual report on its behalf. SIGNATURES QUDIAN INC. /s/ Min Luo By: Name: Min Luo Title: Chairman and Chief Executive Officer Date: April 29, 2022 198 Table of Contents QUDIAN INC. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Reports of Independent Registered Public Accounting Firm (PCAOB ID:1408) Consolidated Balance Sheets as of December 31, 2020 and 2021 Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2019, 2020 and 2021 Consolidated Statements of Shareholders’ Equity for the Years Ended December 31, 2019, 2020 and 2021 Consolidated Statements of Cash Flows for the Years Ended December 31, 2019, 2020 and 2021 Notes to the Consolidated Financial Statements F-1 PAGE(S) F-2 F-6 F-11 F-13 F-14 F-16 Table of Contents Report of Independent Registered Public Accounting Firm To the Shareholders and the Board of Directors of Qudian Inc. Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of Qudian Inc. (the “Company”) as of December 31, 2021 and 2020, the related consolidated statements of comprehensive income, shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2021, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2021, 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’s internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework), and our report dated April 29, 2022 expressed an unqualified opinion thereon. Adoption of New Accounting Standard As discussed in Note 2 to the consolidated financial statements, the Company changed its method for accounting for credit losses on certain financial instruments in 2020. Basis for Opinion These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in 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 reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to 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 included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matter The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to the account or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the account or disclosures to which it relates. F-2 Table of Contents Allowance for loan principal and financing service fee receivables Description of the Matter How We Addressed the Matter in Our Audit At December 31, 2021, the Company’s loan principal and financing service fee receivables and related allowance was RMB 2,639 million and 267 million, respectively. As explained in Note 2 to the consolidated financial statements, the Company considers the loans to be homogeneous unsecured consumer loans of similar principal amounts. The allowance is calculated based on the Company’s historical loss experience with the entire loan portfolio, using a roll-rate based model and adjusted for various qualitative factors that reflect current conditions and reasonable and supportable forecasts of future economic conditions. These factors may include gross-domestic product rates, consumer price indexes, per capita consumption expenditure and other considerations. Auditing management’s allowance for loan principal and financing service fee receivables was complex and subjective due to the highly judgmental nature of the qualitative factors used to adjust the allowance calculated using the roll-rate based model. Quantifying the impact of the selected qualitative factors on the allowance was also complex and highly judgmental. These qualitative factors require management to make significant judgments which could significantly affect the amount of the allowance for loan principal and financing service fee receivables. We obtained an understanding, evaluated the design and tested the operating effectiveness of controls over the Company’s allowance for loan principal and financing service fee receivables. For example, we tested controls over management’s review of the allowance calculations, the significant assumptions and data inputs. To test the Company’s allowance, we performed audit procedures that included, among others, evaluating the methodology used, management’s selection of qualitative factors and their impact on the allowance, and the underlying data used in the calculation. We compared the selected qualitative factors to publicly available market information. We evaluated the appropriateness of the management’s development, selection and weighting of the qualitative factors used in the roll- rate based model. In addition, we also involved valuation specialists to assist with these procedures. We evaluated the loss rate used to calculate the Company’s allowance at December 31, 2021 by comparing management’s estimate to subsequent results. /s/ Ernst & Young Hua Ming LLP We have served as the Company’s auditor since 2016. Shanghai, The People’s Republic of China April 29, 2022 F-3 Table of Contents Report of Independent Registered Public Accounting Firm To the Shareholders and the Board of Directors of Qudian Inc. Opinion on Internal Control Over Financial Reporting We have audited Qudian Inc.’s internal control over financial reporting as of December 31, 2021, 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 our opinion, Qudian Inc. (the “Company”) maintained, in all material respects, effective internal control over financial reporting as of December 31, 2021, based on the COSO criteria. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 2021 and 2020, the related consolidated statements of comprehensive income, shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2021, and the related notes and our report dated April 29, 2022 expressed an unqualified opinion thereon. Basis for Opinion The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Annual Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in 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 audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance 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 and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. Definition and Limitations of Internal Control Over Financial Reporting A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. F-4 Table of Contents Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. /s/ Ernst & Young Hua Ming LLP Shanghai, The People’s Republic of China April 29, 2022 F-5 Table of Contents QUDIAN INC. CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 2020 AND 2021 (Amounts in Renminbi (“RMB”) and US dollar (“US$”), except for number of shares and per share data) ASSETS: Current assets: (including amounts from the consolidated trusts of RMB 5,290,064,945, and RMB 4,892,342,449 (US$ 767,715,289) as of December 31, 2020 and 2021, respectively) Cash and cash equivalents Restricted cash and cash equivalents Short-term investments Short-term loan principal and financing service fee receivables (net of allowance of RMB 849,234,936 and RMB 267,039,108 (US$ 41,904,263) as of December 31, 2020 and 2021, respectively) Short-term finance lease receivables (net of allowance of RMB 21,151,963 and RMB 4,948,676 (US$ 776,555) as of December 31, 2020 and 2021, respectively; including unearned revenue of RMB 7,453,471 and RMB 1,215,118 (US$ 190,679) as of December 31, 2020 and 2021, respectively) Short-term contract assets (net of allowance of RMB 95,778 and RMB 31,168 (US$ 4,890) as of December 31, 2020 and 2021, respectively) Derivative instruments Other current assets (net of allowance of RMB 160,745,160 and RMB 201,242,068 (US$ 31,579,272) as of December 31, 2020 and 2021, respectively) Total current assets Notes 2020 RMB As of December 31, 2021 RMB US$ 1,537,557,823 135,404,201 5,042,314,438 2,065,495,008 177,924,840 5,926,600,761 324,121,239 27,920,290 930,012,987 3 3,940,461,302 2,371,965,781 372,213,190 4 179,612,841 31,462,237 4,937,112 92,812,707 — 27,964,852 17,375,517 4,388,296 2,726,598 5 762,312,764 11,690,476,076 1,599,299,671 12,218,088,667 250,965,019 1,917,284,731 The accompanying notes are an integral part of these consolidated financial statements. F-6 Table of Contents QUDIAN INC. CONSOLIDATED BALANCE SHEETS - continued AS OF DECEMBER 31, 2020 AND 2021 (Amounts in Renminbi (“RMB”) and US dollar (“US$”), except for number of shares and per share data) Non-current assets: (including amounts from the consolidated trusts of RMB nil and RMB nil (US$ nil) as of December 31, 2020 and 2021, respectively) Long-term finance lease receivables (net of allowance of RMB 3,397,366 and RMB 193,812 (US$ 30,413) as of December 31, 2020 and 2021, respectively; including unearned revenue of RMB 4,737,540 and RMB 71,896 (US$ 11,282) as of December 31, 2020 and 2021, respectively) Right-of-use assets Investment in equity method investee (including amounts measured at fair value of RMB 306,275,523 and RMB nil (US$ nil) as of December 31, 2020 and 2021, respectively) Long-term investments (including amounts measured at fair value of RMB nil and RMB 234,425,472 (US$ 36,786,472) as of December 31, 2020 and 2021, respectively) Property and equipment, net (net of allowance of RMB nil and RMB 147,137,267 (US$ 23,089,048) as of December 31, 2020 and 2021, respectively) Intangible assets Long-term contract assets (net of allowance of RMB 23,174 and RMB nil (US$ nil) as of December 31, 2020 and 2021, respectively) Notes 2020 RMB As of December 31, 2021 RMB US$ 4 28,771,351 210,898,398 398,955 300,607,320 62,605 47,171,848 7 349,275,523 85,581,620 13,429,624 8 209,868,073 286,065,467 44,889,914 9 302,969,361 8,478,390 659,100,648 11,011,807 103,427,275 1,727,992 Deferred tax assets Other non-current assets (net of allowance of RMB nil and RMB 2,982,978 17 (US$ 468,094) as of December 31, 2020 and 2021, respectively) Total non-current assets TOTAL ASSETS 23,093,566 154,959,777 31,438 87,285,917 4,933 13,697,065 419,241,195 1,707,555,634 13,398,031,710 442,953,334 1,873,036,506 14,091,125,173 69,509,044 293,920,300 2,211,205,031 The accompanying notes are an integral part of these consolidated financial statements. F-7 Table of Contents QUDIAN INC. CONSOLIDATED BALANCE SHEETS - continued AS OF DECEMBER 31, 2020 AND 2021 (Amounts in Renminbi (“RMB”) and US dollar (“US$”), except for number of shares and per share data) LIABILITIES AND EQUITY Current liabilities: Short-term lease liabilities (including short-term lease liabilities of the consolidated VIEs without recourse to the Company of RMB 21,103,844 and RMB 37,083,335 (US$ 5,819,184) as of December 31, 2020 and 2021, respectively) Accrued expenses and other current liabilities (including accrued expenses and other current liabilities of the consolidated VIEs without recourse to the Company of RMB 234,321,309 and RMB 308,973,067 (US$ 48,484,616) as of December 31, 2020 and 2021, respectively) Guarantee liabilities and risk assurance liabilities (including amounts of guarantee liabilities of RMB 11,697,633 and RMB 885,303 (US$ 138,923), risk assurance liabilities of RMB 19,701,689 and RMB nil (US$ nil) as of December 31, 2020 and 2021, respectively; including guarantee liabilities and risk assurance liabilities of the consolidated VIEs without recourse to the Company of RMB 27,735,758 and RMB nil (US$ nil) as of December 31, 2020 and 2021, respectively) Income tax payable (including income tax payable of the consolidated VIEs without recourse to the Company of RMB 48,983,948 and RMB 77,466,381 (US$ 12,156,166) as of December 31, 2020 and 2021, respectively) Total current liabilities Notes 2020 RMB As of December 31, 2021 RMB US$ 6 23,763,237 37,470,431 5,879,928 11 336,790,094 376,867,814 59,138,784 12 31,399,322 885,303 138,923 80,655,585 472,608,238 78,293,697 493,517,245 12,285,990 77,443,625 The accompanying notes are an integral part of these consolidated financial statements. F-8 Table of Contents QUDIAN INC. CONSOLIDATED BALANCE SHEETS - continued AS OF DECEMBER 31, 2020 AND 2021 (Amounts in Renminbi (“RMB”) and US dollar (“US$”), except for number of shares and per share data) Non-current liabilities: Long-term borrowings and interest payables (including long-term borrowings and interest payables of the consolidated VIEs without recourse to the Company of RMB 102,415,457 and RMB 145,311,721 (US$ 22,802,580) as of December 31, 2020 and 2021, respectively) Convertible senior notes Deferred tax liabilities (including deferred tax liabilities of the consolidated VIEs without recourse to the Company of RMB 2,847,286 and RMB 68,543,130 (US$ 10,755,913) as of December 31, 2020 and 2021, respectively) Long-term lease liabilities (including long-term lease liabilities of the consolidated VIEs without recourse to the Company of RMB 79,498,231 and RMB 168,800,246 (US$ 26,488,442) as of December 31, 2020 and 2021, respectively) Other non-current liabilities (including long-term lease liabilities of the consolidated VIEs without recourse to the Company of RMB nil and RMB 10,012,997 (US$ 1,571,258) as of December 31, 2020 and 2021, respectively) Total non-current liabilities Total liabilities Notes 2020 RMB As of December 31, 2021 RMB US$ 10 13 102,415,457 822,004,519 145,311,721 681,400,553 22,802,580 106,926,616 17 10,923,276 68,543,130 10,755,913 6 80,236,369 168,800,246 26,488,442 — 1,015,579,621 1,488,187,859 10,012,997 1,074,068,647 1,567,585,892 1,571,258 168,544,809 245,988,434 The accompanying notes are an integral part of these consolidated financial statements. F-9 Table of Contents QUDIAN INC. CONSOLIDATED BALANCE SHEETS - continued AS OF DECEMBER 31, 2020 AND 2021 (Amounts in Renminbi (“RMB”) and US dollar (“US$”), except for number of shares and per share data) Commitments and contingencies Equity: Class A Ordinary shares (US$0.0001 par value; 656,508,828 shares authorized, 201,304,881 shares issued and 189,514,026 shares outstanding as of December 31, 2020; 656,508,828 shares authorized, 201,304,881 shares issued and 190,243,651 shares outstanding, as of December 31, 2021) Class B Ordinary shares (US$0.0001 par value; 63,491,172 shares authorized, Notes 22 2020 RMB As of December 31, 2021 RMB US$ 23 132,052 132,052 20,722 63,491,172 shares issued and outstanding, as of December 31, 2020 and 2021) 23 24 Treasury shares Additional paid-in capital Accumulated other comprehensive loss Retained earnings Total Qudian Inc. shareholders’ equity Non-controlling interests Total equity TOTAL LIABILITIES AND EQUITY 43,836 (371,551,131) 4,007,259,660 (51,419,766) 8,315,379,200 11,899,843,851 10,000,000 11,909,843,851 13,398,031,710 43,836 (346,320,584) 4,017,374,973 (58,997,174) 6,879 (54,345,257) 630,413,799 (9,257,944) 8,904,453,278 1,397,303,028 12,516,686,381 1,964,141,227 1,075,370 12,523,539,281 1,965,216,597 2,211,205,031 14,091,125,173 6,852,900 The accompanying notes are an integral part of these consolidated financial statements. F-10 Table of Contents QUDIAN INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME FOR THE YEARS ENDED DECEMBER 31, 2019, 2020 AND 2021 (Amounts in Renminbi (“RMB”) and US dollar (“US$”), except for number of shares and per share data) Notes 2019 RMB For the years ended December 31, 2020 RMB 2021 RMB US$ Revenues: Financing income Sales commission fee Penalty fee Guarantee income Loan facilitation income and other related income Transaction services fee and other related income Sales income and others Total revenues Cost of revenues: Cost of goods sold Cost of other revenues Total cost of revenues Operating expenses: Sales and marketing General and administrative Research and development Changes in guarantee liabilities and risk assurance liabilities (including changes in guarantee liabilities amounts of RMB 939,954,125, RMB 22,265,996 and RMB 53,009,582 (US$ 8,318,360), change in risk assurance liabilities amounts of RMB 203,473,526, RMB (110,160,462) and RMB 148,592,603 (US$ 23,317,422) for the year ended December 31, 2019, 2020 and 2021, respectively). Provision for receivables and other assets Impairment loss from long-lived assets Total operating expenses Other operating income Income from operations Interest and investment income, net Loss from equity method investments Unrealized gain on derivative instruments Foreign exchange gain/(loss), net Other income Other expenses 3,510,054,957 356,811,512 44,354,000 — 2,297,413,315 2,199,463,876 431,945,882 8,840,043,542 80,991,883 72,234,947 826,197,593 131,633,096 (136,542,213) 610,793,584 2,102,664,997 1,255,487,959 197,013,457 5,556,760 10,563,405 617,450 6,203,284 23,803,991 15,797,020 3,687,973,887 1,654,042,540 259,555,367 35,411,010 67,316,352 3,934,761 39,531,049 151,693,310 100,668,099 14 (366,014,556) (535,772,612) (901,787,168) (645,082,780) (217,271,212) (862,353,992) (78,532,651) (220,193,581) (298,726,232) (12,323,487) (34,553,179) (46,876,666) (280,615,518) (286,059,239) (204,780,905) (293,282,118) (285,905,509) (170,690,876) (127,376,379) (443,275,523) (141,263,820) (19,988,133) (69,559,599) (22,167,376) 15 16 (1,143,427,651) (2,283,126,141) — (4,198,009,454) 108,508,163 3,848,755,083 24,291,607 (3,419,825) — 6,635,208 24,583,469 (10,323,771) 87,894,466 (1,641,362,182) — (2,303,346,219) 343,324,461 865,598,137 708,250,666 (370,038,652) — (107,144) 26,357,832 (9,262,586) 201,602,185 151,816,830 (156,394,433) (514,891,140) 82,273,807 31,635,782 23,823,373 (24,541,699) (80,797,652) 12,910,556 922,698,975 144,791,605 20,314,450 129,455,869 (34,804,948) (221,798,009) 2,726,598 17,375,517 (8,060) (51,356) 818,074 5,213,254 (1,017,670) (6,485,205) The accompanying notes are an integral part of these consolidated financial statements. F-11 Table of Contents QUDIAN INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME - continued FOR THE YEARS ENDED DECEMBER 31, 2019, 2020 AND 2021 (Amounts in Renminbi (“RMB”) and US dollar (“US$”), except for number of shares and per share data) For the years ended December 31, Net income before income taxes Income tax expenses Net income Less: net loss attributable to noncontrolling interests Net income attributable to Qudian Inc.’s shareholders Earnings per share for Class A and Class B ordinary shares: Basic Diluted Earnings per ADS (1 Class A ordinary share equals 1 ADSs): Basic Diluted Weighted average number of Class A and Class B ordinary shares outstanding: Basic Diluted Other comprehensive income/(loss) Foreign currency translation adjustment Total comprehensive income Less: comprehensive loss attributable to noncontrolling interests Total comprehensive income attributable to Qudian Inc.’s shareholders 17 18 18 18 18 18 18 Notes 2019 RMB 2020 RMB 3,890,521,771 (626,233,846) 3,264,287,925 — 3,264,287,925 1,220,798,253 (261,979,592) 958,818,661 — 958,818,661 2021 RMB 846,409,045 (260,482,067) 585,926,978 (3,147,100) 589,074,078 US$ 132,820,049 (40,875,320) 91,944,729 (493,848) 92,438,577 11.72 10.94 11.72 10.94 3.78 3.59 3.78 3.59 2.32 2.27 2.32 2.27 0.36 0.36 0.36 0.36 278,531,382 300,457,711 253,658,448 274,333,161 253,438,807 266,292,869 253,438,807 266,292,869 31,893,073 3,296,180,998 — 3,296,180,998 (38,454,600) 920,364,061 — 920,364,061 (7,577,408) 578,349,570 (3,147,100) 581,496,670 (1,189,061) 90,755,668 (493,848) 91,249,516 The accompanying notes are an integral part of these consolidated financial statements. F-12 Table of Contents QUDIAN INC. CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY FOR THE YEARS ENDED DECEMBER 31, 2019, 2020 AND 2021 (Amounts in Renminbi (“RMB”) and US dollar (“US$”), except for number of shares and per share data) Class A and B Ordinary shares Number of Shares Outstanding Amount RMB Treasury shares RMB Additional paid-in capital RMB Accumulated other comprehensive loss/foreign currency translation adjustment RMB Retained earnings RMB Total Qudian Inc. shareholders’ equity RMB Non-controlling interests RMB Total equity RMB Balance at December 31,2018 296,444,088 205,278 (362,130,324) 6,160,445,929 (44,858,239) 5,066,950,612 10,820,613,256 — 10,820,613,256 Repurchase of ordinary shares Canceled shares Vesting of share options held by Share Based Payment Trust Exercise of share options Share-based compensation (Note 21) Purchase of capped call option Other comprehensive loss Net income Balance at (44,343,126) — (2,087,241,398) — — (30,918) 2,087,241,398 (2,087,210,480) — — — (2,087,241,398) — — — (2,087,241,398) — — 1,037,500 591,564 702 412 — — — — — — — — — — — — — — (702) 3,910 87,299,053 (192,804,602) — — — — — — — 4,322 — — — 4,322 — 87,299,053 — 87,299,053 — (192,804,602) — (192,804,602) — — 31,893,073 31,893,073 — — 3,264,287,925 3,264,287,925 — 31,893,073 — 3,264,287,925 December 31,2019 253,730,026 175,474 (362,130,324) 3,967,733,108 (12,965,166) 8,331,238,537 11,924,051,629 — 11,924,051,629 Adjustments due to the adoption of ASC 326 Repurchase of ordinary shares Issuance of shares by the Company’s subsidiary Vesting of share options held by Share Based Payment Trust Exercise of share options Share-based compensation (Note 21) Other comprehensive loss Net income Balance at — — — (1,495,291) — (15,528,092) — — — — — — — (974,677,998 (974,677,998) — (974,677,998) ) — — (15,528,092) — (15,528,092) — — — 10,000,000 10,000,000 562,500 389 — (389) 207,963 25 6,107,285 (6,106,879) — — — — — 431 — — — 431 — — — — — — — — — 45,633,820 — — 45,633,820 — 45,633,820 — — (38,454,600) — — 958,818,661 (38,454,600) 958,818,661 — — (38,454,600) 958,818,661 December 31,2020 253,005,198 175,888 (371,551,131) 4,007,259,660 (51,419,766) 8,315,379,200 11,899,843,851 10,000,000 11,909,843,851 Exercise of share options Share-based compensation (Note 21) Other comprehensive loss Net income Balance at 729,625 — 25,230,547 (25,229,307) — — 1,240 — 1,240 — — — — — — — — — 35,344,620 — — 35,344,620 — 35,344,620 — — (7,577,408) — — 589,074,078 (7,577,408) 589,074,078 — (3,147,100) (7,577,408) 585,926,978 December 31,2021 253,734,823 175,888 (346,320,584) 4,017,374,973 (58,997,174) 8,904,453,278 12,516,686,381 6,852,900 12,523,539,281 The accompanying notes are an integral part of these consolidated financial statements. F-13 Table of Contents QUDIAN INC. CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2019, 2020 AND 2021 (Amounts in Renminbi (“RMB”) and US dollar (“US$”), except for number of shares and per share data) Cash flows from operating activities: Net income Adjustments to reconcile net income to net cash provided by operating activities: Provision/(reversal) for receivables and other assets Impairment loss from long-lived assets Depreciation and amortization Amortization of right-of-use assets Loss on disposal of property and equipment Accrued interest of convertible senior notes Income from the repurchase of convertible senior notes Share-based compensation expense Share of loss from equity method investment Unrealized investment income of short-term investments Unrealized investment income of long-term investments Unrealized investment income of derivative instruments Foreign exchange (gain)/ loss, net Changes in operating assets and liabilities: Financing service fee receivables Finance lease receivables Contract assets Receivables from related parties Deferred tax assets and liabilities Other current and non-current assets Interest payables Guarantee liabilities Risk assurance liabilities Operating lease liabilities Other current and non-current liabilities Net cash provided by operating activities Cash flows from investing activities: Proceeds from redemption of short-term investments Proceeds from redemption of long-term investments Proceeds from collection of loan principal Principal collection of finance lease receivables Proceeds from disposal of long-term assets Purchases of short-term investments Purchases of property and equipment, intangible assets and land lease right of use asset Purchases of long-term investments Purchases of equity method investment Payments to originate loan principal Deposit pledged as collateral or prepayment for derivative instruments Net cash used in investing activities For the years ended December 31, 2019 RMB 2020 RMB 2021 RMB US$ 3,264,287,925 958,818,661 585,926,978 91,944,729 2,283,126,141 — 16,704,682 30,856,490 278,718 23,934,289 — 87,299,053 3,419,825 (3,584,153) — — (6,635,208) 3,873,447 330,214,661 (2,096,477,837) 2,071 132,112,749 (119,570,060) (73,479,202) (39,138,657) 1,254,361,399 (27,876,445) 439,679,436 5,503,389,324 457,817,239 — 22,140,852,309 — 530,975 (454,233,086) (76,389,281) (222,709,723) (15,000,000) (22,760,427,250) — (929,558,817) F-14 1,641,362,182 — 10,424,113 33,525,924 — 27,107,232 (622,109,001) 45,633,820 370,038,652 (45,478,742) — — 107,144 77,321,929 — 2,899,485,965 — 132,655,274 438,899,289 (10,843,333) (251,768,288) (2,328,042,357) (26,406,203) (879,020,326) 2,471,711,935 (151,816,830) 156,394,433 21,619,246 77,855,551 256,289 15,982,460 (12,046,522) 35,344,620 221,798,009 (17,213,203) 24,635,329 (17,375,517) 51,356 31,940,278 — 133,132,960 — 125,293,714 (402,938,535) — (10,812,329) (168,294,292) (77,467,656) 349,798,672 922,065,011 (23,823,373) 24,541,699 3,392,531 12,217,235 40,217 2,507,997 (1,890,362) 5,546,342 34,804,948 (2,701,127) 3,865,821 (2,726,598) 8,060 5,012,127 — 20,891,467 — 19,661,318 (63,229,849) — (1,696,690) (26,409,047) (12,156,366) 54,891,043 144,692,122 11,815,240,269 50,985,560 20,724,809,596 273,855,570 — (16,802,875,965) (221,786,498) (76,403,621) (738,758,741) (18,294,941,866) — (3,269,875,696) 18,799,896,906 — 16,368,229,503 189,717,720 149,084 (19,796,721,359) (478,432,280) (63,185,197) — (14,636,496,696) (629,737,680) (246,579,999) 2,950,114,067 — 2,568,532,389 29,770,850 23,395 (3,106,537,576) (75,076,465) (9,915,136) — (2,296,785,723) (98,819,584) (38,693,783) Table of Contents QUDIAN INC. CONSOLIDATED STATEMENTS OF CASH FLOWS - continued FOR THE YEARS ENDED DECEMBER 31, 2019, 2020 AND 2021 (Amounts in Renminbi (“RMB”) and US dollar (“US$”), except for number of shares and per share data) Cash flows from financing activities: Proceeds from deposits to funding Proceeds from borrowings Proceeds from convertible senior notes, net of issuance cost Proceeds from issuance of shares of subsidiary Proceeds from exercise of share options Repayment of borrowings Repurchase of ordinary shares Repurchase of convertible senior notes Payments for interest of convertible senior notes Purchase of capped call option Payments of deposits to funding Net cash used in financing activities Effect of exchange rate changes Net increase/(decrease) in cash and cash equivalents, and restricted 2019 RMB For the years ended December 31, 2020 RMB 2021 RMB US$ — 2,251,563,000 2,289,629,341 — 4,322 (5,402,354,040) (2,087,241,398) — — (192,804,602) (231,131,760) (3,372,335,137) 235,245,240 102,415,457 — 10,000,000 431 (1,038,727,000) (15,528,092) (859,219,671) (25,457,967) — — (1,591,271,602) — 42,896,264 — — 1,240 — — (119,367,198) (7,722,291) — — (84,191,985) — 6,731,360 — — 195 — — (18,731,319) (1,211,796) — — (13,211,560) 76,077,072 (56,189,971) (20,835,203) (3,269,498) cash and cash equivalents 1,277,572,442 (2,445,625,334) 570,457,824 89,517,281 Cash and cash equivalents, and restricted cash and cash equivalents at beginning of the year Cash and cash equivalents, and restricted cash and cash 2,841,014,916 4,118,587,358 1,672,962,024 262,524,248 equivalents at end of the year 4,118,587,358 1,672,962,024 2,243,419,848 352,041,529 Reconciliation of cash and cash equivalents, and restricted cash and cash equivalents to the consolidated balance sheet Cash and cash equivalents Restricted cash and cash equivalents Total cash and cash equivalents, and restricted cash and cash 2,860,938,368 1,257,648,990 1,537,557,823 135,404,201 2,065,495,008 177,924,840 324,121,239 27,920,290 equivalents 4,118,587,358 1,672,962,024 2,243,419,848 352,041,529 Supplemental disclosures of cash flow information: Income taxes paid, net of refunds Interest expense paid 263,971,349 361,721,059 638,407,957 26,083,616 137,550,241 7,722,291 21,584,634 1,211,796 The accompanying notes are an integral part of these consolidated financial statements. F-15 Table of Contents QUDIAN INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2019, 2020 AND 2021 (Amounts in Renminbi (“RMB”) and US dollar (“US$”), except for number of shares and per share data) 1. Organization Qudian Inc. (the “Company”, and where appropriate, the term “Company” also refers to its subsidiaries, variable interest entities (“VIEs”) and subsidiaries of the VIEs 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, VIEs and subsidiaries of the VIEs, are principally engaged in the operation of online platforms to provide small consumer credit products in the People’s Republic of China (the “PRC”). The Company does not conduct any substantive operations of its own. As PRC law and regulations prohibit foreign control of companies involved in internet value-added business, the Company conducts its primary business operations through its subsidiaries, its VIEs and the subsidiaries of the VIEs. As of December 31, 2021, the Company’s main subsidiaries and VIEs are as follows: Entity Subsidiaries QD Data Limited (“Qudian HK”) QD Technology Limited (“Qudian BVI”) Date of incorporation Place of incorporation Percentage of legal ownership by the Company Principal activities December 2, 2016 Hong Kong (“HK”) November 23, 2016 British Virgin Islands 100% 100% Investment holding Investment holding Qufenqi (Ganzhou) Information Technology September 5, 2016 Co., Ltd. (“Qufenqi Ganzhou”) Qudian Inc. Equity Incentive Trust (“Share December 30, 2016 Based Payment Trust”) Qufenqi (HK) Limited (“Qufenqi HK”) Xiamen Qudian Financial Lease Co., Ltd. April 28, 2014 April 21, 2017 (“Xiamen Financial Lease”) (“BVI”) PRC HK HK PRC 100% Investment holding, research and development Employee benefits Nil 100% 100% Investment holding Financial lease Xiamen Happy Time Technology Co., Ltd. September 5, 2018 PRC 100% Technology development and service (“Xiamen Happy Time”) Qu Plus Plus Inc. (“Qu Plus Plus”) June 28, 2018 Qu Plus Plus Limited (“Qu Plus Plus BVI”) June 29, 2018 May 12, 2020 Qu Plus (HK) Limited (“Qu Plus HK”) Xiamen Youxiang Time Technology Service Co., Ltd. (“Xiamen Youxiang Time”) August 3, 2018 Xiamen Xincheng Youda Financing March 7, 2019 Guarantee Co., Ltd. (“Xiamen Xincheng Youda”) Cayman Islands BVI HK PRC PRC 100% 100% 100% 100% 100% Investment holding Investment holding Investment holding Technology development and service, research and development Financing guarantee service WLM Kids Inc. (“WLM Kids”) WLM Kids Limited (“WLM Kids BVI”) February 24, 2021 February 26, 2021 Cayman Islands BVI 100% 100% Investment holding Investment holding F-16 Table of Contents QUDIAN INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued FOR THE YEARS ENDED DECEMBER 31, 2019, 2020 AND 2021 (Amounts in Renminbi (“RMB”) and US dollar (“US$”), except for number of shares and per share data) 1. Organization - continued Entity WLM Kids (HK) Limited (“WLM Kids Date of incorporation March 9, 2021 HK”) VIEs Beijing Happy Time Technology Development Co., Ltd. (“Beijing Happy Time”) April 9, 2014 Ganzhou Qudian Technology Co., Ltd. November 25, 2016 (“Ganzhou Qudian”) Xiamen Qudian Technology Co., Ltd. April 1, 2017 (“Xiamen Qudian”) Xiamen Weipujia Technology Co., Ltd. June 6, 2018 (“Xiamen Weipujia”) Xiamen Qu Plus Plus Technology Co., Ltd. June 5, 2019 (“Xiamen Qu Plus Plus”) HK PRC PRC PRC PRC PRC Place of incorporation Percentage of legal ownership by the Company Principal activities 100% Investment holding Nil Technology development and service, sale of products Nil Technology development service, sale of products and educational services Nil Technology development and service, sale of products Household service Nil Nil Technology development and service, sale of products The Company, through Qufenqi Ganzhou and Xiamen Youxiang Time (collectively the “WFOEs”) entered into power of attorney and an exclusive call option agreement with the nominee shareholders of the VIEs that gave the WFOEs the power to direct the activities that most significantly affect the economic performance of the VIEs and acquire the equity interests in the VIEs when permitted by the PRC laws, respectively. Certain exclusive agreements have been entered into with the VIEs through the WFOEs, which obligate the WFOEs to absorb a majority of the risk of loss from the VIEs’ activities and entitle the WFOEs to receive a majority of their residual returns. In addition, the Company has entered into share pledge agreements for the equity interests in the VIEs held by the nominee shareholders of the VIEs. The Company agreed to provide unlimited financial support to the VIEs for their operations. In addition, pursuant to the resolutions of all shareholders of the Company and the resolutions of the board of directors of the Company (the “Resolutions”), 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 the WFOEs to exercise the rights under the power of attorney entered into among the WFOEs, the VIEs and the nominee shareholders of the VIEs and the WFOEs’ rights under the exclusive call option agreement between the WFOEs and the VIEs. As a result of the Resolutions and the provision of unlimited financial support from 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 was considered to be the Primary Beneficiary. Despite the lack of technical majority ownership, the Company has effective control of the VIEs through the VIE Agreements and a parent-subsidiary relationship exists between the Company and the VIEs. Through the VIE Agreements, the shareholders of the VIEs effectively assigned all of their voting rights underlying their equity interest in the VIEs to the Company. In addition, through the other exclusive agreements, which consist of F-17 Table of Contents QUDIAN INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued FOR THE YEARS ENDED DECEMBER 31, 2019, 2020 AND 2021 (Amounts in Renminbi (“RMB”) and US dollar (“US$”), except for number of shares and per share data) 1. Organization - continued exclusive option agreement, exclusive business cooperation agreement, and equity pledge agreement, the Company, through its wholly-owned subsidiaries in the PRC, has the 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 the primary beneficiary of the VIEs and consolidates the VIEs and its consolidated subsidiaries as required by SEC Regulation S-X Rule 3A-02 and ASC topic 810 (“ASC 810”), Consolidation. 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 WFOEs, each nominee shareholder irrevocably appointed WFOEs as its attorney-in-fact to exercise on each shareholder’s behalf any and all rights that each shareholder has in respect of its equity interest in the VIEs (including but not limited to executing the exclusive right to purchase agreements, the voting rights and the right to appoint directors and 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 WFOEs, the nominee shareholders irrevocably granted WFOEs a call option to request the nominee shareholders to transfer or sell any part or all of its equity interests in the VIEs, or any or all of the assets of the VIEs, to WFOEs, or their designees. The purchase price of the equity interests in the VIEs shall be equal to the minimum price required by PRC law. As for the assets of the VIEs, the purchase price should be equal to the book value of the assets or the minimum price as permitted by applicable PRC law, whichever is higher. Without WFOEs’ prior written consent, the VIEs and their nominee shareholders shall not amend their articles of association, increase or decrease the registered capital, sell or otherwise dispose of their assets or beneficial interests, create or allow any encumbrance on their assets or other beneficial interests and provide any loans or guarantees, etc. The nominee shareholders cannot request any dividends or other form of assets. If dividends or other form of assets were distributed, the nominee shareholders shall transfer all received distribution to WFOEs or their designees. The agreements are not terminated until all of the equity interests of the VIEs have been transferred to WFOEs or the person(s) designated by WFOEs. None of the nominee shareholders have the right to terminate or revoke the agreements under any circumstance unless otherwise regulated by law. (3) Exclusive Business Cooperation Agreements: Pursuant to the exclusive business cooperation agreements entered into by WFOEs and the VIEs and their subsidiaries, WFOEs provides exclusive technical support and consulting services in return for fees based on 100% of the VIEs’ profit before tax, which is adjustable at the sole discretion of WFOEs. Without WFOEs’ consent, the VIEs and their subsidiaries cannot procure services from any third party or enter into similar service F-18 Table of Contents QUDIAN INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued FOR THE YEARS ENDED DECEMBER 31, 2019, 2020 AND 2021 (Amounts in Renminbi (“RMB”) and US dollar (“US$”), except for number of shares and per share data) 1. Organization - continued arrangements with any other third party, except for those from WFOEs. In addition, the profitable consolidated VIEs and their subsidiaries have granted WFOEs an exclusive right to purchase any or all of the business or assets of each of the profitable consolidated VIEs and their subsidiaries at the lowest price permitted under PRC law. The agreements are irrevocable or can only be unilaterally revoked/amended by WFOEs. (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 to WFOEs as continuing first priority security interest to guarantee the performance of their and the VIEs’ obligations under the power of attorney agreements, the exclusive call option agreements and the exclusive business cooperation agreements. WFOEs is entitled to all dividends during the effective 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, WFOEs will be entitled to certain rights regarding the pledged equity interests, including receiving proceeds from the auction or sale of all or part of the pledged equity interests of the VIEs in accordance with PRC law. None of the nominee shareholders shall, without the prior written consent of WFOEs, assign or transfer to any third party, distribute dividends and create or cause any security interest and any liability in whatsoever form to be created on, all or any part of the equity interests it holds in the VIEs. The agreements are not terminated until all of the technical support and consulting and service fees have been fully paid under the exclusive business cooperation agreements and all of VIEs’ obligations have been terminated under the other controlling agreements. In addition, the Company entered into following agreements: (1) Financial support undertaking letters Pursuant to the financial support undertaking letters, the Company is obligated and hereby undertakes to provide unlimited financial support to the VIEs, to the extent permissible under the applicable PRC laws and regulations, whether or not any such operational loss is actually incurred. The Company will not request repayment of the loans or borrowings if the VIEs or their shareholders do not have sufficient funds or are unable to repay. (2) Resolutions of all shareholders and resolution of the board of directors of Qudian Inc. The shareholders and the Board of Directors resolved that the Board of Directors or any officer authorized by the Board of Directors shall cause WFOEs to exercise its rights under the power of attorney agreements and the exclusive call option agreements when the Board of Directors or the Authorized Officer determines that such exercise is in the best interests of the Company and WFOEs 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 applicable PRC laws and regulations; (ii) each of the VIE Agreements is valid, binding and enforceable in accordance with its terms and applicable PRC laws or regulations and will not violate applicable PRC laws or regulations and (iii) the financial support letters issued by the Company to the VIEs, does not violate the PRC laws and regulations F-19 Table of Contents QUDIAN INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued FOR THE YEARS ENDED DECEMBER 31, 2019, 2020 AND 2021 (Amounts in Renminbi (“RMB”) and US dollar (“US$”), except for number of shares and per share data) 1. Organization - continued However, uncertainties in the PRC legal system could cause the Company’s current ownership structure to be found in violation of existing and/or future PRC laws or regulations and could limit the Company’s ability to enforce its rights under these contractual arrangements. Furthermore, the nominee shareholders 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 act contrary to the terms of the contractual agreements with the VIEs. 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, the Company could be subject to penalties, which could include, but not be limited to, revocation of business and operating licenses, discontinuing or restricting business operations, restricting the Company’s right to collect revenues, temporary or permanent blocking of the Company’s internet financial services platforms, restructuring of the Company’s operations, imposition of additional conditions or requirements with which the Company may not be able to comply, or other regulatory or enforcement actions against the Company that could be harmful to its business. The imposition of any of these or other penalties could have a material adverse effect on the Company’s ability to conduct its business. Except for the deposits that were held by banks and other institutions, trust beneficiaries and other funding partners (collectively referred as the “Funding Partners”) as guarantee deposits, all assets of the consolidated trusts, and the collateralization of the land lease right of use asset as described in Note 10, there was no other pledge or collateralization 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 WFOEs. The Company has not provided any financial or other support that it was not previously contractually required to provide to the VIEs during the periods presented. The table sets forth the assets and liabilities of the VIEs included in the Company’s consolidated balance sheets: Short-term loan principal and financing service fee receivables Other current assets Total current assets Total non-current assets Total assets Total current liabilities Total non-current liabilities Total liabilities F-20 2020 RMB 3,916,692,275 7,128,274,773 11,044,967,048 1,360,688,649 12,405,655,697 1,541,885,470 184,760,974 1,726,646,444 As of December 31, 2021 RMB 2,339,575,202 9,427,793,161 11,767,368,363 1,744,115,342 13,511,483,705 1,339,051,890 592,668,094 1,931,719,984 US$ 367,130,402 1,479,426,476 1,846,556,878 273,689,755 2,120,246,633 210,126,461 93,002,557 303,129,018 Table of Contents QUDIAN INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued FOR THE YEARS ENDED DECEMBER 31, 2019, 2020 AND 2021 (Amounts in Renminbi (“RMB”) and US dollar (“US$”), except for number of shares and per share data) 1. Organization - continued The following table sets forth the results of operations of the VIEs included in the Company’s consolidated statements of comprehensive income: Revenues Net income 2019 RMB For the years ended December 31, 2020 RMB RMB 2021 US$ 8,049,577,016 3,440,929,911 3,549,458,230 562,471,865 1,600,712,429 868,473,261 251,186,710 136,282,407 The carrying amounts of the assets, liabilities and the results of operations of the VIEs and their subsidiaries are presented in aggregate due to the similarity of the purpose and design of the VIEs and their subsidiaries, the nature of the assets in these VIEs and their subsidiaries and the type of the involvement of the Company in these VIEs and their subsidiaries. The table sets forth the cash flows of the VIEs included in the Company’s consolidated statements of cash flows: Net cash provided by operating activities Net cash used in investing activities Net cash used in financing activities 2019 RMB For the years ended December 31, 2020 RMB 2021 RMB 4,362,960,828 (842,120,427) (2,855,955,341) 2,250,346,449 (2,252,529,599) (1,429,389,722) 747,408,333 645,957,049 (571,156,011) US$ 117,284,677 101,364,757 (89,626,842) The amount of the net assets of the VIEs were RMB 10,679 million and RMB 11,580 million (US$ 1,817 million) as of December 31, 2020 and 2021. The creditors of the VIEs’ third-party liabilities did not have recourse to the general credit of the Primary Beneficiary in the normal course of business. Consolidated Trusts The Company established several trusts to invest in loans through the Company’s platform using funds from the Company. Such trusts are administered by third party trust companies as the trustees. The Company provides loan facilitation service and financial guarantee to the trusts. All assets of the consolidated trusts are collateral for the trusts’ obligations and can only be used to settle the trusts’ obligations. Share Based Payment Trust On December 30, 2016, the board of the Company approved and set up Qudian Inc. Equity Incentive Trust (the “Share Based Payment Trust”) for the purpose of holding options awarded to certain employees and the underlying shares before they are exercised as instructed by the employees. Upon the exercise of the options, the shares will be transferred to the relevant employees. As the Company has the power to govern the financial and operating policies of the Share Based Payment Trust and derives benefits from the contributions of the employees who have been awarded the options of the Company through their continued employment with the Company, the assets and liabilities of the Share Based Payment Trust are included in the consolidated balance sheets. F-21 Table of Contents QUDIAN INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued FOR THE YEARS ENDED DECEMBER 31, 2019, 2020 AND 2021 (Amounts in Renminbi (“RMB”) and US dollar (“US$”), except for number of shares and per share data) 2. Summary of Significant Accounting Policies Basis of presentation The consolidated financial statements of the Company have been prepared in accordance with United States generally accepted accounting principles (“U.S. GAAP”). Principles of consolidation The consolidated financial statements include the financial statements of the Company, its subsidiaries, VIEs and the subsidiaries of the VIEs. For controlled subsidiaries that are not wholly-owned, the noncontrolling interests are included in Net income and Total equity. All inter-company transactions and balances have been eliminated. Use of estimates The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosures of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Areas where management uses subjective judgment include, but are not limited to, allowance for loan principal and financing service fee receivables, allowance for finance lease receivables, allowance for contract assets, allowance for other assets, incremental borrowing rates for lease liabilities, share-based compensation, impairment of equity investment, valuation allowance for deferred tax assets, uncertain tax positions, estimates of standalone selling prices and variable considerations of revenue recognition, estimate of risk assurance liabilities, fair value of guarantee liabilities and fair value of investments. Actual results could differ from these estimates, and as such, differences may be material to the consolidated financial statements. Revenue recognition The Company generates revenues primarily by providing borrowers with merchandise and cash installment credit services, credit facilitation services, transaction services, automobile financing services, e-commerce sales and educational services. Under ASC 606, revenue is recognized when control of the promised goods or services is transferred to the Company’s customers, in an amount that reflects the consideration that the Company expects to be entitled to in exchange for those goods or services, net of value-added tax. The Company determines 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. F-22 Table of Contents QUDIAN INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued FOR THE YEARS ENDED DECEMBER 31, 2019, 2020 AND 2021 (Amounts in Renminbi (“RMB”) and US dollar (“US$”), except for number of shares and per share data) 2. Summary of Significant Accounting Policies - continued Revenue recognition - continued Credit facilitation The Company entered into credit facilitation arrangements with various Funding Partners. The Company: (i) matches borrowers with the Funding Partners which directly fund the credit drawdowns to the borrowers and (ii) provides post-origination services, such as short messaging reminder services throughout the term of the loans. For each successful match, the Company receives 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 Company on a periodic basis. In addition, the Company provides a guarantee on the principal and accrued interest repayments of the defaulted loans to the Funding Partners. The Company considers the loan facilitation service, post-origination services and guarantee service as separate services, of which the guarantee service and the post origination service is accounted for in accordance with ASC 815, Derivatives and Hedging, (“ASC 815”), ASC 460, Guarantees, (“ASC 460”) (refer to “Guarantee liabilities” and “Risk Assurance Liabilities” for additional information) and ASC 860, Transfers and servicing of financial assets, respectively (“ASC 860”). The transaction price is the amount of consideration to which the Company expects to be entitled in exchange for transferring the promised services to the customer, net of value-added tax. The transaction price allocated to loan facilitation income and post-origination services includes variable consideration which is contingent on the borrower making timely repayments. The amount of variable consideration is limited to the amount that is probable not to be reversed in future periods. Management estimated the variable consideration using the expected value method, based on historical defaults, current and forecasted borrower repayment trends and assessed whether variable consideration should be 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 or risk assurance liabilities. The remaining transaction price is then allocated to the loan facilitation services and post-origination services on a relative standalone selling price basis. The Company does not have observable price for the loan facilitation services and post-origination services because the services are not provided separately. As a result, the estimation of standalone selling price involves significant judgement. The Company estimates the standalone 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 the Company matches borrowers with the Funding Partners and the funds are provided to the borrower. Additionally, revenues from post-origination services are recognized evenly over the term of the loans as the services are performed. The loan facilitation income recognized was RMB 2,097,593,931, RMB (32,908,294) and RMB 37,028,082 (US$ 5,810,514) for the years ended December 31, 2019, 2020 and 2021, respectively. The post-origination services fee recognized was RMB 199,818,201, RMB 164,541,390 and RMB 2,502,967 (US$ 392,770) for the years ended December 31, 2019, 2020 and 2021, respectively. F-23 Table of Contents QUDIAN INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued FOR THE YEARS ENDED DECEMBER 31, 2019, 2020 AND 2021 (Amounts in Renminbi (“RMB”) and US dollar (“US$”), except for number of shares and per share data) 2. Summary of Significant Accounting Policies - continued Revenue recognition - continued Vehicle sales with guarantee The Company sells vehicles to buyers and provides loan facilitation services to Funding Partners who provides financing to the vehicle buyers. The buyer obtains control of the vehicle when the buyer physically possesses the vehicle and when the Company receives cash consideration for the vehicle from the buyer. The Company will receive recurring service fees from the Funding Partners for its loan facilitation services and post-origination services throughout the term of the loan. In addition, the Company provides a guarantee on the principal and accrued interest repayments of the defaulted loans to the Funding Partners. For vehicle sales, the Company determines the buyer to be its customer. The transaction price for the vehicle sale is the amount of consideration the Company 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 sales income 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 loan facilitation service, post-origination services and guarantee service as separate services, of which the guarantee service and the post origination service is accounted 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 the customer, net of value-added tax. The transaction price of loan facilitation services 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 repayment 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 of variable 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 is then allocated to the loan facilitation services and post-origination services on a relative standalone selling price basis. The Company does not have observable price for the loan facilitation services and post-origination services because the services are not provided separately. As a result, the estimation of standalone selling price involves significant judgement. The Company estimates the standalone 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 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-24 Table of Contents QUDIAN INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued FOR THE YEARS ENDED DECEMBER 31, 2019, 2020 AND 2021 (Amounts in Renminbi (“RMB”) and US dollar (“US$”), except for number of shares and per share data) 2. Summary of Significant Accounting Policies - continued Revenue recognition - continued E-commerce sales The Company recognizes revenue from product sales through its e-commerce platform. The Company’s single performance obligation is to sell products to customers. The Company is the principal and records revenue on a gross basis as it controls the products before transfer to the customers. Revenue is measured based on the amount of consideration the Company expects to receive reduced by value-added tax, discounts and estimates for product returns. Product returns are estimated using the expected value method based on historical return patterns. Revenues are recognized at a point in time when the products are accepted by the customers. As of December 31, 2020 and 2021, estimated product returns were not material. Educational services The Company provides non-academic, junior art and sports educational services, and recognizes tuition revenues. Tuition fee is generally collected in advance and initially recorded as prepayments from customers. Revenue is recognized when control of promised services is transferred to the customers in an amount of consideration to which the Company expects to be entitled to in exchange for those services. Tuition revenues are recognized proportionately as the tutoring sessions are delivered. As of December 31, 2020 and 2021, estimated tuition fee revenue was not material. Transaction services fee The Company entered into credit transaction arrangements with certain Funding Partners. The Company refers borrowers to the Funding Partners which directly fund the credit drawdowns to the borrowers and provides post-origination services, such as short messaging reminder services throughout the term of the loans. For each successful transaction, the Company typically receives a pre-agreed recurring service fee throughout the term of the loans. When borrowers make installment repayments directly to the Funding Partners, the Funding Partners will remit the recurring transaction services fees to the Company on a periodic basis. The referral services are considered to be the performance obligations in the arrangement. The transaction price is the amount of consideration to which the Company expects to be entitled to in exchange for transferring the promised service to the customer, net of value-added tax. The transaction price allocated to the referral services and post origination services includes variable service fees which are contingent on the borrower making timely repayments to the Funding Partners. Variable consideration is estimated using the expected value method based on historical default rate, current and forecasted borrower repayment trends and is limited to the amount of variable consideration that is probable not to be reversed in future periods. The Company will update its estimate of the variable consideration at the end of each reporting period. The estimation of variable consideration (including the amount of variable consideration constrained) involves significant judgement. Revenues from transaction services are recognized when the Company successfully refers the borrower to the Funding Partner and the Funding Partner provides the funds to the borrower. Revenues from post- origination services are recognized evenly over the term of the loans as the services are performed. The transaction services fee recognized was RMB 2,161,854,715, RMB (168,120,830) and RMB 131,475,605 (US$ 20,631,392) for the years ended December 31, 2019, 2020 and 2021, respectively. The post-origination services fee recognized was F-25 Table of Contents QUDIAN INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued FOR THE YEARS ENDED DECEMBER 31, 2019, 2020 AND 2021 (Amounts in Renminbi (“RMB”) and US dollar (“US$”), except for number of shares and per share data) 2. Summary of Significant Accounting Policies - continued Revenue recognition - continued Transaction services fee - continued RMB 37,610,344, RMB 31,578,617 and RMB 20,217,705 (US$ 3,172,599) for the years ended December 31, 2019, 2020 and 2021, respectively. Financing income Borrowers can withdraw cash (“cash installment credit services”) or purchase products (e.g. personal consumer electronics) (“merchandise installment credit services”) up to their approved credit limit and elect the installment repayment period, ranging from one to eighteen installments repayment period (either weekly or monthly) through the Company’s application (collectively “financing platform”) or via borrowers’ Alipay accounts. The Company charges financing service fees for facilitating the financing and managing the financing platform. The financing service fees are recorded as financing income in the consolidated statement of comprehensive income in accordance with ASC 310 Receivables (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 borrowers in cash. These incentives are recorded as a reduction in financing service fees using the effective interest method. Sales commission fees In addition to financing income, the Company earns a margin from its merchandise installment credit services on the products purchased from suppliers on behalf of the borrowers. The margin earned is fixed based on the retail sales price without considering the financing terms chosen by the borrower. Sales commission fees are recognized and recorded net of the related cost on delivery date, as the Company is an agent and arranges for the goods to be provided by the suppliers. Penalty fee The Company charges borrowers and lessees penalty fee for late installment payments. The penalty fee is calculated based on the number of overdue days of unpaid outstanding balance of loan principals and lease receivables at the applicable late payment rate. The penalty fee is recognized on a cash basis, which coincides with the penalty fee being probable not to be reversed. Cost of goods sold Cost of goods sold primarily consists of the purchase price of products, packaging material and product delivery costs. F-26 Table of Contents QUDIAN INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued FOR THE YEARS ENDED DECEMBER 31, 2019, 2020 AND 2021 (Amounts in Renminbi (“RMB”) and US dollar (“US$”), except for number of shares and per share data) 2. Summary of Significant Accounting Policies - continued Lease Sales-type leases – Lessor under ASC 842 The Company purchases cars from car dealers and leases them to car buyers. Each car buyer is required to make a down payment and pay installments throughout the term of the lease. The lease agreements include lease payments that are largely fixed, do not contain residual value guarantees or variable lease payments. The lease terms are based on the non-cancellable term of the lease and the buyer may have options to terminate the lease in advance when meets certain conditions. The buyer obtains control of the car when the buyer physically possesses the car and when the Company receives cash consideration for the car from the buyer. A lease arrangement that transfers substantially all of the benefits and risks incident to the ownership of property and that give rise to a dealer’s profit or loss is classified as a sales-type lease. For sales-type leases, when collectability is probable at lease commencement, the Company derecognizes the underlying asset and recognizes the net investment in the lease which is the sum of the lease receivable and the unguaranteed residual asset and recognizes in net income any selling profit or loss. Initial direct costs are expensed, at the commencement date, if the fair value of the underlying asset is different from its carrying amount. Interest income is recognized in financing income over the lease term using the interest method. Operating Leases – Lessee under ASC 842 The Company has operating leases for certain office rentals and educational service activity centers as a lessee. At inception of a contract, the Company determines whether that contract is, or contains a lease. For each lease arrangement identified, the Company determines its classification as an operating or finance lease. The Company records a lease liability and corresponding operating lease right-of-use (“ROU”) asset at lease commencement. Lease liabilities represent the present value of the lease payments not yet paid, discounted using the discount rate for the lease at lease commencement. The Company’s lease agreements include lease payments that are largely fixed, do not contain material residual value guarantees or variable lease payments. The discount rate is determined using the Company’s incremental borrowing rate at lease commencement since the rate implicit in the lease is not readily determinable. The incremental borrowing rate is the rate of interest that the Company could borrow on a collateralized basis over a similar term at an amount equal to the lease payments in a similar economic environment. ROU asset represents the right to use an underlying asset for the lease term and are recognized in an amount equal to the lease liability adjusted for any lease payments made prior to commencement date, less any lease incentives received, and any initial direct costs incurred by the Company. Lease terms are based on the non-cancellable term of the lease and may contain options to extend the lease when it is reasonably certain that the Company will exercise the option, however none of these have been recognized in the Company’s right-of-use assets or lease liabilities since those options were not reasonably certain to be exercised. If there is a lease modification, the Company considers whether the lease modification results in a separate contract. If so, the Company accounts for the separate contract the same manner as any other new lease, in addition to the original unmodified contract. Otherwise, the Company remeasures and reallocates the remaining F-27 Table of Contents QUDIAN INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued FOR THE YEARS ENDED DECEMBER 31, 2019, 2020 AND 2021 (Amounts in Renminbi (“RMB”) and US dollar (“US$”), except for number of shares and per share data) 2. Summary of Significant Accounting Policies - continued Lease - continued Operating Leases – Lessee under ASC 842 - continued consideration in the contract, reassesses the classification of the lease at the effective date of the modification and accounts for any initial direct costs, lease incentives and other payments made to or by the lessee. If the modification fully or partially terminates the existing lease, the Company remeasures the lease liability and decreases the carrying amount of the right-of-use asset in proportion to the full or partial termination of the existing lease and recognize in profit or loss any difference between the reduction in the lease liability and the reduction in the right-of-use asset. Besides, operating lease expense is recognized as a single lease cost on a straight-line basis over the lease term and is included in cost of other revenues and general and administrative expenses, on the consolidated statements of comprehensive income. Lease liabilities that become due within one year of the balance sheet date are classified as current liabilities. Land lease right of use asset All land in the PRC is owned by the PRC government. The PRC government may sell land use rights for a specified period of time. Land use rights represent operating leases in accordance with ASC 842, Leases (ASC 842). The purchase price of land use rights represents lease prepayments to the PRC government and is recorded as an operating lease right-of-use (“ROU”) asset on the consolidated balance sheet. The ROU asset is amortized over the remaining lease term – 36 years. Foreign currency translation and transactions The functional currency of the Company, and the subsidiaries in the Cayman Islands, British Virgin Islands and Hong Kong is US$. The Company’s subsidiaries, VIEs, and subsidiaries of the VIEs with operations in the PRC adopted RMB as their functional currencies. The determination of the respective functional currency is based on the criteria stated in ASC 830, Foreign Currency Matters. The Company uses RMB as its reporting currency. The financial statements of the Company, and the subsidiaries in the Cayman Islands, British Virgin Islands and Hong Kong are translated into RMB using the exchange rate as of the balance sheet date for assets and liabilities and average exchange rate for the year for income and expense items. Translation gains and losses are recorded in accumulated other comprehensive loss, as a component of shareholders’ equity. Transactions in currencies other than the functional currency are measured and recorded in the functional currency at the exchange rate prevailing on the transaction date. Monetary assets and liabilities denominated in currencies other than the functional currency are remeasured into the functional currency at the rates of exchange prevailing at the balance sheet dates. Transaction gains and losses are recognized in the consolidated statements of comprehensive income during the period or year in which they occur. F-28 Table of Contents QUDIAN INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued FOR THE YEARS ENDED DECEMBER 31, 2019, 2020 AND 2021 (Amounts in Renminbi (“RMB”) and US dollar (“US$”), except for number of shares and per share data) 2. Summary of Significant Accounting Policies - continued Cash and cash equivalents Cash and cash equivalents primarily consist of cash and demand deposits which are highly liquid. The Company considers highly liquid investments that are readily 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 cash and cash equivalents are unrestricted as to withdrawal and use. Restricted cash and cash equivalents Restricted cash are cash and cash equivalents that are not readily available for normal disbursement and mainly represents security deposits held in designated bank accounts for the guarantee of on-and-off balance sheet transactions. Such restricted cash is not available to fund the general liquidity needs of the Company. Short-term investments Short-term investments consist of 1) wealth management products issued by banks or trust companies 2) negotiable certificate of deposit. These wealth management products are highly liquid investments with original maturities of less than twelve months. The Company measures its short- term investments at fair value. The realized investment income and changes in fair value are recognized in interest and investment income in the consolidated statements of comprehensive income. The Company purchased negotiable certificate of deposit in 2021 for the purpose of generating trading revenue. The negotiable certificate of deposit was measured at fair value on recurring basis using quoted prices in active markets. Derivative instruments In 2021, the Company entered into total return swap contracts with CITIC Securities Company Limited (“CITIC”) for the purpose of generating return from Chinese public companies’ ADSs in the US stock markets. In exchange, the Company paid CITIC a periodic interest based on LIBOR plus 2.8%. The Company net settles all total return swap contracts with CITIC. The total notional amount of the outstanding contracts was RMB 619,332,499 (US$ 97,186,784) as of December 31, 2021. The total return swap contracts can be initiated and terminated upon requests of the Company. The Company accounts for the total return swap contracts in accordance with ASC 815, Derivatives and hedging. The total return swap contracts were measured at fair value, which are primarily based on the change in the market value of the ADSs underlying the total return swap contracts, recorded as in earnings. During the year ended December 31, 2021, the net unrealized investment income recognized in the comprehensive income related to the total return swap contracts were RMB 17,375,517 (US$ 2,726,598). As there is no initial cost associated with the derivative, the net unrealized gain represents the derivative’s fair value which is classified as derivative instruments within the consolidated balance sheets. The total return swap contracts may expose the Company to credit risk to the extent that the counterparty may be unable to meet the terms of the arrangement. The Company mitigates this credit risk by transacting with F-29 Table of Contents QUDIAN INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued FOR THE YEARS ENDED DECEMBER 31, 2019, 2020 AND 2021 (Amounts in Renminbi (“RMB”) and US dollar (“US$”), except for number of shares and per share data) 2. Summary of Significant Accounting Policies - continued Derivative instruments - continued counterparty with high credit ratings. The Company pledged cash collateral of RMB 619,332,499 (US$ 97,186,784) to CITIC for its total return swap contracts as of December 31, 2021. The Company also prepays RMB 10,405,181 (US$ 1,632,800) as collateral prepaid to CITIC for new contracts to be entered in the future as of December 31, 2021. Guarantee deposits In the ordinary course of business, the Company is required to guarantee the recoverability of the loan principal and interest for loans originated by the Company that are transferred to certain Funding Partners, and the recoverability of loans directly funded by certain Funding Partners. As a result, the Company 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 as compensating 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 receivables Loan principal and financing service fee receivables represent payments due from borrowers that utilize the Company’s credit services. Loan principal and financing service fee receivables are recorded at amortized cost, net of allowance for loan principal and financing service fee receivables. 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 receivables The Company considers the loans to be homogenous as they are all unsecured consumer loans of similar principal amounts. The profiles of the borrowers are also similar i.e. age, credit histories and employment status. The allowance for loan principal and financing service fee receivables losses is calculated based on historical loss experience with the entire loan portfolio, 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 31-60 days 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 and financing service fee receivables types are captured, and the ending delinquency stratification serves as the beginning point of the next iteration. This process is repeated on a monthly rolling basis. The loss rate calculated for each delinquency stage is then applied to the respective loan principal and service fees balance. Prior to January 1, 2020, the Company applies a consistent credit risk management framework to the entire portfolio of loans in accordance with ASC 450-20, Loss Contingencies (“ASC 450-20”) and adjusts the allowance that is determined by the roll rate-based model for various qualitative factors. These factors may include gross-domestic product rates, per capita disposable income, consumer price indexes, regulatory impact and other considerations. Each of these macroeconomic factors are equally weighted, and a score is applied to each factor based on year-on-year increases and decreases in that respective factor. F-30 Table of Contents QUDIAN INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued FOR THE YEARS ENDED DECEMBER 31, 2019, 2020 AND 2021 (Amounts in Renminbi (“RMB”) and US dollar (“US$”), except for number of shares and per share data) 2. Summary of Significant Accounting Policies - continued Allowance for loan principal and financing service fee receivables - continued Subsequent to January 1, 2020, the Company applies a consistent credit risk management framework to the entire portfolio of loans in accordance with Accounting Standards Update (“ASU”) No. 2016-13, Financial instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASC 326”) and adjusts the allowance that is determined by the roll rate-based model for various qualitative factors that reflect current conditions and reasonable and supportable forecasts of future economic conditions. These factors may include gross-domestic product rates, consumer price indexes, per capita consumption expenditure and other considerations. The Company analyzes a combination of qualitative factors to the change in roll rate using a regression model. Factors that had a strong correlation and economic and commercial significance were selected for the model. For all the years presented, 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 or when the Company determined the balance to be uncollectable. In general, the Company considers loan principal and financing service 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) loans that are 180 days past due. Nonaccrual loan principal The Company does not accrue financing service fee on loan principals that are considered impaired or are more than 90 days past due. A corresponding allowance is determined under ASC 326. 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 to financing income thereafter. Financing service fee accrued but not received is generally reversed against financing income. Financing service fee receivables may be returned to accrual status after all of the borrower’s delinquent balances of loan principal and financing service fee have been settled and the borrower remains current for an appropriate period. Finance lease receivables Finance lease receivables are carried at amortized cost comprising of original financing lease and direct costs, net of unearned income and allowance for finance lease receivables. Allowance for finance lease receivables The Company considers the finance lease receivables to be homogenous as they are all automotive finance lease receivables collateralized by vehicle titles of similar principal amounts. 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 PD and LGD 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 is repeated on a monthly basis. LGD is projected based on historical experience of actual loss and considered proceeds from recovery of the repossessed assets. F-31 Table of Contents QUDIAN INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued FOR THE YEARS ENDED DECEMBER 31, 2019, 2020 AND 2021 (Amounts in Renminbi (“RMB”) and US dollar (“US$”), except for number of shares and per share data) 2. Summary of Significant Accounting Policies - continued Allowance for finance lease receivables - continued Prior to January 1, 2020, the Company applies a consistent credit risk management framework to the entire portfolio of finance lease receivables in accordance with ASC 450-20 and adjusts the allowance that is determined by the PD and LGD methods for various qualitative factors. These factors may include gross-domestic product rates, per capita disposable income, consumer price indexes, regulatory impact and other considerations. Each of these macroeconomic factors are equally weighted, and a score is applied to each factor based on year-on-year increases and decreases in that respective factor. Subsequent to January 1, 2020 the Company applies a consistent credit risk management framework to the entire portfolio of finance lease receivables in accordance with ASC 326 and adjusts the allowance that is determined by the PD and LGD methods for various qualitative factors that reflect reasonable and supportable forecasts of future economic conditions. These factors may include gross-domestic product rates, consumer price indexes, per capita consumption expenditure and other considerations. The Company analyzes a combination of qualitative factors to the change in roll rate using a regression model. Factors that had a strong correlation and economic and commercial significance were selected for the model. For all the years presented, finance lease receivables are charged off when a settlement is reached for an amount that is less than the outstanding balance or when the Company determined the balance to be uncollectable. In general, the Company considers 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 finance lease receivables that are 180 days past due are therefore deemed uncollectible and charged-off; (iv) the vehicle is repossessed. Nonaccrual finance lease receivables A 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 be unable to collect all amounts due according to the terms of the contract. Factors such as payment history, compliance with terms and conditions of the underlying financing lease agreement and other subjective factors related to the financial stability of the borrower are considered when determining whether finance lease receivables are impaired. The Company does not accrue financing lease income on net investment of finance lease receivables that are considered impaired. Prior to January 1, 2020, a corresponding allowance is determined under ASC 450-20. Subsequent to January 1, 2020, a corresponding allowance is determined under ASC 326. Accrual of financing lease income is suspended on accounts that are impaired, 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 received payments bringing the impaired status to current. Contract Assets and Account Receivables Contract assets represent the Company’s right to consideration in exchange for loan facilitation business and transaction services business that the Company has transferred to the customer before payment is due. Account F-32 Table of Contents QUDIAN INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued FOR THE YEARS ENDED DECEMBER 31, 2019, 2020 AND 2021 (Amounts in Renminbi (“RMB”) and US dollar (“US$”), except for number of shares and per share data) 2. Summary of Significant Accounting Policies - continued Contract Assets and Account Receivables - continued receivables represent the considerations for which the Company has satisfied its performance obligations and has the unconditional right to consideration. Prior to January 1, 2020, the Company assesses contract assets and account receivables for impairment in accordance with ASC 310. Subsequent to January 1, 2020, the Company assesses contract assets and accounts receivables for impairment in accordance with ASC 326. Contract assets as of December 31, 2020 and 2021 were RMB 115,906,273 and RMB 27,996,290 (US$ 4,393,229) respectively, net of allowance of RMB 118,952 and RMB 31,168 (US$ 4,890), respectively. Account receivables were RMB 111,037,030 and RMB 204,791,835 (US$ 32,136,308) as of December 31, 2020 and 2021 respectively, which is repayments the borrowers made directly to the Funding Partners and remitted to the Company on a periodic basis. The remaining unsatisfied performance obligations as of December 31, 2020 and 2021, pertaining to post-origination services amounted to RMB 9,154,611 and RMB 1,751,348 (US$ 274,825), respectively. The remaining unsatisfied performance obligations will be recognized over the next two years. Long-term investments Long-term investments represent equity investments in privately-held companies without a readily determinable fair value and listed companies with readily determinable fair value. Equity securities with readily determinable fair values are measured at fair value, and any changes in fair value are recognized in earnings in accordance with ASC 321. The Company elected to measure equity securities without a readily determinable fair value that do not qualify for the net asset value practical expedient using the measurement alternative. Under the measurement alternative, the equity securities are measured at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer. For equity investments that the Company elects to use the measurement alternative, the Company makes a qualitative assessment considering impairment indicators to evaluate whether investments are impaired at each reporting date. Impairment indicators considered include, but are not limited to, a significant deterioration in the earnings performance or business prospects of the investee, including factors that raise significant concerns about the investee’s ability to continue as a going concern, a significant adverse change in the regulatory, economic, or technologic environment of the investee and a significant adverse change in the general market condition of either the geographical area or the industry in which the investee operates. If a qualitative assessment indicates that the investment is impaired, the entity has to estimate the investment’s fair value in accordance with the principles of ASC 820. If the fair value is less than the investment’s carrying value, the Company recognizes an impairment loss in earnings equal to the difference between the carrying value and fair value. Inventories Inventories are stated at the lower of cost or net realizable value. Cost is determined using the specific identification method for the vehicle sales business. Cost is determined using the average cost method for the e-commerce business and educational services. F-33 Table of Contents QUDIAN INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued FOR THE YEARS ENDED DECEMBER 31, 2019, 2020 AND 2021 (Amounts in Renminbi (“RMB”) and US dollar (“US$”), except for number of shares and per share data) 2. Summary of Significant Accounting Policies - continued Borrowings The borrowings from banks are initially recognized equaling to the cash received from the beneficiary and measured subsequently at amortized cost using the effective interest method. Interest costs are capitalized if they are incurred during the acquisition, construction or production of a qualifying asset and such costs could have been avoided if expenditures for these assets have not been made. Guarantee liabilities As part of the Company’s cooperation with various Funding Partners, the Company provides guarantee on the principal and accrued interest repayment of the defaulted 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. The guarantee liabilities are remeasured at each reporting period. The change in fair value of the guarantee liabilities is recorded as changes in guarantee liabilities in the consolidated statements of comprehensive income. When the Company settles the guarantee liabilities through performance of the guarantee by making requisite payments on the respective defaulted loans, the Company records a corresponding deduction to the guarantee liabilities. Subsequent collection from the borrower through the Funding Partners will be recognized as a reversal of the deduction to guarantee liabilities. Risk assurance liabilities In April 2019, the Company and various Funding Partners entered into contracts to provide risk assurance on the principal and accrued interest repayment of loans facilitated through the platform the Company operates. The risk assurance liability is exempted from being accounted for as a derivative in accordance with ASC 815-10-15-58. The risk assurance liability consists of two components. The Company’s obligation to stand ready to make delinquent payments over the term of the arrangement (the non-contingent aspect) is accounted for in accordance with ASC 460. At inception, the Company recognizes the non-contingent aspect of the risk assurance liability at fair value, which considers the premium required by a third-party market participant to issue the same risk assurance in a standalone transaction. Prior to January 1, 2020, the release of the non-contingent aspect of the risk assurance liability is recognized in earnings as a reduction of changes in guarantee liabilities and risk assurance liabilities. The contingent obligation relating to the contingent loss arising from the arrangement is accounted for in accordance with ASC 450, Contingencies. The contingent loss arising from the obligation to make future payments is recognized when borrower default is probable, and the amount of loss is estimable. The contingent loss is calculated based on the expected future payouts, adjusted for various qualitative factors. These factors may include gross-domestic product rates, per capita disposable income, consumer price indexes, regulatory impact and other considerations. Subsequent to January 1, 2020, the non-contingent aspect of the risk assurance liability is subsequently recognized as guarantee income over the term of the arrangement as the Company is released from the stand ready obligation based on the borrower’s repayment of the loan principal. The contingent liability relating to the expected credit losses arising from the contingent aspect of the risk assurance liability is initially measured under F-34 Table of Contents QUDIAN INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued FOR THE YEARS ENDED DECEMBER 31, 2019, 2020 AND 2021 (Amounts in Renminbi (“RMB”) and US dollar (“US$”), except for number of shares and per share data) 2. Summary of Significant Accounting Policies - continued Risk assurance liabilities - continued a current expected credit losses model. The subsequent changes in the contingent aspect of the risk assurance liability is adjusted through earnings as changes in guarantee liabilities and risk assurance liabilities. The contingent loss is calculated based on the expected future payouts, adjusted for various qualitative factors that reflect current conditions and reasonable and supportable forecasts of future economic conditions. These factors may include gross-domestic product rates, consumer price indexes, per capita consumption expenditure and other considerations. The Company analyzes a combination of qualitative factors to the change in roll rate using a regression model. Factors that had a strong correlation and economic and commercial significance were selected for the model. Treasury shares The Company accounts for treasury shares using the cost method. Under this method, the cost incurred to purchase the shares at market price is recorded in the treasury shares account on the consolidated balance sheets. Differences between the resale price and repurchase cost of the treasury shares is reflected in additional paid-in capital. Property and equipment, net Property and equipment are stated at cost less accumulated depreciation. Depreciation is provided using the straight-line method with the residual value based on the estimated useful lives of the class of asset, which range as follows: Category Office and electronic equipment Motor vehicles Leasehold improvements Estimated Useful Life Estimated Residual 3-5 years Nil%-5% 5% 4 years Over the shorter of the expected life of leasehold improvements or the lease term Nil% Costs associated with the repair and maintenance of property and equipment are expensed as incurred. Construction in progress represents building construction costs and unfinished leasehold improvement. Depreciation is recorded starting at the time when assets are ready for the intended use. Intangible assets Intangible assets represent purchased computer software. These intangible assets are amortized on a straight-line basis over their estimated useful lives of the respective assets, most of which varies from 1-10 years. F-35 Table of Contents QUDIAN INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued FOR THE YEARS ENDED DECEMBER 31, 2019, 2020 AND 2021 (Amounts in Renminbi (“RMB”) and US dollar (“US$”), except for number of shares and per share data) 2. Summary of Significant Accounting Policies - continued Research and development Research and development expenses are primarily incurred in the development of new services, new features and general improvement of the Company’s technology infrastructure to support its business operations. Research and development costs are expensed as incurred unless such costs qualify for capitalization as software development costs. In order to qualify for capitalization, (i) the preliminary project should be completed, (ii) management has committed to funding the project and it is probable that the project will be completed and the software will be used to perform 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 as the Company has not met all of the necessary capitalization requirements. Impairment of long-lived assets, including intangible assets with definite lives Long-lived assets and intangible assets with definite lives are reviewed for impairment in accordance with authoritative guidance for impairment or disposal of long-lived assets. Long-lived assets are reviewed for events or changes in circumstances, which indicate that their carrying value may not be recoverable. Long-lived assets are reported at the lower of carrying amount or fair value less cost to sell. Employee defined contribution plan Full time employees of the Company in the PRC participate in a government mandated multi-employer defined contribution plan pursuant to which certain pension benefits, medical care, unemployment insurance, employee housing fund and other welfare benefits are provided to employees. Chinese labor regulations require that the Company make contributions to the government for these benefits based on a certain percentage of the employee’s salaries. The Company has no legal obligation for the benefits beyond the contributions. The total amount that was expensed as incurred, was RMB 42,724,802, RMB 30,138,113 and RMB 79,010,301 (US$ 12,398,440) for the years ended December 31, 2019, 2020 and 2021, respectively. Advertising costs Advertising costs are expensed as incurred in accordance with ASC 720-35, Other Expense-Advertising costs. Advertising costs were RMB 85,928,890, RMB 153,327,392 and RMB 19,047,468 (US$ 2,988,963) for the years ended December 31, 2019, 2020 and 2021, respectively. Advertising costs are included in sales and marketing expenses in the consolidated statements of comprehensive income. Government grants Government grants include cash subsidies received by the Company’s entities in the PRC from local governments as incentives for investing in certain local districts and contributions to technology development and are typically granted based on the amount of investment made by the Company in the form of registered capital or taxable income generated by the Company in these local districts. Such grants allow the Company full discretion in utilizing the funds and are used by the Company for general corporate purposes. The local governments have sole discretion as to whether the Company met all of the criteria to be entitled to the subsidies. F-36 Table of Contents QUDIAN INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued FOR THE YEARS ENDED DECEMBER 31, 2019, 2020 AND 2021 (Amounts in Renminbi (“RMB”) and US dollar (“US$”), except for number of shares and per share data) 2. Summary of Significant Accounting Policies - continued Government grants - continued Government grants are recognized when the entity will comply with the conditions attached to the grant received and there is reasonable assurance that the grant will be received or already received. Value added taxes Xiamen Youdun Technology Co., Ltd., and Xiamen Youqi Technology Co., Ltd. are small-scale VAT taxpayers with an applicable VAT rate of 3%. The other subsidiaries of the VIEs are all general VAT taxpayers (applicable tax rate: 6%, 13% or 16%). On April 4, 2018, the Ministry of Finance and the State Administration of Taxation issued the Notice on Adjustment of VAT Rates, which came into effect on May 1, 2018. According to the abovementioned notice, for general VAT payers’ sales activities previously subject to VAT rates of 17%, the applicable VAT rate was adjusted to 16% starting from May 1, 2018. On March 20, 2019, the Ministry of Finance, the State Administration of Taxation and the General Administration of Customs issued the Announcement on Policies for Deepening the VAT Reform, or Announcement 39, which came into effect on April 2019, to further slash VAT rates. According to Announcement 39, for general VAT payers’ sales activities previously subject to VAT at an existing applicable rate of 16%, the applicable VAT rate was adjusted to 13%. VAT is reported as a deduction to revenue when incurred and amounted to RMB 792,753,015, RMB 201,297,527 and RMB 104,938,590 (US$ 16,467,155) for the years ended December 31, 2019, 2020 and 2021, respectively. Entities that are VAT general taxpayers are allowed to offset qualified input VAT paid to suppliers against their output VAT liabilities. Output VAT receivable net of input VAT payable is recorded in accrued expenses and other current liabilities on the consolidated balance sheets. Income taxes The Company accounts for income taxes using the liability approach and recognizes deferred tax assets and liabilities for the expected future consequences of events that have been recognized in the consolidated financial statements or in the Company’s tax returns. Deferred tax assets and liabilities are recognized on the basis of the temporary differences that exist between the tax basis of assets and liabilities and their reported amounts in the consolidated financial statements using enacted tax rates in effect for the year in which the differences are expected to reverse. Changes in deferred tax assets and liabilities are recorded in earnings. Deferred tax assets are reduced by a valuation allowance through a charge to income tax expense when, in the opinion of management, it is more-likely-than-not that a portion of or all of the deferred tax assets will not be realized. Potential for recovery of deferred tax assets is evaluated by estimating the future taxable profits expected and considering prudent and feasible tax planning strategies. The components of the deferred tax assets and liabilities are classified as non-current. The Company accounts for uncertainty in income taxes recognized in the consolidated financial statements by applying a two-step process to determine the amount of the benefit to be recognized. First, the tax position must F-37 Table of Contents QUDIAN INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued FOR THE YEARS ENDED DECEMBER 31, 2019, 2020 AND 2021 (Amounts in Renminbi (“RMB”) and US dollar (“US$”), except for number of shares and per share data) 2. Summary of Significant Accounting Policies - continued Income taxes - continued be evaluated to determine the likelihood that it will be sustained upon external examination 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 the amount 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 tax payable in the consolidated balance sheets is periodically assessed for adequacy and may be affected by changing interpretations of laws, rulings by tax authorities, changes and/or developments with respect to tax audits, and expiration of the statute of limitations. Changes in recognition and measurement estimates 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 income tax due to uncertain tax position nor incurred any interest and penalties related to potential underpaid income tax expenses for the years ended December 31, 2019, 2020 and 2021. Segment information In accordance with ASC 280 Segment Reporting (“ASC 280”), the Company’s chief operating decision maker (“CODM”) has been identified as the Chief Executive Officer, who reviews operating results to make decisions about allocating resources and assessing performance for the entire Company. The Company had two reportable segments in 2019, consisting of installment credit services and transaction services. In 2020, the Company changed its operating segments to installment credit services and e-commerce sales services. In 2021, the e-commerce sales services was combined with the installment credit services segment as the e-commerce sales services were substantially wound down in 2021 due to COVID-19. The CODM reviews the consolidated results when making decisions about allocating resources and assessing performance of the Company as a whole, and the Company has only one reportable segment. The corresponding information for earlier periods has been restated. Because substantially all of the Company’s long-lived assets and revenues are located in and derived from the PRC, geographical segments are not presented. Fair value measurements of financial instruments The fair value of cash and cash equivalents, restricted cash and cash equivalent, short-term investments, loan principal and financing service fee receivables, finance lease receivables, derivative instruments, other receivables (as defined in Note 5), borrowings, guarantee liabilities and risk assurance liabilities in current assets and liabilities are measured at fair value or approximate their respective fair value because of their short maturities. The carrying amount of the long-term loan principal and financing service fee receivables, long-term finance lease receivables, and long-term borrowings, approximate their fair values due to the fact that the related interest rates approximate rates currently offered by Funding Partners for similar debt instruments of comparable maturities. F-38 Table of Contents QUDIAN INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued FOR THE YEARS ENDED DECEMBER 31, 2019, 2020 AND 2021 (Amounts in Renminbi (“RMB”) and US dollar (“US$”), except for number of shares and per share data) 2. Summary of Significant Accounting Policies - continued Fair value of guarantee liabilities The fair value of the guarantee liabilities was estimated using a discounted cash flow model based on expected payouts from the arrangement with the Funding Partners. The Company estimates its expected future payouts based on estimates of expected delinquency rate and a discount rate for time value. Fair value measurements Fair 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 the measurement date. When determining the fair value measurements for assets and liabilities required or permitted to be recorded at fair value, the Company considers the principal or most advantageous market in which it would transact and the market-based risk measurement or assumptions that market participants 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 the categorization within the hierarchy upon the lowest level of input that is available and significant to the fair value measurement: • Level 1-Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets • Level 2-Include observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data • Level 3-Unobservable inputs which are supported by little or no market activity Earnings per share Basic earnings per share is computed by dividing net income attributable to ordinary shareholders by the weighted average number of ordinary shares outstanding 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. The dilutive effect from the conversion of convertible senior notes is reflected in diluted EPS using the if-converted method and the dilutive effect of share options is reflected in diluted EPS using the treasury stock method. Share-based payments The Company accounts for share-based compensation in accordance with ASC 718, Compensation-Stock Compensation (“ASC 718”). F-39 Table of Contents QUDIAN INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued FOR THE YEARS ENDED DECEMBER 31, 2019, 2020 AND 2021 (Amounts in Renminbi (“RMB”) and US dollar (“US$”), except for number of shares and per share data) 2. Summary of Significant Accounting Policies - continued Share-based payments - continued Share-based payment transactions with employees and independent directors, such as share options are measured based on the grant date fair value of the equity instrument. The Company recognizes the compensation costs net of estimated forfeitures using the accelerated recognition method, over the applicable vesting period for each separately vesting portion of the award. The estimate of forfeitures is adjusted over the requisite service period to the extent that actual forfeitures differ, or are expected to differ, from such estimates. Changes in estimated forfeitures are recognized through a cumulative catch-up adjustment in the period of change and also impact the amount of share-based compensation expense to be recognized in future periods. A change in any of the terms or conditions of share options is accounted for as a modification of share options. The Company calculates the incremental compensation cost of a modification as the excess of the fair value of the modified option over the fair value of the original option immediately before its terms are modified, measured based on the share price and other pertinent factors at the modification date. For vested options, the Company recognizes incremental compensation cost in the period the modification occurred. For unvested options, the Company recognizes, over the remaining requisite service period, the sum of the incremental compensation cost and the remaining unrecognized compensation cost for the original award on the modification date. The Company, with the assistance of an independent third-party valuation firm, determined the fair value of share-based awards granted to employees. Convenience translation for financial statements presentation Translations of amounts from RMB into US$ for the convenience of the reader have been calculated at the exchange rate of RMB 6.3726 per US$1.00 on December 30, 2021, as published on the website of the United States Federal Reserve Board. No representation is made that the RMB amounts could have been, or could be converted into US$ at such rate. Investment in equity method investee The Company uses the equity method to account for an equity investment over which it has significant influence but does not own a majority equity interest or otherwise control, generally accompanying a shareholding of between 20% and 50% of the voting rights. The cost of the investment over the proportional fair value of the assets and liabilities of the investee is reflected in the Company’s memo accounts as “equity method goodwill”. The equity method goodwill is not subsequently amortized and is not tested for impairment under ASC 350. Equity method investments shall continue to be reviewed for impairment in accordance with paragraph ASC 323-10-35-32. The share of earnings or losses of the investee are recognized in the consolidated statements of comprehensive income. Equity method adjustments include the company’s proportionate share of investee income or loss and other adjustments required by the equity method. The Company assesses its equity investment for other-than-temporary impairment by considering factors as well as relevant and available information including, but not limited to, current economic and market conditions, the operating performance of the investees including current earning trends, the general 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’s liquidity, debt ratios, and cash burn rate and other company-specific information. F-40 Table of Contents QUDIAN INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued FOR THE YEARS ENDED DECEMBER 31, 2019, 2020 AND 2021 (Amounts in Renminbi (“RMB”) and US dollar (“US$”), except for number of shares and per share data) 2. Summary of Significant Accounting Policies - continued Significant risks and uncertainties Currency convertibility risk Substantially all of the Company’s businesses are transacted in RMB, which is not freely convertible into foreign currencies. All foreign exchange transactions take place either through the People’s Bank of China (“PBOC”) or other authorized Funding Partners at exchange rates quoted by PBOC. Approval of foreign currency payments by the PBOC or other regulatory institutions requires submitting a payment application form together with suppliers’ invoices and signed contracts. Concentration of credit risk Financial assets that potentially expose the Company to concentrations of credit risk consist primarily of cash and cash equivalents, guarantee deposits, short-term investment, loan principal and financing service fee receivables, finance lease receivables, derivative instruments, cash collateral for derivatives and other receivables. The Company places its cash and cash equivalents, short-term investments, derivative instruments and cash collateral for derivatives with reputable counterparties that have high-credit ratings and quality. There has been no recent history of default in relation to these counterparties. No counterparties represented 10% or more of total financial assets for the years ended December 31, 2020. Two chinese government banks represented 10% or more of total financial assets for the years ended December 31, 2021, amounted to approximately RMB 2,349 million (US$ 369 million), representing 27% of our total balances from counterparties. The Company manages credit risk of loan principal and financing service fee receivables by performing credit assessments on its borrowers and its ongoing monitoring of the outstanding balances. No borrower represented 10% or more of total revenues and loan receivable and financing service fee receivable for the years ended December 31, 2019, 2020 and 2021. Borrower default risk Financial assets that potentially expose the Company to borrower default risk consist primarily of loan principal and financing service fee receivables, finance lease receivables, and contract assets. Besides, the Company enters into guarantee arrangements with Funding Partners to facilitate borrowing transactions, under which the Company provides the Funding Partners protection against the borrower default risk on a set of loans invested by them. The Company will have to perform the guarantee obligation if a default event as defined under the contract occurs. The contractual or notional amounts of these liabilities represent the maximum potential amounts of future payments without consideration of possible recoveries under recourse provisions. The Company manages borrower default risk on their payment for loan principal and financing service fee receivables, and finance lease receivables by performing credit assessments on its borrowers and its ongoing monitoring of the outstanding balances. F-41 Table of Contents QUDIAN INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued FOR THE YEARS ENDED DECEMBER 31, 2019, 2020 AND 2021 (Amounts in Renminbi (“RMB”) and US dollar (“US$”), except for number of shares and per share data) 2. Summary of Significant Accounting Policies - continued Significant risks and uncertainties - continued Borrower default risk - continued The Company manages borrower default risk of guarantee liabilities and risk assurance liabilities through self-developed risk management model. The rating scale of risk management model takes into account factors such as identity characteristics, credit history, payment overdue history, payment capacity, behavioral characteristics and online social network activity. Interest rate risk The Company is exposed to interest rate risk on its interest-bearing assets and liabilities. As part of its asset and liability risk management, the Company reviews and takes appropriate steps to manage its interest rate exposures on its interest-bearing assets and liabilities. The Company has not been exposed to material risks due to changes in market interest rates, and not used any derivative financial instruments to manage the interest risk exposure during the years presented. Business and economic risk The Company believes that changes in any of the following areas could have a material adverse effect on the Company’s future financial position, results of operations or cash flows: changes in the overall demand for services; competitive pressures due to new entrants; advances and new trends in new technologies and industry standards; changes in certain strategic relationships; regulatory considerations and risks associated with the Company’s ability to attract employees necessary to support its growth and risks related to outbreaks of epidemics, such as COVID-19. The Company’s operations could also be adversely affected by significant political, regulatory, economic and social uncertainties in the PRC. Impact of COVID-19 Since January 2020, the continued spread of COVID-19 has negatively impacted the Company’s operations. The Company’s revenues generated from installment credit services declined compared to the period before January 2020 due to the reduction in transaction volume to mitigate risk exposures from COVID-19. The Company also provided additional credit losses for loan principal and financing service fee receivables, finance lease receivables and other current and non-current assets, provided additional constraint on the variable considerations for loan facilitation income, transaction service fees and other related income, and recorded its share of losses from investments in equity method investees and recognized impairment charges on its investments in equity method investees in the two years ended December 31, 2021, due to the impact of COVID-19 and other factors. The COVID-19 pandemic continues to evolve. There are still uncertainties of COVID-19’s future impact, and the extent of the impact will depend on a number of factors, including the duration and severity of COVID-19, the continued emergence and outbreak of new variants, the development and progress of distribution of COVID-19 vaccine and other medical treatment, the potential change in user behavior, the actions taken by government authorities due to the prolonged impact of COVID-19, particularly to contain the outbreak, stimulate the economy to improve business condition, almost all of which are beyond the Company’s control. As a result, F-42 Table of Contents QUDIAN INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued FOR THE YEARS ENDED DECEMBER 31, 2019, 2020 AND 2021 (Amounts in Renminbi (“RMB”) and US dollar (“US$”), except for number of shares and per share data) 2. Summary of Significant Accounting Policies - continued Impact of COVID-19 - continued certain of the Company’s estimates and assumptions, including short-term investment, the allowances for loan principal and financing service fee receivables, finance lease receivables, contract assets and other current and non-current assets, and impairment losses from long-term investments, investment in equity method investee and long-lived assets require significant judgments and carry a higher degree of variabilities and volatilities that could result in material changes to the Company’s current estimates in future periods. Comparative Information Certain items in the consolidated financial statements are reclassified to conform with the current year’s presentation to facilitate comparison. Recently Adopted Accounting Pronouncements In January 2020, the FASB issued ASU No. 2020-01, Investments – Equity Securities (Topic 321), Investments – Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815) – Clarifying the Interactions between Topic 321, Topic 323, and Topic 815 (a consensus of the FASB Emerging Issues Task Force) (“ASU 2020-01”), which clarifies the interactions of the accounting for certain equity securities under ASC 321, investments accounted for under the equity method of accounting in ASC 323, and the accounting for certain forward contracts and purchased options accounted for under ASC 815. ASU 2020-01 could change how an entity accounts for (i) an equity security under the measurement alternative and (ii) a forward contract or purchased option to purchase securities that, upon settlement of the forward contract or exercise of the purchased option, would be accounted for under the equity method of accounting or the fair value option in accordance with ASC 825. These amendments improve current U.S. GAAP by reducing diversity in practice and increasing comparability of the accounting for these interactions. The new guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 31, 2020. Early adoption is permitted. The Company has adopted this guidance on its consolidated financial statements. The standard update did not have a material impact on the Company’s statement of financial position. Recent Accounting Pronouncements: Issued but not effective In August 2020, the FASB issued ASU No. 2020-06, Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity (“ASU 2020-06”), which focuses on amending the legacy guidance on convertible instruments and the derivatives scope exception for contracts in an entity’s own equity. ASU 2020-06 simplifies an issuer’s accounting for convertible instruments by reducing the number of accounting models that require separate accounting for embedded conversion features. ASU 2020-06 also simplifies the settlement assessment that entities are required to perform to determine whether a contract qualifies for equity classification. Further, ASU 2020-06 enhances information transparency by making targeted improvements to the disclosures for convertible instruments and earnings-per-share (EPS) guidance, i.e., aligning the diluted EPS calculation for convertible instruments by requiring that an entity use the if-converted method and that the effect of potential share settlement be included in the diluted EPS calculation when an instrument may be settled in cash or shares, adding information about events or conditions that occur during the reporting period that cause conversion F-43 Table of Contents QUDIAN INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued FOR THE YEARS ENDED DECEMBER 31, 2019, 2020 AND 2021 (Amounts in Renminbi (“RMB”) and US dollar (“US$”), except for number of shares and per share data) 2. Summary of Significant Accounting Policies - continued Recent Accounting Pronouncements: Issued but not effective - continued contingencies to be met or conversion terms to be significantly changed. This update will be effective for the Company’s fiscal years beginning after December 15, 2021, and interim periods within those fiscal years. Entities can elect to adopt the new guidance through either a modified retrospective method of transition or a fully retrospective method of transition. The Company is currently in the process of evaluating the impact of adopting ASU 2020-06 on its consolidated financial statements and related disclosure. 3. Loan principal and financing service fee receivables 3.1 Loan principal and financing service fee receivables consists of the following: Short-term loan principal and financing service fee receivables: Loan principal and financing service fee receivables Less: allowance for loan principal and financing service fee receivables Short-term loan principal and financing service fee receivables, net 2020 RMB As of December 31, 2021 RMB US$ 4,789,696,238 (849,234,936) 3,940,461,302 2,639,004,889 (267,039,108) 2,371,965,781 414,117,453 (41,904,263) 372,213,190 3.2 The following table presents nonaccrual loan principal as of December 31, 2020 and 2021, respectively. Nonaccrual loan principal Less: allowance for nonaccrual loan principal Nonaccrual loan principal, net F-44 2020 RMB As of December 31, 2021 RMB 254,885,248 (249,361,894) 5,523,354 91,016,662 (89,311,940) 1,704,722 US$ 14,282,500 (14,014,992) 267,508 Table of Contents QUDIAN INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued FOR THE YEARS ENDED DECEMBER 31, 2019, 2020 AND 2021 (Amounts in Renminbi (“RMB”) and US dollar (“US$”), except for number of shares and per share data) 3. Loan principal and financing service fee receivables - continued 3.3 The following table presents the aging of past-due loan principal and financing service fee receivables as of December 31, 2020: Domestic consumer loans (uncollateralized) – Loan principal – Financing service fee receivables 1-30 days 31-60 days 61-90 days 91-120 days 121-150 days 151-180 days Total past due RMB RMB RMB RMB RMB RMB RMB Current RMB Total RMB 51,672,697 45,870,724 53,291,222 68,498,711 83,947,214 102,439,323 405,719,891 4,307,995,865 4,713,715,756 1,108,845 1,551,330 2,556,916 75,980,482 — 52,781,542 47,422,054 55,848,138 68,498,711 83,947,214 102,439,323 410,936,982 4,378,759,256 4,789,696,238 70,763,391 5,217,091 — — The following table presents the aging of past-due loan principal and financing service fee receivables as of December 31, 2021: Domestic consumer loans (uncollateralized) – Loan principal – Financing service fee receivables 1-30 days 31-60 days 61-90 days 91-120 days 121-150 days 151-180 days RMB RMB RMB RMB RMB RMB Total past due RMB Current RMB Total RMB Total US$ 43,284,767 32,715,863 28,694,398 27,904,847 29,486,766 33,625,049 195,711,690 2,399,252,995 2,594,964,685 407,206,584 650,524 6,910,869 43,935,291 33,536,939 29,620,946 27,904,847 29,486,766 33,625,049 198,109,838 2,440,895,051 2,639,004,889 414,117,453 41,642,056 44,040,204 2,398,148 821,076 926,548 — — — As of December 31, 2020 and 2021, all loans which are past due 90 days or more are nonaccrual. F-45 Table of Contents QUDIAN INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued FOR THE YEARS ENDED DECEMBER 31, 2019, 2020 AND 2021 (Amounts in Renminbi (“RMB”) and US dollar (“US$”), except for number of shares and per share data) 3. Loan principal and financing service fee receivables - continued 3.4 Movement of allowance for loan principal and financing service fee receivables is as follows: Loan principal RMB 2020 Financing service fee receivables RMB As of December 31, Total RMB Loan principal RMB 2021 Financing service fee receivables RMB Total RMB US$ 1,502,171,991 26,680,910 1,528,852,901 837,075,499 12,159,437 849,234,936 133,263,493 13,023,667 1,448,967,890 (2,127,088,049) 837,075,499 — (14,521,473) — 12,159,437 13,023,667 1,434,446,417 (2,127,088,049) 849,234,936 — (186,372,132) (387,018,263) 263,685,104 — (8,805,433) — 3,354,004 — (195,177,565) (387,018,263) 267,039,108 — (30,627,620) (60,731,610) 41,904,263 Balance at the beginning of the year Adjustment due to the adoption of ASC 326 Additions/ (reverse) Charge-offs Balance at the end of the year Evaluated for impairment on a portfolio basis 837,075,499 12,159,437 849,234,936 263,685,104 3,354,004 267,039,108 41,904,263 4. Finance lease receivables 4.1 Finance lease receivables consists of the following: Gross investment in finance lease receivables Less: unearned income Net investment in finance lease receivables Less: allowance for finance lease receivables Finance lease receivables, net As of December 31, 2020 RMB 245,124,532 (12,191,011) 232,933,521 (24,549,329) 208,384,192 2021 RMB 38,290,695 (1,287,015) 37,003,680 (5,142,488) 31,861,192 US$ 6,008,646 (201,961) 5,806,685 (806,968) 4,999,717 F-46 Table of Contents QUDIAN INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued FOR THE YEARS ENDED DECEMBER 31, 2019, 2020 AND 2021 (Amounts in Renminbi (“RMB”) and US dollar (“US$”), except for number of shares and per share data) 4. Finance lease receivables - continued 4.2 The following table presents nonaccrual finance lease receivables as of December 31, 2020 and 2021, respectively. Nonaccrual finance lease receivables Less: allowance for nonaccrual financial lease receivables Nonaccrual finance lease receivables, net As of December 31, 2020 RMB 2,252,409 (427,878) 1,824,531 2021 RMB 567,406 (114,169) 453,237 US$ 89,038 (17,916) 71,122 4.3 The following table presents the aging of past-due finance lease receivables as of December 31, 2020: Finance lease receivables 1-30 days 31-60 days 61-90 days 90-120 days 120-150 days 150-180 days Total past due RMB 10,435,239 RMB 1,655,460 RMB 982,419 RMB 621,594 RMB RMB 637,153 993,662 RMB 15,325,527 Current RMB 217,607,994 Total RMB 232,933,521 The following table presents the aging of past-due finance lease receivables as of December 31, 2021: Finance lease receivables 1-30 days 31-60 days 61-90 days 90-120 days 120-150 days 150-180 days Total past due RMB 2,155,618 RMB 169,237 RMB 317,440 RMB RMB RMB 97,182 242,872 227,352 RMB 3,209,701 Current RMB 33,793,979 Total RMB 37,003,680 Total US$ 5,806,685 As of December 31, 2020 and 2021, all finance lease receivables which are past due 90 days or more are nonaccrual. F-47 Table of Contents QUDIAN INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued FOR THE YEARS ENDED DECEMBER 31, 2019, 2020 AND 2021 (Amounts in Renminbi (“RMB”) and US dollar (“US$”), except for number of shares and per share data) 4. Finance lease receivables - continued 4.4 The following table presents the future minimum lease payments to be received: As of December 31, 2020 Finance lease receivables As of December 31, 2021 Finance lease receivables As of December 31, 2021 Finance lease receivables Less than 1 year RMB 1 – 2 years RMB 2 – 3 years 3 – 4 years RMB RMB Total RMB 208,218,275 36,167,327 738,930 — 245,124,532 Less than 1 year RMB 1 – 2 years RMB 2 – 3 years 3 – 4 years RMB RMB Total RMB 37,626,031 664,664 — — 38,290,695 Less than 1 year US$ 1 – 2 years US$ 2 – 3 years 3 – 4 years US$ US$ Total US$ 5,904,346 104,300 — — 6,008,646 4.5 Movement of allowance for finance lease receivables for the year ended December 31, 2020 and 2021 are as follows: Balance at the beginning of the year Adjustment due to the adoption of ASC 326 Reverse Charge-offs Balance at the end of the year Evaluated for impairment on a portfolio basis F-48 As of December 31, 2020 RMB 39,933,036 26,044,003 (29,287,359) (12,140,351) 24,549,329 2021 RMB 24,549,329 — (16,452,740) (2,954,101) 5,142,488 US$ 3,852,326 — (2,581,794) (463,564) 806,968 24,549,329 5,142,488 806,968 Table of Contents QUDIAN INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued FOR THE YEARS ENDED DECEMBER 31, 2019, 2020 AND 2021 (Amounts in Renminbi (“RMB”) and US dollar (“US$”), except for number of shares and per share data) 5. Other current assets Other current assets consist of the following: Prepaid expenses Inventory Deposits in trust protection fund Guarantee deposits held by Funding Partners Receivables from third party payment service providers Receivables from Funding Partners and other service providers Other account receivables Receivable from broker for derivative collateral Others Total Less: Allowance for other current assets 5.1 5.2 5.3 As of December 31, 2020 RMB 46,683,662 91,895,497 65,272,000 58,119,412 325,613,031 163,011,741 56,482,783 — 115,979,798 923,057,924 (160,745,160) 762,312,764 2021 RMB 36,116,886 15,212,282 82,872,000 63,977,048 456,492,520 270,647,297 34,157,040 619,332,499 221,734,167 US$ 5,667,528 2,387,139 13,004,425 10,039,395 71,633,638 42,470,467 5,359,985 97,186,784 34,794,930 1,800,541,739 282,544,291 (201,242,068) (31,579,272) 1,599,299,671 250,965,019 5.1 According to the relevant PRC regulations, the consolidated trusts are required to deposit 1% of the trusts’ capital to the trust protection fund, which will be released when the trusts are liquidated. 5.2 The Company has accounts with third-party payment service providers mainly to grant and collect loans. The balance of receivables from third-party payment service providers is unrestricted as to withdrawal and use and readily available to the Company on demand. 5.3 Receivable from broker for derivative collateral is RMB 619 million cash collateral pledged by the company into the account of CITIC for its total return swap contracts. Other receivables as referred to in the “Fair value measurements of financial instruments” accounting policy consists of deposits in trust protection fund, guarantee deposits held by Funding Partners, receivables from third party payment service providers, accounts receivables and others. F-49 Table of Contents QUDIAN INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued FOR THE YEARS ENDED DECEMBER 31, 2019, 2020 AND 2021 (Amounts in Renminbi (“RMB”) and US dollar (“US$”), except for number of shares and per share data) 5. Other current assets - continued Allowance for other current assets consist of the following: Balance at the beginning of the year Adjustment due to the adoption of ASC 326 Additions Charge-offs Balance at the end of the year 6. Lease Sales-type lease Sales-type lease income recognized consists of the following: Financing income Sales income Operating lease arrangements 2020 RMB As of December 31, 2021 RMB US$ 4,411,290 219,292,278 (90,218,396) 27,259,988 160,745,160 25,224,423 — 9,399,815 (3,044,966) 160,745,160 201,242,068 31,579,272 — 59,901,259 (19,404,351) For the years ended December 31, 2019 RMB 2020 RMB 89,872,562 45,993,173 5,502,703 — 89,150,614 — RMB 2021 US$ 863,494 — The Company leases certain office premises and educational service activity centers under non-cancelable leases, and an operating lease arrangement with the local government of Xiamen for land. Lease costs under operating leases for the years ended December 31, 2019, 2020 and 2021 were RMB 30,856,490, RMB 33,525,924 and RMB 80,884,049 (US$ 12,692,472), respectively. F-50 Table of Contents QUDIAN INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued FOR THE YEARS ENDED DECEMBER 31, 2019, 2020 AND 2021 (Amounts in Renminbi (“RMB”) and US dollar (“US$”), except for number of shares and per share data) 6. Lease - continued Operating lease arrangements - continued Future minimum lease payments under non-cancelable operating leases agreements consist of the following as of December 31, 2020 and 2021: 1 year (Including 1 year) 1 year to 2 years (Including 2 years) 2 years to 3 years (Including 3 years) 3 years to 4 years (Including 4 years) 4 years to 5 years (Including 5 years) Over 5 years Total lease payment Less: imputed interest Present value of lease liabilities As of December 31, 2020 RMB 35,896,070 18,750,779 13,526,508 12,723,937 12,379,967 36,974,959 130,252,220 26,252,614 103,999,606 2021 RMB 40,321,257 28,953,101 27,307,080 26,593,652 22,452,011 108,101,711 253,728,812 47,458,135 206,270,677 US$ 6,327,285 4,543,373 4,285,077 4,173,124 3,523,211 16,963,517 39,815,587 7,447,217 32,368,370 The Company’s operating lease commitments have no renewal options, rent escalation clauses and restriction or contingent rents as of December 31, 2019, 2020 and 2021. The weighted average discount rate as of December 31, 2020 and 2021 is 3.20% and 4.01%, respectively. The weighted average remaining lease term as of December 31, 2020 and 2021 is 50 months and 103 months, respectively. Supplemental lease cash flow disclosures Operating ROU assets released in exchange for operating lease liabilities Operating ROU assets obtained in exchange for new operating lease liabilities 7. Investment in equity method investee For the years ended December 31, 2020 RMB 1,794,151 92,795,997 2021 RMB US$ 352,298,094 522,578,298 55,283,259 82,003,938 On October 17, 2016, the Company made a commitment to invest RMB 190 million in cash for 45.9% of the equity interest in Ganzhou QuCampus Technology Co., Ltd (“Ganzhou QuCampus”) which mainly operates computer services, advisory, and online merchandise services. As the Company has significant influence over Ganzhou QuCampus, Ganzhou QuCampus was accounted for as an equity method investment. The Company’s share of loss in Ganzhou QuCampus for the year ended December 31, 2020 was RMB 3 million, which was recognized in the consolidated statements of comprehensive income. Due to the impact of COVID-19, Ganzhou QuCampus ceased operations in 2020 and the company recognized an impairment of RMB 20 million as of December 31, 2020. In 2021, Ganzhou QuCampus has been dissolved and cancelled its registration according to law. F-51 Table of Contents QUDIAN INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued FOR THE YEARS ENDED DECEMBER 31, 2019, 2020 AND 2021 (Amounts in Renminbi (“RMB”) and US dollar (“US$”), except for number of shares and per share data) 7. Investment in equity method investee - continued On June 3, 2020, the Company agreed to acquire up to 10,204,082 Class A ordinary shares of Secoo Holding Limited for a price of US$ 9.80 per Class A ordinary share. The total aggregate purchase price was US$ 100 million. Secoo Holding Limited operates an integrated online and offline platform that sells high-end lifestyle products and services and its American depositary shares (“ADS”) are listed on the NASDAQ under the code “SECO”. Two ADS represents one Class A ordinary share. The transaction was closed on June 17, 2020. The Company determined that it has significant influence of SECO. The aggregate Class A ordinary shares purchased by the Company represented 28.89% of the total ordinary shares, and the Company’s Vice President, Ms. Qi Zhu, was appointed to SECO’s Board. The Company elected to measure SECO at fair value. The Company ceases equity method accounting for SECO as the company represent less than 20% voting share and Qi Zhu resigned from the post of director as of December 28, 2021. SECO is accounted as long-term investment measured at fair value as of December 31, 2021. Changes in fair value of RMB 366,344,810 and RMB 251,634,432 (US$ 39,486,934) was recorded through the consolidated statement of comprehensive income for the year ended December 31, 2020 and for the period from January 1, 2021 to December 28, 2021, respectively. The fair value of SECO was RMB 306,275,523 as of December 31, 2020, based on the last quoted share price. S-X 4-08(g) disclosures for the periods from June 17 to December 31, 2020 and January 1 to December 28, 2021 are not presented because SECO’s summarized financial information are unavailable when the Company’s financial statements are issued. 8. Long-term investments In 2019, the Company invested RMB 185 million for a 9.24% equity interest in Beijing Changba Technology Co., Ltd. (“Changba”), and the percentage of equity interest changed into 9.02% in 2020. In 2020, the Company invested RMB 20 million for a 13.33% equity interest in Beijing Yijie International Children Culture Communication Co., Ltd. The Company elected to measure the investments using the measurement alternative. There were no observable price changes for these equity investments in 2019 and 2020. For Changba, the Company identified an observable price change in an orderly transaction for an identical investment of the same issuer in 2021 and recognized an unrealized gain of RMB 182 million (US$ 29 million). As of December 31, 2021, the Company identified certain impairment indicators related to the investment and recognized an impairment charge of RMB 195 million for this investment. Net unrealized loss recognized during 2021 for Changba is RMB 13 million (US$ 2 million) and the fair value of Changba was RMB 172 million (US$ 27 million) as of December 31, 2021. In July 2019, the Company subscribed for 550 Series A Preferred Shares from Great Alliance Co-living Limited (“Great Alliance”) at an aggregate purchase price of US$5.5 million (RMB 38 million), which represented a 5.21% equity interest in the entity. The Company sold the investment in 2020, and realized RMB 4 million gain in the consolidated statement of comprehensive income. The Company ceases equity method accounting for SECO and accounted it as a long-term investment measured at fair value upon transfer of investment category. Changes in fair value of RMB 12 million (US$ 2 million) was recorded through the consolidated statement of comprehensive income for the period from December 28 to December 31, 2021. The fair value of SECO was RMB 62 million (US$ 10 million) as of December 31, 2021 F-52 Table of Contents QUDIAN INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued FOR THE YEARS ENDED DECEMBER 31, 2019, 2020 AND 2021 (Amounts in Renminbi (“RMB”) and US dollar (“US$”), except for number of shares and per share data) 8. Long-term investments - continued based on the last quoted share price. Impairment charges recognized on all equity investment without readily determinable fair value was RMB nil, RMB nil, RMB 219 million (US$ 34 million) for the years ended December 31, 2019, 2020 and 2021, respectively. 9. Property and equipment, net Construction in progress Leasehold improvements Office and electronic equipment Motor vehicles Property and equipment, gross Less accumulated depreciation Less allowance Property and equipment, net As of December 31, 2020 RMB 275,107,135 40,451,833 6,214,684 5,621,019 327,394,671 24,425,310 — 302,969,361 2021 RMB 660,788,221 169,217,493 9,856,959 10,204,623 850,067,296 43,829,381 147,137,267 659,100,648 US$ 103,692,092 26,553,917 1,546,772 1,601,328 133,394,109 6,877,786 23,089,048 103,427,275 Depreciation expense, for the years ended December 31, 2019, 2020 and 2021, was RMB 11 million, RMB 9 million and RMB 18 million (US$ 3 million), respectively. As of December 31, 2019, 2020 and 2021, the interest cost incurred and capitalized was RMB nil, RMB 3 million and RMB 7 million (US$ 1 million), respectively. During the fourth quarter of the fiscal year ended December 31, 2021, the Company determined that the carrying value of construction in progress and leasehold improvements was impaired. These assets had been recorded as part of the “Construction in progress” and “Leasehold improvements” category in the table above. The Company leased various properties in connection with the Company’s educational services business. According to the changes in the Company’s plan and executive management team that occurred during December, 2021, the Company expects that they will close part of the educational service activity centers and not sublease which is an impairment trigger. The Company’s undiscounted cash flow forecasts of the asset groups related to these educational service activity centers are below their carrying values. The Company has accordingly recorded a charge of RMB 42,544,996 of leasehold improvements and RMB 104,592,271 of construction in progress in the consolidated statement of comprehensive income for the year ended December 31, 2021. 10. Long-term borrowings In November 2019, the Company entered into a revolving credit facility with several banks. The credit facility enables the Company to borrow RMB1,200 million to be used for the construction of the Company’s office building and innovation center. The credit facility expires in eight years and is guaranteed by Xinjiang Qudian Technology Co., Ltd. and Qufenqi (Ganzhou) Information Technology Co., Ltd. and collateralized by the land lease right of use F-53 Table of Contents QUDIAN INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued FOR THE YEARS ENDED DECEMBER 31, 2019, 2020 AND 2021 (Amounts in Renminbi (“RMB”) and US dollar (“US$”), except for number of shares and per share data) 10. Long-term borrowings - continued asset which has a carrying amount of RMB 98 million (US$ 15 million) as of December 31, 2021. Drawdowns from the credit facility will incur interest at a rate equal to the Loan Prime Rate (“LPR”) plus 0.295%. The Company is required to comply with certain financial covenants, which has been met as of December 31, 2020 and 2021. The following table presents long-term borrowings from banks mentioned above as of December 31, 2020 and 2021: Banks LPR+0.295% 30 to 95 months Floating annual rate (%) Term 2020 RMB 102,415,457 As of December 31, 2021 RMB 145,311,721 US$ 22,802,580 The weighted average interest rate for the outstanding borrowings was approximately 4.95% and 4.95% as of December 31, 2020 and 2021, respectively. The following table sets forth the contractual obligations which has not included impact of discount of time value as of December 31, 2020 and 2021: Less than 1 year RMB 1 – 2 years RMB 2 – 3 years RMB 3 – 4 years RMB 4 – 5 years RMB Greater than 5 years RMB Total RMB As of December 31, 2020 Long-term borrowings and interest payables (RMB) As of December 31, 2021 Long-term borrowings and interest payables (RMB) Long-term borrowings and interest payables (US$) 5,064,444 5,064,444 25,082,717 24,094,803 23,070,814 43,102,962 125,480,184 7,185,665 35,588,502 34,186,806 32,733,923 31,296,790 29,859,658 170,851,344 1,127,587 5,584,613 5,364,656 5,136,667 4,911,149 4,685,632 26,810,304 F-54 Table of Contents QUDIAN INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued FOR THE YEARS ENDED DECEMBER 31, 2019, 2020 AND 2021 (Amounts in Renminbi (“RMB”) and US dollar (“US$”), except for number of shares and per share data) 11. Accrued expenses and other current liabilities Accrued expenses and other current liabilities consist of the following: Accrued payroll Tax payables Payable to suppliers Payable to external service providers Payable to funding partner Others 12. Guarantee liabilities and risk assurance liabilities 12.1 Guarantee liabilities The movement of guarantee liabilities are as follows: Balance at beginning of the year Fair value of guarantee liabilities upon the inception of new loans Collections/ (performed guarantee) Change in fair value of guarantee liabilities Balance at end of the year As of December 31, 2020 RMB 2,833,635 184,595,913 14,964,018 35,405,505 26,805,023 72,186,000 336,790,094 2021 RMB 16,843,567 155,211,471 32,100,134 77,657,212 22,694,769 72,360,661 376,867,814 US$ 2,643,123 24,356,067 5,037,211 12,186,111 3,561,304 11,354,968 59,138,784 As of December 31, 2020 RMB 263,465,921 9,865,341 (283,899,625) 22,265,996 11,697,633 2021 RMB 11,697,633 5,604,145 36,593,107 (53,009,582) 885,303 US$ 1,835,614 879,412 5,742,257 (8,318,360) 138,923 As of December 31, 2020 and 2021, the maximum potential undiscounted future payment the Company would be required to make was RMB 221 million and RMB 37 million (US$ 6 million), respectively. The initial term of the guarantee is the same as the term of loans facilitated under the arrangements with the Funding Partners, which ranges from 1 month to 4 years, as of December 31, 2021. The remaining term of the guarantee ranges from 1 month to 1.5 years as of December 31, 2021. F-55 Table of Contents QUDIAN INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued FOR THE YEARS ENDED DECEMBER 31, 2019, 2020 AND 2021 (Amounts in Renminbi (“RMB”) and US dollar (“US$”), except for number of shares and per share data) 12. Guarantee liabilities and risk assurance liabilities 12.2 Risk assurance liabilities The movement of risk assurance liabilities are as follows: Contingent RMB 2020 Non-contingent RMB As of December 31, 2021 Total RMB Contingent RMB Non-contingent RMB Total RMB US$ Balance at the beginning of the year 433,083,558 821,277,841 1,254,361,399 15,766,928 3,934,761 19,701,689 3,091,625 Adjustment due to the adoption of ASC 326 Fair value of risk assurance liabilities upon the inception of new loans Expected credit loss upon the inception of new loans Recognized as guarantee income Collections/ (Payouts) Change in fair value of risk assurance liabilities Balance at end of the year 1,093,382,647 — 1,093,382,647 — — — — — 8,854,513 8,854,513 — — — — 8,784,102 — 8,784,102 — — — — — (1,400,538,815) (826,197,593) — (826,197,593) (1,400,538,815) — 132,825,675 (3,934,761) — (3,934,761) 132,825,675 (617,450) 20,843,247 (118,944,564) 15,766,928 — 3,934,761 (118,944,564) 19,701,689 (148,592,603) — — — (148,592,603) — (23,317,422) — As of December 31, 2020 and 2021, maximum potential undiscounted future payment that the Company would be required to make was RMB 53 million and RMB nil million (US$ nil million), respectively. The risk assurance liability has expired as of December 31, 2021. F-56 Table of Contents QUDIAN INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued FOR THE YEARS ENDED DECEMBER 31, 2019, 2020 AND 2021 (Amounts in Renminbi (“RMB”) and US dollar (“US$”), except for number of shares and per share data) 13. Convertible senior notes On July 1, 2019, the Company issued US$300 million convertible senior notes (the “Notes”) to several initial purchasers and an additional US$45 million principal amount of the Notes pursuant to the initial purchaser’s option to purchase additional Notes. The Notes are senior, unsecured obligations of the Company, and interest is payable semi-annually in cash at a rate of 1.00% per annum on July 1 and January 1 of each year, beginning on January 1, 2020. The Notes will mature on July 1, 2026 unless earlier repurchased, converted, or redeemed prior to such date. The initial conversion rate of the Notes is 106.2756 of the Company’s ADS per US$1,000 principal amount of Notes (which is equivalent to an initial conversion price of approximately US$9.41 per ADS) and will be subject to adjustment in certain events but will not be adjusted for accrued and unpaid interest, if any. The conversion rate will be subject to adjustment in certain events but will not be adjusted for accrued and unpaid interest, if any. In addition, following a make-whole fundamental change that occur prior to the maturity date or following the Company’s delivery of a notice of tax redemption, the Company will, under certain circumstances, increase the conversion rate for the Notes so surrendered for conversion by a number of additional ADSs. Upon conversion, the Company will be physically settled by delivering to the converting holder a number of ADSs equal to the conversion rate in effect immediately prior to the close of business on the relevant conversion date and pay cash in lieu of any fractional ADS deliverable upon conversion based on the last reported sale price of the ADSs on the relevant conversion date. The holders may require the Company to repurchase for cash all or any portion of their Notes on July 1, 2022 (the “Repurchase Date”) at a repurchase price equal to 100% of the principal amount of the Notes to be repurchased, plus accrued and unpaid interest, if any, to, but excluding, the Repurchase Date. The net proceeds from the issuance of the Notes were US$334 million (equivalent to RMB 2,290 million at the exchange rates in July 1, 2019), after deducting underwriting discounts and offering expenses of US$11 million (equivalent to RMB 73 million at the exchange rates in July 1, 2019) from the initial proceeds of US$345 million. The underwriting discounts and offering expenses are amortized at an effective interest rate of 2.07% to accrete the discounted carrying value of the Notes to its face value on July 1, 2022, the repurchase date of the Notes. In 2020 and 2021, the Company repurchased Notes with a principal amount of RMB 1,535 million and RMB 133 million (US$21 million), with an amortized cost of RMB 1,500 million and RMB 131 million (US$21 million), for a total cash consideration of RMB 878 million and RMB 119 million (US$19 million), respectively. As a result, the Company recognized a net gain of RMB 622 million and RMB 12 million (US$2 million) from the repurchase that is recorded as interest and investment income, net in the consolidated statements of comprehensive income. As of December 31, 2020 and 2021, the gross carrying amount of the Notes was RMB 835 million and RMB 685 million (US$ 108 million), net against unamortized debt discount and offering expenses was RMB 13 million and RMB 4 million (US$ 1 million), respectively. The net carrying amount of the liability was RMB 822 million and RMB 681 million (US$ 107 million), respectively. The liability will be accreted as of July 1, 2022. In connection with the issuance of the Notes, the Company purchased the capped call options on the Company’s ADS with certain counterparties by using US$28 million from the net proceeds of the Notes to pay the cost of F-57 Table of Contents QUDIAN INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued FOR THE YEARS ENDED DECEMBER 31, 2019, 2020 AND 2021 (Amounts in Renminbi (“RMB”) and US dollar (“US$”), except for number of shares and per share data) 13. Convertible senior notes - continued such transactions. A capped call is a call option purchased by the Company with a strike price equal to the conversion price but the settlement price is capped at an amount equal to what would be the strike price of the separate high strike call option. The purpose of the capped call was to effectively raise the conversion price on the Notes from US$9.4095 (strike price) to US$12.9150 (cap price) per ADS, and mitigate the potential future dilution upon conversion of the Notes. The cost of the capped call of US$28 million (equivalent to RMB 193 million) was recorded as a reduction of the Company’s additional paid-in capital on the consolidated statements of shareholders’ equity with no subsequent changes in fair value to be recorded. 14. Cost of other revenues Cost of other revenues consists of the following: Interest expenses of borrowings Other costs* For the years ended December 31, 2020 2019 RMB RMB 15,240,283 288,241,857 247,530,755 202,030,929 535,772,612 217,271,212 2021 RMB — 220,193,581 220,193,581 US$ — 34,553,179 34,553,179 * Other costs include commission expenses, salaries and cost of educational services. 15. Provision for receivables and other assets Provision for receivables and other assets consists of the following: Provision/(reversal) for loan principal and financing service fee receivables Provision/(reversal) for finance lease receivables Provision for contract assets Provision for other current assets Provision for investment in equity method investee For the years ended December 31, 2019 RMB 2020 RMB 2021 RMB US$ 2,159,235,919 30,236,266 — 93,653,956 — 2,283,126,141 1,434,446,417 (29,287,359) (3,089,153) 219,292,278 20,000,000 1,641,362,182 (195,177,565) (16,452,740) (87,784) 59,901,259 — (151,816,830) (30,627,620) (2,581,794) (13,774) 9,399,815 — (23,823,373) F-58 Table of Contents QUDIAN INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued FOR THE YEARS ENDED DECEMBER 31, 2019, 2020 AND 2021 (Amounts in Renminbi (“RMB”) and US dollar (“US$”), except for number of shares and per share data) 16. Interest and investment income, net Interest and investment income, net consists of the following: Unrealized investment income of short-term investments Realized investment income of short-term investments Unrealized investment income of long-term investments Interest income Income from the repurchase of convertible senior notes Interest expense of convertible senior notes 17. Income taxes Cayman Islands For the years ended December 31, 2021 2019 RMB 2020 RMB RMB 17,213,203 — 4,108,597 — 44,117,299 US$ 2,701,127 45,478,742 35,892,481 113,179,422 17,760,321 (3,865,821) 4,472,410 4,336,458 27,405,264 1,890,362 — 622,109,001 (2,507,997) (27,107,232) (23,934,289) 24,291,607 708,250,666 129,455,869 20,314,450 (24,635,329) 27,634,511 12,046,522 (15,982,460) Under the current laws of the Cayman Islands, the Company, Qu Plus Plus and WLM Kids are not subject to tax on income or capital gain arising in Cayman Islands. Additionally, upon payments of dividends by the Company to its shareholders, no Cayman Islands withholding tax will be imposed. British Virgin Islands Under the current laws of the BVI, Qudian BVI, Qu Plus Plus BVI and WLM Kids BVI are not subject to tax on income or capital gains. In addition, upon payments of dividends by these companies to their shareholders, no British Virgin Islands withholding tax will be imposed. Hong Kong Qudian HK, Qufenqi HK, Qu Plus HK, Qu Plus Plus (HK) Limited, Global Select (HK) Limited and WLM Kids HK are incorporated in Hong Kong and are subject to Hong Kong profits tax of 16.5% on their activities conducted in Hong Kong. PRC The 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 ‘‘EIT Law’’), which was effective since January 1, 2008 except for the following entities eligible for preferential tax rates. F-59 Table of Contents QUDIAN INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued FOR THE YEARS ENDED DECEMBER 31, 2019, 2020 AND 2021 (Amounts in Renminbi (“RMB”) and US dollar (“US$”), except for number of shares and per share data) 17. Income taxes - continued PRC - continued Xiamen Qudian Technology Co., Ltd. is qualified as High and New Technology Enterprise and is subject to a preferential statutory tax rate of 15% for three years from 2019 to 2021. Dividends, interests, rent or royalties payable by the Company’s PRC subsidiaries, to non-PRC resident enterprises, and proceeds from any such non-resident enterprise investor’s disposition of assets (after deducting the net value of such assets) shall be subject to 10% withholding tax, unless the respective non-PRC resident enterprise’s jurisdiction of incorporation has a tax treaty or arrangements with China that provides for a reduced withholding tax rate or an exemption from withholding tax. The current and deferred component of income tax expenses which were substantially attributable to the Company’s PRC subsidiaries, VIEs and subsidiaries of the VIEs, are as follows: Current income tax expenses Deferred income tax expenses Total income tax expenses 2019 RMB For the years ended December 31, 2020 RMB RMB 2021 US$ 494,121,097 129,397,492 132,112,749 132,582,100 626,233,846 261,979,592 135,188,353 125,293,714 260,482,067 21,214,002 19,661,318 40,875,320 F-60 Table of Contents QUDIAN INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued FOR THE YEARS ENDED DECEMBER 31, 2019, 2020 AND 2021 (Amounts in Renminbi (“RMB”) and US dollar (“US$”), except for number of shares and per share data) 17. Income taxes - continued PRC - continued The principal components of the deferred tax assets and liabilities are as follows: Non-current deferred tax assets Allowance for loan principal and financing service fee receivables Allowance for finance lease receivable Allowance for other current assets Impairment loss from long-lived assets Guarantee liabilities Risk assurance liabilities Share-based compensation Fair value change on investments Fair value change on financial assets Lease liabilities Advertising cost Net operating loss carry forwards Less: valuation allowance Total non-current deferred tax assets net of valuation allowance Net non-current deferred tax assets Non-current deferred tax liabilities Contract assets Right-of-use assets Fair value change on financial assets Unallocated revenue Total non-current deferred tax liabilities Net non-current deferred tax liabilities 2020 RMB As of December 31, 2021 RMB US$ 445,374,376 14,360,187 44,792,004 — 203,687,822 52,558,773 40,910,215 — — 24,966,731 — 94,886,663 (701,745,843) 219,790,928 154,959,777 391,551,056 10,216,523 66,008,093 39,083,895 186,637,271 56,287,963 33,776,437 2,691,614 8,201,268 51,560,367 1,787,054 272,561,783 (838,371,909) 281,991,415 87,285,917 61,442,906 1,603,195 10,358,110 6,133,116 29,287,461 8,832,810 5,300,259 422,373 1,286,958 8,090,947 280,428 42,770,891 (131,558,847) 44,250,607 13,697,065 (15,735,380) (26,360,534) (10,230,912) (23,427,601) (75,754,427) (10,923,276) — (52,117,255) (3,629,878) (207,501,495) (263,248,628) (68,543,130) — (8,178,335) (569,607) (32,561,513) (41,309,455) (10,755,913) The Company operates through its subsidiaries, VIEs and subsidiaries of the VIEs and valuation allowance is considered on an individual entity basis. The Company recorded valuation allowance against deferred tax assets of those entities that were in a three-year cumulative financial loss and are not forecasting profits in the near future as of December 31, 2020 and 2021. In making such determination, the Company also evaluated a variety of factors including the Company’s operating history, accumulated deficit, existence of taxable temporary differences and reversal periods. F-61 Table of Contents QUDIAN INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued FOR THE YEARS ENDED DECEMBER 31, 2019, 2020 AND 2021 (Amounts in Renminbi (“RMB”) and US dollar (“US$”), except for number of shares and per share data) 17. Income taxes - continued PRC - continued As of December 31, 2020 and 2021, the Company had net operation loss of RMB 455,764,785 and RMB 1,098,237,738 (US$ 172,337,466), respectively, from its PRC and Hong Kong subsidiaries, which can be carried forward to offset future taxable income. The PRC subsidiaries’ net operating losses will expire from years 2022 to 2026 if not utilized. For the net operating losses from Hong Kong subsidiaries, it can be carried forward with no expiration date. Reconciliation between the income taxes expense computed by applying the PRC statutory tax rate to profit before income taxes and the actual provision for income taxes is as follows: Profit before income tax PRC statutory income tax rate Income tax at statutory tax rate Effect of different tax rates Tax exempt income Expenses not deductible for tax purposes Adjustment on current income tax of the previous periods Deferred only adjustment Research and development super-deduction Tax rate change Changes in valuation allowance Income tax expenses For the years ended December 31, 2019 RMB 3,890,521,771 2020 RMB 1,220,798,253 2021 RMB 846,409,045 US$ 132,820,049 25% 25% 25% 25% 972,630,443 (552,951,519) (1,625,772) 4,446,637 2,453,713 72,206,605 (14,587,649) (11,870,214) 155,531,602 626,233,846 305,199,563 (272,361,568) (350,121) 73,694,299 24,502,181 — (20,606,639) (157,679,128) 309,581,005 261,979,592 211,602,261 (60,256,708) — 62,168,979 8,525,032 26,769,243 (19,928,755) (105,024,051) 136,626,066 260,482,067 33,205,012 (9,455,592) — 9,755,669 1,337,763 4,200,679 (3,127,257) (16,480,565) 21,439,611 40,875,320 As of December 31, 2021, the Company intends to permanently reinvest the undistributed earnings from foreign subsidiaries to fund future operations. As of December 31, 2021, the total amount of undistributed earnings from its PRC subsidiaries as well as VIEs is RMB 10,890 million (US$ 1,709 million). The amount of unrecognized deferred tax liabilities for temporary differences related to investments in foreign subsidiaries is not determined because such a determination is not practicable. F-62 Table of Contents QUDIAN INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued FOR THE YEARS ENDED DECEMBER 31, 2019, 2020 AND 2021 (Amounts in Renminbi (“RMB”) and US dollar (“US$”), except for number of shares and per share data) 17. Income taxes - continued Unrecognized Tax Benefit As of December 31, 2020 and 2021, the Company recorded an unrecognized tax benefit of RMB nil and RMB 2,588,962 (US$ 406,265) respectively, of which RMB nil and RMB 2,588,962 (US$ 406,265) are presented on a net basis against the deferred tax assets related to tax loss carry forwards on the consolidated balance sheets. It is possible that the amount of uncertain tax position will change in the next twelve months; however, an estimate of the range of the possible outcomes cannot be made at this moment. As of December 31, 2021, unrecognized tax benefits of RMB 2,588,962 (US$ 406,265), if ultimately recognized, will impact the effective tax rate. A reconciliation of the beginning and ending amount of unrecognized tax benefit was as follows: For the years ended December 31, 2020 RMB 2021 RMB US$ Balance at beginning of the year Additions Decreases Balance at end of the year — — — 3,322,470 2,588,962 406,265 — (3,322,470) — 2,588,962 406,265 — As of December 31, 2020 and 2021, the Company did not recorded any interest expense and penalty accrued in relation to the unrecognized tax benefit in income tax expense. 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, 2021, the tax years ended December 31, 2016 through period ended as of December 31, 2021 reporting date for the Company’s PRC subsidiaries remain open to examination by the PRC tax authorities. For the non-PRC entities, the tax years ended December 31, 2015 through period ended December 31, 2021 remain open to examination by tax authorities. F-63 Table of Contents QUDIAN INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued FOR THE YEARS ENDED DECEMBER 31, 2019, 2020 AND 2021 (Amounts in Renminbi (“RMB”) and US dollar (“US$”), except for number of shares and per share data) 18. Earnings per share The following table sets forth the computation of basic earnings per share for the years ended December 31, 2019, 2020 and 2021: 2019 2020 2021 RMB Class A RMB Class B RMB Class A RMB Class B RMB Class A US$ Class A RMB Class B US$ Class B For the years ended December 31, Earnings per share – basic: Numerator: Allocation of net income attributable to Qudian Inc. for basic computation 2,520,194,155 744,093,770 718,824,602 239,994,059 441,499,980 69,280,981 147,574,098 23,157,596 Millions of Shares (denominator): Weighted average number of ordinary share outstanding – basic Denominator used for basic earnings per share Earnings per share – basic 215.04 63.49 190.17 63.49 189.95 189.95 63.49 215.04 11.72 63.49 11.72 190.17 3.78 63.49 3.78 189.95 2.32 189.95 0.36 63.49 2.32 63.49 63.49 0.36 F-64 Table of Contents QUDIAN INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued FOR THE YEARS ENDED DECEMBER 31, 2019, 2020 AND 2021 (Amounts in Renminbi (“RMB”) and US dollar (“US$”), except for number of shares and per share data) 18. Earnings per share - continued The following table sets forth the computation of diluted earnings per share for the years ended December 31, 2019, 2020 and 2021: 2019 2020 2021 RMB Class A RMB Class B RMB Class A RMB Class B RMB Class A US$ Class A RMB Class B US$ Class B For the years ended December 31, 18,876,619 5,057,670 20,833,583 6,273,649 12,171,824 1,910,025 3,810,636 597,972 2,574,495,457 689,792,468 736,911,399 221,907,262 448,623,440 70,398,807 140,450,638 22,039,770 694,850,138 — 228,180,911 — 144,261,274 22,637,742 — — Earnings per share – diluted: Numerator: Interest charges applicable to the Convertible Senior Notes Allocation of net income attributable to Qudian Inc. for diluted computation Reallocation of net income attributable to Qudian Inc. as a result of conversion of Class B to Class A shares Allocation of net income attributable to Qudian Inc 3,288,222,214 694,850,138 985,925,893 228,180,911 605,056,538 94,946,574 144,261,274 22,637,742 Millions of Shares (denominator): Weighted average number of ordinary share outstanding – basic 215.04 63.49 190.17 63.49 189.95 189.95 63.49 63.49 Conversion of Class B to Class A ordinary shares Adjustments for dilutive share options Conversion of the Convertible Senior Notes to Class A ordinary share Denominator used for diluted earnings per share Earnings per share – diluted 63.49 3.45 18.48 — — — 63.49 — 20.67 — — — 63.49 63.49 — — 12.85 12.85 — — — — — — 300.46 10.94 63.49 10.94 274.33 3.59 63.49 3.59 266.29 2.27 266.29 0.36 63.49 2.27 63.49 0.36 F-65 Table of Contents QUDIAN INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued FOR THE YEARS ENDED DECEMBER 31, 2019, 2020 AND 2021 (Amounts in Renminbi (“RMB”) and US dollar (“US$”), except for number of shares and per share data) 18. Earnings per share - continued The following table sets forth the computation of basic and diluted earnings per ADS for the years ended December 31, 2019, 2020 and 2021: Earnings per share – ADS: Denominator used for earnings per ADS – basic Denominator used for earnings per ADS – diluted Earnings per ADS – basic Earnings per ADS – diluted 19. Fair value measurements Assets and liabilities disclosed at fair value For the years ended December 31, 2019 2020 2021 RMB RMB RMB US$ Class A Class A Class A Class A 184.70 181.84 46.74 7.33 199.24 196.67 49.11 7.71 3.78 2.32 0.36 11.72 10.94 3.59 2.27 0.36 The Company measures its cash and cash equivalents, restricted cash and cash equivalents, loan principal and financing service fee receivables, finance lease receivables, convertible senior notes and borrowings at amortized cost. The carrying value of loan principal and financing service fee receivables approximate their fair value due to their short-term nature and are considered a level 3 measurement. The fair value was estimated by discounting the scheduled cash flows through to estimated maturity using estimated discount rates based on current offering rates of comparable institutions with similar services. The guarantee liabilities are presented as a level 3 measurement, with fair value estimated by discounting expected future payouts, net charge off rates, expected collection rates and a discount rate for time value. The Company carries the convertible senior notes at face value less unamortized debt discount and issuance costs on its consolidated balance sheets and presents the fair value for disclosure purposes only. The fair value of the convertible senior notes is classified as Level 2 fair value measurements based on dealer quotes. For further information on the convertible senior notes see Note 13. Assets measured at fair value on a nonrecurring basis The Company measures its property and equipment, intangible assets and equity method investment at fair value on a nonrecurring basis whenever events or changes in circumstances indicate that the carrying value may no longer be recoverable. The Company also measures equity investments without readily determinable fair values on a nonrecurring basis. The non-recurring fair value measurements to the carrying amount of such investments usually require management to estimate a price adjustment for the different rights and obligations between a similar instrument of the same issuer from an observable price change in an orderly transaction and the investment held by the Company. These non-recurring fair value measurements were measured as of the observable transaction dates. The valuation methodologies involved require management to use the observable transaction price at the transaction date (level 2). When there is impairment of equity securities accounted for under the measurement alternative, the non-recurring fair value measurements are measured at the date of impairment. Estimating the F-66 Table of Contents QUDIAN INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued FOR THE YEARS ENDED DECEMBER 31, 2019, 2020 AND 2021 (Amounts in Renminbi (“RMB”) and US dollar (“US$”), except for number of shares and per share data) 19. Fair value measurements - continued Assets measured at fair value on a nonrecurring basis - continued fair value of investees is highly judgmental due to the subjectivity of the unobservable inputs (level 3) used in the valuation methodologies used to determine fair value. The Company uses valuation methodology under the market approach which requires management to use unobservable inputs (level 3) such as selection of comparable companies and their multiples, and discount for lack of marketability. As of December 31, 2021, the Company measured a long-term investment at fair value on a nonrecurring basis using valuation methodology under the market approach. The significant unobservable inputs (level 3) include enterprise value to revenue multiple which was determined based on the median of selected comparable companies at 3.8 times, and the discount for lack of marketability which was estimated at 33%. The fair value of the long-term investment was RMB 172 million (US$ 27 million) as of December 31, 2021. Assets and liabilities measured at fair value on a recurring basis The Company measured its short-term investments, long-term investments with readily determinable fair values, derivative instruments, investment in equity method investee under fair value option and guarantee liabilities at fair value on a recurring basis. As the Company’s guarantee liabilities are not traded in an active market with readily observable prices, the Company uses significant unobservable inputs to measure the fair value of guarantee liabilities. Guarantee liabilities are categorized in the Level 3 valuation hierarchy based on the significance of unobservable factors in the overall fair value measurement. The Company did not transfer any assets or liabilities in or out of level 3 during the years ended December 31, 2020 and 2021. F-67 Table of Contents QUDIAN INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued FOR THE YEARS ENDED DECEMBER 31, 2019, 2020 AND 2021 (Amounts in Renminbi (“RMB”) and US dollar (“US$”), except for number of shares and per share data) 19. Fair value measurements - continued Assets and liabilities measured at fair value on a recurring basis - continued The following table summarizes the Company’s financial assets and liabilities measured or disclosed at fair value on recurring basis as of December 31, 2020 and 2021: Assets: Short-term investments Investment in equity method investee under fair value option Liabilities: Guarantee liabilities Convertible senior notes Assets: Short-term investments Long-term investments Derivative instruments Liabilities: Guarantee liabilities Convertible senior notes Assets: Short-term investments Long-term investments Derivative instruments Liabilities: Guarantee liabilities Convertible senior notes Active market (Level 1) RMB Observable input (Level 2) RMB Non-observable input (Level 3) RMB Total RMB As of December 31, 2020 — 306,275,523 5,042,314,438 — — — 5,042,314,438 306,275,523 — — — 626,692,320 11,697,633 — 11,697,633 626,692,320 Active market (Level 1) RMB Observable input (Level 2) RMB Non-observable input (Level 3) RMB Total RMB As of December 31, 2021 2,412,379,263 62,425,472 — 3,514,221,498 — 17,375,517 — — 5,926,600,761 62,425,472 17,375,517 — — — 611,000,109 885,303 — 885,303 611,000,109 Active market (Level 1) US$ Observable input (Level 2) US$ Non-observable input (Level 3) US$ Total US$ As of December 31, 2021 378,554,948 9,795,919 — 551,458,039 — 2,726,598 — — 930,012,987 9,795,919 2,726,598 — — — 95,879,250 138,923 — 138,923 95,879,250 As of December 31, 2020 and 2021, the discounted cash flow methodology is used to estimate the fair value of guarantee liabilities. The significant unobservable inputs used in the fair value measurement of guarantee liabilities include the discount rate and expected delinquency rates applied in the valuation models. These inputs in isolation can cause significant increases or decreases in fair value. Specifically, when a discounted cash flow model is used to determine fair value, the significant input used in the valuation model is the discount rate applied to present value the projected cash flows. Increases in the discount rate can significantly lower the fair F-68 Table of Contents QUDIAN INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued FOR THE YEARS ENDED DECEMBER 31, 2019, 2020 AND 2021 (Amounts in Renminbi (“RMB”) and US dollar (“US$”), except for number of shares and per share data) 19. Fair value measurements - continued Assets and liabilities measured at fair value on a recurring basis - continued value of guarantee liabilities; conversely a decrease in the discount rate can significantly increase the fair value of the guarantee liabilities. The discount rate is determined based on the market rates. Increase in the expected delinquency rates can significantly increase the fair value of guarantee liabilities; conversely a decrease in the expected delinquency rates can significantly decrease the fair value of guarantee liabilities. Significant Unobservable Inputs Financial Liabilities Guarantee liabilities Unobservable Input Discount rates Expected delinquency rates 2020 6.04% 2021 6.04% 22.57%-23.03% 18.77%-19.70% Range of Inputs Weighted - Average As of December 31, Refer to Note 12.1 for additional information about Level 3 guarantee liabilities measured at fair value on a recurring basis for the years ended December 31, 2020 and 2021. 20. Related party balances and transactions Name of related parties Luo Min Key management and their immediate families Founder, chief executive officer and controlling shareholder of the Company The Company’s key management and their immediate families Relationship with the Company There were no significant related party transactions in 2019, 2020 and 2021. 21. Share-based compensation Stock 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 well as 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 Qudian Inc. 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 the share 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 reserved 1,000,000 shares for issuance under the 2016 Plan. The exercise price for such options is RMB 0.0006 (US$ 0.0001) per share. The Company has set up the Share Based Payment Trust for the purpose of holding options awarded to certain employees and underlying shares before they are exercised as instructed by the employees. Shares options held by Share Based Payment Trust are legally outstanding upon satisfaction of vesting conditions. F-69 Table of Contents QUDIAN INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued FOR THE YEARS ENDED DECEMBER 31, 2019, 2020 AND 2021 (Amounts in Renminbi (“RMB”) and US dollar (“US$”), except for number of shares and per share data) 21. Share-based compensation - continued Stock options - continued For the years ended December 31, 2019, 2020 and 2021, the Company estimated the fair value of the options based on the quoted share price at grant date. Due to the options’ di minimis exercise price, the various assumptions used in the binomial option pricing model will not have a material impact in the calculation of the fair value of the options. The Company recognized compensation cost for the share options on a graded vesting basis. The total share-based compensation expenses recognized by the Company for the share option granted were RMB 87,299,053, RMB 45,633,820 and RMB 35,344,620 (US$ 5,546,342) for the years ended December 31, 2019, 2020 and 2021, respectively. A summary of share option activity under the 2016 Plan for the years ended December 31, 2020 and 2021 is as follows: Balance, December 31, 2019 Granted Exercised Forfeited Balance, December 31, 2020 Exercised Forfeited Balance, December 31, 2021 Vested and expected to vest as of December 31, 2021 Exercisable, December 31, 2021 Number of options Weighted average exercise price RMB Weighted average grant date fair value RMB 12,055,912 878,125 (797,463) (1,066,563) 11,070,011 (1,019,625) (158,500) 9,891,886 9,463,751 7,564,042 — — — — — — — — — — 19.87 14.51 13.45 52.22 16.79 13.60 28.96 16.92 36.72 32.39 Weighted average remaining contractual term Years 8.18 Aggregated intrinsic value RMB 578,275,151 7.31 99,672,691 6.30 578,275,151 6.30 5.87 453,939,274 362,817,639 The aggregate intrinsic value in the table above represents the difference between the exercise price and the Company’s closing stock price on the last trading day in 2019, 2020 and 2021, respectively. Total intrinsic value of options exercised for the years ended December 31, 2019, 2020 and 2021 was RMB 338,242,304, RMB 10,723,410 and RMB 13,862,597 (US$ 2,175,344) respectively. As of December 31, 2021, total unrecognized compensation expense relating to unvested share options was RMB 25,460,836 (US$ 3,995,361). The expense is expected to be recognized over a weighted-average period of 1.49 years. F-70 Table of Contents QUDIAN INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued FOR THE YEARS ENDED DECEMBER 31, 2019, 2020 AND 2021 (Amounts in Renminbi (“RMB”) and US dollar (“US$”), except for number of shares and per share data) 21. Share-based compensation - continued Stock options - continued For the years ended December 31, 2019, 2020 and 2021, the Company allocated share-based compensation expense as follows: For the years ended December 31, Sales and marketing General and administrative Research and development 22. Commitments and contingencies Capital Commitments 2019 RMB 4,482,323 2020 RMB 1,912,318 74,311,629 40,894,564 2,826,938 87,299,053 45,633,820 8,505,101 2021 RMB 1,726,837 29,684,217 3,933,566 35,344,620 US$ 270,978 4,658,102 617,262 5,546,342 The Company’s capital commitments relate primarily to commitments in connection with its plan to build an office building and innovation center. Total capital commitments contracted but not yet reflected in the financial statements as of December 31, 2020 and 2021 amounted to RMB 1,250,123,850 and RMB 545,978,654 (US$ 85,675,965) respectively. All of the commitments relating to the construction will be settled in installments. 23. Ordinary 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 share of 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 B ordinary 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 of Class B ordinary shares by the holder thereof to any person or entity which is not an affiliate of such holder, such Class B ordinary shares would be automatically converted into equal number of Class A ordinary shares. 24. Treasury shares On December 13, 2018, the Board of Directors of the Company authorized a share repurchase program, pursuant to which the Company was authorized to repurchase its own issued and outstanding ADS up to an aggregate value of US$300 million from the open market, in negotiated transactions off the market, or through other legally permissible means in accordance with applicable securities laws from time to time. In 2018, the Company repurchased an aggregate of 33,237,759 ADSs, representing 33,237,759 Class A ordinary shares, at an average price of $6.316. per ADS, for US$209,919,048 (RMB 1,410,222,466). The Company canceled an aggregate of 27,302,698 ADS, for US$ 157,495,891 (RMB 1,048,092,142). F-71 Table of Contents QUDIAN INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued FOR THE YEARS ENDED DECEMBER 31, 2019, 2020 AND 2021 (Amounts in Renminbi (“RMB”) and US dollar (“US$”), except for number of shares and per share data) 24. Treasury shares - continued On April 12, 2019, the Company entered into an ADS Repurchase Agreement with Kunlun Group Limited to repurchase an aggregate of 18,173,885 ADSs, representing 18,173,885 Class A ordinary shares, at an average price of $5.678 per ADS, for US$103,191,319 (RMB 693,517,898). All of the shares were repurchased and canceled subsequently. On August 23, 2019, the Company entered into a forward share repurchase agreement with Citibank, N.A. under which it will repurchase up to US$195 million worth of its outstanding ADSs representing its Class A ordinary shares. The forward share repurchase agreement was completed in October 2019. The company repurchased an aggregate of 26,169,241 Class A ordinary shares, at an average price of $7.451 per ADS, for US$195,000,000 (RMB 1,393,723,500). The Company received 26,169,241 deliveries of ADSs and all of them were cancelled. In 2020, the Company repurchased an aggregate of 1,495,291 ADSs, representing 1,495,291 Class A ordinary shares, at an average price of $1.510 per ADS, for US$2,258,112 (RMB 15,528,092). The amount of treasury shares as of December 31, 2019, 2020 and 2021 were 362,130,324, 371,551,131 and 346,320,584 shares, respectively. As of December 31, 2021, the Company repurchased an aggregate of 83,613,291 ADSs, representing 83,613,291 Class A ordinary shares under the Share Repurchase Program, at an average price of $6.865 per ADS, for US$ 574,026,622 (RMB 3,934,156,758). As of December 31, 2021, 71,645,824 shares were canceled, and 906,237 shares were used for exercise of share options. The remaining balance of treasury shares represents 11,061,230 Class A ordinary shares, at an average price of $4.533 per ADS, for US$ 50,144,695 (RMB 352,427,812). These shares were recorded at their purchase cost on the consolidated balance sheets and have not been cancelled as of December 31, 2021. 25. Restricted net assets The Company’s ability to pay dividends is primarily dependent on the Company receiving distributions of funds from its subsidiaries. Relevant PRC statutory laws and regulations permit payments of dividends by the Company’s subsidiaries, 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 consolidated financial 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”) are required to provide for certain statutory reserves, namely a general reserve, an enterprise expansion fund and a staff welfare and bonus fund. The PRC entities are required to allocate at least 10% of their after tax profits on an individual company basis as determined under PRC accounting standards to the statutory reserve and has the right to discontinue allocations to the statutory reserve if such reserve has reached 50% of registered capital on an individual company basis. In addition, the registered capital of the PRC entities is also restricted. Under PRC regulations, the subsidiaries of the VIEs in the PRC with microloan license are required to provide a statutory reserve, which is appropriated from net income as reported in the Company’s statutory accounts. The F-72 Table of Contents QUDIAN INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued FOR THE YEARS ENDED DECEMBER 31, 2019, 2020 AND 2021 (Amounts in Renminbi (“RMB”) and US dollar (“US$”), except for number of shares and per share data) 25. Restricted net assets - continued Company is required to allocate 1.5% of its balance of loan principal to the statutory reserve. The statutory reserves can only be used for specific purposes and not distributable as cash dividends. Under PRC regulations, the Company’s subsidiary in the PRC with a license to provide financing guarantee service is required to provide a statutory reserve, which is appropriated from net income as reported in the Company’s statutory accounts. The Company is required to allocate 10% of its after tax profits to the statutory reserve. The statutory reserves can only be used for specific purposes and not distributable as cash dividends. Appropriations to the enterprise expansion fund and staff welfare and bonus fund are at the discretion of the Board of Directors of the subsidiaries. The PRC entities are also subject to similar statutory reserve requirements. These reserves can only be used for specific purposes and are not transferable to the Company in the form of loans, advances or cash dividends. Amounts restricted that include paid-in capital and statutory reserve funds, as determined pursuant to PRC GAAP, were RMB 5,002 million and RMB 5,314 million (US$ 834 million) as of December 31, 2020 and 2021, respectively. 26. Condensed financial information of the parent company The following is the condensed financial information of the Company on a parent company only basis. Condensed balance sheets ASSETS: Current assets: Cash and cash equivalents Short-term investments Short-term amounts due from related parties Total current assets Non-current assets: Investments in subsidiaries, VIEs and VIEs’ subsidiaries Total non-current assets TOTAL ASSETS LIABILITIES AND SHAREHOLDERS’ EQUITY: Current liabilities: Accrued expenses and other current liabilities Short-term amounts due to related parties Total current liabilities 2020 RMB As of December 31, 2021 RMB US$ 813,175,789 — 1,743,981,590 2,557,157,379 558,271,954 200,238,180 1,595,236,014 2,353,746,148 87,605,052 31,421,740 250,327,341 369,354,133 10,178,732,276 10,178,732,276 12,735,889,655 10,850,691,369 10,850,691,369 13,204,437,517 1,702,710,255 1,702,710,255 2,072,064,388 6,206,202 7,835,083 14,041,285 2,020,586 4,329,997 6,350,583 317,074 679,471 996,545 F-73 Table of Contents QUDIAN INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued FOR THE YEARS ENDED DECEMBER 31, 2019, 2020 AND 2021 (Amounts in Renminbi (“RMB”) and US dollar (“US$”), except for number of shares and per share data) 26. Condensed financial information of the parent company - continued Condensed balance sheets - continued Non-current liabilities Convertible senior notes Total non-current liabilities TOTAL LIABILITIES Commitments and contingencies Shareholders’ equity Class A Ordinary shares (US$0.0001 par value; 656,508,828 shares authorized, 201,304,811 shares issued and 189,514,026 shares outstanding, as of December 31, 2020; 656,508,828 shares authorized, 201,304,881 shares issued and 190,243,651 shares outstanding, as of December 31, 2021) Class B Ordinary shares (US$0.0001 par value; 63,491,172 shares authorized, 63,491,172 shares issued and outstanding, as of December 31, 2020 and 2021) Treasury shares Additional paid-in capital Accumulated other comprehensive loss Retained earnings Total shareholders’ equity TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY F-74 2020 RMB As of December 31, 2021 RMB US$ 822,004,519 822,004,519 836,045,804 681,400,553 681,400,553 687,751,136 106,926,616 106,926,616 107,923,161 132,052 132,052 20,722 43,836 (371,551,131) 4,007,259,660 (51,419,766) 8,315,379,200 11,899,843,851 12,735,889,655 43,836 (346,320,584) 4,017,374,973 (58,997,174) 8,904,453,278 12,516,686,381 13,204,437,517 6,879 (54,345,257) 630,413,799 (9,257,944) 1,397,303,028 1,964,141,227 2,072,064,388 Table of Contents QUDIAN INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued FOR THE YEARS ENDED DECEMBER 31, 2019, 2020 AND 2021 (Amounts in Renminbi (“RMB”) and US dollar (“US$”), except for number of shares and per share data) 26. Condensed financial information of the parent company - continued Condensed statements of comprehensive income Share-based compensation expense General and administrative Interest and investment income, net Other non-interest income Foreign exchange loss, net Income from the repurchase of convertible senior notes Share of profit in subsidiaries, VIEs and VIEs’ subsidiaries Net income before income taxes Income tax expense Net income Other comprehensive income Foreign currency translation adjustment Total comprehensive income Condensed statements of cash flows Cash flows from operating activities: Net income Adjustments to reconcile net income to net cash used in operating activities: For the years ended December 31, 2020 RMB 2021 RMB 2019 RMB (87,299,053) (43,146,732) (10,149,429) 20,498,736 9,946,070 (45,633,820) (38,512,789) (15,718,860) 19,633,391 2,073,798 — 622,109,001 (35,344,620) (9,973,856) (22,506,569) 4,979,926 352,492 12,046,522 3,374,438,333 414,867,940 639,520,183 3,264,287,925 958,818,661 589,074,078 — — — US$ (5,546,342) (1,565,116) (3,531,772) 781,459 55,314 1,890,362 100,354,672 92,438,577 — 3,264,287,925 958,818,661 589,074,078 92,438,577 31,893,073 (7,577,408) 3,296,180,998 920,364,061 581,496,670 (38,454,600) (1,189,061) 91,249,516 2019 RMB For the years ended December 31, 2020 RMB 2021 RMB US$ 3,264,287,925 958,818,661 589,074,078 92,438,577 Share of profit in subsidiaries, VIEs and VIEs’ subsidiaries Share-based compensation expense Income from the repurchase of convertible senior notes Accrued interest of convertible senior notes Unrealized investment income of short-term Investments Foreign exchange (income)/loss net (3,374,438,333) 87,299,053 — 23,934,289 — (9,946,070) (414,867,940) 45,633,820 (622,109,001) 27,107,232 — (2,073,798) (639,520,183) 35,344,620 (12,046,522) 15,982,460 4,264,330 (352,492) (100,354,672) 5,546,342 (1,890,362) 2,507,997 669,166 (55,314) Changes in operating assets and liabilities: Receivables from related party Payable to employees Other current receivables Other current payables Net cash used in operating activities (34,551) (2,312,714) 1,096,665 4,292,086 (5,821,650) (221,873,465) (176,326) 618,772 5,651,200 (223,270,845) (97,924) (762) — (4,184,856) (11,537,251) (15,366) (120) — (656,694) (1,810,446) F-75 Table of Contents QUDIAN INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued FOR THE YEARS ENDED DECEMBER 31, 2019, 2020 AND 2021 (Amounts in Renminbi (“RMB”) and US dollar (“US$”), except for number of shares and per share data) 26. Condensed financial information of the parent company - continued Condensed statements of cash flows - continued Net cash provided by /(used in) investing activities Net cash provided by/(used in) financing activities Effect of exchange rate changes on cash and cash equivalents Net increase/(decrease) in cash and cash equivalents Cash and cash equivalents at beginning of the year Cash and cash equivalents at end of the year Basis of presentation 2019 RMB 330,197,330 9,587,663 100,137,695 434,101,038 543,307,703 977,408,741 For the years ended December 31, 2020 RMB RMB 2021 1,497,130,562 (1,522,314,300) 84,221,631 (164,232,952) 977,408,741 813,175,789 (132,143,216) (127,088,249) 15,864,881 (254,903,835) 813,175,789 558,271,954 US$ (20,736,154) (19,942,920) 2,489,546 (39,999,974) 127,605,026 87,605,052 Condensed financial information is used for the presentation of the Company, or the parent company. The condensed financial information of the parent company has been prepared using the same accounting policies as set out in the Company’s consolidated financial statements except that the parent company used the equity method to account for investment in its subsidiaries and VIEs. The parent company records its investment in its subsidiaries and VIEs under the equity method of accounting as prescribed in ASC 323, Investments- Equity Method and Joint Ventures. Such investments are presented on the condensed balance sheets as “Investment in subsidiaries and VIEs” and their respective profit or loss as “Equity in profits of subsidiaries and VIEs” on the condensed statements of comprehensive income. Equity method accounting ceases when the carrying amount of the investment, including any additional financial support, in a subsidiary and VIEs is reduced to zero unless the parent company has guaranteed obligations of the subsidiary and VIEs or is otherwise committed to provide further financial support. If the subsidiary and VIEs subsequently reports net income, the parent company shall resume applying the equity method only after its share of that net income equals the share of net losses not recognized during the period the equity method was suspended. The parent company’s condensed financial statements should be read in conjunction with the Company’s consolidated financial statements. 27. Subsequent events In January 2022, the Company repurchased convertible senior notes at market price, with a principal amount of US$ 60,000,000. In March and April 2022, the Company repurchased an aggregate of 3,488,570 ADSs, representing 3,488,570 Class A ordinary shares, at an average price of $1.192 per ADS, for US$ 4,158,751 (RMB 26,457,680). F-76 LIST OF SUBSIDIARIES AND CONSOLIDATED VARIABLE INTEREST ENTITIES OF Exhibit 8.1 QUDIAN INC. (as of December 31, 2021) Subsidiaries Qufenqi (Ganzhou) Information Technology Co., Ltd.* 趣分期(赣州)信息技术有限公司 Xiamen Happy Time Technology Co., Ltd.* 厦门快乐时代科技有限公司 Qufenqi (HK) Limited QD Technologies Limited Tianjin Qudian Financial Lease Co. Ltd.* 天津趣店融资租赁有限公司 QD Data Limited Xiamen Qudian Financial Lease Co., Ltd.* 厦门趣店融资租赁有限公司 Jinan Qudian Car Leasing Co., Ltd.* 济南趣店汽车租赁有限公司 Wenzhou Qudian Car Leasing Co., Ltd.* 温州趣店汽车租赁有限公司 Nanchang Qudian Car Leasing Co., Ltd.* 南昌趣店汽车租赁有限公司 Ningxia Qudian Car Leasing Co., Ltd.* 宁夏趣店汽车租赁有限公司 Shijiazhuang Qudian Car Leasing Co., Ltd.* 石家庄趣店汽车租赁有限公司 Gansu Qudian Car Sale & Service Co., Ltd.* 甘肃趣店汽车销售有限公司 Shenyang Qudian Car Leasing Co., Ltd.* 沈阳趣店汽车租赁有限公司 Chongqing Qudian Car Leasing Co., Ltd.* 重庆趣店汽车租赁有限公司 Suzhou Qudian Car Leasing Co., Ltd.* 苏州趣店汽车租赁有限公司 Taiyuan Qudian Car Leasing Co., Ltd.* 太原趣店汽车租赁有限公司 Xiamen Qudian Car Sale & Service Co., Ltd.* 厦门趣店汽车销售服务有限公司 Zhengzhou Qudian Car Leasing Co., Ltd.* 郑州趣店汽车租赁有限公司 Guiyang Qudian Car Leasing Co., Ltd.* 贵阳趣店汽车租赁有限公司 Chengdu Qudian Car Leasing Co., Ltd.* 成都趣店汽车租赁有限公司 Nanjing Qudian Car Leasing Co., Ltd.* 南京趣店汽车租赁有限公司 Xiamen Xincheng Youda Financing Guarantee Ltd.* 厦门信诚友达融资担保有限公司 Xiamen Youqi Technology Co., Ltd.* 厦门友契科技有限公司 Xiamen Youdun Technology Co., Ltd.* 厦门友盾科技有限公司 Consolidated Variable Interest Entities (“VIEs”) Beijing Happy Time Technology Development Co., Ltd.* 北京快乐时代科技发展有限公司 Xiamen Qudian Technology Co., Ltd.* 厦门趣店科技有限公司 Ganzhou Qudian Technology Co., Ltd.* 赣州趣店科技有限公司 Xiamen Weipujia Technology Co., Ltd.* 厦门唯谱家科技有限公司 Xiamen Qu Plus Plus Technology Development Co., Ltd* 厦门趣加加科技发展有限公司 Jurisdiction of Incorporation PRC PRC Hong Kong British Virgin Islands PRC Hong Kong PRC PRC PRC PRC PRC PRC PRC PRC PRC PRC PRC PRC PRC PRC PRC PRC PRC PRC PRC Jurisdiction of Incorporation PRC PRC PRC PRC PRC Subsidiaries of Consolidated VIEs Ganzhou Happy Fenqi Network Service Co., Ltd.* 赣州快乐分期网络服务有限公司 Xinjiang Qudian Technology Co., Ltd. * 新疆趣店科技有限公司 Fuzhou High-tech Zone Microcredit Co., Ltd.* 抚州高新区趣分期小额贷款有限公司 Qufenqi (Beijing) Information Technology Co., Ltd.* 趣分期(北京)信息技术有限公司 Fuzhou Happy Time Technology Development Co., Ltd.* 抚州快乐时代科技发展有限公司 Xiamen Qudian Commercial Factoring Co., Ltd.* 厦门趣店商业保理有限公司 Ganzhou Happy Time E-Commerce Co., Ltd.* 赣州快乐时代电子商务有限公司 Xiamen Junda Network Technology Co., Ltd.* 厦门均达网络科技有限公司 Tianjin Qufenqi Technology Co., Ltd.* 天津趣分期科技有限公司 Yihuang Qudian Technology Development Co., Ltd.* 宜黄县趣店科技发展有限公司 Jiangxi Chunmian Technology Development Co., Ltd.* 江西春眠科技发展有限公司 Tianjin Happy Time Technology Development Co., Ltd.* 天津快乐时代科技发展有限公司 Xiamen Wanlimu Technology Co., Ltd.* 厦门万里目科技有限公司 Xiamen Qudian Football Club Co., Ltd.* 厦门趣店足球俱乐部有限公司 (formerly known as Xiamen Ludao Football Club Co., Ltd. 厦门鹭岛足球俱乐部有限公司) Jurisdiction of Incorporation PRC PRC PRC PRC PRC PRC PRC PRC PRC PRC PRC PRC PRC PRC * The English name of this subsidiary, consolidated VIE or subsidiary of consolidated VIE, as applicable, has been translated from its Chinese name. I, Min Luo, certify that: Certification by the Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 Exhibit 12.1 1. 2. 3. 4. I have reviewed this annual report on Form 20-F of Qudian Inc. (the “Company”); 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 the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Company as of, and for, the periods presented in this report; The Company’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) 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 within those entities, particularly during the period in which this report is being prepared; (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; (c) Evaluated the effectiveness of the Company’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness 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 by the annual report that has materially affected, or is reasonably likely to materially affect, the company’s internal control over financial reporting; and 5. The Company’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the 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 are reasonably 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 internal control over financial reporting. Date: April 29, 2022 /s/ Min Luo By: Name: Min Luo Title: Chairman and Chief Executive Officer I, Yan Gao, certify that: Certification by the Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 Exhibit 12.2 1. 2. 3. 4. I have reviewed this annual report on Form 20-F of Qudian Inc. (the “Company”); 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 the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Company as of, and for, the periods presented in this report; The Company’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) 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 within those entities, particularly during the period in which this report is being prepared; (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; (c) Evaluated the effectiveness of the Company’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness 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 by the annual report that has materially affected, or is reasonably likely to materially affect, the company’s internal control over financial reporting; and 5. The Company’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the 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 are reasonably 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 internal control over financial reporting. Date: April 29, 2022 /s/ Yan Gao By: Name: Yan Gao Title: Vice President of Finance Certification by the Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 Exhibit 13.1 In connection with the annual report of Qudian Inc. (the “Company”) on Form 20-F for the year ended December 31, 2021 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Min Luo, Chairman and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge: (1) (2) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Date: April 29, 2022 /s/ Min Luo By: Name: Min Luo Title: Chairman and Chief Executive Officer Certification by the Principal Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 Exhibit 13.2 In connection with the annual report of Qudian Inc. (the “Company”) on Form 20-F for the year ended December 31, 2021 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Yan Gao, Vice President of Finance of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge: (1) (2) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Date: April 29, 2022 /s/ Yan Gao By: Name: Yan Gao Title: Vice President of Finance Exhibit 15.1 10/F, Tower B, CPIC Plaza, No. 28 Fengsheng Lane, Xicheng District, Beijing 100032, China Tel: 86 10 5776 3888 Fax: 86 10 5776 3777 April 29, 2022 Qudian Inc. Tower A, AVIC Zijin Plaza Siming District, Xiamen Fujian Province 361000 People’s Republic of China as 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 on foreign investment in the relevant industries, or if these regulations or the interpretation of existing regulations change in the future, we could be subject to severe penalties or be forced to relinquish our interests in those operations.” and “Item 4. Information on the Company—C. Organizational Structure—Our Contractual Arrangements with Consolidated VIEs and Their Shareholders” in Qudian Inc.’s Annual Report on Form 20-F for the year ended December 31, 2021 (the “Annual Report”), which is to be filed with the Securities and Exchange Commission (the “SEC”) on April 29, 2022. We also consent to the filing with the 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 the Securities 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 Firm Tian Yuan Law Firm We consent to the incorporation by reference in the following Registration Statements: Consent of Independent Registered Public Accounting Firm (1) (2) Registration Statement (Form S-8 No. 333-224249) pertaining to the 2016 Equity Incentive Plan of Qudian Inc., and Registration Statement (Form S-8 No. 333-249085) pertaining to the 2016 Equity Incentive Plan of Qudian Inc; of our reports dated April 29, 2022, 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) of Qudian Inc. for the year ended December 31, 2021. Exhibit 15.2 /s/ Ernst & Young Hua Ming LLP Shanghai, The People’s Republic of China April 29, 2022 

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