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(Mark One)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 20-F
☐ REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934
☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2021
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
OR
Date of event requiring this shell company report. . . . . . . . . . . . . . . . . . .
Commission file number: 001-38652
For the transition period from to to
X Financial
(Exact name of Registrant as specified in its charter)
N/A
(Translation of Registrant’s name into English)
Cayman Islands
(Jurisdiction of incorporation or organization)
7-8F, Block A, Aerospace Science and Technology Plaza
No. 168, Haide Third Avenue, Nanshan District
Shenzhen, 518067, the People’s Republic of China
(Address of principal executive offices)
Mr. Frank Fuya Zheng, Chief Financial Officer
7-8F, Block A, Aerospace Science and Technology Plaza
No. 168, Haide Third Avenue, Nanshan District
Shenzhen, 518067, the People’s Republic of China
Tel: +86-755-8628 2977
E-mail: frank.zheng@xiaoying.com
(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 ADS represents six Class A
ordinary shares, par value US$0.0001 per share*
Class A ordinary shares, par value US$0.0001 per share **
Trading symbol
XYF
Name of each exchange on which registered
The New York Stock Exchange
N/A
The New York Stock Exchange
* Effective from November 19, 2020, the ratio of ADSs representing the Class A ordinary shares changed from one (1) ADS representing two (2) Class A ordinary
shares to one (1) ADS representing six (6) Class A ordinary shares.
** Not for trading, but only in connection with the listing of the American depositary shares on the New York Stock Exchange.
Securities registered or to be registered pursuant to Section 12(g) of the Act.
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act.
None
(Title of Class)
None
(Title of Class)
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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.
329,117,943 ordinary shares, comprised of 231,517,943 Class A ordinary shares, par value $0.0001 per share, and 97,600,000 Class B ordinary shares, par value
$0.0001 per share, as of December 31, 2021
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes ☐ No ⌧
If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.
Yes ☐ No ⌧
Note - Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 from their
obligations under those Sections.
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90
days.
Yes ⌧ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T
(§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Yes ⌧ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large
accelerated filer” in Rule 12b-2 of the Exchange Act. Check one:
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 registrant has used to prepare the financial statements included in this filing:
U.S. GAAP ⌧
International Financial Reporting Standards as issued
by the International Accounting Standards Board ☐
Other ☐
If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow.
☐ Item 17 ☐ Item 18
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ☐ No ⌧
(APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST FIVE YEARS)
Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of
1934 subsequent to the distribution of securities under a plan confirmed by a court.
Yes ☐ No ☐
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TABLE OF CONTENTS
INTRODUCTION
FORWARD-LOOKING INFORMATION
PART I
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE
ITEM 3. KEY INFORMATION
ITEM 4. INFORMATION ON THE COMPANY
ITEM 4A. UNRESOLVED STAFF COMMENTS
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
ITEM 8. FINANCIAL INFORMATION
ITEM 9. THE OFFER AND LISTING
ITEM 10. ADDITIONAL INFORMATION
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
PART II
ITEM 13. ITEM DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS
ITEM 15. 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
PART III
ITEM 17. FINANCIAL STATEMENTS
ITEM 18. FINANCIAL STATEMENTS
ITEM 19. EXHIBITS
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INTRODUCTION
Unless otherwise indicated, in this annual report on Form 20-F, the following terms shall have the meaning set out below:
● “active borrowers” refers to, for a specified period, borrowers who made at least one transaction during that period on our platform;
● “ADSs” refers to American depositary shares, each of which represents six Class A ordinary shares, and “ADRs” refers to the American
depositary receipts that may evidence ADSs;
● “APR” or “annual percentage rate” refers to the percentage number represents the actual annualized cost of borrowing over the term of a
loan. The APR for a type of our loan product equals to the annualized actual amount of total interests, service fees and insurance premium
divided by total amount of loans we facilitated.
● “Beijing WFOE” refers to our wholly-owned PRC subsidiary, Xiaoying (Beijing) Information Technology Co., Ltd.;
● “Cayman Companies Act” refers to the Companies Act (As Revised) of the Cayman Islands, as amended;
● “China” or “PRC” refers to the People’s Republic of China, excluding, for purposes of this annual report, Hong Kong, Macau and Taiwan;
● “Class A ordinary shares” refers to our Class A ordinary shares, par value $0.0001 per share, carrying one vote per share;
● “Class B ordinary shares” refers to our Class B ordinary shares, par value $0.0001 per share, carrying 20 votes per share;
● “high-credit-limit” refers to ticket size of RMB80,000 to RMB600,000;
● “institutional funding partners” refers to our institutional funding sources, including banks, consumer finance companies, trust companies and
other institutions who funded the loans we facilitated to borrowers;
● “insurance /guarantee protection” refers to credit insurance or guarantee services provided by insurance companies or financing guarantee
companies in partnership with online finance platforms against the default of both the principal and interest;
● “ordinary shares” refers to our Class A and Class B ordinary shares, par value US$0.0001 per share;
● “PBOC CRC” refers to the credit reference center of the People’s Bank of China;
● “prime borrower” refers to an individual having sound credit history, who has credit records with PBOC CRC and usually no late payment
record of over 60 days in the previous six months. In determining whether a prospective borrower is a prime borrower, we will review his or
her credit history, along with our sophisticated risk management review system;
● “RMB” or “Renminbi” refers to the legal currency of China;
● “U.S. dollars,” “US$,” “$” or “dollars” refers to the legal currency of the United States;
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● “variable interest entities” or “VIEs” refer to Beijing Ying Zhong Tong Rongxun Technology Service Co., Ltd, or Beijing Ying Zhong Tong,
Shenzhen Xiaoying Technology Co., Ltd., or Shenzhen Xiaoying, Shenzhen Tangren Financing Guarantee Co., Ltd. or Shenzhen Tangren,
and Shenzhen Beier Assets Management Co., Ltd., or Shenzhen Beier, and their subsidiaries, which are PRC companies in which we do not
have equity interests but whose financial results have been consolidated into our consolidated financial statements in accordance with
U.S. GAAP due to our having effective control over, and our being the primary beneficiary of, such entity; and “affiliated entities” are to our
VIE, the VIE’s direct subsidiaries under the PRC laws;
● “we,” “us,” “our company,” “our,” or “X Financial” refers to X Financial, a Cayman Islands company, and unless the context requires
otherwise, includes its predecessor entities, consolidated subsidiaries and VIEs; and
● “ZhongAn” refers to ZhongAn Online P&C Insurance Co., Ltd., a joint stock limited company with limited liability incorporated in the
People’s Republic of China and listed on the Hong Kong Stock Exchange (stock code: 6060), carrying on business in Hong Kong as “ZA
Online Fintech P&C.”
Our reporting currency is Renminbi because substantially all of our operations are conducted in China and all of our 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 31, 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.
FORWARD-LOOKING INFORMATION
This annual report on Form 20-F contains forward-looking statements that are based on our management’s beliefs and assumptions and on
information currently available to us. All statements other than statements of historical facts are forward-looking statements. These statements relate to
future events or to our future financial performance and involve known and unknown risks, uncertainties and other factors that may cause our or our
industry’s actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity,
performance or achievements expressed or implied by these forward-looking statements.
You can identify forward-looking statements by terms such as “may,” “could,” “will,” “should,” “would,” “expect,” “plan,” “intend,” “anticipate,”
“believe,” “estimate,” “predict,” “potential,” “project” or “continue” or the negative of these terms or other similar expressions. The forward-looking
statements include, but are not limited to, statements about:
● the PRC consumer finance market;
● our goals and strategies;
● our future business development, financial condition and results of operations;
● expected changes in our revenues, costs or expenditures;
● growth of and competition trends in our industry;
● our expectations regarding demand for, and market acceptance of, our products and services;
● our expectations regarding keeping and strengthening our relationships with borrowers, institutional funding partners and other parties we
collaborate with;
● fluctuations in general economic and business conditions in the markets in which we operate; and
● relevant government policies and regulations relating to our industry.
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You should read this annual report and the documents that we refer to in this annual report and have filed as exhibits to this annual report
completely and with the understanding that our actual future results may be materially different from what we expect. Factors that may cause actual
results to differ materially from current expectations include, among other things, those listed under the heading “Risk Factors” and elsewhere in this
annual report. If one or more of these risks or uncertainties occur, or if our underlying assumptions prove to be incorrect, actual events or results may
vary significantly from those implied or projected by the forward-looking statements. No forward-looking statement is a guarantee of future
performance.
You should not rely upon forward-looking statements as predictions of future events. 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 or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise, after the
date on which the statements are made or to reflect the occurrence of unanticipated events.
We would like to caution you not to place undue reliance on these forward-looking statements and you should read these statements in conjunction
with the risk factors disclosed in “Item 3. Key Information—3.D. Risk Factors.” Those risks are not exhaustive. We operate in an evolving
environment. New risks emerge from time to time and it is impossible for our management to predict all risk factors, nor can we assess the impact of
all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ from those contained in any
forward-looking statement. We do not undertake any obligation to update or revise the forward-looking statements except as required under applicable
law. You should read this annual report and the documents that we reference in this annual report completely and with the understanding that our actual
future results may be materially different from what we expect.
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VIE Structure and Risks Relating to Our Corporate Structure
PART I
We are a Cayman Islands holding company conducting our operations in China through Beijing WFOE, a wholly-owned subsidiary of us,
Shenzhen Xiaoying Puhui Technology Co., Ltd., a wholly-owned subsidiary of Beijing WFOE (“Shenzhen Puhui”), Shenzhen Xiaoying Information
Technology Co., Ltd. (“Shenzhen Xiaoying IT”), a wholly-owned subsidiary of Beijing WFOE, and the VIEs, including Shenzhen Xiaoying, Shenzhen
Tangren, Beijing Ying Zhong Tong, Shenzhen Beier and their subsidiaries. We have equity interests in Beijing WFOE, Shenzhen Puhui, and Shenzhen
Xiaoying IT, however, neither we nor our subsidiaries own any share in the VIEs. Instead, we control and receive the economic benefits of the VIEs’
business operation through a series of contractual arrangements (the “VIE Agreements”). To comply with PRC laws and regulations, we do not have
an equity ownership interest in our VIEs but rely on the VIE Agreements with VIEs to control and operate their businesses. The VIE Agreements are
designed to provide our Beijing WFOE, with the power, rights, and obligations equivalent in all material respects to those it would possess as the
principal equity holder of the VIE, including absolute control rights and the rights to the assets, property, and revenues of the VIE. As a result of these
contractual arrangements, which have not been tested in a court of law in the PRC, under generally accepted accounting principles in the United States
(“U.S. GAAP”), the assets and liabilities of the VIE are treated as our assets and liabilities and the results of operations of the VIE are treated in all
aspects as if they were the results of our operations. We are the primary beneficiary of the VIE, and, therefore, consolidate the financial results of the
VIE in our consolidated financial statements in accordance with U.S. GAAP. See “Item 4.C. Organizational Structure” for more information on these
VIE Agreements.
Because of our corporate structure, we are subject to risks due to uncertainty of the interpretation and the application of the PRC laws and
regulations, including but not limited to the validity and enforcement of the VIE Agreements. We are also subject to the risks of uncertainty about any
future actions of the PRC government in this regard. Our VIE Agreements may not be effective in providing control over the VIE. The contractual
arrangements have not been tested in a court of law in the PRC and there remain significant uncertainties regarding the ultimate outcome of arbitration
should legal action become necessary. One of our VIEs and one of the subsidiaries of our consolidated VIEs are used to replicate foreign investment in
China-based companies where Chinese laws and regulations prohibit and restrict foreign ownership of internet value-added businesses. As a result, our
shareholders may never directly hold equity interests in those entities. We may also be subject to sanctions imposed by PRC regulatory agencies
including Chinese Securities Regulatory Commission, or CSRC, if we fail to comply with their rules and regulations. We may also be subject to PRC
laws relating to, among others, data security and restrictions over foreign investments due to the complexity of the regulatory regime in China, and the
recent statements and regulatory actions by the PRC government relating to data security may affect our remaining business operations in China or
even our ability to offer securities in the United States. We are also subject to the risks and uncertainties about any future actions of the PRC
government that could disallow our VIE structure, which would likely result in a material change in our operations and/or a material change in the
value of our securities, including causing the value of such securities to significantly decline or become worthless. See “Risk Factors-Risks Relating to
Our Corporate Structure” for more information.
Risks Associated with Being Based in or Having the Majority of our Operations in China
We are exposed to legal and operational risks associated with our operations in China. The PRC government has significant authority to exert
influence on the ability of a company with operations in China, including us, to conduct its business. The Chinese government has exercised and
continues to exercise substantial control over virtually every sector of the Chinese economy through regulation and state ownership. Our ability to
operate in China may be harmed by changes in its laws and regulations, including those relating to taxation, data information, antitrust, finance,
environmental regulations, land use rights, property and other matters. The central or local governments of these jurisdictions may impose new, stricter
regulations or interpretations of existing regulations that would require additional expenditures and efforts on our part to ensure our compliance with
such regulations or interpretations. Any actions by the PRC government to exert more oversight and control over offerings that are conducted overseas
and/or foreign investment in companies having operations in China, including us, 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. These China-related risks
could result in a material change in our operations and/or the value of our securities, or could significantly limit or completely hinder our ability to
offer securities to investors in the future and cause the value of such securities to significantly decline or become worthless.
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The PRC government may exert, at any time, substantial intervention and influence over the manner of our operations. Recently, the PRC
government initiated a series of regulatory actions and statements to regulate business operations in China with little advance notice, including
cracking down on illegal activities in the securities market, enhancing supervision over China-based companies listed overseas, adopting new
measures to extend the scope of cybersecurity reviews and new laws and regulations related to data security, and expanding the efforts in anti-
monopoly enforcement.
The regulatory framework for the collection, use, safeguarding, sharing, transfer and other processing of personal information and important data
worldwide is rapidly evolving in PRC and is likely to remain uncertain for the foreseeable future. Regulatory authorities in China have implemented
and are considering a number of legislative and regulatory proposals concerning data protection. For example, the PRC Cybersecurity Law, which
became effective in June 2017, established China’s first national-level data protection for “network operators,” which may include all organizations in
China that connect to or provide services over the internet or other information network. The PRC Data Security Law, which was promulgated by the
Standing Committee of PRC National People’s Congress, or the SCNPC, on June 10, 2021 and became effective on September 1, 2021, outlines the
main system framework of data security protection.
The amended Measures of Cybersecurity Review, which was promulgated by the Cyberspace Administration of China (the “CAC”) in December
2021 and came into effect on February 15, 2022, requires cyberspace operators with personal information of more than one million users to file for
cybersecurity review with the Cybersecurity Review Office (“CRO”), in the event such operators plan for an overseas listing. The amended Measures
of Cybersecurity Review provide that, among others, an application for cybersecurity review must be made by an issuer that is a “critical information
infrastructure operator” or a “data processing operator” as defined therein before such issuer’s securities become listed in a foreign country, if the
issuer possesses personal information of more than one million users, and that the relevant governmental authorities in the PRC may initiate
cybersecurity review if such governmental authorities determine an operator’s cyber products or services, data processing or potential listing in a
foreign country affect or may affect China’s national security. In August 2021, the Standing Committee of the National People’s Congress of China
promulgated the Personal Information Protection Law which became effective on November 1, 2021. The Personal Information Protection Law
provides a comprehensive set of data privacy and protection requirements that apply to the processing of personal information and expands data
protection compliance obligations to cover the processing of personal information of persons by organizations and individuals in China, and the
processing of personal information of persons outside of China if such processing is for purposes of providing products and services to, or analyzing
and evaluating the behavior of, persons in China. The Personal Information Protection Law also provides that critical information infrastructure
operators and personal information processing entities who process personal information meeting a volume threshold to be set by Chinese cyberspace
regulators are also required to store in China the personal information generated or collected in China, and to pass a security assessment administered
by Chinese cyberspace regulators for any export of such personal information. Moreover, pursuant to the Personal Information Protection Law, persons
who seriously violate this law may be fined for up to RMB50 million or 5% of annual revenues generated in the prior year and may also be ordered to
suspend any related activity by competent authorities.
In November 2021, the CAC released the Regulations on Network Data Security (draft for public comments) and accepted public comments until
December 13, 2021. The draft Regulations on Network Data Security provide more detailed guidance on how to implement the general legal
requirements under laws such as the Cybersecurity Law, Data Security Law and the Personal Information Protection Law. The draft Regulations on
Network Data Security follow the principle that the state will regulate based on a data classification and multi-level protection scheme, under which
data is largely classified into three categories: general data, important data and core data. Under the current PRC cybersecurity laws in China, critical
information infrastructure operators that intend to purchase internet products and services that may affect national security must be subject to the
cybersecurity review. On July 30, 2021, the State Council of the PRC promulgated the Regulations on the Protection of the Security of Critical
Information Infrastructure, which took effect on September 1, 2021. The regulations require, among others, that certain competent authorities shall
identify critical information infrastructures. If any critical information infrastructure is identified, they shall promptly notify the relevant operators and
the Ministry of Public Security.
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Currently, the cybersecurity laws and regulations have not directly affected our business and operations, but in anticipation of the strengthened
implementation of cybersecurity laws and regulations and the expansion of our business, we face potential risks if we are deemed as a critical
information infrastructure operator under the Cybersecurity Law. In such case, we must fulfill certain obligations as required under the Cybersecurity
Law and other applicable laws, including, among others, storing personal information and important data collected and produced within the PRC
territory during our operations in China, which we are already doing in our business, and we may be subject to review when purchasing internet
products and services. According to the amended Measures of Cybersecurity Review, we may be subject to review when conducting data processing
activities, and may face challenges in addressing its requirements and make necessary changes to our internal policies and practices in data processing.
As of the date of this annual report, we have not been involved in any investigations on cybersecurity review made by the CAC on such basis, and we
have not received any inquiry, notice, warning, or sanctions in such respect. Based on the foregoing, we do not expect that, as of the date of this annual
report, the current applicable PRC laws on cybersecurity would have a material adverse impact on our business. However, any failure or perceived
failure to comply with all applicable laws and regulations may result in legal proceedings or regulatory actions against us, and could have an adverse
effect on our business and results of operations, and we cannot assure you that the operators from the CAC or other relevant governmental authority
will not introduce additional requirements or policies which may require significant changes in the way we operate our business.
On September 1, 2021, the PRC Data Security Law became effective, which imposes data security and privacy obligations on entities and
individuals conducting data-related activities, and introduces a data classification and hierarchical protection system based on the importance of data in
economic and social development, as well as the degree of harm it will cause to national security, public interests, or legitimate rights and interests of
individuals or organizations when such data is tampered with, destroyed, leaked, or illegally acquired or used. As of the date of this annual report, we
have not been involved in any investigations on data security compliance made in connection with the PRC Data Security Law, and we have not
received any inquiry, notice, warning, or sanctions in such respect. Based on the foregoing, we do not expect that, as of the date of this annual report,
the PRC Data Security Law would have a material adverse impact on our business.
On July 6, 2021, the relevant PRC governmental authorities publicated the Opinions on Strictly Cracking Down Illegal Securities Activities in
Accordance with the Law. These opinions require the relevant regulators to coordinate and accelerate amendments of legislation on the confidentiality
and archive management related to overseas issuance and listing of securities, and to improve the legislation on data security, cross-border data flow
and management of confidential information. These opinions emphasized the need to strengthen the administration over illegal securities activities and
the supervision on overseas listings by China-based companies and proposed to take effective measures, such as promoting the construction of relevant
regulatory systems to deal with the risks and incidents faced by China-based overseas-listed companies. As these opinions were recently issued,
official guidance and related implementation rules have not been issued yet and the interpretation of these opinions remains unclear at this stage. As of
the date of this annual report, we have not received any inquiry, notice, warning, or sanctions from the CSRC or any other PRC government
authorities. Based on the foregoing and the currently effective PRC laws, we are of the view that, as of the date of this annual report, these opinions do
not have a material adverse impact on our business.
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On December 24, 2021, the CSRC published the Provisions of the State Council on the Administration of Overseas Securities Offering and
Listing by Domestic Companies (Draft for Comments), and Administrative Measures for the Filing of Overseas Securities Offering and Listing by
Domestic Companies (Draft for Comments), or, collectively, the Draft Overseas Listing Regulations, which set out the new regulatory requirements
and filing procedures for Chinese companies seeking direct or indirect listing in overseas markets. The Draft Overseas Listing Regulations, among
others, stipulate that Chinese companies that seek to offer and list securities in overseas markets shall fulfill the filing procedures with and report
relevant information to the CSRC, and that an initial filing shall be submitted within three working days after the application for an initial public
offering is submitted, and a second filing shall be submitted within three working days after the listing is completed. Moreover, an overseas offering
and listing is prohibited under circumstances if (i) it is prohibited by PRC laws, (ii) it may constitute a threat to or endanger national security as
reviewed and determined by competent PRC authorities, (iii) it has material ownership disputes over equity, major assets, and core technology, (iv) in
recent three years, the Chinese operating entities and their controlling shareholders and actual controllers have committed relevant prescribed criminal
offenses or are currently under investigations for suspicion of criminal offenses or major violations, (v) the directors, supervisors, or senior executives
have been subject to administrative punishment for severe violations, or are currently under investigations for suspicion of criminal offenses or major
violations, or (vi) it has other circumstances as prescribed by the State Council. The Draft Overseas Listing Regulations, among others, stipulate that
when determining whether an offering and listing shall be deemed as “an indirect overseas offering and listing by a Chinese company”, the principle of
“substance over form” shall be followed, and if the issuer meets the following conditions, its offering and listing shall be determined as an “indirect
overseas offering and listing by a Chinese company” and is therefore subject to the filing requirement: (i) the revenues, profits, total assets or net assets
of the Chinese operating entities in the most recent financial year accounts for more than 50% of the corresponding data in the issuer’s audited
consolidated financial statements for the same period; and (ii) the majority of senior management in charge of business operation are Chinese citizens
or have domicile in PRC, and its principal place of business is located in PRC or main business activities are conducted in PRC. In a Q&A released on
its official website, the respondent CSRC official indicated that the CSRC will start applying the filing requirements to new offerings and listings. New
initial public offerings and refinancing by existing overseas listed Chinese companies will be required to go through the filing process. As for the other
filings for the existing companies, the regulator will grant adequate transition period to complete their filing procedures. On April 2, 2022, the CSRC
published the Provisions on Strengthening the Management of Confidentiality and Archives Related to the draft Overseas Issuance of Securities and
Overseas Listing by Domestic Companies (Draft for Public Comments), or the Draft Archives Rules, for public comments. In the overseas listing
activities of domestic companies, domestic companies, as well as securities companies and securities service institutions providing relevant securities
services hereof, should establish a sound system of confidentiality and archival work, shall not disclose state secrets, or harm the state and public
interests. Where a domestic company provides or publicly discloses to the relevant securities companies, securities service institutions, overseas
regulatory authorities and other entities and individuals, or provides or publicly discloses through its overseas listing entity, any document or material
involving any state secret or any work secret of organs and organizations, it shall report to the competent authority for approval in accordance with the
law, and submit to the secrecy administration department for filing. Domestic companies shall not provide accounting records to an overseas
accounting firm that has not performed the corresponding procedures. Securities companies and securities service organizations shall comply with the
confidentiality and archive management requirements, and keep the documents and materials properly. Securities companies and securities service
institutions that provide domestic enterprises with relevant securities services for overseas issuance and listing of securities shall keep such archives
they compile within the territory of the PRC and shall not transfer such archives to overseas institutions or individuals, by any means such as carriage,
shipment or information technology, without the approval of the relevant competent authorities. If the archives or duplicates of such archives are of
important value to the state and society and needed to be taken abroad, approval shall be obtained in accordance with relevant provisions. As advised
by our PRC legal counsel, the Draft Overseas Listing Regulations and the Draft Archive Rules were released only for soliciting public comment at this
stage and their provisions and anticipated adoption or effective date are subject to changes, and thus their interpretation and implementation remain
substantially uncertain. It is uncertain whether the Draft Overseas Listing Regulations and the Draft Archive Rules apply to the follow-on offerings or
other offerings of the Chinese companies that have been listed overseas. Therefore, we cannot assure you that our contractual arrangements will be
deemed by the relevant government authorities to be in compliance with current PRC laws and regulations or that the relevant government authorities
will not in the future reassess or reinterpret existing laws, regulations or policies in this area, or issue new laws, regulations or policies in this area,
with the result that all or some of these arrangements would be deemed to be in violation of PRC law. We cannot predict the impact of the Draft
Overseas Listing Regulations and the Draft Archive Rules on us, including but not limited to the maintenance of the listing status of our ADSs and/or
other securities, or any of our future offerings of securities overseas at this stage.
4
Table of Contents
As there are still uncertainties regarding these new laws and regulations as well as the amendment, interpretation and implementation of the
existing laws and regulations related to cybersecurity and data protection, We cannot assure you that we will be able to comply with these laws and
regulations in all respects. The regulatory authorities may deem our activities or services non-compliant and therefore require us to suspend or
terminate its business. We may also be subject to fines, legal or administrative sanctions and other adverse consequences, and may not be able to
become in compliance with relevant laws and regulations in a timely manner, or at all. These may materially and adversely affect its business, financial
condition, results of operations and reputation.
As such, our business segments may be subject to various government and regulatory interference in the provinces in which they operate. We
could be subject to regulation by various political and regulatory entities, including various local and municipal agencies and government sub-
divisions. We may incur increased costs necessary to comply with existing and newly adopted laws and regulations or penalties for any failure to
comply.
Risks Associated with the Holding Foreign Companies Accountable Act
The Holding Foreign Companies Accountable Act, or the HFCAA, was enacted on December 18, 2020. Under the HFCAA, if the SEC determines
that we have filed audit reports issued by a registered public accounting firm that has not been subject to inspection by the PCAOB for three
consecutive years, the SEC will prohibit our securities, including our ADSs, from being traded on a U.S. national securities exchange, including
NYSE, or in the over-the-counter trading market in the U.S. The Public Company Accounting Oversight Board, or PCAOB, is currently unable to
conduct inspections on accounting firms in the PRC without the approval of the Chinese government authorities. The auditor and its audit work in
China may not be inspected fully by the PCAOB. Inspections of other auditors conducted by the PCAOB outside China have at times identified
deficiencies in those auditors’ audit procedures and quality control procedures, which may be addressed as part of the inspection process to improve
future audit quality. The lack of PCAOB inspections of audit work undertaken in China prevents the PCAOB from regularly evaluating the PRC
auditor’s audits and its quality control procedures. As a result, we could be delisted from the NYSE and our securities will not be permitted for trading
“over-the-counter” either. Such a delisting would substantially impair our investor’s ability to sell or purchase our securities when they wish to do so,
and the risk and uncertainty associated with delisting would have a negative impact on the price of our securities. Also, such a delisting 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. In June 2021, the United States Senate passed a bill that would amend the HFCAA to accelerate the imposition of
trading prohibitions once an issuer is identified from three years to two years, and a companion bill was introduced in the U.S. House of
Representatives on December 14, 2021. If this bill amending the HFCAA is approved by both houses of Congress and signed by the President, our
securities could be subject to a trading prohibition following our filing of a second consecutive annual report on Form 20-F. The process for
implementing trading prohibitions pursuant to the HFCAA will be based on a list of registered public accounting firms that the PCAOB has been
unable to inspect and investigate as a result of a position taken by a non-U.S. government, or the Relevant Jurisdiction, and such identified auditors,
the PCAOB Identified Firms. The first list of PCAOB Identified Firms was included in a release by the PCAOB on December 16, 2021, or the
PCAOB December 2021 Release. Our independent registered public accounting firm, KPMG Huazhen LLP, is located in and organized under the laws
of the PRC, a jurisdiction where the PCAOB is currently unable to conduct inspections without the approval of the Chinese authorities, and therefore
our auditors are not currently inspected by the PCAOB.
If our auditor is 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. The HFCAA also imposes additional certification and disclosure requirements for Commission
Identified Issuers, and these requirements apply to issuers in the year following their listing as Commission Identified Issuers. The additional
requirements include a certification that the issuer is not owned or controlled by a governmental entity in the Relevant Jurisdiction, and the additional
requirements for annual reports include disclosure that the issuer’s financials were audited by a firm not subject to PCAOB inspection, disclosure on
governmental entities in the Relevant Jurisdiction’s ownership in and controlling financial interest in the issuer, the names of Chinese Communist
Party, or CCP, members on the board of the issuer or its operating entities, and whether the issuer’s article’s include a charter of the CCP, including the
text of such charter.
5
Table of Contents
Transfers of Cash through Our Organizations
The following table presents the cash flows among the Company, its subsidiaries, and the Consolidated VIEs, Trusts and Partnerships in FY 2019,
FY 2020 and FY 2021.
Cash transferred from the Company to the subsidiaries for financing purposes
Cash transferred from the subsidiaries to the Company for financing purposes
Cash transferred from the Consolidated VIEs, Trusts and Partnerships to the subsidiaries for
financing purposes
Cash paid from Consolidated VIEs, Trusts and Partnerships to subsidiaries for loan transferred
under intermediary model
Cash paid by subsidiaries to invest in Consolidated VIEs, Trusts and Partnerships
Cash contribution from Consolidated VIEs, Trusts and Partnerships to subsidiaries
Service fees collected by a subsidiaries from borrowers indirectly through Consolidated VIEs,
Trusts and Partnerships
FY 2019
RMB
199,179
—
FY 2020
RMB
(in Thousands)
—
6,818
FY 2021
RMB
—
4,545
615,495
1,719,385
701,508
20,428
93,000
157,134
144,422
64,376
152,910
2,538,005
215,378
69,073
230,470
284,109
524,177
Our subsidiaries and the VIEs have not made any dividend or distribution to the Company. We declared cash dividends in 2019 and used parts of
the net proceeds from our initial public offering of approximately US$14.8 million for dividend distribution without any tax withholding obligations.
The VIEs had not intended to pay, and had never paid, any earnings or amounts, such as service fee to the Beijing WFOE under the contractual
arrangement. See “Item 3. Key information-Condensed Consolidating Schedules” and the consolidated financial statements included elsewhere in this
annual report for more details.
X Financial is a holding company with no operations of its own. We conduct our operations in China primarily through our subsidiaries and the
VIEs in China. As a result, although other means are available for us to obtain financing at the holding company level, X Financial’s ability to pay
dividends to its shareholders and to service any debt it may incur may depend upon dividends paid by our PRC subsidiaries and service fees paid by
our PRC consolidated affiliated entities. If any of our subsidiaries incurs debt on its own in the future, the instruments governing such debt may restrict
its ability to pay dividends to X Financial. In addition, our PRC subsidiaries and the VIEs are required to make appropriations to certain statutory
reserve funds, which are not distributable as cash dividends except in the event of a solvent liquidation of the companies.
Current PRC regulations permit the Beijing WFOE to pay dividends to YZT (HK) Limited only out of their accumulated profits, if any,
determined in accordance with Chinese accounting standards and regulations. In addition, each of our subsidiaries in China is required to set aside at
least 10% of its after-tax profits each year, if any, to fund a statutory reserve until such reserve reaches 50% of its registered capital. Each of such entity
in China is also required to further set aside a portion of its after-tax profits to fund the employee welfare fund, although the amount to be set aside, if
any, is determined at the discretion of its board of directors. Although the statutory reserves can be used, among other ways, to increase the registered
capital and eliminate future losses in excess of retained earnings of the respective companies, the reserve funds are not distributable as cash dividends
except in the event of liquidation.
The PRC government also imposes controls on the conversion of RMB into foreign currencies and the remittance of currencies out of the PRC.
Therefore, we may experience difficulties in completing the administrative procedures necessary to obtain and remit foreign currency for the payment
of dividends from our profits, if any. Furthermore, if our subsidiaries in the PRC incur debt on their own in the future, the instruments governing the
debt may restrict their ability to pay dividends or make other payments. If we or our subsidiaries are unable to receive all of the revenues from our
operations through the current VIE Agreements, we may be unable to pay dividends on our ordinary shares.
Cash dividends, if any, on our ADSs will be paid in U.S. dollars. If we are considered a PRC tax resident enterprise for tax purposes, any
dividends we pay to our overseas shareholders may be regarded as China-sourced income and as a result may be subject to PRC withholding tax at a
rate of up to 10.0%.
In order for us to pay dividends to our shareholders, we may rely on payments made from our VIEs to the Beijing WFOE, pursuant to the VIE
Agreements between them, and the distribution of such payments to YZT (HK) Limited as dividends from Beijing WFOE. Certain payments from our
VIEs are subject to PRC taxes, including business taxes and VAT. As of the date of this annual report, the VIEs had never paid any dividends to the
Beijing WFOE.
6
Table of Contents
Pursuant to the Arrangement between Mainland China and the Hong Kong Special Administrative Region for the Avoidance of Double Taxation
and Tax Evasion on Income, or the Double Tax Avoidance Arrangement, the 10% withholding tax rate may be lowered to 5% if a Hong Kong resident
enterprise owns no less than 25% of a PRC project. However, the 5% withholding tax rate does not automatically apply and certain requirements must
be satisfied, including without limitation that (a) the Hong Kong project must be the beneficial owner of the relevant dividends; and (b) the Hong Kong
project must directly hold no less than 25% share ownership in the PRC project during the 12 consecutive months preceding its receipt of the
dividends. In current practice, a Hong Kong project must obtain a tax resident certificate from the Hong Kong tax authority to apply for the 5% lower
PRC withholding tax rate. As the Hong Kong tax authority will issue such a tax resident certificate on a case-by-case basis, we cannot assure you that
we will be able to obtain the tax resident certificate from the relevant Hong Kong tax authority and enjoy the preferential withholding tax rate of 5%
under the Double Taxation Arrangement with respect to dividends to be paid by the Beijing WFOE to its immediate holding company, YZT (HK)
Limited.
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
Not applicable.
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE
Not applicable.
ITEM 3. KEY INFORMATION
For risks associated with being based in or having the majority of the operations in China, see “-Risks Associated with Being Based in or Having
the Majority of the Operations in China” as set forth at the outset of Part I.
For the risks related to the HFCA Act, see “-Risks Associated with the Holding Foreign Companies Accountable Act” as set forth at the outset of
Part I and “-Risk Factors-Risks Relating to Doing Business in China-Our ADSs may be delisted under the Holding Foreign Companies Accountable
Act if the PCAOB is unable to inspect auditors who are located in China. The delisting of our ADSs, or the threat of their being delisted, may
materially and adversely affect the value of your investment. Additionally, the inability of the PCAOB to conduct inspections deprives our investors
with the benefits of such inspections.”
For the description of how cash is transferred through our organization, see “—Transfers of Cash through Our Organizations” as set forth at the
outset of Part I.
3.A. Condensed Consolidating Schedules
The following tables present the condensed consolidating schedules depicting the financial position, cash flows and results of operations for the
Company, the consolidated VIEs, Trusts and Partnerships, our subsidiaries and any eliminating adjustments as of December 31, 2019, 2020 and 2021
and for FY 2019, FY 2020 and FY 2021. These tables follow the line item disclosures with respect to the consolidated VIEs, Trusts and Partnerships in
Note 2 to the consolidated financial statements included in this annual report beginning on page F-1.
7
Table of Contents
Selected Consolidated Statement of Balance Sheet Data
As of December 31, 2019
As of December 31, 2020
As of December 31,2021
Consolidated
VIEs,
Trusts and
Partnerships
RMB
The
Company
RMB
Subsidiaries Eliminations Consolidated Company
Group
The
RMB
RMB
RMB
RMB
(in thousands)
Consolidated
VIEs,
Trusts and
Partnerships Subsidiaries Eliminations Consolidated Company
RMB
Group
RMB
RMB
RMB
The
RMB
(in thousands)
Consolidated
VIEs,
Trusts and
Partnerships Subsidiaries Eliminations Consolidated
Group
RMB
RMB
(in thousands)
RMB
RMB
Cash and cash
equivalents
Restricted cash
Accounts
receivable and
contract assets,
net of allowance
for doubtful
accounts
Loans receivable
from Credit
Loans and
Revolving
Loans, net
Loans at fair value
Deposits to
institutional
cooperators, net
Prepaid expenses
and other
current assets,
net
Deferred tax assets,
net
Long-term
investments
Property and
equipment, net
Intangible assets,
net
Loan receivable
from Housing
Loans, net
Financial
investments
Other non-current
assets
Financial guarantee
derivative-assets
Intercompany
receivables
Investments in
Consolidated
VIEs, Trusts and
Partnerships and
subsidiaries
14,052
—
336,513
449,979
655,415
64,344
—
—
1,005,980
514,323
6,042
—
170,390
484,878
569,956
367,256
—
—
746,388
852,134
4,771
—
212,767
220,812
367,224
186,464
—
—
584,762
407,276
—
466,630
304,524
—
771,154
—
—
413,307
—
413,307
—
67,918
679,562
—
747,480
—
—
—
—
2,782,333
289,553
—
—
—
289,553
2,782,333
—
—
—
1,585,732
1,236,026
—
—
—
1,236,026
1,585,732
—
518,720
—
518,720
—
565
907,358
—
907,923
—
—
—
2,458,221
389,679
25,852
—
—
—
2,484,073
389,679
2,702
1,497,705
—
1,500,407
4,763
429,093
273,594
—
707,450
1,862
66,236
335,678
—
403,776
371
104,088
108,668
—
—
—
—
—
—
—
—
420,823
44,618
—
465,441
—
287,607
318,046
—
605,653
277,127
15,015
—
292,142
—
292,115
3,500
—
295,615
14,397
5,742
6,091
29,036
89,536
—
—
—
44,169
24,603
—
—
—
—
—
20,139
35,127
89,536
—
68,772
—
—
—
—
—
6,220
4,917
30,431
7,009
47,490
6,000
—
—
6,914
44,547
—
—
—
—
—
11,137
37,440
47,490
6,000
51,461
719,962
—
—
719,962
—
297,928
—
—
297,928
—
—
—
—
—
—
—
—
128,555
146,313
556,571
2,673
29,554
3,467
3,515
7,263
12,083
—
—
82,844
4,851
26,427
11,819
—
—
—
—
—
—
—
—
—
—
213,127
274,868
560,038
6,188
36,817
12,083
82,844
31,278
11,819
1,017,875
1,701,251
2,472,479
(5,191,605)
—
1,008,811
3,095,377
4,395,612
(8,499,800)
—
1,077,450
5,303,896
9,615,500
(15,996,846)
—
3,378,506
1,050,977
4,646,587
(9,076,070)
—
2,067,921
870,458
3,533,764
(6,472,143)
—
2,899,792
1,566,351
3,669,742
(8,135,885)
—
Total Assets
4,415,196
8,788,881
9,344,230
(14,267,675)
8,280,632
3,084,636
7,248,341
12,136,976
(14,971,943)
7,498,010
3,982,384
11,072,540
16,420,546
(24,132,731)
7,342,739
8
Table of Contents
As of December 31, 2019
As of December 31, 2020
As of December 31,2021
Consolidated
VIEs,
Trusts and
Partnerships
RMB
The
Company
RMB
Subsidiaries Eliminations Consolidated Company
Group
The
RMB
RMB
RMB
RMB
(in thousands)
Consolidated
VIEs,
Trusts and
Partnerships Subsidiaries Eliminations Consolidated Company
RMB
Group
RMB
RMB
RMB
The
RMB
(in thousands)
Consolidated
VIEs,
Trusts and
Partnerships Subsidiaries Eliminations Consolidated
Group
RMB
RMB
(in thousands)
RMB
RMB
Payable to
investors at
fair value of
the
Consolidated
Trusts
Payable to
institutional
funding
partners
Guarantee
liabilities
Financial
guarantee
derivative-
liabilities
Accrued
payroll and
welfare
Other tax
payable
Income tax
payable
Deposit
payable to
channel
cooperators
other non-
current
liabilities
Accrued
expenses and
other
liabilities
Short-term
bank
borrowings
Deferred tax
liabilities
Intercompany
Payables
Total
Liability
Total
shareholder's
equity
—
3,006,349
—
—
3,006,349
—
1,914,184
—
—
1,914,184
—
462,714
—
—
462,714
—
—
—
—
—
—
—
—
—
—
11,141
6,334
—
—
—
17,475
—
—
—
1,460,395
—
1,460,395
—
1,466,068
21,311
—
1,487,379
—
9,790
—
9,790
—
—
—
—
-
—
—
—
—
—
130,442
—
—
130,442
—
565,953
—
—
565,953
22,678
40,970
34,725
23,361
—
—
63,648
58,086
227,047
113,948
—
340,995
—
—
—
10,017
24,764
37,104
35,974
48,350
27,567
—
—
—
34,781
—
8,959
35,646
—
44,605
73,078
—
100,333
119,213
—
219,546
75,917
—
8,190
108,959
—
117,149
—
108,923
—
108,923
—
—
21,472
—
21,472
—
—
21,012
—
21,012
26,683
15,620
—
42,303
—
1,740
25,874
—
27,614
—
—
12,019
—
12,019
49,336
103,480
121,623
—
274,439
9,880
230,564
83,304
—
323,748
5,489
85,485
177,993
—
268,967
—
—
—
—
688
—
621
—
—
—
1,309
—
—
18,700
331,845
—
350,545
—
166,500
—
166,500
—
—
—
—
—
—
—
—
—
—
—
—
3,588,722
1,602,883
(5,191,605)
—
—
4,455,198
4,044,602
(8,499,800)
—
6,747,134
9,249,711
(15,996,845)
49,336
7,021,513
2,034,283
(5,191,605)
3,913,527
9,880
6,846,299
6,065,587
(8,499,800)
4,421,966
5,489
9,444,836
9,912,364
(15,996,845)
3,365,844
4,365,860
1,767,368
7,309,947
(9,076,070)
4,367,105
3,074,756
402,042
6,071,389
(6,472,143)
3,076,044
3,976,895
1,627,704
6,508,182
(8,135,886)
3,976,895
Selected Consolidated Statement of Comprehensive Income Data
Year ended December 31, 2019
Year ended of December 31, 2020
Year ended December 31,2021
Consolidated
VIEs,
Trusts and
Partnerships
RMB
The
Company
RMB
Subsidiaries Eliminations Consolidated Company
Group
The
RMB
RMB
RMB
RMB
(in thousands)
437,456
2,650,594
—
3,088,050
754,755
RMB
(in thousands)
1,438,202
Consolidated
VIEs,
Trusts and
The
Partnerships Subsidiaries Eliminations Consolidated Company Partnerships Subsidiaries Eliminations Consolidated
RMB
Consolidated
VIEs,
Trusts and
Group
Group
RMB
RMB
RMB
RMB
RMB
RMB
RMB
—
2,192,957
—
1,388,256
(in thousands)
2,238,209
—
3,626,465
118,681
1,541,525
(1,660,206)
—
212,814
484,283
(697,097)
—
—
72,826
1,357,422
(1,430,248)
—
—
—
(14,452)
(1,590,541)
(360,469)
—
(1,965,462)
(18,480)
(675,732)
(1,592,149)
—
(2,286,361)
(9,578)
(394,031)
(1,768,086)
—
(2,171,695)
—
(969,257)
(690,949)
1,660,206
—
—
(352,165)
(344,932)
697,097
—
—
(899,267)
(530,981)
1,430,248
—
774,276
(865,185)
1,650,735
(785,350)
774,476
(1,308,488)
(319,869)
(973,446)
1,293,342
(1,308,461)
825,407
(130,549)
962,420
(831,871)
825,407
9
—
—
Total net revenue
Intercompany
revenues
Origination and
servicing,
general and
administrative
and sales and
marketing
expenses
Intercompany
costs
Net income
(loss)
Table of Contents
The following table presents the roll-forward of deficit of investments in our consolidated VIEs, Trusts and Partnership and subsidiaries in FY
2019, FY 2020 and FY 2021.
Investments in
Consolidated VIEs,
Trusts and Partnerships
and subsidiaries
RMB in thousands
2,438,249
(14,609)
954,866
3,378,506
(180,519)
(1,112,823)
(17,242)
2,067,922
695,893
135,977
2,899,792
The
Company
Consolidated
VIEs,
Trusts and
Partnerships
Subsidiaries
RMB in thousands RMB in thousands RMB in thousands
768,380
(199,179)
(615,495)
915,890
869,596
6,818
(1,719,385)
1,130,107
63,874
351,010
4,545
(701,508)
688,263
23,478
365,788
(1,587,076)
—
615,495
(915,890)
(1,887,471)
—
1,719,385
(1,191,735)
—
(1,359,821)
—
701,508
(784,924)
—
(1,443,237)
818,696
199,179
—
—
1,017,875
(6,818)
—
61,628
(63,874)
1,008,811
(4,545)
—
96,661
(23,478)
1,077,449
Balance as of December 31, 2018
Equity in earnings of the Consolidated VIEs, Trusts and Partnerships
Equity in earnings of subsidiaries
Balance as of December 31, 2019
Equity in earnings of the Consolidated VIEs, Trusts and Partnerships
Equity in earnings of subsidiaries
Cumulative effect of accounting change
Balance as of December 31, 2020
Equity in earnings of the Consolidated VIEs, Trusts and Partnerships
Equity in earnings of subsidiaries
Balance as of December 31, 2021
Amount due from (due to) Consolidated VIEs, Trusts and Partnerships and subsidiaries
Balance as of December 31, 2018
The Company transferred to the subsidiaries
The Consolidated VIEs, Trusts and Partnerships transferred to the subsidiaries
Intercompany transactions
Balance as of December 31, 2019
The Company transferred to the subsidiaries
The Consolidated VIEs, Trusts and Partnerships transferred to the subsidiaries
Intercompany transactions
Impact of foreign exchange rate
Balance as of December 31, 2020
The Company transferred to the subsidiaries
The Consolidated VIEs, Trusts and Partnerships transferred to the subsidiaries
Intercompany transactions
Impact of foreign exchange rate
Balance as of December 31, 2021
3.B. Capitalization and Indebtedness
Not applicable.
3.C. Reason for the Offer and Use of Proceeds
Not applicable.
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3.D. Risk Factors
Risks Relating to Our Business and Industry
We have ceased the P2P operation business, but we cannot assure you that our operations were in full compliance with relevant legal
requirements and would not be punished under relevant regulations
Due to the relatively short history of the online consumer finance industry in China, a comprehensive regulatory framework governing our
industry is under development by the PRC government. Before any industry-specific regulations were introduced in mid-2015, the PRC government
relied on general and basic laws and regulations for governing the online consumer finance industry, including the PRC Contract Law, the General
Principles of the Civil Law of the PRC, and related judicial interpretations promulgated by the Supreme People’s Court. See “Item 4. Information on
the Company—4.B. Business Overview—Regulation—Regulations Relating to Online Lending Information Services.”
Since July 2015, the PRC government and relevant regulatory authorities have issued various laws and regulations governing the online consumer
finance industry, including, among others, (i) the Guidelines on Promoting the Healthy Development of Online Finance Industry, or the Guidelines,
(ii) the Interim Measures on Administration of Business Activities of Online Lending Information Intermediaries, or the Interim Measures, (iii) the
Guidelines on Online Lending Funds Custodian Business, or the Custodian Guidelines, (iv) Guidelines on Information Disclosure of the Business
Activities of Online Lending Information Intermediaries, or the Disclosure Guidelines, (v) Notice on Rectification of Cash Loan Business, or Circular
141, (vi) the Notice on the Special Rectification and Inspection of Risk of Online Lending Intermediaries, or Circular 57, (vii) the Notice on
Conducting Compliance Inspections of Online Lending Intermediaries, or the Inspection Notice, and (viii) the Compliance Checklist of Online
Lending Information Intermediaries, or the Compliance Checklist. See “Item 4. Information on the Company—4.B. Business Overview—Regulation
—Regulations Relating to Online Lending Information Services.” In December 2018, the relevant PRC regulatory authorities of the P2P lending
industry issued the Circular on Making Efforts to Prevent Risk and Classify Online Lending Institutions, or the Circular 175. Circular 175 classifies
the online P2P lending marketplaces into six categories, and except for large-scale peer-to-peer direct lending marketplaces that have not demonstrated
any high-risk characteristics, which are generally referred to as Normal Marketplaces, other marketplaces, including shell companies with no
substantive operation, small-scale marketplaces, marketplaces with high risks and marketplaces on which investors are not fully repaid or that are
otherwise unable to operate their businesses, shall exit the peer-to-peer lending industry or cease operation.
The Guidelines formally introduced for the first time the regulatory framework and basic principles governing the online finance industry,
including the provision of online lending information services in China. Following the core principles of the Guidelines, the Interim Measures first
time introduced a record filing and licensing regime, pursuant to which, online lending information intermediaries shall register with the local financial
regulatory authority, update their business scope in their business license to include “online lending information intermediary” and obtain
telecommunication business license from the relevant telecommunication regulatory authority after the completion of their registration with the local
financial regulatory authority. In order to instruct online lending information intermediaries to rectify their business operations that are deemed as non-
compliant with the Guidelines or the Interim Measures, the Interim Measures authorized the local financial regulatory authorities to conduct onsite
inspections or inquiries from time to time. In March 2017, one of our consolidated VIEs, Shenzhen Ying Zhong Tong Financial Information
Service Co., Ltd. received a rectification notice from the Shenzhen Head Office for Special Rectification of Online Finance Risk, which required us to
adopt certain rectification measures to certain aspects of our business operations which were not in full compliance with applicable laws and
regulations, including the requirements for ceasing to facilitate loans exceeding RMB200,000 for one borrower and setting up custody accounts with
qualified banks to better manage clients and funds. We have responded with our rectification plan with a schedule in March 2017 and have undertaken
effective measures in response to the authority’s request.
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Meanwhile, the Guidelines and the Interim Measures prohibit online lending information intermediaries from certain activities, including but not
limited to, credit enhancement, illegal fund-raising, and setting up capital pool. The Circular 141 promulgated by the Head Office for Special
Rectification of Online Finance Risk and Head Office for Special Rectification of Peer-to-Peer Online Lending on December 1, 2017 further specifies
that certain types of cash loan may be subject to inspection and rectification. These types of cash loan have the following four characteristics: lack of
specific scenes, designated purposes, targeted users and mortgage. Online lending information intermediaries shall not facilitate such cash loans
without specific scenes and designated purposes. It is stipulated in Circular 57 that online lending information intermediary shall cease providing
prohibited cash loans after Circular 141 has come into effect and shall gradually reduce the outstanding balance of prohibited cash loans within
scheduled timetable in order to complete the record filing as requested by the Interim Measure. We do not believe any of the loan products we facilitate
is prohibited under Circular 141 and Circular 57, as none of our products has all of the four characteristics of cash loans as defined under Circular 141.
For example, although some of our loan products, such as Xiaoying Credit Loan’s credit card cash advance product, are lacking mortgage and specific
scenes, we believe they target a specific user base with designated purpose for which the borrowers are required to specify at loan application.
However, in the absence of authoritative interpretation of the key requirements or characteristics of cash loan, especially whether the definition of cash
loan requires all of the four characteristics or any of the four characteristics, we cannot assure you that our existing practices would not be deemed to
violate any relevant laws, rules and regulations that are applicable to our business practices. In addition, Circular 141 requires banking financial
institutions that participate in the “cash loan” business to ensure that no third parties will charge borrowers any interest or expenses of loans to
borrowers and not to accept any credit enhancement services or other similar services from third parties without qualification to provide guarantee. To
comply with Circular 141, we cooperate with certain qualified institutional partners with the financing guarantee license, including Shenzhen Tangren,
our consolidated VIE, to provide guarantees for certain loan products we facilitate. Moreover, Circular 141 prohibits banking financial institutions
from outsourcing core businesses such as credit examination and risk control. Currently, we only provide initial screening, preliminary credit
examination and technical services, but we cannot rule out the possibility that government authorities could consider our services to be in violation of
Circular 141. If any of our services are deemed to be in violation of Circular 141, we may be required to cease or modify any such “cash loans” to
comply with Circular 141, otherwise we may be ineligible for registration with the local financial regulatory authority, which may materially and
adversely affect our business and prospects. While we are closely monitoring the regulatory development, as of the date of this annual report, we have
not been informed by any regulatory authorities to cease or modify any of our current products due to violation of any rules with respect to cash loan
under Circular 141 or Circular 57.
On January 19, 2018, the Shenzhen Head Office for Special Rectification of Online Finance Risk promulgated the Notice Regarding Further
Implementing Rectification of Online Lending Information Intermediaries which required that all the online lending information intermediaries in
Shenzhen, including one of our consolidated VIEs, Shenzhen Ying Zhong Tong Financial Information Service Co., Ltd., shall close all the business
operations that were not in full compliance with the Interim Measures before June 30, 2018. We have further submitted a self-inspection report to the
Shenzhen financial regulatory authority regarding the current status on our rectification process on February 2, 2018 pursuant to the Notice Regarding
Further Implementing Rectification of Online Lending Information Intermediaries.
In August 2018, the Inspection Notice further clarifies that the compliance inspection under the Interim Measures consists of self-inspection
conducted by online lending information intermediaries, inspection conducted by local and national Internet Finance Associations, and verification
conducted by the local online lending rectification office, all of which shall be completed by the end of December 2018. The online lending
information intermediaries that are in compliance with the applicable rules and regulations then could be allowed to submit the record filing
applications as requested by the Interim Measures. Pursuant to the Inspection Notice and the Compliance Checklist, we have further submitted a self-
inspection report and certain self-inspection documents to the Shenzhen financial regulatory authority and the Shenzhen Head Office for Special
Rectification of Online Finance in October and November 2018 respectively.
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As of December 17, 2020, Xiaoying Wealth Management platform’s P2P operation business had been cleared and ceased, and the principal and
earnings of all individual investors had been fully settled. However, uncertainties still exist in relation to the interpretation and implementation of the
relevant laws and regulations relating to P2P operation business. We cannot assure you that we will not be subject to any penalties retroactively
prescribed in the relevant laws and regulations relating to our previous P2P operation business, although we have already ceased the related business,
and if we were punished, our business, financial condition and results of operations may be materially and adversely affected.
We have obtained an approval of online microcredit business operating qualification and have started online microcredit business. Any lack of
requisite approvals, licenses or permits applicable to our business may have a material and adverse impact on our business, financial
condition and results of operations.
According to the Guidelines on Further Strengthening and Regulating Pilot Access and Auditing of Microcredit Companies (Trial) issued by
Shenzhen Financial Services Office in April 2013, or the Trial Guidelines on Microcredit Companies, the Shenzhen financial regulatory authority
temporarily restricts certain kinds of companies including, among others, financing guarantee companies, pawn investment companies or real estate
development companies establish the online microcredit business. One of our consolidated VIEs, Shenzhen Tangren, holds the financing guarantee
license currently, thus we cannot assure that we are eligible to operate the online microcredit business. However, the interpretation of the Trial
Guidelines on Microcredit Companies remains uncertain and it is unclear how it will affect our application for the online microcredit business
operating license.
Shenzhen Xiaoying Technology Co., Ltd. (“Shenzhen Xiaoying”), one of our VIEs, has obtained a letter from the Local Financial Regulatory
Bureau of Shenzhen Municipality on May 12, 2021, stating the approval of the business qualification of Shenzhen Xiaoying Microcredit Co., Ltd.
(“Xiaoying Microcredit”), a wholly-owned subsidiary of Shenzhen Xiaoying, for the microcredit business in China. The approved microcredit
business qualification is subject to annual onsite inspections. We have started our microcredit business in July 2021. However, since the regulatory
regime and practice with respect to network microcredit companies are evolving in recent years and subject to uncertainties, see “Item 4. Information
on the Company—B. Business Overview—Regulations—Regulations Relating to Microcredit,” we cannot assure you that we would not be subject to
any rectification requirements or administrative penalties due to any non-compliance, nor can we assure you that we will be able to satisfy rectification
requirements, if any, and maintain such license or renew the license. For example, in November 2020, the CBIRC and PBOC released the Interim
Measures for the Administration of Network Microcredit Business (Draft), or the Draft Interim Administrative Measures, to solicit public comments.
The Draft Interim Administrative Measures make it clear that a network microcredit business shall be carried out mainly in the provincial
administrative areas to which the entity is registered and shall not be cross-provincial without prior approval. The registered capital of a company
operating a network microcredit business within a province shall not be less than RMB1 billion and shall be a one-time paid-in monetary capital. The
registered capital of a company operating a network microcredit cross-provinces shall not be less than RMB5 billion and shall be a one-time paid-in
monetary capital. The Draft Interim Administrative Measures would establish a three-year transition period, and those operating cross-provincial
network microcredit businesses without approval will be phased-out.
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Further, pursuant to Regulations on Local Financial Supervision and Administration (Draft for Public Comments), or the Draft Local Financial
Supervision and Administration Regulation promulgated on December 31, 2021, “Local Financial Organizations” refers to microcredit companies,
financing guarantee companies, regional equity markets, pawn shops, financial leasing companies, commercial factoring companies, local asset
management companies, and other institutions engaged in local financial business that are supervised and managed by laws, administrative regulations,
and provincial-level people’s governments authorized by the State Council. The Draft Local Financial Supervision and Administration Regulation
specify that provincial governments shall perform their duties of supervision, management, and risk disposal of local financial organizations, and no
individual or entity shall set up Local Financial Organizations without prior approval. The merger, division, reduction of registered capital, change of
the business scope or operating area, the change of the shareholders holding more than 5% of its equity interests, as well as change of the actual
controller of the Local Financial Organization shall be subject to the approval of the provincial local financial supervision and management
department. Also, Local Financial Organization shall make filings to provincial local financial supervision and management department for setting up
branches within the provincial administrative region, changing the name or address of business, increasing the registered capital, changing the
directors, supervisors and senior management personnel. Penalties such as fines or criminal liability may be imposed if the Local Financial
Organizations fail to comply with the Draft Local Financial Supervision and Administration Regulation. Both of the Draft Interim Administrative
Measures and the Draft Local Financial Supervision and Administration Regulation were released for public comment only, there remains substantial
uncertainty regarding the Draft Interim Administrative Measures and the Draft Local Financial Supervision and Administration Regulation, including
with respect to their final content, adoption timeline or effective date. If we were considered that we have engaged in the online microcredit business
and the Draft Interim Administrative Measures and the Draft Local Financial Supervision and Administration Regulation were issued, we may be
subject to various regulatory restriction which may adversely affect our business operations. We cannot assure you that Xiaoying Microcredit will be
able to maintain or renew its business qualification for microcredit business if the draft measures are implemented. Although we believe that Xiaoying
Microcredit is only a supplementary funding source and we do not intend to rely on it as a major source for funding, if we need to obtain funding
through Xiaoying Microcredit but are unable to maintain or renew the business qualification for microcredit business,or to obtain any other requisite
approvals, licenses or permits, our business, financial condition and results of operations would be materially and adversely affected. Given the
evolving regulatory environment, there is uncertainty as to how the requirements in the Draft Interim Administrative Measures or the Draft Local
Financial Supervision and Administration Regulation will be interpreted and implemented. To the extent that we are not able to fully comply with the
requirements, our business, financial condition and results of operations may be materially and adversely affected. We will continuously make
adjustments in our business to comply with evolving regulatory requirements, but we are unable to predict with certainty the impact, if any, that future
legislation, or regulations relating to the online microcredit business industry will have on our business, financial condition and results of operations.
As of the date of this annual report, we have not been subject to any material fines or other penalties under any PRC laws or regulations including
those governing the online consumer finance industry in China. If our previous or existing practice is deemed to violate any rules, laws or regulations,
we may face injunctions, including orders to cease illegal activities, correction order, condemnation, fines and criminal liability, and may be exposed to
other penalties as determined by the relevant government authorities. If such situations occur, our business, financial condition and prospects would be
materially and adversely affected.
If our borrowers default their loans under our online microcredit business, our financial operation may still be subject to material adverse
effect.
Shenzhen Xiaoying has obtained a letter from the Local Financial Regulatory Bureau of Shenzhen Municipality on May 12, 2021, stating the
approval of the business qualification of Xiaoying Microcredit, a wholly-owned subsidiary of Shenzhen Xiaoying, for the microcredit business in
China. Since the loans provided by Xiaoying Microcredit is our own capital, defaults by our borrowers may have material adverse effect on our
financial operation. As of December 31, 2021, 3.6% of our outstanding loans is issued by Shenzhen Xiaoying through our own capital. We have no
insurance or guarantee protection for the loans issued by Shenzhen Xiaoying, our financial operation may be subject to material adverse if our
borrowers default their outstanding loans.
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We have a limited operating history in a new and evolving market, which makes it difficult to evaluate our future prospects.
We started to facilitate investment products to individual investors in China in August 2014 and commenced our loan facilitation business in
July 2015 and thus have a limited operating history. We have limited experience in most aspects of our business operations, such as loan product
offerings, data-driven credit assessment and development of long-term relationships with borrowers, investors and institutional funding partners. We
seek to expand the base of prospective borrowers that we serve, which may result in higher delinquency rates of transactions facilitated by us. The
delinquency rate for all outstanding loans on our platform that were 31-60 days past due increased from 0.79% as of December 31, 2020 to 1.48% as
of December 31, 2021. In addition, our ability to continuously attract low-cost funding sources is also critical to our business. For example, we have
completely ceased accepting funding to our loan products from individual investors since the end of 2019, and currently our primary funding source is
our institutional funding partners. As our business develops or in response to competition and regulation, we may continue to introduce new loan
products, make adjustments to our existing loan products and our proprietary credit assessment model, or make adjustments to our business operation
in general. For example, our product mix changed since our launch of Xiaoying Card Loan in December 2016. In 2016, 0.9% of our total loan
facilitation amount were Xiaoying Card Loan, while in 2019, 2020 and 2021, such proportion was 70.2%, 80.3%, and 100% respectively. Furthermore,
as of December 31, 2021, we invested RMB1 billion in Xiaoying Microcredit for our newly established microcredit business. Any significant change
to our business model not achieving expected results may have a material adverse impact on our financial condition and results of operations. Our
historical financials during the limited operating history are not indicative of our future trends. As a result, it is difficult to effectively assess our future
prospects.
You should consider our business and prospects in light of the risks and challenges we encounter or may encounter given the rapidly evolving
market in which we operate and our limited operating history. These risks and challenges include, among other things, our ability to:
● offer personalized and competitive products and services;
● increase the utilization of our products and services by existing borrowers and institutional funding partners as well as new borrowers and
institutional funding partners;
● offer attractive service fee rates while driving growth in size and profitability of our business;
● maintain low delinquency rates of loans facilitated by us;
● develop sufficient, diversified, cost-efficient and reputable funding sources;
● maintain and enhance our relationships with our institutional funding partners;
● broaden our prospective borrower base;
● navigate a complex and evolving regulatory environment;
● improve our operational efficiency;
● attract, retain and motivate talented employees to support our business growth;
● enhance our technology infrastructure to support the growth of our business and maintain the security of our system and the confidentiality of
the information provided and utilized across our system;
● navigate economic condition and fluctuation; and
● defend ourselves against legal and regulatory actions, such as actions involving intellectual property or privacy claims.
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Failure of other online lending platforms or damage to the reputation of the online consumer finance industry may materially and adversely
affect our business and results of operations.
We operate in the online consumer finance industry, which is a new and evolving industry. Negative publicity about this industry and the market
segment may arise from time to time. Negative publicity about China’s consumer finance industry in general may also have a negative impact on our
reputation, regardless of whether or not we have engaged in any inappropriate activities. The PRC government has recently instituted specific rules to
develop a more transparent regulatory environment for the online consumer finance industry. Any players in China’s online consumer finance industry
who are not in compliance with these regulations may adversely impact the reputation of the industry as a whole. Negative developments in the
consumer finance industry, such as widespread user defaults, fraudulent behavior, the closure of other online consumer finance platforms, or incidents
indirectly resulting from the accumulation of large amounts of debt and inability to repay by any particular borrower, may also lead to tightened
regulatory scrutiny of the sector and limit the scope of permissible business activities that may be conducted by market players in the consumer finance
industry. Moreover, in the ordinary course of our business, we may need to bring lawsuits against certain borrowers for delinquent loans. If courts do
not support our claims, such legal proceedings may also negatively impact our reputation and brand image. If any of the foregoing takes place, our
business and results of operations could be materially and adversely affected.
The service fees we charge either borrowers or institutional funding partners may decline in the future due to factors beyond our control and
any material decrease in such service fees could harm our business, financial condition and results of operations.
We generated our revenues from service fees collected indirectly from borrowers through our VIE, Shenzhen Tangren or external financing
guarantee companies. We also charge service fees directly to certain institutional funding partners. Any material decrease in our service fees would
have a substantial impact on our revenues and profitability. In the event that the amount of service fees we collect from borrowers or institutional
funding partners for loans we facilitate decrease significantly in the future, our business, financial condition and results of operations will be harmed.
The level of service fees we collect from borrowers or institutional funding partners may also be affected by a variety of factors, including our
borrowers’ creditworthiness and ability to repay, the competitive landscape of our industry, our access to funding sources of loans we facilitate and
regulatory requirements. Our service fees may also be affected by changes in our product and service mix and changes to our borrower engagement
initiatives. Our competitors may also offer more attractive fees, which may require us to reduce our service fees to compete effectively. Certain
consumer financing solutions offered by traditional financial institutions may provide lower fees than our service fees. Although we do not believe
such consumer financing solutions currently compete with our products or target the same 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 service fees that we will be able to charge borrowers
or institutional funding partners. Our service fees may also be affected by regulatory restrictions applied to our institutional funding partners. In
August 2021, it was reported that some consumer finance companies received window guidance from regulators to keep the interest rate on personal
loans within 24%. As the funding for loans we facilitated are partly provided by those institutional funding partners, the service fees we charge
borrowers or institutional funding partners may be further affected.
In addition, our service fees are sensitive to many macroeconomic factors that are beyond our control, such as inflation, recession, the
performance of credit markets, global economic disruptions, unemployment and fiscal and monetary policies. If the service fees we collect from
borrowers decrease significantly due to factors beyond our control, our business, financial condition and results of operations will be materially and
adversely affected.
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Our service fees, to the extent that they are fully or partially deemed as loan interest, may also be subject to the restrictions on interest rates as
specified in applicable rules on private lending. Pursuant to the Provisions on Several Issues Concerning Laws Applicable to Trials of Private Lending
Cases issued by the Supreme People’s Court on August 6, 2015 (as further amended on August 19, 2020 and December 29, 2020), or the Private
Lending Judicial Interpretations, if the services fees that we charge borrowers are considered as loan interest and we are deemed as a lender, and if the
sum of the annual interest that lenders charge and our service fees exceed 36%, the portion of the service fees that exceeds the 36% limit is invalid, and
even if the borrower has paid the portion of the service fees that exceeds the 36% limit, such borrower may request us to refund the portion of the
service fees that exceeds the 36% limit and the PRC courts will uphold such request. In accordance with Circular 141, the overall cost of loans,
including the loan interest and other forms of fees charged by the institutions shall be included in an overall annualized interest rate and conform to the
restrictions on interest rates as specified in applicable rules on private lending. The Compliance Checklist further specifies that interests and fees
collected by any third party collaborator or charged offline shall form part of an overall annualized interest rate. In addition, the online lending
information intermediary is also prohibited to deduct loan interest, service fees, administrative fee and deposit from a loan principal in advance. We
have ceased deducting any service fees from a loan principal in advance and have complied with applicable regulatory requirements since December 7,
2017. On August 19, 2020 and December 29, 2020, the Private Lending Judicial Interpretations was amended by the Supreme People’s Court, where a
lender claims that corresponding borrower shall pay interest as per the interest rate contractually stipulated, relevant people’s court shall uphold such
claim, except where the interest rate agreed on by both parties concerned exceeds four times the loan prime rate (“LPR”), for one-year loan when the
contract is concluded. “LPR for one-year loan” refers to the LPR for one-year loan to be published on a monthly basis by the National Interbank
Funding Center authorized by the People’s Bank of China as of August 20, 2019. On December 29, 2020, the Supreme People’s Court issued the
Official Reply of the Supreme People’s Court to the Issues concerning the Scope of Application of the New Judicial Interpretation on Private Lending,
or the Official Reply. According to the Private Lending Judicial Interpretations and the Official Reply, for financial institutions and branches engaging
in loan business and established upon the approval of the financial regulatory authorities, including but not limited to microcredit company, Private
Lending Judicial Interpretations shall not apply to disputes caused by granting loans and relevant financial business. Therefore, currently, there is no
clear regulatory guidance on the loan interest ceiling for the loans between the borrowers and the institutional partners.
On March 31, 2021, PBOC issued Announcement 2021 No. 3, or the Announcement 3, to clarify the calculation methodology of annual loan
interest rate. Annual loan interest rate shall be the ratio, on an annualized basis, of all the loan-related costs charged on the borrower to the loan
principal actually occupied. However, the Announcement 3 does not further interpret the constitution of the costs directly related to the loan. The
calculation method is not clearly defined, and we are not sure whether our APR calculation method has fully complied with the regulatory
requirements.
None of the loans we provided or facilitated in 2021, had an annualized fee rate exceeding 36%. We have reduced our annualized fee rates of all
products which exceeded the 36% limit and have complied with applicable regulatory requirements since December 7, 2017. The annualized fee rates
of all new loans that we facilitated since December 7, 2017 are below 36%. As a result, we do not believe that our current service fees and various
other fees charged from our borrowers violate these provisions. However, due to the lack of the specific and clear regulatory guidance on the loan
interest ceiling and the calculation method, if our current fee level is deemed to be excessive or constitutes usurious loans under any existing or future
relevant PRC laws, regulations and rules, parts or all of the fees we collected may be ruled as invalid by the PRC courts, and we may face, among
others, regulatory warning, correction order, or be required to reduce the fees and annual interest rate we charge our borrowers. In addition, any future
changes on APR ceiling may affect our profitability. If such situations were to occur, our business, financial condition, results of operations and
prospects would be materially and adversely affected.
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We face competition in the online consumer finance industry, and, if we do not compete effectively, our results of operations could be harmed.
The online consumer finance industry in China is highly competitive, and we compete with other sizable online consumer lending marketplaces
with a focus on prime borrowers. We also compete with other financial products and companies that attract borrowers, investors, or institutional
funding partners. Our competitors may operate different business models, have different cost structures or selectively participate in different market
segments. They may ultimately be proven more successful or more adaptable to consumer demand and new regulatory, technological and other
developments. Some of our current and potential competitors have significantly more financial, technological, marketing and other resources than we
do and may be able to devote greater resources to the development, promotion, sale and support of their product and services offerings. Our
competitors may also have longer operating history, more extensive user bases, greater brand recognition and brand loyalty and broader relationships
with business partners. Additionally, a current or potential competitor may acquire, or form strategic alliances with, one or more of our competitors.
Our competitors may be better at satisfying user demand by developing tailored products, offering attractive service fees, strengthening risk
management capabilities, introducing more advanced and effective data analytics technologies, obtaining funding sources at more favorable rates and
undertaking more extensive and effective marketing campaigns. Furthermore, more players may enter into this market and increase the level of
competition. In face of such competition, in order to grow or maintain the amount of loans facilitated to borrowers, we may have to lower our service
fees, which could materially and adversely affect our business and results of operations. If we are unable to compete with such companies and meet the
need for innovation in our industry, the demand for our products or services could stagnate or substantially decline, which could harm our business and
results of operations.
The Administrative Measures for Credit Information Services may impose adverse effects on our business, financial condition and results of
operations.
In July 2021, according to media reports, the Credit Information Administration of the PBOC put forward requirements in a non-public manner to
certain internet platforms engaged in financing business, requiring that the information voluntarily submitted by an individual, as generated from the
platform or acquired externally, shall not be disclosed to financial institutions during the business cooperation with such institutions, or to be directly
provided to the institutions in the name of application information, identity information, basic information, profile information, etc.
On September 27, 2021, the PBOC promulgated the Administrative Measures for Credit Information Services, or the Credit Information Services
Measures, which took effect on January 1, 2022. Pursuant to the Credit Information Services Measures, Credit Information Services, shall mean the
collection, sorting, retention, and processing of credit information of enterprises and individuals, and the provision of the foregoing information to
information users. Credit information, shall mean the basic individual information, lending information and other relevant information used for
identification and determination of creditworthiness status of enterprises and individuals, and collected pursuant to the law for the purpose of providing
services for financial activities, as well as the analyzed and evaluated information formed based on the foregoing information. Entities engaging in
personal credit information services shall obtain the personal credit information organization license pursuant to the Credit Information Services
Measures. Financial institutions shall not carry out commercial cooperation with entities who have not obtained business qualifications for engaging in
credit information services to obtain any credit information services.
In our current cooperation with financial institutions, we would directly provide financial institutions with the personal information of our users on
our platform, including basic user information (such as name, age, etc.) and loan-related information (such as loan purpose, annual income, etc.),
which may be deemed as credit information under the Credit Information Services Measures. As of the date of this annual report, we have not obtained
personal credit information organization license, and our direct provision of such users’ personal information to financial institutions may not be
permitted. In response, we have been working closely with Baihang Credit who holds a personal credit information organization license to execute a
plan to comply with the new regulation. Meanwhile, as the Credit Information Services Measures is newly issued and there are no specific
implementation rules with this regard, we are not sure how it will be interpreted and implemented and whether it will have an adverse impact on our
business. While we will make efforts and adjustments to comply with the evolving regulatory requirements, we cannot assure you that such efforts
would be sufficient as the regulators may not hold the same view as ours.
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If we are unable to maintain or increase the amount of loans we facilitate or if we are unable to retain existing borrowers or attract new
borrowers, our business and results of operations will be adversely affected.
The amount of loans facilitated through our platform was RMB39,441 million in 2019, RMB29,676 million in 2020 and RMB51,859 million in
2021. To maintain and increase the amount of loans we facilitate, we must continue to engage our existing borrowers and attract new borrowers, which
may be affected by several factors, including our brand recognition and reputation, our products and services offered, our efficiency in engaging
prospective borrowers, our ability to convert registered users to borrowers, the effectiveness of our credit analysis and risk management system, our
ability to secure sufficient and cost-efficient funding, the service fees we charge borrowers, our borrower experience, the PRC regulatory environment
governing our industry and the macroeconomic environment. For example, although we do not believe any of the loan products we currently facilitate
is explicitly prohibited in accordance with the requirements under Circular 141 and Circular 57, we have taken rectification measures, including
adjusting the annualized fee rates not to exceed 36% and ceasing deducting service fees from a loan principal in advance, to better comply with the
applicable requirements.
In addition, as of December 31, 2021, we collaborated with 139 channel partners to obtain borrowers for our various loan products. In 2020 and
2021, approximately 68.5% and 74.3% of our active borrowers for Xiaoying Card Loan were engaged through our channel partners. If these channels
become less effective or less efficient, or if we are unable to continue to use these channels or work with less channel partners, or if we cannot expand
our business partner base or work with more business partners, we may not be able to acquire and engage new and existing borrowers efficiently. In
addition, we may also impose more stringent borrower qualifications to ensure the quality of the loans we facilitate, which may negatively affect the
amount of loans we facilitate. If we are unable to attract borrowers or if borrowers do not continue to use our products and services, we may be unable
to increase our amount of loans facilitated and corresponding revenues, and our business and results of operations may be materially and adversely
affected.
We face risks related to natural disasters, public health emergencies, epidemic, pandemics and other outbreaks, which could significantly
disrupt our operations.
We are vulnerable to natural disasters and other calamities. Fire, floods, typhoons, earthquakes, power loss, telecommunications failures, break-
ins, war, riots, terrorist attacks or similar events may give rise to severe 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 our ability to provide our products and services.
Our business could also be adversely affected by the effects of diseases, including Ebola virus disease, Zika virus disease, H1N1 flu, H7N9 flu, avian
flu, Severe Acute Respiratory Syndrome, or SARS, COVID-19 or other epidemics.
On January 30, 2020, the International Health Regulations Emergency Committee of the World Health Organization (the “WHO”) declared the
COVID-19 coronavirus outbreak a public health emergency of international concern and on March 10, 2020, declared it to be a pandemic. Actions
taken around the world to help mitigate the spread of the coronavirus include restrictions on travel, and quarantines in certain areas, and forced
closures for certain types of public places and businesses. Our borrowers may negatively impacted by COVID-19, including healthcare, travel, offline
education, franchising, auto/transportation and real estate/home furnishing sectors, may reduce their liquidity to repay the loans, which may materially
adversely impact our loan performance. The loan facilitation amount may also decreased as our institutional funding partners adjusted their strategies
due to pessimistic expectations.
Our results of operations were adversely affected by the COVID-19 especially during the first half year of 2020. In the early onset of the third
quarter of 2020, our business was already on track for a steady recovery and our business operation has returned to the pre-COVID-19 pandemic level.
In 2021, both our operational and financial results continued to show progress against our strategic objectives. There are new confirmed COVID-19
cases reported in China in early 2022 and the recent COVID-19 resurgence in Chinese mainland has been in general stabilized and under control.
There is no obvious adverse change in our loan performance due to the recent COVID-19 resurgence as of the date of this annual report. However, the
potential impact brought by and the duration of the COVID-19 outbreak are difficult to assess or predict and the full impact of the virus on our
operations will depend on many factors beyond our control. While it is unknown how long these conditions will last and what the complete financial
effect will be to our company, we are closely monitoring its impact on us. Our business, results of operations, financial conditions and prospects could
be materially adversely affected to the extent that COVID-19 harms the Chinese and global economy in general, and the trading price of our ADSs
may be adversely affected.
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Our platform requires adequate funding and access to adequate lending capital on terms acceptable to us cannot be assured.
Our business involves matching of borrowers and funding sources for loans. The growth and success of our future operations depend on the
availability of adequate funding to meet borrower demand for loans facilitated on our platform. In 2021, 98.0% of the total funding for loans we
facilitated were provided by institutional funding partners and 2.0% of the total funding for loans we facilitated were provided by our capital. In order
to maintain the requisite level of funding for the loans we facilitate to meet borrower demand, we will need to optimize the investor funding
composition of our platform and establish long-term collaboration with our institutional funding partners.
However, our cooperation with banking financial institutions may be subject to restrictions stipulated under Circular 141, according to which
banking financial institutions shall not receive credit enhancement services offered by any third party that lacks qualifications to provide guarantee,
and shall ensure that such third party does not charge fees from borrowers. Under our existing cooperation model with banking financial institutions
prior to the promulgation of Circular 141, some of our entities lacking the qualifications to provide guarantee also provide guarantee to certain funding
arrangements with banking financial institutions. As a result, our banking financial institution partners may cease our cooperation under such existing
business model, which may adversely affect our funding capabilities. In light of this regulatory development, we have reviewed and adjusted our
cooperation with banking financial institution partners, such as suspending certain cooperation, to better comply with the regulatory requirements. We
ceased the online intermediary model in April 2017. The online intermediary model refers to the initial provision of loans to P2P borrowers using our
own funds through an intermediary and subsequent sale of such loans to P2P lenders by us. We gradually reduced the volume of loans facilitated
through the offline intermediary model with funding from banking financial institution partners after December 31, 2017 due to regulatory requirement
and completely ceased such operations in February 2018. The offline intermediary model refers to the initial provision of loans to borrowers on our
platform using our own funds through an intermediary and subsequent sale of such loans to institutional funding partners. We cannot assure you,
however, that we will be able to adopt a compliant business model vis-à-vis institutional funding partners in a timely manner, or at all, or that such
business model will be sufficiently viable, which in turn may adversely affect our ability to obtain adequate funding to grow our business.
Beginning from late 2018, the local PRC governments gradually slowed down its acceptance and review of the application for the registration as
an online lending information intermediary as required under the Interim Measures. We made a gradual shift with respect to funding sources from
individual investors to institutional funding partners since early 2019 in response to the enhanced regulatory restrictions in the online consumer
financing industry. In late December 2019, the government began to implement a regulatory policy encouraging companies that previously applied for
the online lending information intermediary registration to obtain an online microcredit company permit instead. This change in policy has an
implication that we will be no longer legally allowed to provide intermediary service to individual investors directly. At the end of 2019, we ceased
funding our loan products from our individual investors through Xiaoying Wealth Management platform. We actively expanded institutional funding,
such as banks, consumer finance companies, trust companies and other institutions, and achieved 100% institutional funding for the new loans
facilitated by the end of the second quarter of 2020. Furthermore, after obtaining an approval for our microcredit business in May 2021, we started to
fund some new loans by our owned capital. As of December 31, 2021, 3.6% of the outstanding loans were funded by our own capital.
If the provision of services by financial institutional cooperators, such as insurance company and financing guarantee companies, becomes
limited, restricted, or is rendered less effective or more expensive, our business may be materially and adversely affected.
21.0% of our outstanding loans were covered by the credit insurance products provided by ZhongAn as of December, 2021. We collaborate with
various external financing guarantee companies and insurance company who provide guarantee/insurance services to protect institutional funding
partners from losses. See “Item 4. Information on the Company—4.B. Business Overview—Our Partnership with Financial institutional cooperators.”
Although we have entered into a series of agreements relating to our ongoing business cooperation and service arrangement with our financial
institutional cooperators, we cannot assure you that the provisions of services provided by such financial institutional cooperators will be renewed
upon expiration of the agreements or continue to remain at the same level or on more favorable terms in the future. If any of such financial institutional
cooperators ceases business collaboration with us, it may adversely affect our relationship with our users and institutional funding partners.
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In addition, given that Shenzhen Xiaoying and Shenzhen Tangren are both our consolidated VIEs, while we believe our past and current
cooperation model with our financial institutional cooperators does not violate any prohibitive rules relating to Online Lending Information Services,
including among others, provisions under the Interim Measures that prohibit providing any guarantee to lenders directly or in a disguised form by
online lending information intermediaries or provisions under Circular 57 that prohibit setting aside risk reserve funds by online lending information
intermediaries to protect investors against default, we cannot assure you that the regulators would hold the same view as ours. See “Item 4.
Information on the Company—4.B. Business Overview—Regulation—Regulations Relating to Online Lending Information.” If our agreements with
financial institutional cooperators were terminated or to be altered to our disadvantage, our business, results of operations and financial condition will
be materially and adversely affected.
The protections offered by our financial institutional cooperators on our loan products significantly enhance the confidence of our institutional
funding partners. In addition to those protections, Shenzhen Tangren, our consolidated VIE with the financing guarantee license, currently provides a
guarantee for certain loan products we facilitate. When in the event of default, Shenzhen Tangren will compensate those financial institutional
cooperators for their payout amount to our investors in accordance with the agreements; however, Shenzhen Tangren’s compensation obligation shall
not exceed a cap (“the pre-agreed Cap”) which is the lower of (1) total amount of guarantee fees contractually required to be collected from the
borrowers for such loans facilitated during the current period on an aggregated basis, and (2) a certain percentage of the total principal of the loans
facilitated stated in an annualized manner, as pre-agreed with those financial institutional cooperators separately. We may consider introducing other
funding protection arrangements to our financial institutional cooperators or institutional funding. We cannot assure you that new arrangements would
be perceived by them, which may have adverse impact on our business operations. If our financial institutional cooperators cease business
collaboration with us, it may adversely affect our relationship with our institutional funding partners, who view on the protection offered by our
financial institutional cooperators with importance.
We cannot assure you that our financial institutional cooperator will continue to provide its insurance or guarantee decision opinion, which is
based on its credit analysis model, leveraging its resources and access to various databases, including PBOC CRC that is only available to licensed
financial institutions. We are working with other partners with financial license on co-developing risk management capabilities. The denial of access to
their insurance or guarantee decision opinion may materially and adversely impact our ability to assess the creditworthiness of prospective borrowers
in the future. Any deterioration in our risk assessment capabilities may adversely affect the quality of transactions that we facilitate and we may
experience higher delinquency rates, which may materially and adversely affect our business, results of operations and financial condition.
If we are unable to obtain adequate credit insurance under terms or conditions acceptable to us due to changes in the credit insurance
regulations in China, our business, financial condition and results of operations would be materially and adversely affected.
On May 8, 2020, China Banking and Insurance Regulatory Commission promulgated the Measures for the Regulation of Credit Insurance and
Guarantee Insurance, or the Measures for the Credit Insurance and Guarantee Insurance, as amended on June 21, 2021, which repeals the Interim
Measures for the Supervision of Credit Guarantee and Insurance Business issued on July 11, 2017. Pursuant to the Measures for the Credit Insurance
and Guarantee Insurance, the insurance companies carrying out credit insurance and guarantee insurance (together, the “Credit and Guarantee
Insurance”) businesses, such as ZhongAn, are required to comply with the regulatory requirements on solvency and ensure the overall size of business
is appropriate for the capital strength of the company. When carrying out financing Credit and Guarantee Insurance business, insurance companies are
required to pay particular attention to the underlying risks, fully assess the impact of Credit and Guarantee Insurance business on the solvency of the
company, and duly perform liquidity risk management. The insurance companies have to establish more stringent internal control measures to ensure
the compliance of the Credit and Guarantee Insurance business. Furthermore, the Measures for the Credit Guarantee and Insurance Guarantee sets out
specific rules regarding insurance companies carrying out Credit and Guarantee Insurance business via Internet, under which the insurance companies
shall cooperate with the financial institutions with lending qualifications and is required to publish material information in relation to insurance
products, policy query links, customer complaint channels, information security, cooperative Internet agencies, which shall also be published by the
cooperative Internet agencies in a prominent position on their business web pages. In addition, the balance of self-retained liability of the insurance
company cannot exceed the respective limits as set forth in the Measures for the Credit Insurance and Guarantee Insurance.
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We have cooperated with ZhongAn to develop Credit and Guarantee Insurance products to secure insurance protection for the loans we facilitated.
21.0% of our outstanding loans were covered by the Credit and Guarantee Insurance products provided by ZhongAn as of December, 2021. If
ZhongAn is unable to continue to provide the Credit and Guarantee Insurance with same terms and conditions, we may not be able to remain adequate
Credit and Guarantee Insurance for our loan products as before, or may have to incur additional cost in purchasing such insurance from ZhongAn or
other insurance companies. If we are unable to obtain adequate Credit and Guarantee Insurance for our loan products under terms or conditions
acceptable to us, our business, financial condition and results of operations would be materially and adversely affected.
We may be deemed to operate financing guarantee business by the PRC regulatory authorities.
The State Council promulgated the Regulations on the Supervision and Administration of Financing Guarantee Companies, or 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 ranging from RMB500,000 to RMB1,000,000, confiscation of illegal gains if any, and if the violation constitutes a criminal offense, criminal
liability shall be imposed in accordance with the law. We have cooperated with banks, trust companies, and other institutional funding partners who
funded the loans for our borrowers. See “Item 4. Information on the Company—4.B. Business Overview—Our Investors and Institutional Funding
Partners.” Under our current business model, some of our entities lacking the qualifications to provide financing guarantee are obligated to repay
certain institutional funding partners the full overdue amount in case the borrowers fail to repay, or purchase the creditor’s rights of the underlying loan
from certain institutional funding partners under certain circumstances.
In addition, prior to September 2017, we, at our sole discretion, paid ZhongAn for a majority of the loan principal and interest default but have not
been subsequently collected through some of our entities lacking qualifications to provide financing guarantee. See “Item 4. Information on the
Company—4.B. Business Overview—Our Partnership with Financial Institutional Cooperators.” In 2020, certain amount of deposits paid by
Shenzhen Tangren to one of our institutional cooperators were actually provided by Shenzhen Xiaoying Puhui Technology Co., Ltd., a directly wholly
owned subsidiary of Beijing WFOE, which were used to compensate for such institutional cooperator’s loss for the amount it had paid under investors’
claims arising from borrowers’ default to repay loans. 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 we would be deemed to operate financing guarantee
business because of our cooperation model with our financial institutional cooperators, and our current arrangements with banks, trust companies and
other institutional funding partners. As of the date of this annual report, we have not been subject to any fines or other penalties under any PRC laws or
regulations related to financing guarantee business. Furthermore, given that Shenzhen Xiaoying and Shenzhen Tangren are both our consolidated
VIEs, while we believe our past and current cooperation model with our financial institutional cooperators does not constitute providing any guarantee
to lenders directly or in a disguised form by online lending information intermediary under Interim Measures or under Circular 57, we cannot assure
you that the regulators would hold the same view as ours. Given the evolving regulatory environment of the financing guarantee business, we cannot
assure you that we will not be subject to any fines, penalties or other liabilities, or be required in the future by the relevant governmental authorities to
obtain approval or license for financing guarantee business to continue our collaboration with banks, trust companies and other institutional funding
partners. If we are required to amend the current model or are no longer able to collaborate with banks, trust companies or other institutional funding
partners at all, or become subject to penalties, our business, financial condition, results of operations and prospects could be materially and adversely
affected.
For the impact of Circular 141 and Circular 57 on our cooperation with institutional funding partners, see “Item 3. Key Information on the
Company—3.D. Risk Factors—Risks Relating to Our Business and Industry—Our platform requires adequate funding and access to adequate lending
capital on terms acceptable to us cannot be assured.”
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Failure in our proprietary credit analysis and risk management system may materially and adversely affect our products and service.
We offer our products and services based on risk assessment conducted by our proprietary credit analysis and risk management system, which is
strengthened by our financial institutional cooperators’ insurance or guarantee decision opinion based on their credit analysis models. Our system uses
machine learning and modeling techniques to analyze transaction and repayment data from loans that we facilitated and data from applicants and other
third party sources. Even though we have accumulated a large amount of applicant data and extensive credit analysis experience to perform risk
management analysis in our system, our credit analysis and risk management system may not be continuously effective as we continue to increase the
amount of loans we facilitate, expand our borrower base and broaden our funding channels in the future. If our credit analysis model contains
inaccurate assumptions or inefficiencies through model updates, or if the credit data and analysis we obtain are inaccurate or outdated, our credit
analysis could be negatively affected, resulting in inaccurate decision.
If we are unable to effectively and accurately assess the credit profiles of applicants based on their credit profiles, we may either be unable to offer
attractive service fee rates and products and services to borrowers, or unable to maintain low delinquency rates for loans we facilitate or to attract
institutional funding partners. In addition, our credit analysis may not be able to provide more predictive assessments of future borrower behavior and
result in better evaluation of our borrower base as compared to our competitors. Furthermore, our risk management model and system may not
optimally protect our business against systemic risk. If our proprietary credit analysis and risk management system fails to perform effectively, our
business, liquidity and results of operations may be materially and adversely affected.
If we are unable to maintain low delinquency rates for transactions facilitated by us, our business and results of operations may be materially
and adversely affected. Further, historical delinquency rates may not be indicative of future results.
Our institutional funding partners may experience losses due to borrower defaults. The delinquency rate for all outstanding loans on our platform
that were 31-60 days past due increased from 0.79% as of December 31, 2020, to 1.48% as of December 31, 2021.
Our ability to attract and retain borrowers and institutional funding partners is significantly dependent on our ability to effectively assess a
borrower’s credit profile and maintain low delinquency rates. To conduct this assessment, we have employed a series of procedures and developed a
proprietary credit assessment and decision model. Our credit scoring model aggregates and analyzes the personal information submitted by a
prospective borrower as well as the data we collect from a number of internal and external sources, and then generates a credit assessment result for
the prospective borrower. If our credit scoring model contains programming or other errors or the information provided by borrowers or third parties is
incorrect or stale, our loan pricing and approval process could be negatively affected, resulting in misclassified loans or incorrect approvals or denials
of loans. If we are unable to effectively and accurately assess the credit profiles of borrowers, we may be unable to maintain low delinquency rates of
loans facilitated by our platform.
If widespread defaults were to occur, institutional funding partners may lose confidence in our platform and our financial institutional cooperators
may cease business collaboration with us or increase their fees collectible from new borrowers or raise some unfavorable terms in the future, which
may materially and adversely affect our business and results of operations. We are required to pay deposits to those financial institutional cooperators
and the amount of deposit is separately agreed with each institutional cooperator. In 2020, we witnessed an increase in borrowers’ defaulting rates. To
maintain the collaborative relationship with one of our financial institutional cooperators and to avoid any material adverse impact on our current
business model and future transaction cost, we used deposits amounting to RMB970.0 million to compensate for such institutional cooperator’s loss
for the amount it had paid under investors’ claims arising from borrowers’ default to repay loans in 2020. We have been expanding cooperation
relationships with various financial institutional cooperators to reduce our risk of heavy dependency on certain financial institutional cooperators.
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Furthermore, for most Xiaoying Card Loans newly facilitated since September 2017 and certain Xiaoying Revolving Loans that are repaid in
installments by borrowers, we entered into a series of arrangements with various financial institutional cooperators and negotiate the upper limit of
Shenzhen Tangren’s compensation obligation prospectively at each quarter with these financial institutional cooperators based on the expected default
rate. The portion that we are obligated to pay to those financial institutional cooperators but are not expected to be collected from the borrowers due to
the estimated default or prepayment risk in relation to the guarantee fee is recorded in the change in fair value of financial guarantee derivative.
Moreover, if the total amount of the compensation paid by those financial institutional cooperators to the insured investors or institutional funding
partners exceeds the expected maximum payout amount for certain period, they are entitled to increase their fees collectible from new borrowers,
which would impact our results of operations in the event we are unable to pass on such increase to new borrowers. In addition, when the delinquency
rates of our loan products increase, we may also need to increase the guarantee fees that we are entitled from new borrowers. In the event we are not
able to raise the APR to capture such increase in guarantee fees, our results of operations would be adversely affected. See “Item 4. Information on the
Company—4.B. Business Overview—Our Partnership with Financial Institutional Cooperators —Credit Insurance and Guarantee Services” for more
details. Therefore, if we are unable to maintain low delinquency rates for transactions we facilitated, our business and results of operations may be
materially and adversely affected.
The data that we collect may be inaccurate due to inadvertent error or fraud. If we fail to detect inaccurate and false information, the
performance of our credit analysis will be compromised, and our business, results of operations and brand and reputation will be negatively
impacted.
We analyze data provided directly by applicants or with their authorization and data from third parties. The data we receive may not accurately
reflect an applicant’s creditworthiness because such data may be based on outdated, incomplete or inaccurate information due to inadvertent error or
fraud. In addition, the completeness and reliability of consumer credit history information in the PRC is relatively limited. The People’s Bank of
China, or PBOC, has developed and put into use a national personal and corporate credit information database which remains relatively
underdeveloped.
The data provided directly by an applicant to us may become outdated and inaccurate, as he or she may have, after providing the data to us:
● 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.
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We conduct data screening to detect inaccurate information and improve the quality of the data input for our credit analysis model. However, our
data screening and anti-fraud systems may be insufficient to accurately detect inaccurate and fraudulent information. Such inaccurate or fraudulent
information could compromise the accuracy of our credit analysis and adversely affect the effectiveness of our control over our delinquency rates. We
may not be able to recoup funds underlying loans made in connection with inaccurate or fraudulent data, which may materially and adversely affect
our results of operations. To better assess a borrower’s creditworthiness, we consult our institutional cooperators for their credit analysis and cooperate
with third party credit agencies and databases for credit data of borrowers. However, due to the underdevelopment of an industry-wide information
sharing arrangement, we are unable to determine whether applicants have outstanding loans through other online lending platforms at the time when
they obtain a loan from us or the aggregate amount borrowed by a borrower through our platform and other online lending platforms. This creates the
risk that a borrower may borrow money through us in order to pay off loans on other online lending platforms and vice versa. The additional debt may
adversely affect the borrower’s creditworthiness generally, and could result in the financial distress or insolvency of the borrower, impairing the
borrower’s ability to repay the loan and the investor and institutional funding partner’s ability to receive repayment of such loan. In addition, if a
borrower incurs debt on other online lending platforms in order to repay our loans, the borrower’s ability to repay such loans is limited by the
availability of funding sources subject to factors beyond the borrower’s control, which may adversely affect our results of operations. For example, the
release of Circular 141 and Circular 57 in December 2017 tightened industry regulations and resulted in an unexpected short-term volatility of
borrower credit performance across our industry. Online lending platforms have ceased extending “cash loans” with the four characteristics as defined
under Circular 141 and a number of online lending platforms significantly altered their business models or suspended operations altogether. The
impact is relatively more acute on products with short term and small loan balance, such as Xiaoying Card Loans, as borrowers previously used to be
able to easily borrow from other online lending platforms to fund their repayment. The release of Circular 141 and Circular 57 led to liquidity shortage
for certain borrowers who relied on other lending platforms to repay Xiaoying Card Loans.
In addition, a significant increase in fraudulent activities could negatively impact our brand name and reputation, discourage institutional funding
partners from investing in loans on our platform, reduce the amount of loans facilitated to borrowers and make it necessary to take additional steps to
reduce fraud risk, which could increase our costs. High profile fraudulent activities could even lead to regulatory intervention, and may divert our
management’s attention and cause us to incur additional expenses and costs.
Although we have not experienced any material business or reputational harm as a result of fraudulent activities or inaccurate information in the
past, we cannot rule out the possibility that inaccurate information or fraudulent activities may materially and adversely affect our business, financial
condition and results of operations in the future.
We may be required to obtain additional value-added telecommunication business licenses.
PRC regulations impose sanctions on entities for engaging in the provision of telecommunication business of a commercial nature without having
obtained a value-added telecommunication business license. If we fail to obtain licenses required for our business, we could be subject to sanctions
including corrective orders and warnings from the PRC telecommunication administration authority, fines and confiscation of illegal gains and, in the
case of significant infringements, the websites and mobile applications may be ordered to cease operation.
Pursuant to the Interim Measures, we are required to apply for appropriate telecommunication business operation permit, i.e., the value-added
telecommunication business license, in accordance with relevant provisions of competent communication departments after we have completed the
registration of online lending intermediary with local financial regulatory authority. The local government authority has not yet issued the relevant
implementation rules regarding such filing and therefore we cannot assure you we will be able to make the necessary filing or apply for the value-
added telecommunication business license. Even if we have obtained the telecommunication business license, we may also be subject to monetary
penalty or suspension of operation and rectification by the telecommunication administrations if we fail to operate the business as prescribed in the
telecommunication operating licenses, or fail to operate the business as regulated by the telecommunications administration or other regulatory
authorities.
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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 our consolidated VIEs
or subsidiaries of our consolidated VIEs to obtain Internet content provider licenses, or ICP licenses, online data processing and transaction processing
licenses, or 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 required in the future, or a new license regime is
introduced or new regulatory rules are promulgated, we cannot assure you that we would be able to obtain any required license or other regulatory
approvals in a timely manner, or at all, which would subject us to the sanctions described above or other sanctions as stipulated in the new regulatory
rules, and materially and adversely affect our business and impede our ability to continue our operations.
Additionally, according to Guidance on Regulating Asset Management Business of Financial Institutions, or the Guidance, which was
promulgated jointly by the PBOC, China Insurance Regulatory Commission (“CIRC”), CSRC and the State Administration of Foreign
Exchange(“SAFE”) on April 27, 2018, only financial institutions, such as banks, trusts, securities, funds, futures, insurance asset management agencies
and financial asset investment companies, can operate asset management business. As ancillary services that we currently provide are not “asset
management business” as defined in the Guidance or other applicable Laws and Regulations, we do not believe that we would be subject to the
Guidance. However, we cannot assure you if the money market products offered by the relevant financial institutions to which we provide the ancillary
services will not be ceased pursuant to the Guidance.
Nevertheless, the interpretation and the enforcement of such regulations in the context of online consumer finance industry remains uncertain, and
therefore, it is unclear what kind of value-added telecommunication business licenses we should obtain. 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 our consolidated VIEs or subsidiaries of our consolidated VIEs
to obtain Internet content provider licenses, or ICP licenses, online data processing and transaction processing licenses, or ODPTP licenses or other
value-added telecommunication business licenses, or issue new regulatory requirements to institute a new licensing regime for our industry.
In addition, the Telecommunications Regulations promulgated by the State Council and its related implementation rules, including a catalog
issued by the Ministry of Industry and Information Technology, or MIIT, categorize various types of value-added telecommunications services. Under
the Telecommunications Regulations, e-commerce operator may be required to obtained an online data processing and transaction processing license,
or ODPTP license. Our online shopping mall may be required to obtain ODPTP license.
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 we would be able to obtain or maintain any required license or other regulatory approvals
in a timely manner, or at all, which would subject us to the sanctions described above or other sanctions as stipulated in the new regulatory rules, and
materially and adversely affect our business and impede our ability to continue our operations.
If our products and services do not achieve sufficient market acceptance, our financial condition, results of operations and competitive
position will be materially and adversely affected.
We intend to broaden the scope of products and services that we offer, while we may not be successful in doing so. New products and services
must achieve a certain level of market acceptance in order for it to be economically feasible for us to bear the default risks associated with them and
recoup our investment costs in developing and bringing them to market. Our existing or new products and services could fail to attain sufficient market
acceptance for many reasons, including:
● our failure to predict market demand accurately and supply attractive and increasingly personalized products and services at appropriate
prices and in amount that meet this demand in a timely fashion;
● our existing products and services may cease to be popular among current borrowers and institutional funding partners or prove to be
unattractive to prospective borrowers and institutional funding partners;
● our failure to assess risk associated with new products and services and to properly price such products and services;
● negative publicity about our products and services or mobile applications’ performance or effectiveness;
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● critical assessment taken by regulatory authorities that the launch of new products and services and changes to our existing products and
services do not comply with PRC laws, regulations or rules applicable to us; and
● the introduction or anticipated introduction of competing offerings by competitors.
If our existing and new products and services do not achieve adequate acceptance in the market, our financial condition, competitive position and
results of operations could be harmed.
Increases in market interest rates could negatively affect the amount of loans facilitated by us and cost of funds provided to borrowers.
The total borrowing costs of all loans facilitated by us are fixed, including the fixed service charged by us or our financial institutional cooperators
and interest rates charged by our institutional funding partners. If prevailing market interest rates rise, the service fee rates and interest rates of loans
we facilitate may rise accordingly, and borrowers may be less likely to accept such adjusted terms. If borrowers decide not to use our products because
of such an increase in market interest rates, our ability to retain existing borrowers and engage prospective borrowers as well as our competitive
position may be severely impaired. If we are unable to effectively manage such market interest rate risk, our business, profitability, results of
operations and financial condition could be materially and adversely affected.
Any harm to our brand or reputation or any negative publicity about the parties that we collaborate with may materially and adversely affect
our business and results of operations.
Enhancing the recognition and maintaining the reputation of our brand is critical to the current performance and future growth of our business and
competitiveness, since this initiative affects our ability to better attract and serve consumers and to maintain and expand our relationship with
institutional funding partners. Factors that are vital to this objective include our ability to:
● maintain the effectiveness, quality and reliability of our systems;
● provide consumers with satisfactory services;
● engage a large number of quality borrowers with low delinquency rate;
● improve our credit analysis and risk management system;
● effectively manage and resolve user complaints; and
● effectively protect personal information and privacy of users.
Any malicious or otherwise negative allegation made by the media or other parties about our company, including our management, business,
compliance with law, financial condition, prospects or our historical business operations, whether with or without merit, could severely hurt our
reputation and harm our business and results of operations.
In addition, certain factors that may adversely affect our reputation are beyond our control. Negative publicity about parties that we collaborate
with in the operation of our business, 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 or services we offer. Although we selectively establish collaboration relationships with reliable third parties, we
cannot assure you that they will not conduct any unsatisfactory, inappropriate or illegal actions that will damage our reputation and brand, which
consequently could cause our business to be harmed.
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We have obligations to verify information relating to borrowers and detecting fraud. If we fail to perform such obligations to meet the
requirements of relevant laws and regulations, we may be subject to liabilities.
Our current business is connecting institutional funding partners with individual borrowers, which constitutes an intermediary service. Our
contracts with institutional funding partners and borrowers are intermediation contracts under the PRC Civil Code. Under the PRC Civil Code, an
intermediary that intentionally conceals any material information or provides false information in connection with the conclusion of an intermediation
contract, which results in harm to the client’s interests may not claim for any service fee for its intermediary services, and is liable for any damage
incurred by the client. Therefore, if we fail to provide true and accurate information to institutional funding partners in time and in full, and are found
to be at fault for failure or deemed failure to exercise proper care, or to conduct adequate information verification or supervision, we could be subject
to liabilities as an intermediary under the PRC Civil Code. In addition, the Interim Measures and the Inspection Notice have imposed on online lending
information intermediaries, including us, additional obligations to verify the truthfulness of the information provided by or in relation to loan
applicants and to actively detect fraud, conduct risk evaluation of lenders, categorize lenders and disclose the risk information on borrowers to the
lenders. We leverage a large database of past fraud accounts information and sophisticated rule-based detection technology in detecting fraudulent
behaviors. Based on new data collected and fraudulent behaviors detected during our daily business operations, we update our database on a monthly
basis. As the Interim Measures are relatively new, it is still unclear to what extent online lending information intermediaries should exercise care in
detecting fraud. Although we believe that as an information intermediary, we should not bear the credit risk for institutional funding partners as long as
we take reasonable measures to detect fraudulent behaviors, we cannot assure you that we would not be subject to any liabilities under the Interim
Measures if we fail to detect any fraudulent behavior. If that were to occur, our results of operations and financial condition could be materially and
adversely affected.
We may face regulatory risk as we indirectly charge our borrowers in the manner that our borrowers are not aware
Our consolidated VIE, Shenzhen Tangren, and external financing guarantee companies that we cooperate provide guarantee for a number of loans
if our borrowers fail to repay. The financing guarantee companies that we cooperate charge borrowers a guarantee fee, a portion of which will be
subsequently paid to us by the financing guarantee companies as the service fee for the intermediary service we provide. Shenzhen Tangren charge
borrowers an evaluation service fee, which will be allocated to us as the service fee as well. The Announcement 3 states that all institutions engaged in
loan business shall display annual loan interest rate to borrowers in an obvious way when marketing through websites, mobile applications, posters and
other channels and that the annual loan interest rate shall be the ratio, on an annualized basis, of all the loan-related costs charged on the borrower to
the loan principal actually occupied. According to the Interim Measures, an online lending information intermediary shall agree with lenders and
borrowers on the service fee standards and payment. However, our borrowers are not aware of the fact that we actually charge service fees and the
manner in which such fees are charged. Therefore, our business practices and the way we collect service fees may be considered by the regulatory
authorities as a violation of regulations and we may be subject to administrative penalties. If we were imposed penalties or forced to adjust the way by
which we charge fees, there will be an adverse impact on our business, financial condition, and operating results.
We finance certain loans offered with our own funds, which may subject us to regulatory risks.
We had partially financed certain undersubscribed loans with our own funds in the past to increase matching rate and enhance borrowers’
experiences on our platform. We gradually reduced such practices after August 2016 when the Interim Measures, which prohibits online finance
information intermediaries from investing in loans using their own funds unless otherwise stipulated by laws and regulations, was promulgated, and
completely ceased such practices in April 2017. As of the date of this annual report, we have not been subject to any fines or other penalties due to the
fact that certain historical loans on our platform were partially funded with our own funds before the Interim Measures taking effect but remained
outstanding afterwards.
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In the past, we initially provided credit using our own funds to our borrowers and subsequently sold the loans including the creditor’s rights in the
loans to investors on our P2P platform or to institutional funding partners. We completely ceased such practices with investors on our P2P platform in
April 2017. We also gradually reduced such practices with banking financial institution partners after December 31, 2017 and completely ceased such
practices in February 2018. In our current operation model, certain loans are initially advanced by unaffiliated third parties who will subsequently
transfer such loans to us. We, as the intermediary, will when transfer such loans to third parties. While we do not believe that such acquired loans from
existing lenders are prohibited under the Interim Measures, we cannot assure you that such practice would not be deemed by the PRC authorities as
illegal provision of loans to the general public or illegally granting loans without the PBOC’s permit, which are prohibited by relevant PRC laws and
regulations. If such practices were found to violate the Interim Measures or other relevant PRC laws and regulations, we might be subject to fines,
penalties or other liabilities, which could materially and adversely affect our business, financial condition and prospects.
Beginning from late 2018, the local PRC governments gradually slowed down its acceptance and review of the application for the registration as
an online lending information intermediary as required under the Interim Measures. We made a gradual shift with respect to funding sources from
individual investors to institutional funding partners since early 2019 in response to the enhanced regulatory restrictions in the online consumer
financing industry. In late December 2019, the government began to implement a regulatory policy encouraging companies that previously applied for
the online lending information intermediary registration to obtain an online microcredit company permit instead. This change in policy has an
implication that we will be no longer legally allowed to provide intermediary service to individual investors directly. At the end of 2019, we ceased
funding our loan products from our individual investors through Xiaoying Wealth Management platform. We actively expanded institutional funding,
such as banks, consumer finance companies, trust companies and other institutions, and achieved 100% institutional funding for the new loans
facilitated by the end of the second quarter of 2020.
In addition, we have obtained a letter from the Local Financial Regulatory Bureau of Shenzhen Municipality on May 12, 2021, stating the
approval of the business qualification of Xiaoying Microcredit for microcredit business from the relevant local authority and have started our
microcredit business in July 2021. As of December 31, 2021, 3.6% of our outstanding loans is funded by our own capital. However, since the
regulatory regime and practice with respect to network microcredit companies are evolving in recent years and subject to uncertainties, see “Item 4.
Information on the Company—B. Business Overview—Regulations—Regulations Relating to Microcredit,” we cannot assure you that we would not
be subject to any rectification requirements or administrative penalties due to any non-compliance, nor can we assure you that we will be able to
satisfy rectification requirements, if any, and maintain such license or renew the license. For example, in November 2020, the CBIRC and PBOC
released the Interim Measures for the Administration of Network Microcredit Companies Business (Draft) to solicit public comments. The draft
measures make it clear that a network microcredit business shall be carried out mainly in the provincial administrative areas to which the entity is
registered and shall not be cross-provincial without prior approval. The registered capital of a company operating a network microcredit business
within a province shall not be less than RMB1 billion and shall be a one-time paid-in monetary capital. The registered capital of a company operating a
network microcredit cross-provinces shall not be less than RMB5 billion and shall be a one-time paid-in monetary capital. The draft measures would
establish a three-year transition period, and those operating cross-provincial network microcredit businesses without approval will be phased-out.
We cannot assure you that Xiaoying Microcredit will be able to maintain or renew its business qualification for microcredit business if the draft
measures are implemented. Although we believe that Xiaoying Microcredit is only a supplementary funding source and we do not intend to rely on it
as a major source for funding, if we need to obtain funding from Xiaoying Microcredit but are unable to maintain or renew the business qualification
for microcredit business or obtain any other requisite approvals, licenses or permits, our business, financial condition and results of operations would
be materially and adversely affected.
We are subject to risks associated with other parties with which we collaborate. If we cannot effectively cooperate with such other parties or if
such other parties fail to perform or provide reliable or satisfactory services, our business, financial condition and results of operations may be
materially and adversely affected.
We collaborate with certain third parties across various aspects of our business operation, including user acquisition partners, other institutions
from which we obtain information for our credit assessment model and risk management system, guarantee providers for certain loans we facilitated
and our cloud computing service provider.
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These parties may not be able to provide accurate and complete data, sufficiently or timely perform guarantee obligations over the defaulted loans
that we facilitated or provide satisfactory services to us, borrowers and institutional funding partners on commercially acceptable terms or at all. Any
failure by these parties to continue with good business operations, comply with applicable laws and regulations, in particular, the relevant laws and
regulations in collecting and distribution personal information, or any negative publicity on these parties could damage our reputation, expose us to
significant penalties and decrease our total revenues and profitability. Also, if we fail to retain existing or attract new quality parties to collaborate
with, our ability to retain existing borrowers and institutional funding partners, engage prospective borrowers and institutional funding partners may be
severely limited, which may have a material and adverse effect on our business, financial condition and results of operations. In addition, certain of
these other parties that we collaborate with have access to our user data to a limited extent in order to provide their services. If these other parties
engage in activities that are negligent, illegal or otherwise harmful to the trustworthiness and security of our 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 and experience a decrease in
users, even if these activities are not related to, attributable to or caused by us.
In addition, we offer money market products managed by qualified asset management institutions on our platform and provide traffic referral
service. Pursuant to the Compliance Checklist, the online lending information intermediaries shall not provide access to financial products offered by
other institutions without a prior regulatory permit and shall not advertise such financial products. Due to the lack of detailed implementation rules to
the Compliance Checklist, we cannot assure you that our practice will be not deemed as violation of the Compliance Checklist. We may be required to
adjust our business practice and our cooperation with third party institutions may be materially and adversely affected.
If our ability to collect delinquent loans is impaired, there is any decline or depreciation in the value of collaterals or there is misconduct in
payment collection, our business and results of operations might be materially and adversely affected.
We have implemented internal payment and collection policies and practices designed to optimize the repayment process. We also engage several
third party collection service providers to assist us with payment collection from time to time. However, we may not receive payments as expected on
loans that we facilitate. Even though certain of our loan products are secured by borrowers’ collaterals, there might be a decline or depreciation in the
value of collaterals, which could reduce the amount of proceeds we can get from the collateral in the event of a borrower’s default. Upon a borrower’s
default, we will classify the defaulting borrowers into different risk levels based on the type of loan products, outstanding amount, delinquent days and
historical repayment pattern. The third party collection agencies that we engaged will make phone calls, send text messages, in-person visit and claim
lawsuits to the defaulting borrower to request repayment. In particular, the third party collection agencies that we engage may not possess adequate
resource and manpower to collect payment on and service the loans we facilitated.
Moreover, the current regulatory regime for debt collection in the PRC remains unclear. In 2018, we refined and strengthened our administration
on collection policies and practices in consideration of the regulatory development with respect to the debt collection in the PRC consumer finance
industry. As a result, we may not be able to maintain our efficiency level to collect payments from borrowers and the delinquency rates for our loan
products may increase. We cannot assure you that the third party collection personnel will not engage in any misconduct as part of their collection
efforts. Any such misconduct by our collection personnel or the perception that our collection practices are considered to be aggressive and not
compliant with the relevant laws and regulations in the PRC may result in harm to our reputation and business, which could further reduce our ability
to collect payments from borrowers, lead to decrease in the willingness of prospective borrowers to apply for loans or fines and penalties imposed by
the relevant regulatory authorities, any of which may have a material adverse effect on our results of operations.
If we are unable to provide a high-quality user experience, our reputation and business may be materially and adversely affected.
The success of our business largely depends on our ability to provide a high-quality user experience, which in turn depends on factors such as:
(i) our ability to estimate future borrowing requests from our users, (ii) our ability to continue to offer products and services at competitive service fee
rates, (iii) our ability to provide a reliable and user-friendly mobile application user interface for users and our ability to further improve and streamline
our online loan application and approval process. As of December 31, 2021, substantially all of the transactions were completed through our mobile
application. If users are not satisfied with our level of service when we failed to provide sufficient loans to our users, or if our system is severely
interrupted or otherwise fails to meet user requests, for example, the users have to wait for days to receive their loan application results or our mobile
app is constantly disrupted due to system failure and breakdown, our reputation could be adversely affected and we could fail to maintain user loyalty.
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Our ability to provide high-quality user experience also depends on the quality of the products and services provided by our business partners over
which we have limited or no control. In the event that a user is dissatisfied with the quality of the products and services provided by our business
partners, we do not have any means to directly make improvements in response to user complaints, and our business, reputation, financial performance
and prospects could be materially and adversely affected.
In addition, we depend on our user service hotline and WeChat online user service center to provide certain services to our users. If our user
service representatives fail to provide satisfactory service, or if waiting time is too long due to the high volume of calls from borrowers at peak times,
our brands and user loyalty may be adversely affected. In addition, any negative publicity or poor feedback regarding our user service may harm our
brands and reputation and in turn cause us to lose users and market share. As a result, if we are unable to continue to maintain or enhance our user
experience and provide a high quality user service, we may not be able to retain users or attract prospective users, which could have a material adverse
effect on our business, financial condition and results of operations.
Failure to manage our liquidity and cash flows may materially and adversely affect our financial condition and results of operations.
We had positive cash flows from operating activities of RMB600.6 million in 2019, negative cash flow from operating activities of RMB679.2
million in 2020, and positive cash flows from operating activities of RMB449.2 million (US$70.5 million) in 2021. We cannot guarantee that we will
not have negative cash flows in the future. We collect the service fees on a monthly basis and interests on a monthly basis from the borrowers. Inability
to collect payments from users, borrowers in particular, in a timely and sufficient manner may adversely affect our liquidity, financial condition and
results of operations.
We may need additional capital to accomplish business objectives, pursue business opportunities, and respond to challenges or unforeseen
circumstances, and financing may not be available on terms acceptable to us, or at all.
Historically, we have issued equity securities to support the growth of our business. As we intend to continue to make investments to support the
growth of our business, we may require additional capital to accomplish our business objectives and pursue business opportunities, and respond to
challenges or unforeseen circumstances, including developing new products and services, further enhancing our risk management capabilities,
increasing our marketing expenditures to improve brand awareness and enhancing our operating infrastructure. Accordingly, we may need to engage in
equity or debt financings to secure additional funds. However, additional funds may not be available when we need them, on terms acceptable to us, or
at all. In the event that we obtain debt financing, repayment of debt may divert a substantial portion of cash flow, which would reduce funds available
for expenses and payment pursuant to other general corporate purposes.
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 our ordinary shares. If we are unable to obtain adequate financing or
financing on terms satisfactory to us when it is needed, our ability to continue to accomplish our business objectives and pursue business opportunities,
and respond to challenges or unforeseen circumstances could be significantly limited, and our business, operating results, financial condition and
prospects could be adversely affected.
Our marketing efforts are critical to our performance and future growth, and if we are unable to promote and maintain our brands in an
effective and cost-efficient way, our business and financial results may be harmed.
We believe that developing and maintaining awareness of our brand effectively is critical to attract borrowers and institutional funding partners.
This depends largely on the effectiveness of our marketing efforts and the success of the channels we use to promote our platform. If any of our current
marketing channels become less effective, if we are unable to continue to use any of these channels, if the cost of using these channels were to
significantly increase or if we are not successful in generating new channels, we may not be able to attract new borrowers and institutional funding
partners in a cost-effective manner or convert potential borrowers and institutional funding partners into active borrowers and institutional funding
partners on our platform.
Our efforts to build our brands may cause us to incur significant expenses. These efforts may not result in increased revenue in the immediate
future. Even if they do, any increases in revenue may not offset the expenses incurred. If we fail to successfully promote and maintain our brands while
incurring substantial expenses, our results of operations and financial condition would be adversely affected, which may impair our ability to grow our
business.
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Undetected errors or significant disruption in our IT system, including events beyond our control, could prevent us from offering our products
and services, thereby reducing the attractiveness of our products and services and resulting in a loss of borrowers.
Our business and internal systems rely on software and processes that are highly technical and complex. In addition, our business depends on the
abilities of these software and processes to store, retrieve, process and manage large amounts of data. The software and processes on which we rely
have contained, and may now or in the future contain, errors or bugs. Some errors may only be discovered after the code has been released for external
or internal use.
In addition, in the event of a system outage and physical data loss, our ability to provide products and services would be materially and adversely
affected. The reliability, availability and satisfactory performance of our technology and our underlying network infrastructure are critical to our
operations, user service, reputation and our ability to attract new and retain existing borrowers and institutional funding partners. Our information
technology systems infrastructure is currently deployed and our data is currently maintained on customized computing services in China. Our
operations depend on the service provider’s ability to protect its and our systems in its facilities against damage or interruption from natural disasters,
power or telecommunications failures, air quality issues, environmental conditions, computer viruses or hackers’ attempts to harm our systems,
criminal acts and other similar events. Moreover, if our arrangement with this service provider is terminated or if there is a lapse of service or damage
to their facilities, we could experience interruptions in our service as well as delays and additional expense in providing products and services to our
borrowers and institutional funding partners.
Any interruptions or delays in our service, whether as a result of third party error, our error, natural disasters or security breaches, whether willful
or not, could harm our reputation and our relationships with borrowers and institutional funding partners. Additionally, in the event of damage or
interruption, our insurance policies may not adequately compensate us for any losses that we may incur. We also may not have sufficient capacity to
recover all data and services in the event of an outage. These factors could prevent us from processing loan applications and other business operations,
damage our brand name and reputation, divert our employees’ attention, reduce our revenue, subject us to liability and discourage users from using our
products and services, any of which could adversely affect our business, financial condition and results of operations.
Misconduct, errors and failure to function by our employees and parties we collaborate with could harm our business and reputation.
We are exposed to the risk of misconduct and errors by our employees and parties that we collaborate with. Our business depends on our
employees and/or business partners to interact with users, process large numbers of transactions and support the loan collection process. We could be
materially and adversely affected if the 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 our operations or systems. It is not always possible to identify and deter misconduct or errors
by our employees and other business partners, and the precautions we take to detect and prevent such activities may not be effective in controlling
unknown or unmanageable risks or losses. If any of our employees and other business partners misuse or misappropriate funds, commit fraud or other
misconduct or fail to follow our rules and procedures when interacting with our users we could be liable for damages and subject to regulatory actions
and penalties. We could also be perceived to have facilitated or participated in the illegal misappropriation of funds, documents or data, and therefore
be subject to civil or criminal liability. In addition, we have engaged certain third party service providers for loan collection services. Aggressive
practices or misconduct by any of our third party service providers in the course of collecting loans could damage our reputation.
Any of these occurrences could result in our diminished ability to operate our business, potential liability to users inability to attract users
reputational damage, regulatory intervention and financial harm, which could negatively impact our business, financial condition and results
of operations.
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If we are unable to protect the confidential information of our users and adapt to the relevant regulatory framework regarding protection of
such information, our business and operations may be adversely affected.
We have access to, store and process certain personal information and other sensitive data from our users and our business partners, which makes
us an attractive target and potentially vulnerable to cyber-attacks, computer viruses, physical or electronic break-ins or similar disruptions. We have
taken steps to protect confidential information that we have access to, and while we have been targeted previously from cybersecurity attacks, none of
which were successful or had a material adverse impact to our operations historically. However, 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, we may be unable to
anticipate these techniques or to implement adequate preventative measures. Any accidental or willful security breaches or other unauthorized access
to our system could cause confidential user information to be stolen and be used for criminal purposes.
We also face indirect technology, cybersecurity and operational risk relating to the third parties upon whom we rely to facilitate or enable our
business activities, including, among others, third party online payment service providers who manage accounts for funds. Any cyber-attack, computer
viruses, physical or electronic break-ins or similar disruptions of such third party payment service providers could, among other things, adversely
affect our ability to serve our users.
Security breaches or unauthorized access to confidential information could expose us to liability related to the loss of 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 our technology infrastructure are exposed and exploited, our relationships with users could be severely
damaged, we could incur significant liability and our business and operations could be adversely affected.
In addition, PRC government authorities have enacted a series of laws and regulations in regard of the protection of personal information, 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 a
user information protection system with appropriate remedial measures. We have obtained consent from our users to use their personal information
within the scope of authorization and we have taken technical measures to ensure the security of such personal information and to prevent any loss or
divergence of personal information from. However, there is uncertainty as to the interpretation and application of such laws. On 20 August 2021, the
Standing Committee of the National People’s Congress promulgated the Personal Information Protection Law of the PRC, or the Personal Information
Protection Law, which took effect on 1 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, (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 it is necessary for personal information to be provided by a personal information processor to
a recipient outside the territory of the PRC due to any business need or any other need, a security assessment organized by the national cyberspace
authority shall be passed. If such laws or regulations are to be interpreted and applied in a manner inconsistent with our current policies and practices,
changes to the features of our system may be required and additional costs incurred. We cannot assure you that our existing user information protection
system and technical measures will be considered sufficient under applicable laws and regulations. If we are unable to address any information
protection concerns, or to comply with the then applicable laws and regulations, we may incur additional costs and liability and our reputation,
business and operations might be adversely affected. See “Item 4. Information on the Company—4.B. Business Overview—Regulation—Regulations
on Internet Information Security” for details.
On June 1, 2017, the PRC Cybersecurity Law became effective. The law requires network products and services providers as we are, among other
things, to strictly preserve the secrecy of user information they collect and to store within mainland China data that is gathered or produced by such
network products and services provider in the country. If we are deemed to have violated the law, potential penalties include, depending on the nature
of violation, regulatory warning, correction order, forced shut down of our websites, suspension of operation revocation of business licenses,
confiscation of illegal gains, and fines imposed on the company ranging from approximately RMB10,000 to RMB1 million or management personnel
ranging from approximately RMB5,000 to RMB1 million. On 10 June 2021, the Standing Committee of the National People’s Congress promulgated
the Data Security Law of the PRC, or Data Security Law, which took effect on 1 September 2021. The Data Security Law imposes data security and
privacy obligations on entities and individuals carrying out data activities, and introduces a data classification and hierarchical protection system. The
Data Security Law also provides that the state shall establish a data security review system, where data handling activities that affect or may affect the
national security will undergo national security review, and shall implement export controls on certain data.
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Due to the relatively new nature of the PRC Cybersecurity Law and Data Security Law as well as the lack of clarification in the statutory law itself
as to the circumstances and standard under which the law should apply and violations be found, there are great uncertainties as to the interpretation and
application of the law. The law’s vagueness in its own statutory language also indicates that the CAC, the designated government enforcement agency,
will have broad latitude to direct how the law is interpreted and enforced, thus creating greater uncertainties with regard to the interpretation and
application of the law since the government enforcement agency has yet to provide further guidance on the enforcement mechanism of the law. If we
are found to have violated the PRC Cybersecurity Law and Data Security Law in a government enforcement action, we may face severe penalties that
may result in monetary losses, losses of access to assets essential for daily operation of our business or for the continuance of service provision, and
temporary or total disruption of our business for an extended period of time. In addition, the finding of a violation of the PRC Cybersecurity Law and
Data Security Law, even if later repealed, may cause damages to our reputation and our brand name, causing users to lose confidence in our service
and to refrain from choosing or continuing to use our products and services. All of these consequences may have a material adverse impact on our
business, financial condition and results of operations.
Furthermore, the stringent reporting obligation imposed by the PRC Cybersecurity Law and Data Security Law itself, without a finding of
violation, may have a material adverse impact on our business and results of operations. As we are obligated by the laws to inform our users of any
security flaw or vulnerability as they are discovered, users may become wary of the existence or frequency of such reports and lose confidence in the
security of our system, thus discouraged from choosing or continuing to use our products and services, even though the security flaws or
vulnerabilities are readily fixed and overcome.
If we fail to implement and maintain an effective system of internal controls over financial reporting, we may be unable to accurately report
our results of operations, meet our reporting obligations or prevent fraud.
Our independent registered public accounting firm has not conducted an audit of our internal control over financial reporting. However, in
connection with the audits of our consolidated financial statements for the year ended December 31, 2016 and 2017 and as of December 31, 2016 and
2017, we and our predecessor independent registered public accounting firm identified two “material weaknesses” in our internal control over financial
reporting and other control deficiencies. As defined in standards established by the PCAOB, a “material weakness” is a deficiency, or a combination of
deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim
financial statements will not be prevented or detected on a timely basis. The material weaknesses identified related to (1) our lack of sufficient skilled
staff with U.S. GAAP knowledge and SEC reporting knowledge for the purpose of financial reporting as well as the lack in formal accounting policies
and procedures manual to ensure proper financial reporting in accordance with U.S. GAAP and SEC reporting requirements; and (2) our internal audit
function is still in the process of establishing formal risk assessment process and internal control framework. In connection with the audits of our
consolidated financial statements for the year ended December 31, 2019, we and our successor independent registered public accounting firm
identified two additional material weaknesses in our internal control over financing reporting. The two additional material weaknesses identified by us
and our auditor related to: (1) the Company did not maintain effective controls over the accounting treatments of new business arrangements, including
new Consolidated Trusts related arrangements; and (2) there was not adequate management oversight of accounting activities in relating to certain tax
practices to conform to the U.S. GAAP. In connection with the audits of our consolidated financial statements for the year ended December 31, 2020,
we and our successor independent registered public accounting firm determined that three material weaknesses remain as of December 31, 2020,
which related to (1) our lack of sufficient skilled staff with U.S. GAAP knowledge and SEC reporting knowledge for the purpose of financial reporting
as well as the lack in formal accounting policies and procedures manual to ensure proper financial reporting in accordance with U.S. GAAP and SEC
reporting requirements; (2) our internal audit function is still in the process of establishing formal risk assessment process and internal control
framework; and (3) there was not adequate management oversight of accounting activities in relating to certain tax practices to conform to the U.S.
GAAP. In connection with the audits of our consolidated financial statements for the year ended December 31, 2021, we and our successor
independent registered public accounting firm determined that these three material weaknesses remain as of December 31, 2021.
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We are in the process of implementing a plan to address the material weaknesses, including: hiring skilled financial and accounting staff with U.S.
GAAP and SEC reporting experience; providing relevant training to our accounting personnel and establishing internal audit function and audit
committee with members who have an appropriate level of financial expertise to oversee our accounting and financial reporting process as well as our
internal audit function. We have engaged an independent internal control advisor to assist us to establish the formal risk assessment process and
internal control framework, and review the appropriateness and sufficiency of the process to identify and address risk of material misstatement related
to U.S. GAAP reporting. We have set up a position, namely financial business partner, who is required to monitor the whole process of the conduct of
business and has adequate experiences and qualifications to timely make professional judgements of the accounting treatment of new business
arrangements. We have also formalized an accounting manual for the accounting treatment of Consolidation Trusts and required a timely review
process from qualified reviewers. We have hired an experienced and qualified tax manager and provided tax related training to our accounting
personnel. We have also taken other steps to strengthen our internal control over financial reporting, including formalizing a set of comprehensive U.S.
GAAP accounting manual, formalizing risk assessment process and internal control framework. We will continue to implement measures to remediate
our internal control deficiencies to comply with Section 404 of the Sarbanes Oxley Act. We expect that we will incur significant costs in the
implementation of such measures. However, we cannot assure you that all these measures will be sufficient to remediate our material weakness in
time, or at all.
We are subject to the reporting requirements of the Exchange Act, the Sarbanes-Oxley Act and the rules and regulations of the New York Stock
Exchange, or NYSE. The Sarbanes-Oxley Act requires, among other things, that we maintain effective disclosure controls and procedures and internal
controls over financial reporting. Commencing with our fiscal year ending December 31, 2021, 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. As of the date of this annual report, progress has
been made to remediate our internal control deficiencies and remediation measures are to be further implemented and executed. The material
weaknesses will not be considered remediated until the applicable remedial processes and procedures have been in place for a sufficient period of time
and management has concluded, through testing, that these controls are effective. Our management has concluded that our internal control over
financial reporting was ineffective as of December 31, 2021, due to the material weaknesses in internal control over financial reporting identified
above. See “Item 15. Controls and Procedures.”
In addition, once we cease to be an “emerging growth company” as the term is defined in the JOBS Act, our independent registered public
accounting firm must attest to and report on the effectiveness of our internal control over financial reporting. Our management may conclude that our
internal control over financial reporting is not effective. Moreover, even if our management concludes that our internal control over financial reporting
is effective, our independent registered public accounting firm, after conducting its own independent testing, may issue a report that is qualified if it is
not satisfied with our internal controls or the level at which our controls are documented, designed, operated or reviewed, or if it interprets the relevant
requirements differently from us. This will require that we incur substantial additional professional fees and internal costs to expand our accounting
and finance functions and that we expend significant management efforts. Prior to our initial public offering, we were a private company with limited
accounting personnel and other resources with which to address our internal controls and procedures, and we were never required to test our internal
controls within a specified period, and, as a result, we may experience difficulty in meeting these reporting requirements in a timely manner.
In addition, our internal control over financial reporting will not prevent or detect all errors and all fraud. 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 not able to comply with the requirements of Section 404 of the Sarbanes-Oxley Act in a timely manner, or if we are unable to maintain
proper and effective internal controls, we may not be able to produce timely and accurate financial statements. If that were to happen, the market price
of our ADSs could decline and we could be subject to sanctions or investigations by the NYSE, SEC or other regulatory authorities.
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We may not be able to prevent unauthorized use of our intellectual property, which could harm our business and competitive position.
We regard our trademarks, domain names, copyrights, know-how, proprietary technologies and similar intellectual properties as critical to our
success, and we rely on trademark and trade secret law, confidentiality agreement, invention assignment and non-compete agreements with our
employees and others to protect our proprietary rights. See “Item 4. Information on the Company—4.B. Business Overview—Intellectual Property”
and ”Item 4. Information on the Company—4.B. Business Overview—Regulation—Regulations Related to Intellectual Property.” However, we cannot
assure you that any of our intellectual property rights would not be challenged, invalidated, circumvented or misappropriated, or that such intellectual
property will be sufficient to provide us with competitive advantages. Because of the rapid pace of technological development, we cannot assure you
that all of our proprietary technologies and similar intellectual property will be patented in a timely or cost-effective manner, or at all. Furthermore,
parts of our business rely on technologies developed or licensed by other parties, or co-developed with other parties, and we may not be able to obtain
or continue to 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
agreement, invention assignment and non-compete agreements may be breached by counterparties, and there may not be adequate remedies available
to us for any such breach. Accordingly, we may not be able to effectively protect our intellectual property rights or to enforce our contractual rights in
China. Preventing any unauthorized use of our intellectual property is difficult and costly and the steps we take may be inadequate to prevent the
misappropriation of our intellectual property. In the event that we resort to litigation to enforce our intellectual property rights, such litigation could
result in substantial litigation costs and a diversion of our managerial and financial resources. We can provide no assurance that we will prevail in such
litigation. In addition, our trade secrets may be leaked or otherwise become available to, or be independently discovered by, our competitors. To the
extent that our employees or consultants use intellectual property owned by others in their work for us, disputes may arise as to the rights in related
know-how and inventions. Any failure in protecting or enforcing our intellectual property rights could have a material adverse effect on our business,
financial condition and results of operations.
We may be subject to intellectual property infringement claims, which may be expensive to defend and may disrupt our business
and operations.
We cannot be certain that our operations or any aspects of our business do not or will not infringe upon or otherwise violate trademarks,
copyrights, know-how, proprietary technologies or other intellectual property rights held by other parties. We may unknowingly infringe on other
parties’ trademarks, copyrights, know-how, proprietary technologies or other intellectual property rights through our products and services or other
aspects of our business. As a result, we may be subject to legal proceedings and claims relating to the intellectual property rights of others from time to
time in the future. Holders of such intellectual property rights may seek to enforce such intellectual property rights against us in China, the
United States or other jurisdictions. If any infringement claims are brought against us, we may be forced to divert management’s time and other
resources from our business and operations to defend against these claims, regardless of their merits.
Additionally, the interpretation and application of China’s intellectual property right laws and the procedures and standards for protecting
trademarks, copyrights, knowhow, proprietary technologies or other intellectual property rights in China are uncertain and still evolving, and we
cannot assure you that PRC courts or regulatory authorities would agree with our analysis. If we were found to have violated the intellectual property
rights of others, we may be subject to liability for our infringement or may be prohibited from using such intellectual property, and we may incur
licensing fees or be forced to develop alternatives of our own. As a result, our business and results of operations may be materially and adversely
affected.
We may be subject to risks related to litigation and regulatory proceedings.
We may be, and in some instances have been, subject to claims, lawsuits (including class actions and individual lawsuits), regulatory and
government investigations, and other proceedings relating to intellectual property, consumer protection, privacy, labor and employment, import and
export practices, competition, securities, tax, marketing and communications practices, contracts, commercial disputes and various other matters. We
may also be subject to claims or lawsuits for infringement or violation of third party intellectual property rights. The number and significance of our
legal disputes and inquiries have increased as we have grown larger, as our business has expanded in scope and geographic reach, and as our services
have increased in complexity.
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Moreover, having become a public company has raised our public profile, which may result in increased litigation as well as increased public
awareness of any such litigation. In addition, we may be target of securities class action and derivative lawsuits. We will need to defend against such
lawsuits, including any appeals, and we may also initiate legal proceedings to protect our rights and interests. There is substantial uncertainty regarding
the scope and application of many of the laws and regulations to which we are subject, which increases the risk that we will be subject to claims
alleging violations of those laws and regulations. There can be no assurance that we will prevail in any such cases, and any adverse outcome of these
cases could have a material adverse effect on our reputation, business and results of operations.
In particular, we will need to defend against the putative shareholder class action lawsuit described in “Item 8. Financial Information—A.
Consolidated Statements and Other Financial Information—Litigation,” including any appeals of such action. We are currently unable to ascertain the
possible loss or possible range of loss, if any, associated with the resolution of this lawsuit. The litigation process may utilize our cash resources and
divert management’s attention from the day-to-day operations of our company, all of which could materially harm our business. An adverse
determination in this lawsuit, including an adverse determination on appeal in this lawsuit, may have a material adverse effect on our financial
condition and results of operations.
Regardless of the outcome of any particular claim, lawsuit, investigation, dispute or proceeding, any of these types of legal proceedings can have a
material and adverse impact on us due to their costs, diversion of our resources, and other factors. We may decide to settle legal disputes on terms that
are unfavorable to us. Furthermore, if any litigation to which we are a party is resolved adversely, we may be subject to an unfavorable judgment that
we may not choose to appeal or that may not be reversed upon appeal. In addition, the terms of any settlement or judgment in connection with any
legal claims, lawsuits, or proceedings may require us to cease some or all of our operations, or pay substantial amounts to the other party and could
materially and adversely affect our business, financial condition and results of operations.
Mr. Yue (Justin) Tang, our founder, Chairman of the board and Chief Executive Officer, is named in a lawsuit filed by ChinaCast Education
Corporation in the United States; there is uncertainty as to the outcome of this lawsuit and its impact on us.
Mr. Yue (Justin) Tang, our founder, Chairman of the board and Chief Executive Officer, has been named one of the defendants in a lawsuit filed by
ChinaCast Education Corporation, or ChinaCast, in the Court of Chancery of the State of Delaware in the United States. Mr. Tang was an independent
director of ChinaCast’s board from 2007 until January 2012. ChinaCast’s complaint alleges that certain ChinaCast senior management and directors
(including Mr. Yue (Justin) Tang), or Defendants, caused injury to ChinaCast during their tenures, and seeks, among other reliefs, damages of not less
than US$200 million.
ChinaCast specifically alleges that Mr. Tang: (i) breached his fiduciary duty because he knew or should have known of certain fraud and theft that
the ChinaCast’s former management purportedly carried out, (ii) failed to ensure that ChinaCast had reasonable information and reporting systems to
detect the alleged wrongdoing, (iii) engaged in self-interested transactions with the ChinaCast’s management and (iv) failed to oversee and monitor
ChinaCast’s operations.
On March 4, 2022, the plaintiffs and Mr. Tang entered into a settlement agreement to amicably settled dispute. The impact on our reputation and
operation due to the lawsuit against Mr. Tang was immaterial.
Any failure by us or institutional funding partners payment service providers to comply with applicable anti-money laundering and anti-
terrorist financing laws and regulations could damage our reputation, expose us to significant penalties, and decrease our revenues and
profitability.
We have adopted and implemented various policies and procedures including internal controls and “know-your-customer” procedures, for
preventing money laundering and terrorist financing. In addition, we rely on our institutional funding partners and payment service providers to have
their own appropriate anti-money laundering policies and procedures. Our institutional funding partners may be subject to anti-money laundering
obligations under applicable anti-money laundering laws and regulations and are regulated in that respect by the PBOC. We have adopted
commercially reasonable procedures for monitoring our institutional funding partners and payment processors.
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As of December 31, 2021, we have not been subject to fines or other penalties, or suffered business or other reputational harm, as a result of actual
or alleged money laundering or terrorist financing activities in the past. However, our policies and procedures may not be completely effective in
preventing other parties from using us, any of our institutional funding partners, or payment service providers as a conduit for money laundering
(including illegal cash operations) or terrorist financing without our knowledge. If we were to be associated with money laundering (including illegal
cash operations) or terrorist financing activities, our reputation could suffer and we 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 us, all of which could
have a material adverse effect on our financial condition and results of operations. Even if we, our institutional funding partners and payment service
providers comply with the applicable anti-money laundering laws and regulations, we, our institutional funding partners and payment service providers
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 which might arise from any failure of other online consumer finance platforms to detect
or prevent money laundering activities, even if factually incorrect or based on isolated incidents, could tarnish our image, undermine the trust and
credibility we have established, and negatively impact our financial condition and results of operations.
The Guidelines purport to require, among other things, Internet finance service providers to comply with certain anti-money laundering
requirements, including the establishment of a user identification program, the monitoring and reporting of suspicious transactions, the preservation of
user 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 Interim Measures require online lending intermediaries to comply with certain anti-money
laundering obligations, including verifying user identity, reporting suspicious transactions and keeping identity data and transaction records. The
Custodian Guidelines require the anti-money laundering obligation to be included in the fund custodian agreements between an online lending
intermediary and custody banks, and the online lending intermediary shall cooperate with funds custody banks to fulfill anti-money laundering
obligations. On October 10, 2018, the PBOC, the China Banking and Insurance Regulatory Commission and CSRC together promulgated the
Measures for the Anti-money Laundering and Anti-terrorist Finance of Internet Finance, which further specified that, any Internet finance institutions
(including online lending intermediary) incorporated upon approval or upon record-filing by applicable regulatory authority, shall report any forms of
cash receipts and payments whose transaction value reaches or exceeds RMB50,000 or foreign currency equivalent of US$10,000 on a per-transaction
or cumulative basis on a given day, within five working days from the date when such transaction takes place. 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
implementation rules if and when adopted.
From time to time we may evaluate and potentially consummate strategic investments, acquisitions or international expansion, which could
require significant management attention, disrupt our business and adversely affect our financial results.
We may evaluate and consider strategic investments, combinations, acquisitions or alliances with other businesses or international expansion to
further better serve borrowers and enhance our competitive position. These transactions could have a material impact on our financial condition and
results of operations if consummated. Even 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 benefits or avoid the difficulties and
risks of such transaction, which may result in investment losses. In addition, we made certain investments through nominee arrangements where we
have appointed nominees as registered shareholders of certain investee companies, as we currently do not qualify under certain regulatory financial
requirements to be registered as a shareholder of such investee companies. While we believe such investments and the nominee arrangements reflect
the true intentions of us and the respective business partners, and are therefore legal and valid under PRC Civil Code, we cannot assure you that the
PRC courts or other regulators would hold the same view as ours, and such investments may not have the same effect as direct shareholding ownership
in the investee companies where our nominee shareholders may fail to perform their respective obligations under the nominee arrangements, such as,
among others, to vote on the shareholders’ meetings per our instructions, or to transfer all dividends obtained from such companies to us on a timely
manner.
Strategic investments, acquisitions or international expansion 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;
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● 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 our normal daily operations and potential disruptions to our ongoing businesses;
● difficulties in maintaining uniform standards, controls, procedures and policies within the combined organizations;
● difficulties in retaining relationships with our platform users, employees and other partners of the acquired business;
● risks of entering markets in which we have limited or no prior experience;
● regulatory risks, including remaining in good standing with existing regulatory bodies or receiving any necessary pre-closing or post-closing
approvals, as well as being subject to new regulators with oversight over the acquired business;
● assumption of contractual obligations that contain terms that are not beneficial to us, require us to license or waive intellectual property rights
or increase our risk for liability;
● liability for activities of the acquired business before the acquisition, including intellectual property infringement claims, violations of laws,
commercial disputes, tax liabilities and other known and unknown liabilities; and
● unexpected costs and unknown risks and liabilities associated with strategic investments or acquisitions.
We may not make any investments, acquisitions or international expansion, or, alternatively, any future investments, acquisitions or international
expansion may not be successful, may not benefit our business strategy, may not generate sufficient revenues to offset the associated acquisition costs
or may not otherwise result in the intended benefits.
Our business depends on the continued efforts of our senior management and key technology development personnel. If one or more of our
key executives or key technology development personnel were unable or unwilling to continue in their present positions, our business may be
severely disrupted.
Our business operations depend on the continued services of our senior management and key technology development personnel. In particular, Mr.
Yue (Justin) Tang, our founder, Chairman and Chief Executive Officer, Mr. Shaoyong (Simon) Cheng, our Vice Chairman, Mr. Kan (Kent) Li, our
president and Chief Risk Officer , Mr. Ding (Gardon) Gao, our co-founder and Chief Technology Officer and Mr. Frank Fuya Zheng, our Chief
Financial Officer are critical to the management of our business and operations and the development of our strategic direction. While we have
provided different incentives to our management and key technology development personnel, we cannot assure you that we can continue to retain their
services. If one or more of our key executives or key technology development personnel were unable or unwilling to continue in their present
positions, we may not be able to replace them easily or at all, our future growth may be constrained, our business may be severely disrupted and our
financial condition and results of operations may be materially and adversely affected, and we may incur additional expenses to recruit, train and retain
qualified personnel. In addition, we have entered into confidentiality and non-competition agreements with our management, there is no assurance that
any member of our management team and technology development team will not join our competitors or form a competing business. If any dispute
arises between our current or former officers or key technology development personnel 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.
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Competition for employees is intense, and we may not be able to attract and retain the qualified and skilled employees needed to support
our business.
We believe our success depends on the efforts and talent of our employees, primarily including technology development, financial products, risk
management, general management and sales and marketing. Our future success depends on our continued ability to attract, develop, motivate and
retain qualified and skilled employees. It is competitive to attract and retain skilled talent with expertise in technology, risk management, and general
management. We may not be able to hire and retain these personnel at compensation levels consistent with our existing compensation and salary
structure. Some of the companies with which we compete for experienced employees have greater resources than we have and may be able to offer
more attractive terms of employment.
In addition, we invest significant time and resources in the training of our employees, which increases their value to competitors who may seek to
recruit them. If we fail to retain our employees, we could incur significant expenses in hiring and training their replacements, and the quality of our
services and our ability to serve users could diminish, resulting in a material adverse effect to our business.
If we grant employees stock options or other equity incentives in the future, our net income could be adversely affected.
We granted incentives and rewards to employees and executives under our share incentive plan. We are required to account for share-based
compensation in accordance with Financial Accounting Standards Board Accounting Standards Codification Topic 718, Compensation—Stock
Compensation, which generally requires a company to recognize, as an expense, the fair value of stock options and other equity incentives to
employees based on the fair value of equity awards on the date of the grant, with the compensation expense recognized over the period in which the
recipient is required to provide service in exchange for the equity award. As of December 31, 2021, holders of our outstanding options and other equity
incentives were entitled to purchase a total of 71,164,148 ordinary shares. As a result, we incurred share-based compensation expense of
RMB88,434,772 (US$13,877,346) in during the year ended December 31, 2021. If we grant more options or other equity incentives in the future, we
could incur significant compensation charges and our results of operations could be adversely affected.
Increase in labor costs in the PRC may adversely affect our business and results of operations.
In recent years, the Chinese economy has experienced inflationary and labor costs increases. Average wages are projected to continue to increase.
Further, under PRC law we are required 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 our 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 our labor costs, including wages and
employee benefits, will continue to increase. If we are unable to control our labor costs or pass such increased labor costs on to our users by increasing
the fees of our services, our financial condition and results of operations may be adversely affected.
We do not have any business insurance coverage for our operations.
Insurance companies in China currently do not offer as extensive an array of insurance products as insurance companies in more developed
economies. Currently, we do not have any business liability or disruption insurance to cover our operations. We have determined that the costs of
insuring these risks and the difficulties associated with acquiring such insurance on commercially reasonable terms make it impractical for us to have
such insurance. Any uninsured business disruptions may result in substantial costs and the diversion of resources, which could have an adverse effect
on our results of operations and financial condition.
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We are subject to the risk of a severe or prolonged downturn in the Chinese or global economy and deterioration of credit profiles of
borrowers, which may materially and adversely affect our business and financial condition.
The global macroeconomic environment is facing challenges, including the economic slowdown in the Eurozone since 2014, potential impact of
the United Kingdom’s exit from the European Union on January 31, 2020, and the adverse impact on the global economies and financial markets as
the COVID-19 outbreak evolved into a worldwide health crisis in 2020. The growth of the PRC economy has slowed down since 2012 compared to
the previous decade and the trend may continue. 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 been concerns over unrest and terrorist threats in the Middle East, Europe and Africa and over the conflicts involving Ukraine, Syria and North
Korea. There have also been concerns on the relationship among China and other Asian countries and the trade disputes between the United States and
China. The ongoing trade tensions between the United States and China may have tremendous negative impact on the economies of not merely the two
countries concerned, but the global economy as a whole. It is unclear whether these challenges and uncertainties will be contained or resolved, and
what effects they may have on the global political and economic conditions in the long term. If economic conditions deteriorate, we may face
increased risk of default or delinquency of borrowers, which will result in lower returns or losses. In the event that the creditworthiness of our
borrowers deteriorates or we cannot track the deterioration of their creditworthiness, the criteria we use for the analysis of borrower credit profiles may
be rendered inaccurate, and our risk management system may be subsequently rendered ineffective. This in turn may lead to higher default rates and
adverse impacts on our reputation, business, results of operations and financial positions.
Economic conditions in China are sensitive to global economic conditions, changes in domestic economic and political policies, and the expected
or perceived overall economic growth rate in China. While the economy in China has grown significantly over the past decades, growth has been
uneven, both geographically and among various sectors of the economy, and the rate of growth has been slowing in recent years. Although growth of
China’s economy remained relatively stable, there is a possibility that China’s economic growth may materially decline in the near future. Any severe
or prolonged slowdown in the global or PRC economy may materially and adversely affect our business, results of operations and financial condition.
The offering of our products and services depends on effective use of mobile operating systems and distribution through mobile application
stores, which we do not control.
Our loan products Xiaoying Credit Loan and loan facilitation services to other platforms are offered through mobile applications. We may need to
devote significant resources to support and maintain of such applications. The mobile applications are dependent on the interoperability of popular
mobile operating systems that we do not control, such as Android and iOS. Any changes in such systems that degrade the accessibility of our mobile
applications or give preferential treatment to competing products and services could adversely affect the usability of our mobile applications. In
addition, we rely upon third party mobile application stores for users to download our mobile applications. As such, the distribution, operation and
maintenance of our mobile applications are subject to application stores’ standard terms and policies for application developers.
Our future growth and results of operations could suffer if we experience difficulties in the future in offering our products and services through
our mobile applications, or if we face increased costs to distribute our mobile applications. If it becomes increasingly difficult for our users to access
and utilize our products and services on their mobile devices, or if the prevailing mobile operating systems do not support our mobile applications, our
business and financial condition and operating results may be adversely affected.
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Our operations depend on the performance of the Internet infrastructure and fixed telecommunications networks in China.
Almost all access to the Internet in China is maintained through state-owned telecommunication operators under the administrative control and
regulatory supervision of the MIIT. We primarily 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. We 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 our business, we may be required to upgrade
our technology and infrastructure to keep up with increasing traffic. We cannot assure you that our cloud computing service provider and the
underlying Internet infrastructure and the fixed telecommunications networks in China will be able to support the demand 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 our costs of using customized cloud computing services. If the prices we pay for customized cloud computing services rise
significantly, our results of operations may be adversely affected. Furthermore, if Internet access fees or other charges to Internet users increase, our
user traffic may decline and our business may be harmed.
Risks Relating to Our Corporate Structure
We do not have direct ownership of some of our operating entities in China, but exercise control over the operating activities that most impact
the economic performance, bear the risks of, enjoys the rewards normally associated with ownership of the entity, and consolidate the
financial results of the VIEs in our consolidated financial statements in accordance with U.S. GAAP through contractual arrangements with
the VIE and its shareholders, which may not be effective in providing control over our operating entities.
We do not have direct ownership of some of our operating entities in China, but through contractual arrangements (the “VIE Agreements”), we
exercise control over the operating activities that most impact the economic performance, bears the risks of, and enjoys the rewards normally
associated with ownership of the entity. As a result, through such contractual arrangements with the VIE and its shareholders, we are the primary
beneficiary of the VIE, and, therefore, consolidate the financial results of the VIE in our consolidated financial statements in accordance with U.S.
GAAP. 38.3% of our current revenue is derived from our VIEs in China. To comply with PRC laws and regulations, we do not have an equity
ownership interest in our VIEs but rely on the VIE Agreements with VIEs to control and operate their businesses. However, as discussed below, these
VIE Agreements may not be effective from PRC laws in providing us with the necessary control over VIEs and their operations. Any deficiency in
these VIE Agreements may result in our loss of control over the management and operations of VIEs, which will result in a significant loss in the value
of an investment in our company. Because of the practical restrictions on direct foreign equity ownership imposed by the PRC government authorities,
we must rely on contractual rights through our VIE structure to effect control over and management of VIEs, which exposes us to the risk of potential
breach of contract by the shareholders of VIEs. For further description about our VIE Agreements, please see “4.C. Organizational Structure -
Contractual Arrangements with Consolidated VIEs and Their Shareholders.”
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Because we are an offshore holding company and our business was conducted through the VIE Agreements with our VIEs in China, 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.
We are an offshore holding company incorporated in the Cayman Islands. As a holding company with no material operations, our operations were
conducted in China by our subsidiaries and through the VIE Agreements with our VIEs in China, the equity of which is owned by Xiaoying (Beijing)
Information Technology Co., Ltd., or Beijing WFOE, through the VIE Agreements, as a result of which, under United States generally accepted
accounting principles, the assets and liabilities of the VIEs are treated as our assets and liabilities and the results of operations of VIEs are treated in all
respects as if they were the results of our 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 50% equity interest in any PRC
company engaging in value-added telecommunications businesses (except for e-commerce, domestic multi-party communication, store-and-forward
and call center services). The primary foreign investor must also have operating experience and a good track record in providing value-added
telecommunications services, or VATS, overseas. On March 29, 2022, the Decision of the State Council on Revising and Repealing Certain
Administrative Regulations, which will take effect on May 1, 2022, was promulgated to amend certain provisions of regulations including the
Provisions on the Administration of Foreign-Invested Telecommunications Enterprises (2016 Revision), the requirement for major foreign investor to
demonstrate a good track record and experience in operating value-added telecommunications businesses is deleted.
Because we are an exempted company incorporated with limited liability in the Cayman Islands, we are classified as a foreign enterprise under
PRC laws and regulations, and our wholly-owned PRC subsidiary, Xiaoying (Beijing) Information Technology Co., Ltd., or Beijing WFOE, is a
foreign-invested enterprise, or an FIE. To comply with the current PRC laws and regulations, we conduct our business in China through our certain
consolidated VIEs and their affiliates. Beijing WFOE has entered into a series of contractual arrangements with our consolidated VIEs and their
shareholders. For a description of these contractual arrangements, see “Item 4. Information on the Company—4.C. Organizational Structure—
Contractual Arrangements with Consolidated VIEs and their Shareholders.”
We believe that our corporate structure and contractual arrangements comply with the current applicable PRC laws and regulations. Our PRC legal
counsel is of the opinion that our current ownership structure of the VIEs, the contractual arrangements among our PRC subsidiaries, our consolidated
VIEs and its subsidiaries are not in violation of existing PRC laws, rules and regulations; and these contractual arrangements are valid, binding and
enforceable in accordance with their terms and applicable PRC laws and regulations currently in effect, except that the pledge of equity in Shenzhen
Tangren, which holds a financial guarantee license, and the pledge of equity in Shenzhen Beier would not be deemed validly created until they are
registered with the competent administration for market regulation, and we may not be able to register the pledge of equity in Shenzhen Tangren and
the pledge of equity in Shenzhen Beier, in which case we must rely on the equity pledge agreement to enforce the pledge. However, 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, the MIIT, or other authorities that regulate online consumer finance platforms and other participants in the
telecommunications industry, would ultimately take a view that is consistent with the opinion of our PRC legal counsel or 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.
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 our consolidated VIEs and may 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 our business and operating licenses;
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● levying fines on us;
● confiscating any of our income that they deem to be obtained through illegal operations;
● shutting down our services;
● discontinuing or restricting our operations in China;
● imposing conditions or requirements with which we may not be able to comply;
● requiring us to change our corporate structure and contractual arrangements;
● restricting or prohibiting our use of the proceeds from overseas offerings to finance our PRC consolidated VIEs’ business and operations;
● requiring us to delist from the NYSE; and
● taking other regulatory or enforcement actions that could be harmful to our business.
Furthermore, new PRC laws, rules and regulations may be introduced to impose additional requirements that may be applicable to our corporate
structure and contractual arrangements. See “Item 3. Key Information—D. Risk Factors—Risks Relating to Our Corporate Structure—Our business
may be significantly affected by the newly enacted PRC Foreign Investment Law, and its enactment may materially and adversely affect our business
and financial condition.” Occurrence of any of these events could materially and adversely affect our business and financial condition and results of
operations. In addition, if the imposition of any of these penalties or requirements to restructure our corporate structure causes us to lose the right to
direct the activities of our consolidated VIEs or our right to receive their economic benefits, we would no longer be able to consolidate the financial
results of such VIEs in our consolidated financial statements. If our corporate structure and contractual arrangements are deemed to be illegal by
relevant regulators, our business and results of operations would be materially and adversely affected and the price of our ADSs may decline.
However, we do not believe that such actions would result in the liquidation or dissolution of our company, our wholly-owned subsidiaries in China or
our consolidated VIEs or their subsidiaries. See “Item 4. Information on the Company—4.C. Organizational Structure—Contractual Arrangements
with Consolidated VIEs and their Shareholders.”
We do not hold equity interests in the VIEs. We rely on contractual arrangements with our consolidated VIEs and their shareholders to
operate our business, which may not be as effective as direct ownership in providing operational control and may have potential conflicts of
interests with us. If the PRC government determines that the VIE Agreements 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 if the determinations, changes, or interpretations
result in our inability to assert contractual control over the assets of our VIEs that conduct all or substantially all of our operations.
We do not hold equity interests in the VIEs. We rely on contractual arrangements with our consolidated VIEs and their shareholders to operate our
business. For a description of these contractual arrangements, see “Item 4. Information on the Company—4.C. Organizational Structure—Contractual
Arrangements with Consolidated VIEs and Their Shareholders.” A significant portion of our revenue is attributed to our consolidated VIEs. These
contractual arrangements may not be as effective as direct ownership in providing us with control over our consolidated VIEs. If our consolidated
VIEs or their shareholders fail to perform their respective obligations under these contractual arrangements, our recourse to the assets held by our
consolidated 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 the record holders of equity
interest in our consolidated VIEs, including such equity interest, may be put under court custody. The validity of the VIE Agreements has not been
tested in the PRC jurisdiction. These VIE Agreements may not be enforceable in China if PRC government authorities or courts take a view that such
VIE Agreements contravene PRC laws and regulations or are otherwise not enforceable for public policy reasons. In the event we are unable to
enforce these VIE Agreements, we may not be able to exert effective control over the VIEs, and our ability to conduct our business may be materially
and adversely affected. As a consequence, our ADSs may decline in value or become worthless if the determinations, changes, or interpretations result
in our inability to assert contractual control over the assets of our VIEs that conduct all or substantially all of our operations.
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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. 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 our consolidated VIEs, and our ability to conduct our business and our financial condition and results of
operations may be materially and adversely affected. See “Item 3. Key Information—D. Risk Factors—Risks Relating to Doing Business in China—
There are uncertainties regarding the interpretation and enforcement of PRC laws, rules and regulations.”
In connection with our operations in China, we rely on the shareholders of our consolidated VIEs to fulfill by the obligations under such
contractual arrangements. The interests of these shareholders in their individual capacities as shareholders of our consolidated VIEs may differ from
the interests of our company as a whole, as what is in the best interests of our consolidated VIEs, including matters such as whether to distribute
dividends or to make 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 or entities will act in the best interests of our company or that those conflicts of
interest will be resolved in our favor. In addition, these individuals and entities may breach or cause our consolidated VIEs and their subsidiaries to
breach or refuse to renew the existing contractual arrangements with us.
Currently, we do not have arrangements that address potential conflicts of interest shareholders of our consolidated VIEs may encounter due to
their dual roles as shareholders of consolidated VIEs and as beneficial owners of our company. However, we could, at all times, exercise our option
under the exclusive call option agreement to cause them to transfer all of their equity ownership in our consolidated VIEs to a PRC entity or individual
designated by us as permitted by 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 our consolidated VIEs as provided under the powers of attorney, directly appoint new directors of our
consolidated VIEs. We rely on the shareholders of our consolidated VIEs to comply with PRC laws and regulations, which protect contracts, and to
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 with 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 our consolidated 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 Mr. Yue (Justin) Tang, 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. Yue (Justin) Tang, our Chief Executive Officer, beneficially owns all of the Class B ordinary shares issued and outstanding, representing
31.58% of our total issued and outstanding share capital and 89.69% of our aggregate voting power as of March 31, 2022. As a result, he will have the
ability to control or exert significant influence over important corporate matters and investors may be prevented from influencing important corporate
matters involving our company that require approval of shareholders, including:
● the composition of our board of directors and, through the voting of the board of directors, any determinations with respect to our operations,
business direction and policies, including the appointment and removal of officers;
● any determinations with respect to mergers or other business combinations;
● our disposition of all or substantially all of our assets; and
● any change in control.
These actions may be taken even if they are opposed by our other shareholders, including the holders of the ADSs. Furthermore, this
concentration of ownership may also discourage, delay or prevent a change in control of our company, which could deprive 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.
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If the custodians or authorized users of our controlling nontangible assets, including chops and seals, fail to fulfill their responsibilities,
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 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 consolidated 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
consolidated 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 mechanisms to monitor our key employees, including the designated legal representatives of our
subsidiaries and consolidated VIEs, the procedures may not be sufficient to prevent all instances of abuse or negligence. There is a risk that our key
employees or designated legal representatives could abuse their authority, for example, by binding our subsidiaries and consolidated 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 misappropriates 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 actions 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, 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 expenses while distracting management from our operations, and our business and
operations may be materially and adversely affected.
Our business may be significantly affected by the newly enacted PRC Foreign Investment Law, and its enactment may materially and
adversely affect our business and financial condition.
On March 15, 2019, the National People’s Congress promulgated the PRC Foreign Investment Law, which took effect on January 1, 2020 and
replaced the existing laws regulating foreign investment in China, namely, the PRC Equity Joint Venture Law, the PRC Cooperative Joint Venture Law
and the Wholly Foreign-owned Enterprise Law, together with their implementation rules and ancillary regulations. Meanwhile, the Regulations for the
Implementation of the Foreign Investment Law, or the FIL Implementations, came into effect on January 1, 2020, which clarified and elaborated the
relevant provisions of the Foreign Investment Law.
Since the Foreign Investment Law and the FIL Implementations are newly enacted, there is still uncertainties in relation to its interpretation and
implementation. The PRC Foreign Investment Law have revised the definition of “foreign investment” and removed all references to the definitions of
“actual control” or “variable interest entity structure” under the 2015 Draft Foreign Investment Law. Instead, the PRC Foreign Investment Law
stipulates that foreign investment includes “foreign investors invest in China through other methods under laws, administrative regulations, or
provisions prescribed by the State Council “. Therefore, there are still possibilities that future laws, administrative regulations or provisions of the State
Council may deem contractual arrangements as a way of foreign investment. There can be no assurance that our contractual arrangements will not be
deemed to be in violation of the market access requirements for foreign investment under the PRC laws and regulations. Once an entity falls within the
definition of foreign investment entity, it may be subject to foreign investment “restrictions” or “prohibitions” set forth in a “negative list” to be
separately issued by the State Council later. If a foreign investment entity proposes to conduct business in an industry subject to foreign investment
“restrictions” in the “negative list,” it must go through a pre-approval process.
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The most updated negative list, issued on 27 December 2021 and became effective on 1 January 2022, stipulates that any PRC domestic enterprise
engaging in the fields prohibited by the negative list shall obtain the consent of the relevant competent PRC authorities for overseas listing, and the
foreign investors shall not participate in the operation and management of such enterprise, and the shareholding percentage of the foreign investors in
such enterprise shall be subject to the relevant administrative provisions of PRC domestic securities investment by foreign investors. Such negative list
does not further elaborate whether existing overseas listed enterprise will be subject to such requirements. The staff of the NDRC addressed in an
interview on 27 December 2021 that certain existing overseas listed enterprises whose foreign investors’ shareholding percentage exceed the
aforementioned threshold are not required to make adjustment or deduction. If any of the businesses that we operate were in the “restricted” category
on the “negative list,” and the enacted version of the PRC Foreign Investment Law and the final “negative list” mandate further actions to be taken by
us, such as a pre-approval process, there is no assurance that we can obtain such pre-approval on a timely basis, or at all. Such determination would
materially and adversely affect the value of our ADSs, and such further actions required to be taken by us under the newly enacted PRC Foreign
Investment Law may materially and adversely affect our business and financial condition. 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.
In addition, the PRC Foreign Investment Law provide a five-year period for the existing foreign invested enterprises established according to the
existing laws regulating foreign investment to maintain their structure and corporate governance after the implementation of the PRC Foreign
Investment Law. Thus we may be required to adjust the structure and corporate governance of certain of our PRC entities after the expiration of such
period. 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, corporate governance and business operations.
Contractual arrangements in relation to our variable interest entities, may be subject to scrutiny by the PRC tax authorities and they may
determine that we, or our variable interest entities and their subsidiaries, owe additional taxes, which could negatively affect our financial
condition and the value of your investment.
Under applicable PRC laws and regulations, arrangements and transactions among related parties may be subject to audit or challenge by the PRC
tax authorities. The PRC enterprise income tax law and regulations require enterprises that conduct related party transactions to prepare transfer
pricing documentations to demonstrate the basis of determining the price, the computation methodology and detailed explanations. The tax authorities
may impose reasonable adjustments on taxation if they have identified any related party transactions that are inconsistent with arm’s length principles
after they conducted tax inspection. We may face material and adverse tax consequences if the PRC tax authorities determine that the contractual
arrangements among our PRC subsidiaries, our variable interest entities and their shareholders were not entered into on an arm’s length basis in such a
way as to result in an impermissible reduction in taxes under applicable PRC laws, regulations and rules, and adjust income of our variable interest
entities in the form of a transfer pricing adjustment. A transfer pricing adjustment could, among other things, result in a reduction of expense
deductions recorded by our variable interest entities for PRC tax purposes, which could in turn increase their tax liabilities without reducing the tax
expenses of our PRC subsidiaries. Please see Note 12 “Income taxes” to our audited consolidated financial statements. In addition, if a PRC subsidiary
requests the shareholders of our variable interest entities to transfer their equity interests at nominal or no value pursuant to these contractual
arrangements, such transfer could be viewed as a gift and subject the PRC subsidiary to PRC income tax. Furthermore, the PRC tax authorities may
impose late payment fees and other penalties on our variable interest entities for the adjusted but unpaid taxes according to the applicable regulations.
Our financial position could be materially adversely affected if our variable interest entities’ tax liabilities increase or if they are required to pay late
payment fees and other penalties.
In December 2021 and January 2022, our two subsidiaries and two VIEs received Tax Treatment Decisions issued by the First Inspection Bureau
of the Shenzhen Municipal Taxation Bureau (“the First Inspection Bureau”) for our tax payments status from January 1, 2016, to June 30, 2019. We
were subject to certain adjustments on taxations and were required to pay back certain value-added taxes, city maintenance and construction taxes, the
enterprise income taxes, as well as the respective late payment fees, due to our failure to file the correct taxable income as required by relevant laws
and regulations during the period from January 1, 2016, to June 30, 2019. We have paid such taxes and late payment fees as requested in full in
December 2021 and January 2022. As of the date of this annual report, we have not been involved in any other investigations, inquiries, notices,
warnings, or sanctions from any other PRC government authorities regarding our tax payments.
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Risks Relating to Doing Business in China
Changes in the political and economic policies of the PRC government may materially and adversely affect our business, financial condition
and results of operations and may result in our inability to sustain our growth and expansion strategies.
Substantially all of our operations are conducted in the PRC and all of our revenue is sourced from the PRC. Accordingly, our financial 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 to guide the allocation of
resources. Some of these measures may benefit the overall PRC economy, but may also have a negative effect on us. Our 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 us. 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 in turn could lead to a reduction in demand for our services and consequently have a material
adverse effect on our businesses, financial condition and results of operations.
Uncertainties with respect to the PRC legal system, including uncertainties regarding the enforcement of laws, and sudden or unexpected
changes in laws and regulations in China could adversely affect us and limit the legal protections available to you and us.
Our operating subsidiaries are incorporated under and governed by the laws of the PRC. The PRC legal system is based on written statutes. 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 and regulations governing economic matters in general, such as foreign investment, corporate organization and governance, commerce,
taxation and trade. As a significant part of our business is conducted in China, our operations are principally governed by PRC laws and regulations.
However, since the PRC legal system continues to evolve rapidly, the interpretations of many laws, regulations and rules are not always uniform and
enforcement of these laws, regulations and rules involves uncertainties, which may limit legal protections available to us. Uncertainties due to evolving
laws and regulations could also impede the ability of a China-based company, such as our company, to obtain or maintain permits or licenses required
to conduct business in China. In the absence of required permits or licenses, governmental authorities could impose material sanctions or penalties on
us. In addition, some regulatory requirements issued by certain PRC government authorities may not be consistently applied by other PRC government
authorities (including local government authorities), thus making strict compliance with all regulatory requirements impractical, or in some
circumstances impossible. For example, we may have to resort to administrative and court proceedings to enforce the legal protection that we enjoy
either by law or contract. However, since PRC administrative and court authorities have discretion in interpreting and implementing statutory and
contractual terms, it may be more difficult to predict the outcome of administrative and court proceedings and the level of legal protection we enjoy
than in more developed legal systems. Furthermore, 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 may have retroactive effect. As a result, we may not be aware of our violation of these policies and rules
until sometime after the violation. Such uncertainties, including uncertainty over the scope and effect of our contractual, property (including
intellectual property) and procedural rights, could materially and adversely affect our business and impede our ability to continue our operations.
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Furthermore, if China adopts more stringent standards with respect to corporate social responsibilities or financial regulations, we may incur
increased compliance costs or become subject to additional restrictions in our operations. Intellectual property rights and confidentiality protections in
China may also not be as effective as in the United States or other countries. In addition, we cannot predict the effects of future developments in the
PRC legal system on our business operations, including the promulgation of new laws, or changes to existing laws or the interpretation or enforcement
thereof. These uncertainties could limit the legal protections available to us and our investors, including you. Moreover, any litigation in China may be
protracted and result in substantial costs and diversion of our resources and management attention.
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The PRC government has significant oversight and discretion over the conduct of our business and may intervene or influence our operations as
the government deems appropriate to further regulatory, political and societal goals. The PRC government has recently published new policies that
significantly affected certain industries such as the education and internet industries, and we cannot rule out the possibility that it will in the future
release regulations or policies regarding our industry that could adversely affect our business, financial condition and results of operations.
Furthermore, the PRC government has recently indicated an intent to exert more oversight and control over securities offerings and other capital
markets activities that are conducted overseas and foreign investment in China-based companies like us. On July 6, 2021, State Council issued the
Opinions on Lawfully and Severely Combating Illegal Securities Activities to further strengthen cross-border supervision and consolidate the primary
responsibility for information security of overseas listed companies. On 24 December 2021, the China Securities Regulatory Commission, or the
CSRC, issued the Regulations of the State Council on the Administration of Overseas Issuance and Listing of Securities by Domestic Enterprises
(Draft for Public Comments) and the Measures for the Administration of Overseas Issuance of Securities and Filing of Listing by Domestic Enterprises
(Draft for Comments), or, collectively, the Draft Overseas Listing Regulations, pursuant to which domestic enterprises should submit filing documents
to CSRC within three business days after the submission of the application for overseas initial public offering, and after completing the filing
procedures for an overseas initial public offering and listing, for the purposes of implementing and strengthening the CSRC’s supervision, issuer will
need to comply with continuous filing and reporting requirements after such offering and listing, among others, including the following: (i) a reporting
obligation in respect of a material event which arose prior to such offering and listing, (ii) filing for follow-on offerings after the initial offering and
listing, (iii) filing for share exchanges where by the issuer issues securities to acquire assets, and (iv) a reporting obligation for material events after the
initial offering and listing. In a Q&A released on its official website, the respondent CSRC official indicated that the CSRC will start applying the
filing requirements to new offerings and listings. New initial public offerings and refinancing by existing overseas listed Chinese companies will be
required to go through the filing process. As for the other filings for the existing companies, the regulator will grant adequate transition period to
complete their filing procedures. On April 2, 2022, the CSRC published the Provisions on Strengthening the Management of Confidentiality and
Archives Related to the draft Overseas Issuance of Securities and Overseas Listing by Domestic Companies (Draft for Public Comments), or the Draft
Archives Rules, for public comments. In the overseas listing activities of domestic companies, domestic companies, as well as securities companies
and securities service institutions providing relevant securities services hereof, should establish a sound system of confidentiality and archival work,
shall not disclose state secrets, or harm the state and public interests. Where a domestic company provides or publicly discloses to the relevant
securities companies, securities service institutions, overseas regulatory authorities and other entities and individuals, or provides or publicly discloses
through its overseas listing entity, any document or material involving any state secret or any work secret of organs and organizations, it shall report to
the competent authority for approval in accordance with the law, and submit to the secrecy administration department for filing. domestic companies
shall not provide accounting records to an overseas accounting firm that has not performed the corresponding procedures. Securities companies and
securities service organizations shall comply with the confidentiality and archive management requirements, and keep the documents and materials
properly. Securities companies and securities service institutions that provide domestic enterprises with relevant securities services for overseas
issuance and listing of securities shall keep such archives they compile within the territory of the PRC and shall not transfer such archives to overseas
institutions or individuals, by any means such as carriage, shipment or information technology, without the approval of the relevant competent
authorities. If the archives or duplicates of such archives are of important value to the state and society and needed to be taken abroad, approval shall
be obtained in accordance with relevant provisions. However, the Draft Overseas Listing Regulations and the Draft Archive Rules were released for
public comment only, there remains substantial uncertainty, including but not limited to its final content, adoption timeline, effective date or relevant
implementation rules. The Draft Overseas Listing Regulations and the Draft Archive Rules, if enacted, may subject us to additional compliance
requirements in the future. we cannot assure you that we will be able to receive clearance of such filing requirements in a timely manner, or at all. Any
failure of us to fully comply with new regulatory requirements may significantly limit or completely hinder our ability to continually offer our Shares,
cause significant disruption to our business operations, severely damage our reputation, materially and adversely affect our financial condition and
results of operations and cause our Shares to significantly decline in value or become worthless. Substantially all of our operations are conducted in the
PRC, and are governed by PRC laws, rules and regulations. Our PRC subsidiaries and 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. Any such intervention in or influence on our business operations or action to
exert more oversight and control over securities offerings and other capital markets activities, once taken by the PRC government, could adversely
affect our business, financial condition and results of operations and the value of our Class A ordinary shares or the ADSs, or significantly limit or
completely hinder our ability to offer or continue to offer securities to investors and cause the value of such securities to significantly decline or in
extreme cases, become worthless.
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Uncertainties exist with respect to the enactment timetable, interpretation and implementation of the laws and regulations with respect to our
online platform business operation.
Our online platform business is subject to various internet-related laws and regulations. These internet-related laws and regulations are relatively
new and evolving, and their enactment timetable, interpretation and implementation involve significant uncertainties.
For example, On February 7, 2021, the State Administration for Market Regulation, or the SAMR, promulgated Guidelines to Anti-Monopoly in
the Field of Platform Economy, or the Anti-Monopoly Guidelines for Platform Economy. The Anti-Monopoly Guidelines for Platform Economy
provides operational standards and guidelines for identifying certain internet platforms’ abuse of market dominant position which are prohibited to
restrict unfair competition and safeguard users’ interests, including without limitation, prohibiting personalized pricing using big data and analytics,
selling products below cost without reasonable causes, actions or arrangements seen as exclusivity arrangements, using technology means to block
competitors’ interface, using bundle services to sell services or products. In addition, internet platforms’ compulsory collection of user data may be
viewed as abuse of dominant market position that may have the effect to eliminate or restrict competition. On August 20 2021, the Standing
Committee of the National People’s Congress promulgated the Personal Information Protection Law of the PRC, or the Personal Information
Protection Law which took effect on 1 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, (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 it is necessary for personal information to be provided by a personal information processor to
a recipient outside the territory of the PRC due to any business need or any other need, a security assessment organized by the national cyberspace
authority shall be passed. In addition, on June 10, 2021, the Standing Committee of the National People’s Congress promulgated the PRC Data
Security Law, which took effect in September 2021. The Data Security Law, among others, provides for security review procedures for data activities
that may affect national security. Furthermore, Measures for Cybersecurity Review, which became effective on June 1, 2020, as amended on December
28, 2021, and became effective on February 15, 2022, set forth the cybersecurity review mechanism for critical information infrastructure operators,
and provide that (i) critical information infrastructure operators who intend to purchase internet products and services that affect or may affect national
security shall be subject to a cybersecurity review; (ii) online platform operators who are engaged in data processing are also subject to the regulatory
scope; (iii) the CSRC is included as one of the regulatory authorities for purposes of jointly establishing the state cybersecurity review working
mechanism; (iv) the online platform operators holding more than one million users/users’ individual information and seeking a listing outside China
shall file for cybersecurity review; (v) the risks of core data, material data or large amounts of personal information being stolen, leaked, destroyed,
damaged, illegally used or illegally transmitted to overseas parties and the risks of critical information infrastructure, core data, material data or large
amounts of personal information being influenced, controlled or used maliciously shall be collectively taken into consideration during the
cybersecurity review process. Although we do not believe we are a critical information infrastructure provider, and as the date of this annual report, we
have not been involved in any investigations on cybersecurity review made by the CAC on such basis and we have not received any inquiry, notice,
warning, or sanctions from any other PRC government authorities in this regard, the PRC authorities could interpret such term broadly. If we are
deemed to be a critical information infrastructure operator under such rules, we could be subject to cybersecurity review by Cyberspace Administration
of China and other relevant PRC regulatory authorities and be required to change our existing practices in data privacy and cybersecurity matters at
substantial costs. During such cybersecurity review, we may be required to stop providing services to our customers, and such review could also result
in negative publicity to us and diversion of our managerial and financial resources.
On August 31, 2018, the Standing Committee of the National People’s Congress promulgated the E-commerce Law, which came into effect on
January 1, 2019. The E-commerce Law imposes a series of requirements on e-commerce operators including e-commerce platform operators,
merchants operating on the platform and the individuals and entities carrying out business online. The platform governance measures we adopt in
response to the enhanced regulatory requirements may fail to meet these requirements and may lead to penalties or our loss of merchants to those
platforms, or to complaints or claims made against us by customers on our platforms.
As there are uncertainties regarding the enactment timetable, interpretation and implementation of the existing and future internet-related laws and
regulations, we cannot assure you that our business operations will comply with such regulations in all respects and we may be ordered to terminate
certain of our business operations that are deemed illegal by the regulatory authorities and become subject to fines and/or other sanctions.
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You may experience difficulties in effecting service of legal process, enforcing foreign judgments or bringing actions in China against us or
our management named in the annual report based on foreign laws.
We are a company incorporated under the laws of the Cayman Islands, we conduct substantially all of our operations in China, and substantially
all of our assets are located in China. In addition, all our senior executive officers reside within China for a significant portion of the time and most are
PRC nationals. As a result, it may be difficult for our shareholders to effect service of process upon us or those persons inside China. In addition,
China does not have treaties providing for the reciprocal recognition and enforcement of judgments of courts with the Cayman Islands and many other
countries and regions. Therefore, recognition and enforcement in China of judgments of a court in any of these non-PRC jurisdictions in relation to any
matter not subject to a binding arbitration provision may be difficult or impossible.
Shareholder claims that are common in the United States, including securities law class actions and fraud claims, generally are difficult to pursue
as a matter of law or practicality in China. For example, in China, there are significant legal and other obstacles to obtaining information needed for
shareholder investigations or litigation outside China or otherwise with respect to foreign entities. Although the local authorities in China may
establish a regulatory cooperation mechanism with the securities regulatory authorities of another country or region to implement cross-border
supervision and administration, such regulatory cooperation with the securities regulatory authorities in the Unities States have not been efficient in the
absence of mutual and practical cooperation mechanism. No organization or individual may provide the documents and materials relating to securities
business activities to overseas parties arbitrarily without the consent of the competent securities regulatory authority in China according to the PRC
Securities Law. See also “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” for risks associated with investing in us as a Cayman Islands company.
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.
PRC regulations relating to investments in offshore companies by PRC residents may subject our PRC-resident beneficial owners or our PRC
subsidiary to liability or penalties, limit our ability to inject capital into our PRC subsidiary or limit our PRC subsidiary’s 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 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.
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Mr. Yue (Justin) Tang and Mr. Baoguo Zhu completed the SAFE registration pursuant to SAFE Circular 37. We have notified substantial
beneficial owners of ordinary shares who we know are PRC residents of their filing obligations. 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 subsidiary to fines and
legal sanctions. Such failure to register or comply with relevant requirements may also limit our ability to contribute additional capital to our PRC
subsidiary and limit our PRC subsidiary’s ability to distribute dividends to our company. These risks may have a material adverse effect on our
business, financial condition and results of 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 using the proceeds of our initial public offering to make loans to our PRC subsidiary and our
consolidated VIE, or to make additional capital contributions to our PRC subsidiary.
In utilizing the proceeds of our initial public offering, we, as an offshore holding company, are permitted under PRC laws and regulations to
provide funding to our PRC subsidiary, 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 SAFE and capital contributions to our PRC subsidiary 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.
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 and amended on December 30, 2019, 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
bank 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 grant 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, including the
net proceeds from our initial public offering, to our PRC subsidiary, 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 our consolidated VIEs and their subsidiaries, each a PRC domestic company. Meanwhile, we are not likely to finance the activities of our
consolidated VIEs and their subsidiaries by means of capital contributions given the restrictions on foreign investment in the businesses that are
currently conducted by our consolidated VIEs and their subsidiaries.
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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 subsidiary or any consolidated variable interest entity or future capital
contributions by us to our PRC subsidiary. As a result, uncertainties exist as to our ability to provide prompt financial support to our PRC subsidiary or
consolidated VIEs and their subsidiaries when needed. If we fail to complete such registrations or obtain such approvals, our ability to use foreign
currency, including the proceeds we received from our initial public offering, 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.
Any failure to comply with PRC regulations regarding 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
positions 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. In February 2012, SAFE promulgated the Notice on Issues Concerning the Foreign
Exchange Administration for Domestic Individuals Participating in Stock Incentive Plan of Overseas Publicly Listed Company, according to which,
employees, directors, supervisors and other management members who are PRC residents and non-PRC citizens who reside in China for a continuous
period of not less than one year participating in any stock incentive plan of an overseas publicly listed company , subject to a few exceptions, 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 and our directors, executive officers and other employees who are PRC citizens or who reside in the PRC for a
continuous period of not less than one year and who have been granted options are subject to these regulations. 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.
In addition, the State Administration of Taxation, or the SAT, has issued certain circulars concerning employee share options and restricted shares.
Under these circulars, our employees working in China who exercise share options or are granted restricted shares will be subject to PRC individual
income tax. Our PRC subsidiary has obligations to file documents related to employee share options or restricted shares with relevant tax authorities
and to withhold individual income taxes of those employees who exercise their share options. If our employees fail to pay or we fail to withhold their
income taxes according to relevant laws and regulations, we may face sanctions imposed by the tax authorities or other PRC government authorities.
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, including our wholly-owned PRC subsidiaries and the subsidiaries of the VIE and on remittances from the consolidated VIEs, for our
offshore cash and financing requirements, including the funds necessary to pay dividends and other cash distributions to our shareholders, fund
intercompany loans, service any debt we may incur outside of China and pay our expenses. When our principal operating subsidiaries or the
consolidated 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 subsidiary and certain other subsidiaries permit payments of
dividends only from part of their retained earnings, if any, determined in accordance with applicable PRC accounting standards and regulations.
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Under PRC laws, rules and regulations, each of our subsidiaries incorporated in China is required to set aside at least 10% of its net income
each 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 included in the retained earnings distributable as cash dividends. Furthermore, under PRC law, our wholly-owned
PRC subsidiary, which is a wholly foreign-owned enterprise under PRC law, cannot distribute any profits until all of its losses from prior fiscal years
have been offset. In accordance with the articles of association of our wholly-owned PRC subsidiary, profit distributions also need to be approved by
its executive directors and shareholders before any distribution plan becomes effective. As a result, our subsidiaries incorporated in China are restricted
in their ability to transfer a portion of their respective net assets to their shareholders as dividends, loans or advances. In addition, registered share
capital and statutory reserve accounts are also restricted from withdrawal in the PRC, up to the amount of net assets held in each operating subsidiary.
Limitations on the ability of our consolidated VIEs to make remittance to the wholly-foreign owned enterprise and on the ability of our
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, 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.”
Dividends paid to our foreign investors and gains on the sale of our ADSs or ordinary shares by our foreign investors may be 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 paid 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. In addition, any gain realized on the transfer of shares by such investors is also subject to PRC tax
at a rate of 10%, 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 ordinary shares or ADSs, and any gain realized from the transfer of our ordinary shares or ADSs, may be treated as income derived from
sources within the PRC and may as a result be subject to PRC taxation. Furthermore, if we are deemed a PRC resident enterprise, dividends paid to
individual investors who are non-PRC residents and any gain realized on the transfer of ADSs or ordinary shares by such investors may be subject to
PRC tax at a current rate of 20% (which in the case of dividends may be withheld at source). Any PRC tax liability may be reduced under applicable
tax treaties or tax arrangements between China and other 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 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 paid to our non-PRC investors, or gains from the transfer of our
ADSs or 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 ordinary shares may decline significantly.
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We and our existing 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.
In October 2017, the State Administration of Taxation issued the Bulletin on Issues Concerning the Withholding of Non-PRC Resident Enterprise
Income Tax at Source, or Bulletin 37, which replaced the Notice on Strengthening Administration of Enterprise Income Tax for Share Transfers by
Non-PRC Resident Enterprises, or Circular 698, issued by the State Administration of Taxation, on December 10, 2009, and partially replaced and
supplemented rules under the Bulletin on Issues of Enterprise Income Tax on Indirect Transfers of Assets by Non-PRC Resident Enterprises or
Bulletin 7, issued by the State Administration of Taxation, on February 3, 2015 and amended in December 2017. Pursuant to Bulletin 7, an “indirect
transfer” of PRC assets, including a transfer of equity interests in an unlisted non-PRC holding company of a PRC resident enterprise, by non-PRC
resident enterprises may be re-characterized and treated as a direct transfer of the underlying PRC 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, immoveable properties located in China, and equity investments in PRC resident enterprises and any gains from the transfer of
such asset by a direct holder, who is 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 the case 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 may consequently be subject to PRC enterprise income tax at a rate of 25%. Where the underlying transfer relates to immoveable
properties located in China or to equity investments in a PRC resident enterprise, which is not related to a PRC establishment or place of business of a
non-resident enterprise, a PRC enterprise income tax of 10% 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. Pursuant to Bulletin 37, the
withholding agent shall declare and pay the withheld tax to the competent tax authority in the place where such withholding agent is located within
7 days from the date of occurrence of the withholding obligation, while the transferor is required to declare and pay such tax to the competent tax
authority within the statutory time limit according to Bulletin 7. Late payment of applicable tax will subject the transferor to default interest. Both
Bulletin 37 and Bulletin 7 do 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.
There is uncertainty as to the application of Bulletin 37 or previous rules under Bulletin 7. 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 taxes if our company is transferor in such transactions, and
may be subject to withholding obligations if our company is transferee in such transactions, under Bulletin 37 and Bulletin 7. For transfer of shares in
our company by investors that are non-PRC resident enterprises, our PRC subsidiary may be requested to assist in the filing under Bulletin 37 and
Bulletin 7. As a result, we may be required to expend valuable resources to comply with Bulletin 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.
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We are subject to restrictions on currency exchange.
All of our net income is denominated in Renminbi. The Renminbi is currently convertible under the “current account,” which includes dividends,
trade and service-related foreign exchange transactions, but not under the “capital account,” which includes foreign direct investment and loans,
including loans we may secure from our onshore subsidiaries or consolidated VIE. Currently, certain of our PRC subsidiary, 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 a significant amount of our 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 consolidated VIEs.
Fluctuations in exchange rates could result in foreign currency exchange losses and could materially reduce the value of your investment.
The value of the Renminbi against the U.S. dollar and other currencies may fluctuate and is affected by, among other things, changes in political
and economic conditions and the foreign exchange policy adopted by the PRC government. On July 21, 2005, the PRC government changed its policy
of pegging the value of the Renminbi to the U.S. dollar. Following the removal of the U.S. dollar peg, the Renminbi appreciated more than 20%
against the U.S. dollar over the following three years. Between July 2008 and June 2010, this appreciation halted and the exchange rate between the
Renminbi and the U.S. dollar remained within a narrow band. Since June 2010, the Renminbi has started to appreciate slowly against the U.S. dollar,
though there have been periods when the U.S. dollar has appreciated against the RMB. On August 11, 2015, the PBOC allowed the Renminbi to
depreciate by approximately 2% against the U.S. dollar. Since then and until the end of 2016, the Renminbi has depreciated against the U.S. dollar by
approximately 10%. It is difficult to predict how long such depreciation of RMB against the U.S. dollar may last and when and how the relationship
between the RMB and the U.S. dollar may change again.
All of our revenue and substantially all of our costs are denominated in Renminbi. We are a holding company and we rely on dividends paid by
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 our operations,
appreciation of the Renminbi against the U.S. dollar would have an adverse effect on the Renminbi amount we would receive. Conversely, if we
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.
Proceedings brought by the SEC against the Big Four PRC-based accounting firms, including our independent registered public accounting
firm, could result in our inability to file future financial statements in compliance with the requirements of the Exchange Act.
In December 2012, the SEC instituted administrative proceedings under Rule 102(e)(1)(iii) of the SEC’s Rules of Practice against the Big Four
PRC-based accounting firms, including our independent registered public accounting firm, alleging that these firms had violated U.S. securities laws
and the SEC’s rules and regulations thereunder by failing to provide to the SEC the firms’ audit work papers with respect to certain PRC-based
companies under the SEC’s investigation.
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On January 22, 2014, the administrative law judge, or the ALJ, presiding over the matter rendered an initial decision that each of the firms had
violated the SEC’s rules of practice by failing to produce audit workpapers to the SEC. The initial decision censured each of the firms and barred them
from practicing before the SEC for a period of six months. On February 12, 2014, the Big Four PRC-based accounting firms appealed the ALJ’s initial
decision to the SEC. On February 6, 2015, before a review by the Commissioner had taken place, the Chinese accounting firms reached a settlement
with the SEC whereby the proceedings were stayed. Under the settlement, the SEC accepted that future requests by the SEC for the production of
documents would normally be made to the CSRC. The Chinese accounting firms would receive requests matching those under Section 106 of the
Sarbanes-Oxley Act of 2002, and would be required to abide by a detailed set of procedures with respect to such requests, which in substance would
require them to facilitate production via the CSRC. The CSRC for its part initiated a procedure whereby, under its supervision and subject to its
approval, requested classes of documents held by the accounting firms could be sanitized of problematic and sensitive content so as to render them
capable of being made available by the CSRC to US regulators.
Under the terms of the settlement, the underlying proceeding against the four PRC-based accounting firms was deemed dismissed with prejudice
at the end of four years starting from the settlement date, which was on February 6, 2019. Despite the final ending of the proceedings, the presumption
is that all parties will continue to apply the same procedures: i.e. the SEC will continue to make its requests for the production of documents to the
CSRC, and the CSRC will normally process those requests applying the sanitisation procedure. We cannot predict whether, in cases where the CSRC
does not authorize production of requested documents to the SEC, the SEC will further challenge the four PRC-based accounting firms’ compliance
with U.S. law. If additional challenges are imposed on the Chinese affiliates of the “big four” accounting firms, we could be unable to timely file future
financial statements in compliance with the requirements of the Exchange Act.
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 the proceedings against these audit firms may cause investor uncertainty regarding PRC-based, United States-listed companies and the
market price of our ADSs may be adversely affected.
If the accounting firms are subject to additional remedial measures, our ability to file our financial statements in compliance with SEC
requirements could be impacted. A determination that we have not timely filed financial statements in compliance with SEC requirements would
substantially reduce or effectively terminate the trading of our ADSs in the United States.
Our ADSs may be delisted under the Holding Foreign Companies Accountable Act if the PCAOB is unable to inspect auditors who are located
in China. The delisting of our ADSs, or the threat of their being delisted, may materially and adversely affect the value of your investment.
Additionally, the inability of the PCAOB to conduct inspections deprives our investors with the benefits of such inspections.
The Holding Foreign Companies Accountable Act, or the HFCAA, was enacted on December 18, 2020. The PCAOB is currently unable to
conduct inspections on accounting firms in the PRC without the approval of the Chinese government authorities. The auditor and its audit work in the
PRC may not be inspected fully by the PCAOB. Inspections of other auditors conducted by the PCAOB outside China have at times identified
deficiencies in those auditors’ audit procedures and quality control procedures, which may be addressed as part of the inspection process to improve
future audit quality. The lack of PCAOB inspections of audit work undertaken in China prevents the PCAOB from regularly evaluating the PRC
auditor’s audits and its quality control procedures. As a result, we could be delisted from the NYSE and our ADSs will not be permitted for trading
“over-the-counter” either. Such a delisting 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 delisting 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.
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Furthermore, on June 22, 2021, the U.S. Senate passed the Accelerating Holding Foreign Companies Accountable Act (“AHFCAA”), which, if
signed into law, would amend the HFCAA and require the SEC to prohibit an issuer’s securities from trading on any U.S. stock exchanges if its auditor
is not subject to PCAOB inspections for two consecutive years instead of three consecutive years. In addition, the documentation we may be required
to submit to the SEC proving certain beneficial ownership requirements and establishing that we are not owned or controlled by a foreign government
in the event that we use a foreign public accounting firm not subject to inspection by the PCAOB or where the PCAOB is unable to inspect or
investigate our accounting practices or financial statements because of a position taken by an authority in the foreign jurisdiction could be onerous and
time consuming to prepare. The HFCAA mandates the SEC to identify issuers of SEC-registered securities whose audited financial reports are
prepared by an accounting firm that the PCAOB is unable to inspect due to restrictions imposed by an authority in the foreign jurisdiction where the
audits are performed. If such identified issuer’s auditor cannot be inspected by the PCAOB for three consecutive years, the trading of such issuer’s
securities on any U.S. national securities exchanges, as well as any over-the-counter trading in the U.S., will be prohibited.
On March 24, 2021, the SEC adopted interim final rules relating to the implementation of certain disclosure and documentation requirements of
the HFCAA. An identified issuer will be required to comply with these rules if the SEC identifies it as having a “non-inspection” year under a process
to be subsequently established by the SEC. On November 5, 2021, the SEC approved the PCAOB’s Rule 6100, Board Determinations Under the
Holding Foreign Companies Accountable Act. Rule 6100 provides a framework for the PCAOB to use when determining, as contemplated under the
HFCAA, 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 issued amendments to finalize rules implementing the
submission and disclosure requirements in the Holding Foreign Companies Accountable Act. The rules apply to registrants that the SEC identifies as
having filed an annual report with an audit report issued by a registered public accounting firm that is located in a foreign jurisdiction and that PCAOB
is unable to inspect or investigate because of a position taken by an authority in foreign jurisdictions.
On December 16, 2021, the PCAOB issued a Determination Report which found that the PCAOB is unable to inspect or investigate registered
public accounting firms headquartered in: (i) China, and (ii) Hong Kong. Our independent registered public accounting firm is located in and
organized under the laws of the PRC, a jurisdiction where the PCAOB is currently unable to conduct inspections without the approval of the Chinese
authorities, and therefore our auditors are not currently inspected by the PCAOB.
Any of these actions, or uncertainties in the market about the possibility of such actions, could adversely affect our access to the U.S. capital
markets and the price of our shares.
Future developments in respect of increase U.S. regulatory access to audit information are uncertain, as the legislative developments are subject to
the legislative process and the regulatory developments are subject to the rule-making process and other administrative procedures. Other
developments in U.S. laws and regulatory environment, including but not limited to executive orders such as Executive Order (E.O.) 13959,
“Addressing the Threat from Securities Investments That Finance Communist Chinese Military Companies,” may further restrict our access to the U.S.
capital markets and the price of our shares.
If our auditor is 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. Such a delisting 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 delisting 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.
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The Chinese government exerts substantial influence over the manner in which we must conduct our business activities. Any actions by
Chinese government, including any decision to intervene or influence our operations or to exert control over any offering of securities
conducted overseas and/or foreign investment in China-based issuers, may cause us to make material changes to our operation, may limit or
completely hinder our ability to offer or continue to offer securities to investors, and may cause the value of such securities to significantly
decline or be worthless.
The Chinese government has exercised and continues to exercise substantial control over virtually every sector of the Chinese economy through
regulation and state ownership. Substantially all of our operations are located in China. Our ability to operate in China may be harmed by changes in
its laws and regulations, including those relating to taxation, data information, environmental regulations, land use rights, property and other matters.
The central or local governments of these jurisdictions may impose new, stricter regulations or interpretations of existing regulations that would
require additional expenditures and efforts on our part to ensure our compliance with such regulations or interpretations. Accordingly, government
actions in the future, including any decision not to continue to support recent economic reforms and to return to a more centrally planned economy or
regional or local variations in the implementation of economic policies, could have a significant effect on economic conditions in China or particular
regions thereof, and could require us to divest ourselves of any interest we then hold in Chinese properties.
As such, our business segments may be subject to various government and regulatory interference in the provinces in which they operate. We
could be subject to regulation by various political and regulatory entities, including various local and municipal agencies and government sub-
divisions. We may incur increased costs necessary to comply with existing and newly adopted laws and regulations or penalties for any failure to
comply.
Furthermore, it is uncertain when and whether we will be required to obtain permission from the PRC government to list on U.S. exchanges or
enter into the VIE Agreements in the future, and even when such permission is obtained, whether we will be denied or rescinded. Although we are
currently not required to obtain permission from any of the PRC federal or local government to obtain such permission and has not received any denial
to list on the U.S. exchange and/or enter into VIE Agreements, our operations could be adversely affected, directly or indirectly, by existing or future
laws and regulations relating to our business or industry.
Risks Relating to Our Ordinary Shares and ADSs
The trading price of the ADSs may be volatile, which could result in substantial losses to you.
The trading price of our ADSs is likely 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 market prices, of other companies with business operations located mainly
in China that have listed their securities in the United States. 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 the ADSs, regardless of our 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 Chinese companies 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 our 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 the ADSs.
In addition to the above factors, the price and trading volume of the ADSs may be highly volatile due to multiple factors, including the following:
● regulatory developments affecting us or our industry;
● announcements of studies and reports relating to the quality of our credit offerings or those of our competitors;
● changes in the economic performance or market valuations of other consumer finance service providers;
● actual or anticipated fluctuations in our quarterly results of operations and changes or revisions of our expected results;
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● 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;
● allegations of a lack of effective internal control over financial reporting resulting in financial; inadequate corporate governance policies, or
allegations of fraud, among other things, involving China-based issuers;
● release or expiry of lock-up or other transfer restrictions on our outstanding shares or ADSs; and
● sales or perceived potential sales of additional 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 the ADSs and trading volume could decline.
The trading market for the ADSs will depend in part on the research and reports that securities or industry analysts publish about us or our
business. If research analysts do not establish and maintain adequate research coverage or if one or more of the analysts who covers us downgrades the
ADSs or publishes inaccurate or unfavorable research about our business, the market price for our ADSs would likely decline. If one 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 the ADSs to decline.
Because we do not expect to pay dividends periodically in the foreseeable future, you may mainly rely on price appreciation of the ADSs for
return on your investment.
Our board of directors has complete discretion as to whether to distribute dividends, subject to certain requirements of Cayman Islands law. In
addition, our shareholders may by ordinary resolution declare a dividend, but no dividend may exceed the amount recommended by our directors.
Under Cayman Islands law, a Cayman Islands company may pay a dividend out of either profit or share premium account, provided that in no
circumstances may a dividend be paid if this would result in the company being unable to pay its debts as they fall due in the ordinary course of
business. 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, our future results of operations and cash flow, our capital requirements and surplus, the amount of distributions, if any, received by
us from our subsidiaries, our financial condition, contractual restrictions and other factors deemed relevant by our board of directors. Accordingly, the
return on your investment in the ADSs will likely depend mainly upon any future price appreciation of the ADSs. There is no guarantee that the 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 the ADSs and
you may even lose your entire investment in the ADSs.
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Substantial future sales or perceived potential sales of the ADSs in the public market could cause the price of the ADSs to decline.
Sales of the ADSs in the public market, or the perception that these sales could occur, could cause the market price of the ADSs to decline
significantly. The total number of ordinary shares outstanding as of March 31, 2022 was 329,117,943 ordinary shares, comprised of 231,517,943
Class A ordinary shares and 97,600,000 Class B ordinary shares. All ADSs representing our ordinary shares 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 will be available for sale, subject to volume and other restrictions as applicable under Rules 144 and 701 under
the Securities Act. Any or all of these ordinary shares may be released prior to the expiration of the applicable lock-up period at the discretion of the
designated representatives. To the extent shares are released before the expiration of the applicable lock-up period and sold into the market, the market
price of the ADSs could decline significantly.
Certain major holders of our ordinary shares will 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 ADSs in the public market could cause the price of the ADSs to decline significantly.
The voting rights of holders of ADSs are limited by the terms of the deposit agreement, and you may not be able to exercise your right to direct
the voting of your Class A ordinary shares underlying your ADSs.
Holders of ADSs do not have the same rights as our registered shareholders. As a holder of our ADSs, you will not have any direct right to attend
general meetings of our shareholders or to cast any votes at such meetings. You will only be able to exercise the voting rights which attach to the
Class A ordinary shares underlying your ADSs indirectly by giving voting instructions to the depositary in accordance with the provisions of the
deposit agreement. Under the deposit agreement, you may vote only by giving voting instructions to the depositary, as holder of the Class A ordinary
shares underlying your ADSs. Upon receipt of your voting instructions, the depositary may try to vote the Class A ordinary shares underlying your
ADSs in accordance with your instructions. If we ask for your instructions, then upon receipt of your voting instructions, the depositary will try to vote
the underlying Class A ordinary shares in accordance with those instructions. If we do not instruct the depositary to ask for your instructions, the
depositary may still vote in accordance with instructions you give, but it is not required to do so. You will not be able to directly exercise any right to
vote with respect to the underlying Class A ordinary shares unless you withdraw the shares and become the registered holder of such shares prior to the
record date for the general meeting. When a general meeting is convened, you may not receive sufficient advance notice of the meeting to enable you
to withdraw the shares underlying your ADSs and become the registered holder of such shares prior to the record date for the general meeting to allow
you to attend the general meeting and to vote directly with respect to any specific matter or resolution to be considered and voted upon at the general
meeting. In addition, under our second amended and restated articles of association, for the purposes of determining those shareholders who are
entitled to attend and vote at any general meeting, our directors may close our register of members and/or fix in advance a record date for such
meeting, and such closure of our register of members or the setting of such a record date may prevent you from withdrawing the Class A ordinary
shares underlying your ADSs and becoming the registered holder of such shares prior to the record date, so that you would not be able to attend the
general meeting or to vote directly. Where any matter is to be put to a vote at a general meeting, the depositary will notify you of the upcoming vote
and to deliver our voting materials to you. We cannot assure you that you will receive the voting material in time to ensure you can direct the
depositary to vote your shares. In addition, the depositary and its agents are not responsible for failing to carry out voting instructions or for their
manner of carrying out your voting instructions. This means that you may not be able to exercise your right to direct how the shares underlying your
ADSs are voted and you may have no legal remedy if the shares underlying your ADSs are not voted as you requested.
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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 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 non-cash distributions if the depositary decides it is impractical to make them available to you.
To the extent that there is a distribution, the depositary has agreed to distribute to you the securities or other property it or the custodian receives
on our ordinary shares or other deposited securities after deducting its fees and expenses. You will receive these distributions in proportion to the
number of 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.
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.
ADSs holders may not be entitled to a jury trial with respect to claims arising under the deposit agreement, which could result in less favorable
outcomes to the plaintiff(s) in any such action.
The deposit agreement governing the ADSs representing our Class A ordinary shares provides that, to the fullest extent permitted by law, ADS
holders waive the right to a jury trial of any claim they may have against us or the depositary arising out of or relating to our shares, the ADSs or the
deposit agreement, including any claim under the U.S. federal securities laws.
If we or the depositary opposed a jury trial demand based on the waiver, the court would determine whether the waiver was enforceable based on
the facts and circumstances of that case in accordance with the applicable state and federal law. To our knowledge, the enforceability of a contractual
pre-dispute jury trial waiver in connection with claims arising under the federal securities laws has not been finally adjudicated by the United States
Supreme Court. However, we believe that a contractual pre-dispute jury trial waiver provision is generally enforceable, including under the laws of the
State of New York, which govern the deposit agreement, by a federal or state court in the City of New York, which has non-exclusive jurisdiction over
matters arising under the deposit agreement. In determining whether to enforce a contractual pre-dispute jury trial waiver provision, courts will
generally consider whether a party knowingly, intelligently and voluntarily waived the right to a jury trial. We believe that this is the case with respect
to the deposit agreement and the ADSs. It is advisable that you consult legal counsel regarding the jury waiver provision before entering into the
deposit agreement.
If you or any other holders or beneficial owners of ADSs bring a claim against us or the depositary in connection with matters arising under the
deposit agreement or the ADSs, including claims under federal securities laws, you or such other holder or beneficial owner may not be entitled to a
jury trial with respect to such claims, which may have the effect of limiting and discouraging lawsuits against us and / or the depositary. If a lawsuit is
brought against us and/or the depositary under the deposit agreement, it may be heard only by a judge or justice of the applicable trial court, which
would be conducted according to different civil procedures and may result in different outcomes than a trial by jury would have had, including results
that could be less favorable to the plaintiff(s) in any such action.
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Nevertheless, if this jury trial waiver provision is not permitted by applicable law, an action could proceed under the terms of the deposit
agreement with a jury trial. No condition, stipulation or provision of the deposit agreement or ADSs serves as a waiver by any holder or beneficial
owner of ADSs or by us or the depositary of compliance with any substantive provision of the U.S. federal securities laws and the rules and regulations
promulgated thereunder.
Certain judgments obtained against us by our shareholders may not be enforceable.
We are an exempted company incorporated under the laws of the Cayman Islands. We conduct our operations outside the United States and
substantially all of our 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 our assets or the assets of our directors and officers.
For more information regarding the relevant laws of the Cayman Islands and China.
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 incorporated under the laws of the Cayman Islands. Our corporate affairs are governed by our memorandum and
articles of association, the Cayman Companies Act and the common law of the Cayman Islands. The rights of our shareholders to take action against
our directors, actions by our 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.
Shareholders of Cayman Islands exempted companies like us have no general rights under Cayman Islands law to inspect corporate records (other
than copies of our memorandum and articles of association, our register of mortgages and charges, and copies of any special resolutions passed by the
shareholders) or to obtain copies of lists of shareholders of these companies. Our directors will have discretion under our 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 our
management, members of our board of directors or our controlling shareholders than they would as public shareholders of a company incorporated in
the United States. For a discussion of significant differences between the provisions of the Cayman Companies Act and the laws applicable to
companies incorporated in the United States and their shareholders.
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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 ordinary share represented by 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 ordinary shares, including ordinary shares represented by ADS. 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 the ADSs may fall and the voting and other rights of the holders of our ordinary shares and the ADSs
may be materially and adversely affected. In addition, our 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.
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;
● 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 our
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, NYSE
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. Currently, we do not
plan to rely on home country practice with respect to our corporate governance. However, if we choose to follow home country practice in the future,
our shareholders may be afforded less protection than they otherwise would enjoy under the NYSE corporate governance listing standards applicable
to U.S. domestic issuers.
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There is a significant risk that we were a passive foreign investment company, or PFIC, for 2020 and we may be a PFIC for the current or
subsequent taxable years, which could result in adverse U.S. federal income tax consequences to U.S. investors in our ADSs or our ordinary
shares.
In general, a non-U.S. corporation is a PFIC for any taxable year in which (i) 75% or more of its gross income consists of passive income or
(ii) 50% or more of the quarterly value of its assets (generally determined on a quarterly basis) consists of assets that produce, or are held for the
production of, passive income. For purposes of the above calculations, a non-U.S. corporation that owns at least 25% by value of the shares of another
corporation is treated as if it held its proportionate share of the assets of the other corporation and received directly its proportionate share of the
income of the other corporation. Passive income generally includes interest (and income equivalent to interest), dividends, rents, royalties and gains
from financial investments. Cash is generally a passive asset for these purposes. Goodwill (which may be determined by reference to the excess of the
sum of the corporation’s market capitalization and liabilities over the value of its assets) is an active asset to the extent attributable to business
activities that produce active income.
Due to the decrease in our market capitalization and uncertainties as to the proper classification of certain items of our income and assets for
purposes of the PFIC rules, there is a significant risk that we were a PFIC for our 2020 taxable year. The proper application of the PFIC rules to us is
not clear. For example, it is uncertain whether for purposes of the PFIC rules we should be treated as the owner of the Consolidated Trusts’ assets.
Although such trusts are consolidated on our financial statements for accounting purposes, based on the manner in which we and the trusts currently
operate and the nature of our rights and obligations with respect to the trusts, we believe it is reasonable to treat the trusts’ assets (to the extent not
attributable to any investment by us in the trusts) as not owned by us for purposes of the PFIC rules, but there can be no assurance in this regard. If the
trusts’ assets were treated as owned by us for PFIC purposes, we would be a PFIC for our 2020 taxable year. Moreover, the value of our goodwill for
2020 was not a positive amount and it is not entirely clear how the percentage of our active assets should be calculated in such circumstances, and to
what extent certain assets shown on our balance sheet should be treated as active for purposes of determining our PFIC status. In addition, it is not
entirely clear how the contractual arrangements between us and our VIEs will be treated for purposes of the PFIC rules. Because we exercise effective
control over the operation of our VIEs and are entitled to substantially all of their income, we believe it is appropriate to treat the VIEs as owned by us
for purposes of the PFIC rules. However, there can be no assurance in this regard and we may be a PFIC for any taxable year if our VIEs are not
treated as owned by us for such purposes. For these reasons, there is a significant risk that we were a PFIC for our taxable 2020 year and that we will
be a PFIC for our current and future taxable years.
If we are a PFIC for any taxable year during which a U.S. investor owns ADSs or ordinary shares, certain adverse U.S. federal income tax
consequences could apply to such U.S. investor. For example, a U.S. investor may be subject to increased tax liabilities and generally will be subject to
certain reporting requirements. See “Item 10. Additional Information—10.E. Taxation—U.S. Federal Income Taxation—Passive Foreign Investment
Company.”
We will continue to incur increased costs as a result of being a public company, particularly after we cease to qualify as an “emerging growth
company.”
Since the completion of our initial public offering, we have incurred 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 NYSE, imposes various
requirements on the corporate governance practices of public companies. As a company with less than US$1,070,000,000 in total annual gross revenue
for our last fiscal year, we qualify as an “emerging growth company” pursuant to the JOBS Act. An emerging growth company may take advantage of
specified reduced reporting and other requirements that are otherwise applicable generally to public companies. These provisions include exemption
from the auditor attestation requirement under Section 404 of the Sarbanes-Oxley Act of 2002 in the assessment of the emerging growth company’s
internal control over financial reporting and permission to delay adopting new or revised accounting standards until such time as those standards apply
to private companies. However, we have elected to “opt out” of the provision that allow us to delay adopting new or revised accounting standards and,
as a result, we will comply with new or revised accounting standards as required when they are adopted for public companies. This decision to opt out
of the extended transition period under the JOBS Act is irrevocable.
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We expect these rules and regulations to increase our legal and financial compliance costs and to make some corporate activities more time
consuming and costly. After we are no longer an “emerging growth company,” we expect to incur significant expenses and devote 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 will need to increase the number of independent directors and
adopt policies regarding internal controls and disclosure controls and procedures. We also expect that operating as a public company will 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 will 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. We are currently evaluating and monitoring developments with respect to these rules and regulations, and we cannot predict or estimate with
any degree of certainty the amount of additional costs we may incur or the timing of such costs.
In the past, shareholders of a public company often brought securities class action suits against the company following periods of instability in the
market price of that company’s securities. If we were involved in a class action suit, it could divert a significant amount of our management’s attention
and other resources from our business and operations, which could harm our results of operations and require us to incur significant expenses to defend
the suit. Any such class action suit, whether or not successful, could harm our reputation and restrict our ability to raise capital in the future. In
addition, if a claim is successfully made against us, we may be required to pay significant damages, which could have a material adverse effect on our
financial condition and results of operations.
ITEM 4. INFORMATION ON THE COMPANY
4.A. History and Development of the Company
Shenzhen Ying Zhong Tong Financial Information Service Co., Ltd., or Shenzhen Ying Zhong Tong, was incorporated in March 2014 and
controlled by Mr. Yue (Justin) Tang. In August 2014, we, through Shenzhen Ying Zhong Tong, began to facilitate investment products to individual
investors in China with a variety of terms and rates of return to meet the demand from individual investors. In July 2015, Shenzhen Ying Zhong Tong
commenced loan facilitation business to facilitate loan products to borrowers who are underserved by the current traditional financial system in China.
In October 2016, entities controlled by Mr. Yue (Justin) Tang, Mr. Baoguo Zhu and other investors incorporated Shenzhen Xiaoying Technology
Co., Ltd., or Shenzhen Xiaoying. In December 2016, Shenzhen Xiaoying acquired all of the equity interest in Shenzhen Ying Zhong Tong. In
December 2017, we underwent a restructuring in contemplation of our initial public offering. After such restructuring, the shareholders of Shenzhen
Xiaoying were changed to Mr. Yue (Justin) Tang, entities controlled by Mr. Yue (Justin) Tang and Mr. Baoguo Zhu.
In March 2015, our co-founders, Mr. Yue (Justin) Tang and Mr. Baoguo Zhu, incorporated Beijing Ying Zhong Tong Rongxun Technology
Service Co., Ltd, or Beijing Ying Zhong Tong, which is controlled by Mr. Yue (Justin) Tang.
In December 2016, Xi’an Bailu Enterprise Management Co., Ltd., or Xi’an Bailu, incorporated Shenzhen Tangren Financing Guarantee Co., Ltd.,
or Shenzhen Tangren, a company holding a financing guarantee license. Xi’an Bailu, which holds 100% equity interest in Shenzhen Tangren, is
ultimately controlled by Mr. Yue (Justin) Tang and two other individuals who are his business partners, while the capital contribution of Shenzhen
Tangren paid by Xi’an Bailu was borrowed from Shenzhen Xiaoying.
In January 2015, we incorporated Winning Financial Service Inc. under the laws of the Cayman Islands as our offshore holding company, which
later changed its name to X Financial in August 2017. Subsequently, we incorporated YZT (HK) Limited as X Financial’s wholly-owned subsidiary
and our intermediate holding company to facilitate financing. In October 2015, YZT (HK) Limited incorporated Xiaoying (Beijing) Information
Technology Co., Ltd., or Beijing WFOE, as its wholly-owned subsidiary in the PRC, through which we obtained control over Shenzhen Tangren on a
series of contractual arrangements entered into on December 16, 2016 when Shenzhen Tangren was formed and Beijing Ying Zhong Tong and
Shenzhen Xiaoying (together with Shenzhen Tangren, the VIEs) on a series of contractual arrangements entered into on December 22, 2017,
respectively. Such contractual arrangements consist of equity pledge agreements, shareholders’ voting rights proxy agreement, spousal consent letter,
and exclusive business cooperation agreements, exclusive call option agreements. See “Item 4. Information on the Company—4.C. Organizational
Structure—Contractual Arrangements with Consolidated VIEs and their Shareholders” for details.
In September 2018, we completed an initial public offering of 11,763,478 ADSs (including the ADSs sold upon the exercise of the over-allotment
option granted to the underwriters), representing 23,526,956 Class A ordinary shares. On September 19, 2018, our ADSs were listed on the NYSE
under the symbol “XYF.”
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On May 31, 2021, Shenzhen Xiaoying Microcredit Co., Ltd. , or Xiaoying Microcredit, was incorporated in the PRC with online microcredit
business operating license by Shenzhen Xiaoying. Shenzhen Xiaoying had completed the capital contributions of RMB1 billion to Xiaoying
Microcredit by the end of November, 2021.
Our corporate headquarters is located at 7-8F, Block A, Aerospace Science and Technology Plaza, No. 168, Haide Third Avenue, Nanshan
District, Shenzhen, 518067, the People’s Republic of China. Our telephone number at this address is +86-0755-86282977. Our registered office in the
Cayman Islands is located at the offices of Maples Corporate Services Limited at PO Box 309, Ugland House, Grand Cayman, KY1-1104, Cayman
Islands. We maintain a website at http://ir.xiaoyinggroup.com/ that contains information about our Company, but that information is not part of this
report or incorporated by reference herein.
Share Repurchase Program
In March 2022, our board of directors has approved a share repurchase plan under which the Company may repurchase up to US$15 million worth
of its Class A ordinary shares in the form of American depositary shares (“ADSs”) over the next eighteen months, effective until September, 2023.
Under the share repurchase plan, the repurchase may be made from time to time through various means, including open market transactions, privately
negotiated transactions, and through other legally permissible means, depending on market conditions and in accordance with applicable rules and
regulations. The manner, timing and amount of any share repurchases will be determined by the our management in its discretion based on its
evaluation of various factors. We expect to fund repurchases out of its existing cash balance.
4.B. Business Overview
Overview
X financial is a leading online personal finance company in China. We are committed to connecting borrowers on our platform with institutional
funding partners. With proprietary big data-driven technology, we have established strategic partnerships with financial institutions across multiple
areas of its business operations, enabling us to facilitating loans to prime borrowers under a robust risk assessment and control system.
We offer differentiated products specifically catered to the financing needs of individuals in China. Our main category of loan products is
Xiaoying Credit Loan, a category of online personal credit loan products facilitated through our platform, including Xiaoying Card Loan, Xiaoying
Preferred Loan and other unsecured loan products that we introduce from time to time. Xiaoying Card Loan is our flagship product under Xiaoying
Credit Loan, which offers borrowers a combination of small credit line and attractive APR in China. We ceased facilitation of Xiaoying Preferred Loan
in October 2019. We ceased facilitation of Xiaoying Revolving Loan at the end of 2020 to optimize our product portfolio with a focus on Xiaoying
Card Loan, which targets prime borrowers and has proven to meet customers’ needs and fits better into our strategy to drive long-term profitable
growth. Xiaoying Revolving Loan was a category of products that provide borrowers with a credit limit, enabling borrowers to repay the borrowed
amount at any time with an interest-free period or repay by installments. The major product under the category Xiaoying Revolving Loan was
Yaoqianhua, initially named as Xiaoying Wallet when it was launched in August 2018.
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Our proven risk management and credit assessment capabilities, and the accompanying insurance/guarantee protection from third parties, enable
us to attract a diversified and low-cost funding base to support our growth. Before 2020, we had both individual investors and corporate investors on
our Xiaoying Wealth Management platform, a platform that was designed for investors who invested in our loan products by providing funding for
such loans. At the end of 2019, we ceased funding our loan products from our individual investors through Xiaoying Wealth Management platform.
We have established a long-term collaboration relationship with institutional funding partners, including banks, consumer finance companies, trust
companies and other financial institutions. Institutional funding partners have become our major funding source for our loan products, as we gradually
reduced the funds from individual investors in 2019. We actively expanded institutional funding and achieved 100% institutional funding for the new
loans facilitated by the end of the second quarter of 2020. As of December 17, 2020, the Company had repaid all the outstanding investment principal
and interest to individual investors who previously made investments as a P2P investor through Xiaoying Wealth Management platform. In May 2021,
we obtained a network microcredit license from the Local Financial Regulatory Bureau of Shenzhen Municipality and started online microcredit
business in July 2021 by providing loans funded from own capital. As of December 31, 2021, our registered capital for microcredit reached
RMB1,000,000,000. In 2019, 68.1% of the total funding for loans we facilitated were provided by individual investors, 26.6% were provided by
corporate investors and institutional funding partners, and 5.3% were provided by our own funds. In 2020, 4.7% of the total funding for loans we
facilitated were provided by individual investors, 95.3% were provided by institutional funding partners. In 2021, 98.0% of the total funding for loans
we facilitated were provided by institutional funding partners and 2.0% were provided by our own funds. In 2019, 2020, and 2021, the overall funding
cost for the loans we facilitated was 7.72%, 8.31%, and 8.62% respectively.
Our business model is light in labor commitment, and we believe we manage our transaction and operating costs in an effective way. Benefiting
from our superior loan product offerings, strong credit performance and accompanying insurance/guarantee protection, we continue to expand our user
base primarily through referral without incurring significant sales and marketing expenses, resulting in relatively low user acquisition costs.
Furthermore, our highly automated risk management system and technology infrastructure enable us to automatically facilitate a large number of
transactions simultaneously. In 2019, 2020, and 2021, our net revenue per employee was RMB4,456,000, RMB4,798,599, and RMB8,552,983
respectively, and our general and administrative expenses as a percentage of our total net revenues was 7.4%, 8.3%, and 5.2% respectively.
We utilize data-driven and technology-empowered credit analysis. Our proprietary risk control system, WinSAFE, builds risk profiles of our
prospective borrowers upon data from reputable credit information providers employed by traditional financial institutions, augmented by a variety of
social and behavioral data from internet and mobile platforms not typically utilized by traditional financial institutions. Leveraging data analysis and
machine learning in assessing a borrower’s value, repayment capability and propensity, we are able to offer differentiated credit limits to borrowers
based on individual credit assessment result. Our rigorous data-driven credit assessment methodology has helped us to achieve a strategic balance
between borrower expansion and asset quality control. In 2019, 2020, and 2021, the total loans we facilitated amounted to RMB39,441 million,
RMB29,676 million, and RMB51,859 million, respectively, while the delinquency rate for all outstanding loans that were 31-60 days past due
increased from 0.79% as of December 31, 2020 to 1.48% as of December 31, 2021.
We benefit from our strategic partnership with various licensed financial institutional cooperators. The protection offered by their credit insurance
or financing guarantee on the loans that we facilitate significantly enhances our intuitional funding partners’ trust in our business. Our risk
management system is also strengthened by those financial institutional cooperators’ insurance or guarantee decision opinion. Our financial
institutional cooperators’ credit assessment models are based on information from various databases, including information from PBOC CRC which is
only available to licensed financial institutions. Our financial institutional cooperators’ insurance or guarantee decision opinion serves as one of the
inputs of our comprehensive credit risk management system, along with other behavior and credit information.
We also partner with Baihang Credit, the second largest licensed individual credit bureau in China, which integrates, saves and processes the data
collected from its partner companies and provides information searching and other additional services to its partner companies in return. The
cooperation strengthens our credit assessment system and allows us to quickly and accurately assess the creditworthiness of borrowers, target a broader
user base for financial services, and reduce the cost of risk management. According to a new regulation, loan facilitation platforms are restricted from
submitting credit assessment-related personal data directly to financial institutions, and such data transfer must be conducted through a licensed credit
agency. In response, we have been working closely with Baihang Credit to execute a plan to comply with the new regulation.
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We generate revenues primarily from (i) the fees that we charge for our service of matching institutional funding partners with borrowers (i.e., our
loan facilitation service) and for other services we provide over the lifetime of the loan (i.e., our post-origination service and guarantee service); (ii)
interests from borrowers from our microcredit business and the financing fees we charges for the loans facilitated through the Consolidated Trusts and
Partnerships (i.e., our financing income). Our consolidated VIE, Shenzhen Tangren, and external financing guarantee companies charge borrowers a
guarantee fee, a portion of which will be subsequently paid to us as the service fee. We also charge service fees directly to certain institutional funding
partners. In 2019, our service fee rate (annualized based on original amount of loan principal) of our major loan products ranged from 0.0% to 24.1%
and the service fees we charged for loan facilitation services, post-origination services and guarantee services accounted for 72.0%, 10.7% and 1.8%,
respectively, of our total net revenues. In 2020, our service fee rate (annualized based on original amount of loan principal) of our major loan products
ranged from 0.0% to 21.4% and the service fees we charged for loan facilitation services, post-origination services and guarantee services accounted
for 59.6%, 9.3% and 0.7%, respectively, of our total net revenues. In 2021, our service fee rate (annualized based on original amount of loan principal)
of our major loan products ranged from 0.1% to 11.8% and the service fees we charged for loan facilitation services, post-origination services and
guarantee services accounted for 70.2%, 8.7%, and 0.4%, respectively, of our total net revenues. In 2019, 2020 and 2021, our financing income
accounted for 13.2%, 27.9%, and 18.5%, respectively, of our total net revenues.
The total borrowing cost is expressed as APR, the actual annualized cost of borrowing over the term of a loan. The following table sets forth the
APR range of our major loan products for the periods indicated.
Loan Product
Xiaoying Credit Loan (1)
Xiaoying Revolving Loan (2)
Xiaoying Housing Loan
Loan facilitation services to other platforms (3)
Note:
2019
Year Ended December 31,
2020
9.67%~36.00 %
17%~36 %
12.50%~12.50 %
1.35%~36.00 %
8.00%~36.00 %
14.37%~25.27 %
— %
4.39 %
2021
8.00%~24.38 %
—
—
—
(1) Xiaoying Credit Loan is a category of online personal credit loan products facilitated through our platform, including Xiaoying Card Loan,
Xiaoying Preferred Loan and other unsecured loan products that we introduce from time to time. We ceased facilitation of Xiaoying Preferred
Loan in October 2019.
(2) Xiaoying Revolving Loan is category of products that provide borrowers with a credit limit, enabling borrowers to repay the borrowed amount at
any time with an interest-free period or repay by installments. The major product under the category Xiaoying Revolving Loan is Yaoqianhua,
initially named as Xiaoying Wallet when it was launched in August 2018. We have ceased the operation of Xiaoying Revolving Loan in 2020.
(3) Different from APR used to express the total borrowing cost for our loan products, the figures set forth in the table represent the service fee range
we collect from borrowers referred from other platforms for loans successfully allocated to investors or other funding sources. We have ceased to
facilitate loans for other platforms in 2020.
Our total net revenue was RMB3,088.1 million in 2019, RMB2,193.0 million in 2020, and RMB3,626.5 million (US$569.1 million) in 2021. We
had a net income of RMB825.4 million (US$129.5 million) in 2021, compared to a net loss of RMB1,308.5 million in 2020.
Our Borrowers and Loan Products
Overview
We strategically target the prime borrowers underserved by traditional financial institutions. We believe we set a high standard of credit quality by
defining our borrowers as prime borrowers, who we define as an individual having sound credit history, who has credit records with PBOC CRC and
usually no late payment record of over 60 days in the previous six months. For the determination of a prime borrower, we review their credit history,
along with our sophisticated risk management review system.
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Our differentiated loan product suite addresses the financing needs of our target prime borrower segments. Xiaoying Credit Loan is our main
category of loan products, which consists of Xiaoying Card Loan catering to the young consumers, Xiaoying Preferred Loan catering to small business
owners and other unsecured loan products that we introduce from time to time. Xiaoying Revolving Loan mainly consists of Yaoqianhua (initially
named as Xiaoying Wallet) catering to online purchasing users. Xiaoying Housing Loan caters to the property owners. Our Xiaoying Credit Loan and
Xiaoying Revolving Loan are unsecured loan products and our Xiaoying Housing Loan is a secured loan product. We ceased facilitation of Xiaoying
Preferred Loan and Xiaoying Housing Loan in 2019. And we ceased facilitation of Xiaoying Revolving Loan and loan facilitation for other platforms
in 2020. In 2021, we focus on our flagship product, Xiaoying Card Loan, which offers borrowers a combination of small credit line and attractive APR
in China.
We facilitated loans to 8,175,373 active borrowers, each of whom made at least one transaction on our platform during the period from the
commencement of our loan facilitation business to December 31, 2021. The number of our active borrowers decreased from 2,152,962 in 2019 to
1,663,737 in 2020 and then increased to 2,371,537 in 2021. The amount of loans we facilitated to borrowers decreased from RMB39,441 million in
2019 to RMB29,676 million in 2020 and then increased to RMB51,859 million in 2021. The table below sets forth the breakdown of loan facilitation
amount by product for the periods indicated.
Loan Product
Xiaoying Credit Loan (1)
Xiaoying Revolving Loan (2)
Xiaoying Housing Loan (3)
Loan facilitation services to other platforms (4)
Total
Notes:
Year Ended December 31,
2019
Year Ended December 31,
2020
Year Ended December 31,
2021
RMB in
millions
29,825
4,780
31
4,805
39,441
%
75.6 %
12.1 %
0.1 %
12.2 %
100.0 %
RMB in
millions
24,057
5,618
N/A
1
29,676
%
81.1 %
18.9 %
N/A
0.0 %
100.0 %
RMB in
millions
51,859
N/A
N/A
N/A
51,859
%
100 %
N/A
N/A
N/A
100 %
(1) The data set forth herein includes Xiaoying Card Loan, Xiaoying Preferred Loan and other unsecured loan products that we operated during 2020.
Xiaoying Card Loan was launched in December 2016. Xiaoying Preferred Loan was launched in November 2015 and was ceased in
October 2019.
(2) The major product under the category Xiaoying Revolving Loan is Yaoqianhua, initially named as Xiaoying Wallet when it was launched in
August 2018. We ceased the operation of Yaoqianhua in December 2020.
(3) Xiaoying Housing Loan was launched in July 2015 and ceased in February 2019.
(4) We started to provide loan facilitation services to other platforms in December 2015. We have ceased to facilitate loans for other platforms in
2020.
Loans that are delinquent for more than 60 days are charged-off and excluded in the outstanding balance, except for Xiaoying Housing Loan. As
Xiaoying Housing Loan is a secured loan product and we are entitled to payment by exercising our rights to the collaterals, we do not exclude
Xiaoying Housing loan delinquent for more 60 days in the outstanding loan balance. The outstanding balance of loans we facilitated to borrowers
decreased from RMB16.1 billion as of December 31, 2019 to RMB13.2 billion as of December 31, 2020 and then increased to RMB24.9 billion as of
December 31, 2021. The table below sets forth the breakdown of outstanding loan balance by product as of the dates indicated.
Loan Product
Xiaoying Credit Loan
Xiaoying Revolving Loan
Xiaoying Housing Loan
Loan facilitation services to other platforms
Total
As of December 31,
2019
RMB
in millions %
13,090
1,446
156
1,378
16,070
81.5 %
9.0 %
1.0 %
8.5 %
100 %
71
As of December 31,
2020
RMB
in millions
12,714
399
105
0
13,218
As of December 31,
2021
RMB
in millions %
24,864
%
96.2 %
3.0 %
0.8 %
0.0 %
0
48
N/A
100.0 % 24,912
99.8 %
0.0 %
0.2 %
N/A
100 %
Table of Contents
To make the outstanding loan balance comparable to our peers, we also present the outstanding loan balance excluding loans overdue more than
180 days, except for Xiaoying Housing Loan. The outstanding balance of loans we facilitated to borrowers decreased from RMB17.3 billion as of
December 31, 2019 to RMB13.7 billion as of December 31, 2020 and then increased to RMB25.9 billion as of December 31, 2021. The table below
sets forth the breakdown of outstanding loan balance by product as of the dates indicated.
Loan Product
Xiaoying Credit Loan
Xiaoying Revolving Loan
Xiaoying Housing Loan
Loan facilitation services to other platforms
Total
As of December 31,
2019
As of December 31,
2020
As of December 31,
2021
RMB
in millions
14,230
1,503
156
1,378
17,267
%
82.4 %
8.7 %
0.9 %
8.0 %
100.0 %
RMB
in millions
13,075
482
105
0
13,662
%
95.7 %
3.5 %
0.8 %
0.0 %
100.0 %
RMB
in millions
25,859
1
48
N/A
25,908
%
99.8 %
0.0 %
0.2 %
N/A
100 %
The transaction process on our platform provides our borrowers with a streamlined and standardized process of loan application and funding with
step-by-step instructions including the following stages:
● First stage: an applicant submits loan application with their PRC identity card information, bank card information and mobile phone number.
● Second stage: verification of the applicant’s information through our authentication technologies and multiple databases upon the
authorization by the applicant.
● Third stage: the first credit assessment of the applicant by our propriety risk control model and the second credit assessment of the applicant
by our financial institutional cooperators’ risk control model.
● Fourth stage: approval of loan application, loan listing and the disbursement of funds to borrowers after the credit assessment of our
institutional funding’s risk control model.
After the completion of funding, we also provide servicing and collection services. The transaction process varies in certain stages for different
loan products. The details of transaction process for Xiaoying Credit Loan, Xiaoying Revolving Loan and Xiaoying Housing Loan are described
below, respectively.
Xiaoying Credit Loan
Considering that both Xiaoying Card Loan and Xiaoying Preferred Loan are unsecured online personal credit loan products, in 2018 we integrated
those two products with similar features into one general product category, Xiaoying Credit Loan, to improve management efficiency. We have ceased
the facilitation of Xiaoying Preferred Loan since October 2019. We may introduce other unsecured loan products from time to time under the category
of Xiaoying Credit Loan.
Xiaoying Card Loan
Launched in December 2016, Xiaoying Card Loan, primarily an online personal credit loan product, is our flagship product targeting prime
borrowers.
Borrowers
Xiaoying Card Loan’s target borrowers are primarily young consumers who are in the early stages of their careers with insufficient credit lines
granted by traditional credit card issuers, and they choose Xiaoying Card Loan to supplement their credit lines to fulfill their consumption needs.
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Products
We offer Xiaoying card loan in amounts ranging from RMB1,000 to RMB80,000 with terms of three, six, nine and twelve installments. Borrowers
usually repay the principal and interest accrued based on the original principal amount in equal monthly installments, provided that, prior to December
7, 2017, we deducted part of the service fees from the loan principal in advance and received the remaining service fees paid by borrowers in equal
monthly installments. In October 2017, we introduced a new loan product “Xiaoying Professional Loan” to credit card holders who have been assigned
with the highest credit grade by our risk management system and require long-term liquidity and large-amount capital. Xiaoying Professional Loan has
a term of one to three years. Borrowers of this product can repay at any time after three months of origination and all monthly service fees for the
remaining period is waived upon termination. We started to operate and manage Xiaoying Professional Loan under Xiaoying Card Loan since January
1, 2018. In 2019 ,2020 and 2021, the average APR of Xiaoying Card Loan paid by borrowers was 29.73%, 21.9%, and 19.34%.
We facilitated 1,919,735 loans, 2,462,468 loans, and 4,926,629 loans for Xiaoying Card Loans in 2019, 2020 and 2021, respectively. The total
loan amount of Xiaoying Card Loan we facilitated decreased from RMB27,702 million in 2019 to RMB23,841 million in 2020 and then increased to
RMB51,859 million in 2021. The average loan amount per transaction was RMB14,430 in 2019, RMB9,682 in 2020, and RMB10,526 in 2021. The
outstanding balance of Xiaoying Card Loan we facilitated to borrowers increased from RMB11,631 million as of December 31, 2019 to RMB12,615
million as of December 31, 2020 and further to RMB24,864 million as of December 31, 2021.
Transaction Process
We facilitate most of Xiaoying Card Loan through mobile application which is a simple, secure and convenient loan application process. The
following diagram illustrates a simplified transaction process of Xiaoying Card Loan:
Stage 1: Application
Applicants of Xiaoying Card Loan must first register a user account by providing requested personal details, including mobile phone number and
PRC identity card information. With the applicant’s authorization, the PRC identity card will be automatically captured and recognized by our
authentication module through Optical Character Recognition, or OCR technology. Applicants are also required to do specific poses facing the front
camera of their phones to complete automatic biometric recognition. When the registered users choose their desired loan amount and term of a loan
product, they are required to further provide additional information including current residential addresses, contacts and debit card information used
for monthly repayment.
Stage 2: Verification
Upon submission of a completed application, we verify each applicant’s information using multiple authentication technologies and internal and
external databases, including, among others, face scanning and OCR technology, the internal and industry blacklist provided by third party database
and the mobile activities of the applicant, to identify and screen for fraudulent applications. See “—Risk Management” for details.
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Stage 3: Credit Assessment
Once an applicant’s information is input into our proprietary risk control system, WinSAFE, we will conduct credit assessment based on our
database. We will also send the identity information of the applicant to our financial institutional cooperators and receive their credit opinion on
insurance or guarantee based on their credit analysis model. We will, in accordance with our own risk management strategies, embed such credit
opinion on insurance or guarantee into our risk management model for determining and assigning each applicant a credit grade. Such credit grade is a
comprehensive credit level reflecting our prediction of the applicant’s likelihood of future delinquency, considering multiple factors, among others, the
applicant’s ability to fund repayment obligations. We continue to optimize our risk management model as we modify and identify more effective
proxies to estimate an applicant’s income level. We constantly incorporate new information into our credit assessment process with our own
accumulated data as well as external third party collaboration such as other online lending platforms to better evaluate the overall indebtedness of the
applicant and his or her likelihood to repay our loans with loans from other platforms. Credit grade will not be adjusted until the same applicant applies
for another loan, when the repayment history of all the existing loans will be added into the risk model to determine the credit grade for the new loan
application. See “—Risk Management” for a detailed description of WinSAFE and other aspects of our risk management.
Stage 4: Approval and Funding
Following the credit assessment, we may (i) approve the loan application, (ii) approve the loan subject to modification of the loan amount, or
(iii) decline the loan application. Applicants are notified of the results.
Once the applicant’s loan application is approved, we may send the application to institutional funding partners for their credit assessment. Once a
loan is fully subscribed after the credit assessment of our institutional funding’s risk control model, funds are transferred to the borrower’s account.
The borrower will enter into related agreements for funding.
Stage 5: Servicing and Collection
We provide repayment reminder services through in-app notifications, SMSs or phone calls by our service representatives before the due date for
each scheduled repayment. We collect a penalty fee from a defaulting borrower on a daily basis for past due loan principal.
We establish a score model to differentiate the risk level of a defaulting borrower based on the type of loan products, outstanding amount,
delinquent days and historical repayment pattern. We adopt various approaches, including text messages, phone calls and other legitimate actions to
request repayment of the delinquent loan balance and accrued interests and default charges.
We outsource most of our collection services to third party collection agencies and we require them to use our serving and collection system and
comply with our guidelines and standards. We also monitor the performance of such third party collection agencies to ensure appropriate collection
methods and practices through KPI monitoring, phone call recording playback, site visits, complaint call playback, internal training, as well as
assessments.
Borrower Acquisition and Retention
Xiaoying Card Loan is very attractive to prime borrowers looking for a combination of small credit line and attractive APR. Supported by our
advanced credit analytics, we are able to deliver a superior user experience through user-friendly loan application process, efficient credit decision, and
speedy remittance, which in turn enables us to expand our borrower base. We also advertise our loan products and loan facilitation services through
online channels, including our website and mobile application and cooperation with search engines, app stores, third party apps and WeChat self-media
public accounts.
We continue to provide existing borrowers with convenient lending services to enhance borrower stickiness. For borrowers with good transaction
history, we may raise their loan limit, offer discounted service fees and a better referral program.
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Xiaoying Preferred Loan
Launched in November 2015, Xiaoying Preferred Loan is a high-credit-limit unsecured personal loan product. We have strategically ceased the
facilitation of Xiaoying Preferred Loan since October 2019 due to the high cost of its servicing and collection and the related risks. Xiaoying Preferred
Loan’s target borrowers were primarily self-employed business owners with established credit record who have liquidity and capital needs for daily
operations.
As for loans that were previously funded by investors of Xiaoying Wealth Management platform, the credit line primarily ranged from
RMB100,000 to RMB200,000. As for loans funded by our institutional funding partners, the credit line could be up to RMB600,000. Borrowers
usually repaid the principal and interest accrued based on the original principal amount in equal monthly installments. In 2018 and 2019, the APR of
Xiaoying Preferred Loan paid by borrowers was 17.96% and 17.51%, respectively.
We facilitated 36,982 and 19,457 loans of Xiaoying Preferred Loans in 2018 and 2019, respectively. The loan amount of Xiaoying Preferred Loan
we facilitated decreased from RMB6,653 million in 2018 to RMB2,115 million in 2019. The average loan amount per transaction was RMB179,886 in
2018 and RMB108,720 in 2019. The outstanding balance of Xiaoying Preferred Loan we facilitated to borrowers was RMB1,452 million as of
December 31, 2019 to compare with nil as of December 31, 2020.
Xiaoying Revolving Loan
In August 2018, we introduced Xiaoying Revolving Loan (mainly including Yaoqianhua, which was previously named as Xiaoying Wallet), which
is an evolving loan product for online purchases and mobile payments. Borrowers are able to use Xiaoying Revolving Loan to have a credit limit, and
they can repay the borrowed amount at any time, enjoying an interest-free period of up to 7 or 32 days depending on a user’s rating. Borrowers are also
able to choose to repay by 3, 6, 10 or 11 monthly installments through Xiaoying Revolving Loan.
We ceased the operation of Yaoqianhua in December 2020 and currently we do not have any other new loan products under the category of
Xiaoying Revolving Loan. We facilitated 12,194,632 and 13,357,630 loans of Xiaoying Revolving Loan in 2019 and 2020. The total loan amount of
Xiaoying Revolving Loan we facilitated was RMB4,780 million in 2019 and RMB5,618 million in 2020. The outstanding balance of Xiaoying
Revolving Loan we facilitated to borrowers is RMB0.01 million as of December 31, 2021.
Xiaoying Housing Loan
In July 2015, we started to facilitate Xiaoying Housing Loan, a home equity loan product secured by properties owned by borrowers. Xiaoying
Housing Loan’s target borrowers are primarily small business owners holding properties with short-term liquidity and capital needs for daily
operations and consumption. Since February 2019, we have strategically ceased the facilitation of Xiaoying Housing Loan due to the time-consuming
foreclosure process of underlying collateral for defaulted loans.
Xiaoying Housing Loan was offered in a large credit line ranging from RMB100,000 to RMB10,000,000 with collateral of properties. Xiaoying
Housing Loan was funded by institutional funding partners, thus it is not subject to the upper limits on the outstanding loan balance under applicable
laws regulating online lending information services. See “Regulation—Regulations Relating to Online Lending Information Services”. We primarily
offer loan products with an average term of six months and borrowers usually make monthly repayments of interests accrued on the original principal
amount followed by a lump sum payment of the principal upon maturity. In 2018, 2019, the APR of Xiaoying Housing Loan paid by borrowers was
11.86%, 12.5%, respectively.
The number of Xiaoying Housing loan facilitated in 2019 and 2020 was 19 and nil, respectively, which represents the total number of transactions
of loan facilitation during the relevant period. The total loan amount of Xiaoying Housing Loan we facilitated was RMB31 million in 2019 and nil in
2020. The average loan amount per transaction was approximately RMB1.6 million in 2019 and nil in 2020. The outstanding balance of Xiaoying
Housing Loan we facilitated to borrowers decreased from RMB156 million as of December 31, 2019 to RMB105 million as of December 31, 2020,
and further to RMB48 million as of December 31, 2021. We facilitated Xiaoying Housing Loan through offline channels in China. Borrowers of
Xiaoying Housing Loan entered into an entrusted guarantee agreement and a security agreement with Shenzhen Tangren under which the borrower
payed fees to Shenzhen Tangren for providing guarantee to the investor or institutional funding partners of Xiaoying Housing Loan and established
mortgage in its real properties as a security for Shenzhen Tangren’s guarantee services. Shenzhen Tangren is our consolidated VIE with financing
guarantee license which has provided guarantee to Xiaoying Housing Loan since September 2017. Prior to that, some of our entities provided such
guarantee.
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Loan Facilitation Services to Other Platforms
In December 2015, we started to cooperate with selected financial technology companies and facilitate loan products designed by them to their
referred borrowers. Such loans have terms primarily ranging from one to three months. Through such cooperation, we have expanded our borrower
acquisition channels.
In 2020, we cooperated with one financial technology companies. The total loan amount we facilitated for other platforms was RMB4,805 million
in 2019, RMB1 million in 2020. We have ceased to facilitate loans for other platforms since the second half of 2020. The outstanding balance of loans
we facilitated for other platforms was RMB1,378 million as of December 31, 2019 compare with nil as of December 31, 2020.
We carefully select the financial technology companies for cooperation based on various factors including their business model and performance,
financial condition, experiences of the management team, risk control capabilities, compliance and reputation in accordance with our systemic
cooperative admission policies. Those selected financial technology companies conduct their credit analysis and approval before referring borrowers
from their platforms to us. In addition, we conduct separate identity verification to decline those borrowers with high risks under our risk management
system. We collect service fees from borrowers referred from the selected financial technology companies for loans successfully allocated to investors
or institutional funding partners, and the average service fee rate was 2.93% in 2019 and 4.39% in 2020.
We require the selected financial technology companies to provide credit enhancements on the loans facilitated to the borrowers referred to us,
including compensating us and/or purchasing back such loans if they are in default. Depending on the credit ability and business performance of those
financial technology companies and the historical default rate of the borrowers they referred to us, we may also require them to pay us a deposit,
ranging from 2% to 10% of the amount of principal of loans we facilitated, from which we are entitled to deduct if they fail to compensate the
defaulted loans referred to us. In general, we monitor the outstanding balance of loans we facilitated to the borrowers referred from the financial
technology companies on a daily basis. We will require the financial technology companies to make contribution if the deposit amount falls below the
agreed percentage (i.e., 2% to 10%) of the amount of loan principals we facilitated. Each of the financial technology companies we cooperated with is
required to pay the deposit prior to fund transfer and the outstanding balance of the deposit that we received from them was RMB21.0 million as of
December 31, 2021.
Our Investors and Institutional Funding Partners
We used to provide investment products to individual investors on our Xiaoying Wealth Management platform. Since early 2019, the Company
began the transformation of its business model from a P2P platform to a platform that focuses on the facilitation of its institutional funding partners to
provide loans to borrowers. The change was initiated primarily in response to the rapidly evolving regulations in China, including requirements to
reduce loan balance, investor count and fees for the P2P business. We ceased accepting new investment in our loan products from individual investors
on the Xiaoying Wealth Management platform at the end of 2019 and achieved 100% institutional funding for the new loans facilitated by the end of
the second quarter of 2020. In December 2020, we fully repaid the investment principals and interest to all of the individual investors who invested in
our loan products on the Xiaoying Wealth Management platform. Individual investors are still able to purchase other financial products, including
money market products and insurance products, on our Xiaoying Wealth Management platform. In May 2021, we obtained a network microcredit
license from the Local Financial Regulatory Bureau of Shenzhen Municipality and started online microcredit business in July 2021. In 2019, 68.1% of
the total funding for loans we facilitated were provided by individual investors, 26.6% were provided by corporate investors and institutional funding
partners, and 5.3% were provided by our own funds. In 2020, 4.7% of the total funding for loans we facilitated were provided by individual investors,
95.3% were provided by institutional funding partners. In 2021, 98.0% of the total funding for loans we facilitated were provided by institutional
funding partners and 2.0% were provided by our own capital.
As part of our efforts to expand our cooperation with institutional funding partners, we established a business relationship with certain trusts
which were administered by third party trust companies. The trusts were set up to invest solely in the loans facilitated by us on our platform to provide
returns to the beneficiaries of the trusts through interest payments made by the borrowers. In 2021, we further developed a new business model with
certain trust partners. We and certain trusts jointly established several limited partnership enterprises, or LPs, to invest solely in the loans facilitated by
us on our platform to provide returns to us through interest payments made by the borrowers. In terms of the partnership agreements, we, as the
general partner, are responsible for the business operations of the LPs and authored to execute contracts on behalf of the LPs. We determine to
consolidate these trusts and LPs as we have the power to direct the operating activities and absorb or enjoys the potential residual losses or returns of
the trusts and LPs.
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In connection with our collaboration with institutional funding partners, we have jointly established effective risk control management system. We
work with various financial institutional cooperators, such as insurance company and financing guarantee companies to provide insurance or guarantee
covering loans funded by institutional funding partners, which enhances the funding partners’ confidence and enables us to obtain funding sources at
favorable terms.
In light of the regulatory update, we have reviewed and adjusted our cooperation with banking financial institution partners, such as suspending
certain cooperation, to better comply with the regulatory requirements. We ceased the online intermediary model in April 2017. We gradually reduced
the volume of loans facilitated through the offline intermediary model with funding from banking financial institution partners after December 31,
2017 due to regulatory requirement and completely ceased such operations in February 2018. We continue the operations through the offline
intermediary model with funding from other partners to the extent permitted under applicable laws and regulations. Those institutional funding
partners may invest their funds in the loans facilitated under direct model and/or intermediary model, depending on their investment strategies.
Our Partnership with Financial Institutional Cooperators
We have established in-depth cooperation with ZhongAn who provides credit insurance to protect funding providers against default for both the
principal and interest. We monitor ZhongAn’s financial condition and credit quality periodically through public information disclosed as required by
PRC regulatory authorities since its establishment in October 2013 and by Hong Kong Stock Exchange since its listing in September 2017. As
disclosed in ZhongAn’s 2021 annual report and 2020 annual report, ZhongAn’s comprehensive solvency margin ratio was 502%, 560%, and 472% as
of December 31, 2019, 2020 and 2021, respectively.
We have also established cooperation with high-quality financing guarantee companies who provide guarantee services to protect institutional
funding partners from losses. Substantially all of them have at least AA credit rating issued by rating companies including China Lianhe Credit Rating
Co., Ltd., China Chengxin Credit Management Co., Ltd. and Shenzhen Lianhe Credit Information Service Co., Ltd. Our financing guarantee partners
provide guarantee services covering both the North China and South China areas, most of which have a registered capital of more than RMB1 billion.
As we have more cooperation with these financing guarantee companies, the amount of our loan facilitation insured by ZhongAn is decreasing.
Credit Insurance and Guarantee Services
Prior to September 2017, ZhongAn provided credit insurance to substantially all the loans we facilitated. ZhongAn initially reimbursed the loan
principal and interest to the investor upon the borrower’s default. In order to maintain stable business relationship with ZhongAn, we would then at our
sole discretion, compensate ZhongAn for substantially all the loan principal and interest default but have not been subsequently collected.
From September 2017, we revised the arrangement with ZhongAn. Starting from 2020, we enter into a series of arrangements with various
external financing guarantee companies, which is similar to the revised arrangement with ZhongAn. According to those arrangements, in addition to
credit insurance or guarantee protection, Shenzhen Tangren, our consolidated VIE with the financing guarantee license, also provides a guarantee for
certain loans we facilitate to protect institutional funding partners against defaults for both the principal and interest. Shenzhen Tangren will
compensate those financial institutional partners for the amount they had paid under investors’ claims arising from defaults by borrowers; however,
Shenzhen Tangren’s compensation obligation shall not exceed the pre-agreed Cap. The arrangements also clarify that in case of any adjustment to the
guarantee service fee rate Shenzhen Tangren collectible from borrowers, the total guarantee service fees Shenzhen Tangren collectible from all
borrowers will change accordingly and the upper limit of Shenzhen Tangren’s compensation obligation will also change in accordance with such
adjustment.
We have expanded our cooperation with high-quality external financing guarantee companies that provide guarantee services to protect
institutional funding partners from losses incurred from borrowers’ defaults and charge guarantee fees from borrowers. A portion of guarantee fees
will be subsequently paid to us by the external financing guarantee companies as the service fee.
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Deposit Arrangement
Starting from November 2019, we enter into a series of deposit arrangements with financing institutional cooperators. We are required to pay
deposits to those financial institutional cooperators monthly or in accordance with an agreed payment schedule. The amount of deposit is separately
agreed with each institutional cooperator, usually calculated by multiplying the outstanding loan balance on the reconciliation date by an
agreed percent rate (“the standard amount”). The agreed percent rate may be adjusted from time to time. If the balance of the deposits exceeds the
standard amount or supplementary payment of deposit is needed, the financial institutional cooperators shall refund the excess part to us or we shall
make supplementary payment of deposit in accordance with an agreed payment schedule.
Cooperation on Technology
We cooperate with financial institutional cooperators in technology development. The risk decision system established by our financial
institutional cooperators which is based on their credit analysis model, leveraging its resources and access to various databases, including PBOC CRC
that is only available to licensed financial institutions. provide assistant services to our risk decision process. Such services include product
management, business monitoring and management risk policies. In addition to our financial institutional cooperators’ decision and input, we also
incorporate other credit and fraud related data and models to complete our full credit evaluation.
Third Party Payment Service Providers
We cooperate with third party payment service providers for the payment, settlement and clearance of the proceeds of the loans for our borrowers
and investors. In choosing the third party payment agent, we take into consideration numerous criteria, including network infrastructure, security
measures, reliability, information technology capabilities and experience.
Risk Management
We have adhered to the principal of “Respect Risk” in our operations since our establishment. Leveraging its extensive knowledge and in-depth
insights in risk management from years of working experiences with large and reputable financial institutions, our risk management team has
developed comprehensive risk management system, policies and measures covering data collection and reprocess, development and upgrading of risk
control system, fraud detection and credit scoring and pricing.
The three core elements of our risk management are data, technology and management. We base our credit assessment on rigorous quantitative
analysis. We have developed our proprietary risk control system, WinSAFE, on the foundations of traditional consumer banking risk management
modules with reputable credit information and big data generated from mobile internet to manage the risk in our daily operation.
Data Collection and Reprocessing
Sufficient and high-quality data is the foundation for effective risk management. We collect data that is directly provided and authorized for our
use by the user and from multiple third party data providers. We cooperate with third party credit agencies for credit data of borrowers. Moreover, we
accumulate data from social activities, including but not limited to, social circles, website activities, mobile behavior and contact information. All the
data collected by our internal team enables us to build up a comprehensive credit database to analyze user data from both traditional consumer finance
data and the big data generated from mobile internet relating to users’ social behavior and spending pattern that are typically ignored by traditional
financial institutions.
We take advantage of our accumulated massive data and have established a comprehensive profile of each user containing over 2,500 variables
covering traditional consumer banking data and the big data generated from mobile internet, providing the solid base for our credit assessment and
decision-making and differentiating us from other consumer finance companies who may only have data in certain areas. We utilize various data
reprocessing technology such as data smoothing algorithm and social network graphic to ensure the reliability and accuracy of data and perform in-
depth data analysis.
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Risk Control System and Models
We have independently developed our proprietary risk control system, WinSAFE, which is our decision center and is able to carry out thousands
of testing simultaneously. Based on data collection, processing and analytics, through our WinSAFE system, we continue to fine-tune mobile lending
credit policy through numerous tests each month to achieve best risk returns. The two major components of our risk management procedures are risk
assessment model optimization and credit policy adjustments.
The risk assessment model optimization maintains over 100 models primarily including logistics regression and machine learning models that are
employed at different stages for different products. Each model performs the function independently but operates in close synchronization with each
other, enabling WinSAFE to effectively analyze a borrower’s value, payment capability and payment attitude to accurately evaluate the borrower’s
credit worthiness. Apart from the traditional numerical variables, we also convert unorthodox inputs, such as human behavior, social relationships and
mobile activities, into numerical covariates through complex algorithms. The credit policy adjustments is established through lifetime value of the
users and rigorous stress tests to achieve a balance between business volume and profitability with an emphasis on business resiliency. We
continuously modify and incorporate new information into our credit policy, such as economic environment, user clientele change and new testing
results. The models are updated daily or regularly to match the business development through machine learning with traditional modeling, providing
an increasingly accurate indicator of default risk with the increasing availability of data.
Currently, through our continuous optimization, WinSAFE is able to process data through the processes from loan application to approval and is
able to make decisions within ten minutes for over half of Xiaoying Card Loan, providing instant feedback that the mobile users are in desire of and
strengthening our risk control and fully automatic decision-making capability.
Fraud Detection
We utilize internal and third party databases and authentication technologies, including face scanning and OCR verification of identity cards and
bank cards, to verify and authenticate the identity of the applicant and the submitted application information. We effectively implement over 300 anti-
fraud rules and use our multiple-source database containing various internal and industry blacklists and multiple-dimension tagging system to detect
the probability of individual and group fraud.
Leveraging our in-depth data analysis of the comprehensive data we have collected, we assess the applicant’s payment capability and payment
attitude. We adopt over 2,500 variables in credit assessment and crosscheck with a blacklist of over 1,000,000 fraud data. Utilizing big data, we apply
various analytical processes, such as machine learning, deep learning, graphical analysis, to identify credit risks and potential fraudulent behavior of
each applicant and build and optimize our credit assessment model.
When our risk control system receives an application, we will send the applicant’s insurance or guarantee application to our financial institutional
cooperators and will receive the insurance or guarantee decision opinion from those financial institutional cooperators based on their credit analysis.
We will, in accordance with our own risk management strategies, embed such assessment results into our risk management models for decision
making.
Credit Scoring and Pricing
We offer differentiated credit pricing and credit limits to prime borrowers based on individual credit grades. Based on our prediction of the
applicant’s likelihood of future delinquency and his/her profile, our risk management system assigns a credit grade to each remaining Xiaoying Card
Loan applicant, with risk level A representing the lowest risk, risk level D representing the highest risk. Such credit grade is a comprehensive credit
level generally determined based on the grouping of an applicant’s basic information, credit history and behavior data, including personal identity
information, education background, consumption and social network behavior, and insurance or guarantee decision opinion from our financial
institutional cooperators. Credit grade is determined at the time of a loan application and will not be adjusted until the borrower applies for another
loan, when the repayment history of all the existing loans will be added into the risk model to determine the credit grade for the new loan application.
In addition to the individual specification attaching to the credit grade for each applicant, from time to time, we adjust the overall standard of each
credit risk level based on market conditions and our risk management policies when we believe necessary.
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Different from our credit grade model for Xiaoying Card Loan, we adopt a rule-based credit assessment and pricing system with manual review
for the applicants of our Xiaoying Preferred Loan and Xiaoying Housing Loan. For Xiaoying Preferred Loan, other than focusing on reviewing the
applicants’ credit assessment result based on our database and the insurance or guarantee decision opinion from our financial institutional cooperators,
we also review property ownership, insurance policies or provident funds. In terms of Xiaoying Housing Loan, we focus on assessing the value of the
collateral properties provided by the applicants.
We review and modify our segmented pricing from time to time, taking into consideration not only the borrower credit risk but also other factors,
such as market interest rates, adequacy of investor protection mechanism and competition in the market.
Risk Management Team
Our risk management committee is the highest decision-making authority in terms of risk management, comprised of our Chairman and Chief
Executive Officer, Mr. Yue (Justin) Tang, our Vice Chairman, Mr. Shaoyong (Simon) Cheng, and our President and Chief Risk Officer, Mr. Kan (Kent)
Li. Our risk management committee is responsible for making decisions on the principles, core terms and model for each project.
Our strong risk management team is led by our President and Chief Risk Officer, Mr. Kan (Kent) Li, who has extensive work experience in risk
management and previously served at Capital One. Our team members have extensive experiences and in-depth insights in risk management from their
working experiences with reputed financial institutions such as HSBC, JPMorgan, China Construction Bank, Ping An and Everbright. Leveraging on
the most advanced technique and risk control capability, our risk management team has established an effective risk control system applied in the
online lending business.
We have established comprehensive policies and processes to ensure the effectiveness of our risk management in daily operations. Our risk
management team engages in various risk management activities, including approving the launch of any new product and screening and selecting our
business partners with sound risk management system. All the decisions by our risk management team shall only be made based on rigorous
quantitative analysis of real data.
Our Technology and IT Infrastructure
Technology System
We believe our technology and IT infrastructure are a competitive advantage and an important reason that borrowers and institutional funding
partners utilize our platform. Key features of our technology and IT infrastructure include:
Abundant Mobile Internet Data
We collected a large amount of borrowers’ credit and behavioral data. The substantial volume of data in the system enables us to build a
comprehensive credit profile for each borrower.
Advanced Computing Technology
We adopt innovative risk pricing models for the accumulation of credit data for loan facilitation platform.
User-friendly Mobile Applications
We have independently developed the mobile applications for borrowers of Xiaoying Card Loan, Xiaoying Revolving Loan and investors of
Xiaoying Wealth Management, respectively. The mobile applications enable users to access our platform at any time and at any location to make
transactions in a convenient way.
The mobile application of Xiaoying Card Loan and Xiaoying Revolving Loan adopts the OCR identity verification technology (ID card, face,
bank card) for borrowers to complete the verification. We also incentivize the borrowers to recommend the application to their friends by issuing
coupons as discounts to the service fee.
We have completely ceased the investment in loans on our Xiaoying Wealth Management platform, while individual investors are still able to
purchase other financial products, including money market products and insurance products, on our Xiaoying Wealth Management platform.
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Data and Transaction Security and Stability
We collect and store a large amount of user data, including mobile phone numbers, identification card numbers, bank card numbers and borrowing
information in our database. We take the privacy of our users and security of their information seriously, and have implemented a strict internal user
data security management policy and to protect our users’ confidential information. The policy establishes user’s authorization to data usage, data and
information classification, approval procedures and access rights for confidential information and data. We require written records of each of our
employee’s access and retrieval of the data and monitor the process.
We adopt remote backup technology and have built up a disaster recovery structure of “two locations, three centers.” In addition, we back up our
core business database daily on dedicated backup servers. We have implemented a data-backup policy to ensure the safety of our data.
Research and Development
Our technology development personnel have extensive experience with leading internet, online consumer finance and mobile commerce and
financial technology companies, and focuses on the following that support our long-term business growth:
● Maintaining and strengthening all of our platform and application system, including but not limited to: main website, mobile applications,
back-stage system, proprietary data and credit analysis systems, payment system and big data system;
● Ensuring our technology system is well established, reviewed, tested and continuously strengthened; and
● Organizing and participating in the industry seminars, exploring relevant cutting-edge technologies.
Brand, Sales and Marketing
Our general marketing efforts are designed to build brand awareness and reputation and to attract and retain borrowers and institutional funding
partners. We believe reputation and word-of-mouth marketing drive continued organic growth in borrower base. As a supplement, we use offline
network channel and online marketing initiatives to promote our brand and products. For example, we work with several advertising companies to
promote our mobile applications with internet companies through online advertisements. We also cooperate with media and organize branding events
to enhance our brand awareness.
Users Service
To better serve our users, we have independently developed a comprehensive user service system. We provide user service from 9:00 a.m. to
6:00 p.m. through our user service hotline in the weekdays and also provide online user service from 9:00 a.m. to 10:00 p.m. every day through our
website, mobile applications and WeChat public account. Our user service personnel are responsible for answering calls for our user service hotlines,
responding to queries in emails, as well as providing online user service support. To monitor the quality of our user services, each inquiry made by our
users will be recorded and reviewed on a selective basis.
Intellectual Property
We regard our trademarks, domain names, copyrights, know-how, proprietary technologies and similar intellectual property as critical to our
success, and we rely on trademark and trade secret law and confidentiality, invention assignment and non-compete agreements with our employees and
others to protect our proprietary rights. We have registered 97 trademarks in the PRC. We are the registered holder of 143 domain names. We also have
67 copyrights for our proprietary techniques in connection with our systems. We have 3 patents under application in the PRC.
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Seasonality of Our Business
We experience seasonality in our business, reflecting seasonal fluctuations in internet usage and traditional personal consumption patterns, as our
individual borrowers typically use their borrowing proceeds to finance their personal consumption needs. For example, we generally experience lower
transaction volume during national holidays in China, particularly during the Chinese New Year holiday season in the first quarter of each year. As we
facilitate loans to institutional funding partners, such as commercial banks, our business may also be affected by liquidity seasonality in the banking
system. For example, liquidity in China’s banking sector has historically had a tendency to be looser at the beginning of each calendar year and tighter
towards the end of each calendar year. Due to our limited operating history, the seasonal trends that we have experienced in the past may not apply to,
or be indicative of, our future operating results.
Competition
The online personal finance industry in China is an emerging industry in China. It provides a new means for consumers to obtain financing. As a
leading player in China’s online personal finance platform market, we face intensive competition from other online marketplaces, online finance
service providers, technology giant backed internet finance platforms, as well as traditional financial institutions.
Online personal finance marketplaces which operate online platforms connecting borrowers and institutional funding partners compete directly
with us for both borrowers and institutional funding partners. We also compete with traditional financial institutions, including credit card issuers,
consumer finance business units in commercial banks and other consumer finance companies. Some of our larger competitors have substantially
broader product or service offerings and rich financial resources to support heavy spending on sales and marketing. In light of the low barriers to entry
in the online consumer finance industry, more players may enter this market and increase the level of competition. We anticipate that more established
internet, technology and financial services companies that possess large, existing user bases, substantial financial resources and established distribution
channels may enter the market in the future.
As evidenced by our market leadership, we believe that we are able to compete effectively for borrowers and institutional funding partners by
leveraging our competitive advantages including our strategic positioning to target the prime borrower segment, superior user experience on our
platform, effectiveness of our risk management, the return offered to institutional funding partners, our partnership with various business partners, and
the strength and reputation of our brands.
Recent Investment
YTZ (HK) Limited , a wholly-owned subsidiary of X Financial, entered into a subscription agreement dated March 2, 2021, for subscribing
certain limited partnership interests in Dragonfly Ventures II, L.P., a limited partnership governed under the laws of the Cayman Islands and managed
by Dragonfly GP II, LLC, focusing on the blockchain industry investment with its long-term value investment strategy and research-driven process.
Pursuant to the subscription agreement, we invested in an aggregate amount of US$10 million in the partnership. As a limited partner, we do not have
ability to take in the control or management of the affairs or the conduct of the business of the partnership. In connection with the restructuring of
Dragonfly Ventures II, L.P., YTZ (HK) Limited entered into certain Withdrawal, Contribution and Adherence Agreement dated December 30, 2021
and entered into an amended and restated exempted limited partnership agreement.
YTZ (HK) Limited, our wholly-owned subsidiary, entered into a second amended and restated limited partnership agreement dated March 15,
2021, for subscribing certain limited partnership interests in IOSG Fund II LP, a limited partnership governed under the laws of the Cayman Islands
and managed by IOSG Pted Ltd. focusing on the blockchain industry investment with its long-term value investment strategy and research-driven
process. Pursuant to the agreement, we committed to invest US$3 million to the partnership. As a limited partner, we do not have ability to take in the
control or management of the affairs or the conduct of the business of the partnership.
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Shenzhen Ying Ai Gou Trading Co., Ltd. (“Shenzhen Ying Ai Gou”), a wholly-owned subsidiary of Beijing Ying Zhong Tong Rongxun
Technology Service Co., Ltd. (“Beijing Ying Zhong Tong”), one of our VIEs, entered into a share purchase agreement with Shenzhen SUNHOPE
Investment Development Co., Ltd, a PRC company (“SUNHOPE”), and Shenyang Tianxinhao Technology Limited, a PRC company (“Tianxinhao”)
which is a wholly-owned subsidiary of SUNHOPE. Pursuant to the agreement, Shenzhen Ying Ai Gou acquired 45% issued and outstanding shares of
Tianxinhao from SUNHOPE for approximately RMB315 million. After the closing of this acquisition, Shenzhen Ying Ai Gou owned 12.6% of issued
and outstanding shares of Newup Bank of Liaoning, a PRC company and non-state-owned bank (“Newup Bank”), through Tianxinhao. As an indirect
minority shareholder of Newup Bank, we do not have ability to take in the control or management of the affairs or the conduct of the business of
Newup Bank.
Insurance
We provide social security insurance including pension insurance, unemployment insurance, work-related injury insurance and medical insurance
for our employees. We also provide additional commercial medical insurance coverage for our key management. We do not maintain business
interruption insurance, general third party liability insurance, product liability insurance or key-man insurance. We consider our insurance coverage to
be sufficient for our business operations in China and in line with market practice.
Regulation
This section sets forth a summary of the most significant laws, rules and regulations that affect our business activities in the PRC or our
shareholders’ rights to receive dividends and other distributions from us.
Regulations Relating to Foreign Investment
On March 15, 2019, the National People’s Congress promulgated the PRC Foreign Investment Law, which became effective on January 1, 2020
and replaced the existing laws regulating foreign investment in China, namely, the PRC Equity Joint Venture Law, the PRC Cooperative Joint Venture
Law and the Wholly Foreign-owned Enterprise Law, together with their implementation rules and ancillary regulations. Meanwhile, the Regulations
for the Implementation of the PRC Foreign Investment Law came into effect on January 1, 2020, which clarified and elaborated the relevant provisions
of the PRC Foreign Investment Law. The organization form, organization and activities of foreign-invested enterprises shall be governed, among
others, by the PRC Company Law and the PRC Partnership Enterprise Law. Foreign-invested enterprises established before the implementation of the
PRC Foreign Investment Law may retain the original business organization and so on within five years after the implementation of this Law. The
Foreign Investment Law and the Implementation Regulations do not mention the relevant concept and regulatory regime of VIE structures.
The PRC Foreign Investment Law is formulated to further expand opening-up, vigorously promote foreign investment and protect the legitimate
rights and interests of foreign investors. According to the PRC Foreign Investment Law, “foreign investment” refers to investment activities directly or
indirectly conducted by one or more natural persons, business entities, or otherwise organizations of a foreign country (collectively referred to as
“foreign investor”) within China, and the investment activities include the following situations: (i) a foreign investor, individually or collectively with
other investors, establishes a foreign-invested enterprise within China; (ii) a foreign investor acquires stock shares, equity shares, shares in assets, or
other similar rights and interests of an enterprise within China; (iii) a foreign investor, individually or collectively with other investors, invests in a new
project within China; and (iv) investments in other means as provided by laws, administrative regulations, or the State Council.
According to the PRC Foreign Investment Law, foreign investments are entitled to pre-entry national treatment and subject to negative list
management system. The pre-entry national treatment means that the treatment given to foreign investors and their investments at the stage of
investment access is no lower than that of domestic investors and their investments. The negative list management system means that the state
implements special administrative measures for foreign investment in specific fields. Foreign investors shall not invest in any forbidden fields
stipulated in the negative list and shall meet the conditions stipulated in the negative list before investing in any restricted fields. Foreign investors’
investment, earnings and other legitimate rights and interests within the territory of China shall be protected in accordance with the law, and all
national policies on supporting the development of enterprises shall equally apply to foreign-invested enterprises.
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Investment activities in the PRC by foreign investors are governed by the Catalog of Industries for Encouraging Foreign Investment, or the
Catalog, which became effective on January 27, 2021, and the Special Administrative Measures (Negative List) for Foreign Investment Access, or the
Negative List promulgated by the MOC, which became effective on July 23, 2020 and has been amended from time to time by the MOC and the
National Development and Reform Commission. It sets out the industries in which foreign investments are prohibited or restricted. Foreign investors
will not make investments in prohibited industries, while must satisfy certain conditions stipulated in the Negative List for investment in restricted
industries. According to the Negative List, the proportion of foreign investment in entities engaged in value-added telecommunication services
(excluding e-commerce, domestic multi-party communications services, store-and-forward services, and call center services) shall not exceed 50%.
The most updated Negative List, issued on 27 December 2021 and became effective on 1 January 2022, stipulates that any PRC domestic enterprise
engaging in the fields prohibited by the negative list shall obtain the consent of the relevant competent PRC authorities for overseas listing, and the
foreign investors shall not participate in the operation and management of such enterprise, and the shareholding percentage of the foreign investors in
such enterprise shall be subject to the relevant administrative provisions of PRC domestic securities investment by foreign investors. Such negative list
does not further elaborate whether existing overseas listed enterprise will be subject to such requirements. The staff of the NDRC addressed in an
interview on 27 December 2021 that certain existing overseas listed enterprises whose foreign investors’ shareholding percentage exceed the
aforementioned threshold are not required to make adjustment or deduction.
Among others, the state guarantees that foreign invested enterprises participate in the formulation of standards in an equal manner and that
foreign-invested enterprises participate in government procurement activities through fair competition in accordance with the law. Further, the state
shall not expropriate any foreign investment except under special circumstances. In special circumstances, the state may levy or expropriate the
investment of foreign investors in accordance with the law for the needs of the public interest. The expropriation and requisition shall be conducted in
accordance with legal procedures and timely and reasonable compensation shall be given.
The Regulations for the Administration of Foreign-Invested Telecommunications Enterprises (2016 revision) , which was promulgated by the State
Council on December 11, 2001 and amended on September 10, 2008 and February 6, 2016, require foreign-invested value-added telecommunications
enterprises in China to be established as Sino-foreign equity joint ventures with the foreign investors owning no more than 50% of the equity interests
of such enterprise. In addition, the main foreign investor who invests in a foreign-invested value-added telecommunications enterprises operating the
value-added telecommunications business in China must demonstrate a good track record and sound experience in operating a value-added
telecommunications business, provided that qualified foreign investors must obtain prior approvals from the MIIT and the MOFCOM or their
authorized local counterparts, for its commencement of value-added telecommunication business in China. However, on March 29, 2022, the Decision
of the State Council on Revising and Repealing Certain Administrative Regulations, which will take effect on May 1, 2022, was promulgated to amend
certain provisions of regulations including the Provisions on the Administration of Foreign-Invested Telecommunications Enterprises (2016 Revision),
the requirement for major foreign investor to demonstrate a good track record and experience in operating value-added telecommunications businesses
is deleted.
Circular of the Ministry of Industry and Information Technology on Removing the Restrictions on Shareholding Ratio Held by Foreign Investors
in Online Data Processing and Transaction Processing (Operating E-commerce) Business, or Circular 196, which was promulgated on June 19, 2015,
provides that foreign investors are permitted to invest up to 100% of the registered capital in a foreign-invested telecommunication enterprise engaging
in the operation of online data processing and transaction processing (E-commerce). However, foreign investors are only permitted to invest up to 50%
of the registered capital in a foreign-invested telecommunication enterprise that engages in the operation of Internet information services. While
Circular 196 permits foreign ownership, in whole or in part, of online data and deal processing businesses (E-commerce), a sub-set of value-added
telecommunications services, it is not clear whether our marketplace lending platform will be deemed as online data and deal processing.
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In July 2006, the MIIT issued the Notice on Strengthening the Administration of Foreign Investment in and Operation of Value-added
Telecommunications Business, or the MIIT Notice, pursuant to which, for foreign investor invest in telecommunications service business in China, a
foreign-invested telecommunications enterprise must be established, and such enterprise must hold a telecommunications businesses operation license.
Furthermore, under the MIIT Notice, domestic telecommunications enterprises may not rent, transfer or sell a telecommunications business operation
license to foreign investors in any form, nor may they provide any resources, premises, facilities or other assistance in any form to foreign investors for
their illegal operation of any telecommunications business in China. In addition, under the MIIT Notice, a foreign-invested value-added
telecommunication service operator (or its shareholders) shall legally own the Internet domain names and registered trademarks used for its business
operation.
Due to the above restrictions and requirements, we conduct our value-added telecommunications businesses through Shenzhen Xiaoying
Technology Co., Ltd.,one of our consolidated VIEs, and Shenzhen Ying Ai Gou Trading Co., Ltd., one of the subsidiaries of our consolidated VIEs.
However, there is uncertainty as to how the requirements in the above rules will be interpreted and implemented and whether there will be new rules
issued which would establish further requirements and restrictions on our contractual arrangements.
Regulations Relating to Value-Added Telecommunication Services
The Telecommunications Regulations of the PRC, or the Telecommunications Regulations, promulgated by the State Council on September 25,
2000 and amended on July 29, 2014 and February 6, 2016, provide a regulatory framework for telecommunications services providers in the PRC. The
Telecommunications Regulations require telecommunications services providers to obtain an operating license prior to the commencement of their
operations. The Telecommunications Regulations distinguish “basic telecommunications services” from “value-added telecommunications services.
The basic telecommunications services provider who provides public network infrastructure, public data transmission and basic voice communications
services shall obtain a Basic Telecommunications Service Operating License, and the value-added service provider who provides telecommunications
and information services provided through the public network infrastructure shall obtain a Value-added Telecommunications Service Operating
License, or VATS License. A catalogue was issued as an attachment to the Telecommunications Regulations to categorize telecommunications services
as either basic or value-added. The current catalogue, as most recently updated on June 6, 2019, categorizes online information services and online
data processing and transaction processing services as value-added telecommunications services. Internet content provider may be required to obtain
an Internet content provider license, or ICP license, and e-commerce operator may be required to obtained an online data processing and transaction
processing license, or ODPTP license.
On July 3, 2017, the MIIT promulgated the Administrative Measures on Telecommunications Business Operating Licenses , under which, a
commercial operator of value-added telecommunications services must first obtain the 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
On August 17, 2016, the China Banking Regulatory Commission, or the CBRC (one of the predecessors of the China Banking and Insurance
Regulatory Commission), the MIIT, the Ministry of Public Security and the State Internet Information Office jointly issued the Interim Measures on
Administration of Business Activities of Online Lending Information Intermediaries , or the Interim Measures. Pursuant to the Interim Measures, online
lending information service providers shall apply for VATS License in accordance with relevant rules issued by competent telecommunication
authority after completing the filing records to local financial regulators. However, the relevant implementation rules regarding such filing is yet to be
issued therefore currently we are not able to make the necessary filing and then to apply for the VATS License. See “Item 3. Key Information—3.D.
Risk Factors—Risks Relating to Our Business and Industry—We may be required to obtain additional value-added telecommunication business
licenses.”
Regulations Relating to Online Lending Information Services
On July 18, 2015, the Guidelines on Promoting the Healthy Development of Online Finance Industry, or the Guidelines, were jointly promulgated
by ten PRC regulatory agencies, including the PBOC, the MIIT and the CBRC. The Guidelines set out definition of online peer-to-peer lending as
direct loans between individuals through an online platform, which is under the supervision of the CBRC, and governed by the PRC Contract Law, the
General Principles of the Civil Law of the PRC, and related judicial interpretations promulgated by the Supreme People’s Court. Pursuant to the
Guidelines, an online peer-to-peer lending information services provider shall specify its nature as an information intermediary that provides
information services to facilitate the lending between borrowers and lenders, rather than offer credit enhancement services or engage in illegal fund-
raising.
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On April 12, 2016, the Notice on the Implementation Plan of the Special Rectification of Peer-to-peer Online Lending Risk, or the Notice, was
issued by the China Bank Regulatory Commission, or the CBRC, which reiterated the requirements set out in the Guideline and further clarified the
activities online peer-to-peer lending information service providers are prohibited to engage in.
The Interim Measures define online peer-to-peer lending as direct loans between peers, including nature persons, legal persons or organizations,
through online platforms, which is in line with the definition of “online peer-to-peer lending” in the Guideline. Pursuant to the Interim Measures,
companies engaged in the online lending information intermediary business shall only provide financial information services to borrowers and lenders
for the purpose of facilitating their direct lending. Online lending information service providers shall complete registration with local financial
regulatory authority and obtain appropriate telecommunication business license in accordance with relevant rules issued by competent
telecommunication authority. The Interim Measures also require the online lending information service providers to substantially cover “online lending
information intermediary” in its business scope filed with the local registration regulatory authority.
According to the Interim Measures, online lending information providers shall, depending on the risk management capability, set upper limits on
the outstanding loan balance of a single borrower borrowed both on one online lending platform and across all online lending platforms. In the case of
natural persons, the balance of loan borrowed on one online lending platform shall not exceed RMB200,000, and the aggregated balance of loan
borrowed across all platforms shall not exceed RMB1 million; in the case of legal persons or organizations, the limit for the outstanding loan balance
on one platform and across all platforms shall be RMB1 million and RMB5 million respectively.
The Interim Measures stipulate that online lending information service providers shall not directly or indirectly engage in certain prohibited
actions, including but not limited to, (i) self-financing, (ii) accepting or gathering funds of lenders, (iii) providing any guarantee to lenders directly or
in a disguised form, (iv) issuing financial products to raise fund or acting as an agent to sell financial products, (v) splitting or fractionalizing the term
of any financing product, (vi) asset securitization, (vii) falsifying or exaggerating the truthfulness and earnings of financing products or concealing the
defects and risks of financing products, (viii) extending loans.
With respect to the online lending information service providers established prior to the implementation of the Interim Measures, which have not
been in full compliance with the applicable requirements of the Interim Measures, the competent local financial regulatory department provide those
not in full compliance with applicable requirements of the Interim Measures, a grace period of twelve months, within which such platforms shall
rectify any violation against the Interim Measures and comply with all applicable requirements in the Interim Measures.
According to the Interim Measures, online lending information providers are subject to sanctions or penalties by local financial regulatory
authorities or other competent authorities if found to be in violation of any applicable laws and regulations or relevant regulatory provisions relating to
online lending information services. The sanctions and penalties include supervisory inquiry, regulatory warning, correction order, condemnation,
credit record modification, fine up to RMB30,000, and criminal liabilities where applicable.
On October 28, 2016, the CBRC, the MIIT and State Administration for Industry and Commerce, or the SAIC, jointly issued the Guidance on the
Administration of Registration of Online Lending Information Intermediaries, or the Registration Guidelines, which provides the general filing
rules for online lending intermediaries, and delegates the filing authority to local financial authorities. The Registration Guidelines, sets forth that
online lending intermediaries are approved locally. Under the general filing procedures for online lending intermediaries, before an filing application is
submitted to local financial regulators, the online lending intermediaries may be required to: (i) rectify any breach of applicable regulations as required
by local financial regulators; and (ii) apply to the Industry and Commerce Administration Department to amend or register such entity’s the
business scope.
The CBRC also authorizes local financial regulators to make detailed implementation rules regarding filing procedures. However, relevant local
financial regulators are also in the process of making such implementation rules, which may require us to complete filing records under such future
requirements within a grace period.
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On February 22, 2017, the CBRC released the Guidelines on Online Lending Funds Custodian Business , or the Custodian Guidelines, which set
out requirements on the fund custodian services for online lending information intermediaries. The Custodian Guidelines define custodian as
commercial banks qualified for providing depositary services for online lending information providers and specify the criteria for qualification.
Pursuant to the Custodian Guideline, an online lending information service provider may only enter into fund depositary agreement with one custodian
for the funds of lenders and borrowers held by it, and shall segregate the funds of lenders, borrowers and the proprietary funds of online lending
information service providers in separate accounts. For any online lending information service providers and custodian operating prior to the
implementation of the Custodian Guideline, which are not in full compliance with the Custodian Guidelines, they are required to rectify any violation
of the Custodian Guideline within a six-month grace period starting from the issuance of the Custodian Guideline.
On August 23, 2017, the CBRC further issued the Guidelines on Information Disclosure of the Business Activities of Online Lending Information
Intermediaries, or the Disclosure Guidelines, which clarified the disclosure obligation of online lending information service providers. Pursuant to the
Disclosure Guidelines, online lending information service providers shall set a special column of information disclosure on the eye-catching locations
of its official website and all other available internet channels, such as mobile applications and WeChat official accounts to disclose certain
information, including, among other things (i) basic information of the online lending information service provider, such as its registration information,
organization information, and financial data; (ii) transaction related information, such as the total notional and number of transactions matched through
the online lending information platform; and (iii) any event that could result in a material adverse effect on the operations of online lending
information providers. The Disclosure Guidelines also require online lending information service providers to record all the disclosed information and
retain such information for no less than five years from the date of the disclosure. For any online lending information service providers are not in full
compliance with the Disclosure Guidelines, they are required to rectify any violation of the Custodian Guideline within a six-month grace period upon
issuance of the Disclosure Guideline.
On July 4, 2017, Financial Development and Service Office of the People’s Government of Shenzhen published a discussion draft on the proposed
Administrative Measures on the Registration of Shenzhen based Online Lending Information Intermediary, or the Proposed Administrative Measures,
for public review and comments. The Proposed Administrative Measures set out detailed requirements and procedures for the registration of online
lending information service providers, which, including, among others, to require the online lending information providers to implement robust
network security protection system, select a qualified commercial bank that has a branch in Shenzhen as its fund custodian institution and opened the
custodian accounts for online lending in its Shenzhen branch, and employ at least three senior executives with more than five years’ experience in the
financial industry holding bachelor degrees or above. The public review and comments for the Proposed Administrative Measures has now concluded,
but it is still uncertain when the draft will become effective and whether the definitive version would have substantial changes from the draft.
On December 1, 2017, the Notice on Rectification of Cash Loan Business, or Circular 141, was promulgated by the Head Office for Special
Rectification of Online Finance Risk and the Head Office for Special Rectification of Peer-to-Peer Online Lending. In accordance with Circular 141,
cash loan, which is characterized by the lack of specific scenes, designated purposes, targeted users and mortgage may be inspected and rectified.
Circular 141 further specifies that the overall cost of loan, including among others, the loan interest and other forms of fees, charged by the institutions
shall be subject to the restrictions on interest rates as specified in applicable rules on private lending. In addition, Circular 141 provides that banking
financial institutions shall not receive credit enhancement services offered by any third party that lacks qualifications to provide guarantee, and shall
ensure such third party not to charge fees from borrowers.
Moreover, pursuant to Circular 141, an online lending information provider shall not (i) provide online lending intermediary services for the
lending whose interest rate violates the regulatory requirement, (ii) deduct the interest, service fee, administrative fee and deposit from a loan principal
in advance, or set high overdue interest, overdue fine payment or default interest; (iii) outsource core business such as user information collection,
information screening, credit assessment, and account opening to any third party; (iv) assist the banking financial institutions to participate in peer-to-
peer online lending; (v) assist to match the loans for students or any borrower unable to repay; (vi) provide online lending intermediary services for
loans used for purchasing real property, or any loan without specific usage of funds.
On December 8, 2017, the Head Office for Special Rectification of Peer-to-Peer Online Lending issued the Notice on the Special Rectification and
Inspection of Risk of Online Lending Intermediaries, or Circular 57, providing further clarification on several matters in connection with the
rectification and registration of online lending information intermediaries, including, among other things:
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Requirements to qualify for registration. Circular 57 sets forth certain requirements for online lending intermediary to qualify for the registration,
including, among others, an online lending intermediary (i) shall cease conducting any thirteen prohibited actions regulated in the Interim Measures or
exceeding the individual lending amount upper limit as stipulated in the Interim Measures after August 24, 2016, and shall fully eliminate the
outstanding balance of such non-compliance products offered before August 24, 2016; (ii) shall cease offering the down payment loan for purchasing
real property, campus loan or cash loan, and gradually reduce the outstanding balance of the abovementioned loan within certain timetable; and (iii) set
up custody accounts with qualified banks that have passed certain testing and evaluation procedures run by the Head Office for Special Rectification of
Peer-to-Peer Online Lending to hold user funds. For the online lending intermediaries that are unable to accomplish the rectification and registration
but are continuing to participate in the online lending business, the relevant authorities shall subject such online lending intermediaries to
administrative sanctions, including but not limited to revoking the operation license for telecommunication service, shutting down the websites,
ceasing the entire business and forbidding the financial institutions to provide any financial service to such online lending intermediaries.
Requirements relating to the timing of the registration. The local governmental authorities shall complete inspection and registration with the
following timetable: (i) completion of registration for major online lending information intermediaries by the end of April 2018; (ii) with respect to
online lending information intermediaries with substantial outstanding balance of those loans prohibited under the relevant laws and regulations and
difficulties to timely eliminate all those balance, the full elimination of such balance and registration shall be completed by the end of May 2018;
(iii) with respect to those online lending information intermediaries with complex and extraordinary circumstances and substantial difficulties to
complete rectification, the ‘relevant work’ shall be completed by the end of June 2018.
Requirements relating to the transfer of creditor’s rights. The low-frequency transfer of creditor’s rights among lenders shall be regarded as
legitimate, while transfer of creditor’s rights by means of, (i) quasi-asset securitization services or in form of packaged assets, securitized assets, trust
assets or fund shares, (ii) ”super-lender” mode where the executives or related parties of the online lending intermediary enter into a loan agreement
with a borrower, and then transfer the creditor’s rights of such loan to the actual lender through online lending platform; (iii) connecting with the
current and regular financial products, shall be deemed as illegal.
In August 2018, the Notice on Conducting Compliance Inspections of Online Lending Intermediaries, or the Inspection Notice, and the
Compliance Checklist of Online Lending Information Intermediaries, or the Compliance Checklist, were promulgated by the Head Office for Special
Rectification of Peer-to-Peer Online Lending, on the basis of Interim Measures, Custodian Guidelines, Disclosure Guidelines, Circular 141 and
Circular 57. According to the Inspection Notice, the compliance inspection, which consists of self-inspection conducted by online lending information
intermediaries, inspection conducted by local and national Internet Finance Associations, and verification conducted by the local online lending
rectification office, shall be completed by the end of December 2018. The online lending information intermediaries that are in compliance with the
applicable rules and regulations could be granted access to the information disclosure system and the product registration system, and subject to certain
conditions, such online lending information intermediaries are allowed to submit the filing applications.
The Compliance Checklist sets forth 108 inspection items. The main focuses of the compliance inspection under the Inspection Notice and the
Compliance Checklist are, including among others, whether the online lending information intermediaries (1) conduct any business other than the
information intermediary business, such as the credit intermediary business, (2) form any capital pool, or advance any funds to users; (3) finance for
themselves directly or indirectly; (4) provide guarantee to lenders or promise full repayment of principal and interest; (5) provide promise of
guaranteed redemption; (6) conduct risk evaluation of lenders and categorize lenders; (7) fully disclose risk information of the borrowers to the
lenders; (8) strictly follow the principle of spreading money across small amount loans; (9) raise funds by offering wealth management products on
their own or through their affiliates; (10) attract investors or lenders by means of high profits or other methods. However, the specific standards and
procedures for the access to the information disclosure system and the product registration system and the application procedures of P2P registration
will be subject to further notice.
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In December 2018, the relevant PRC regulatory authorities of the P2P lending industry issued the Circular on Making Efforts to Prevent Risk and
Classify Online Lending Institutions, or Circular 175, in which the regulatory authorities, for the first time, classified the online P2P lending
marketplaces into six categories: (i) marketplaces on which investors are not fully repaid or that are otherwise unable to operate their businesses and
under investigation of the public security department, (ii) marketplaces that have been unable to operate their businesses but are not under
investigation of the public security department, (iii) 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, (iv) small-scale marketplaces ,
(v) marketplaces with high risks, and (vi) Normal Marketplaces. Pursuant to Circular 175, the scope of the rectification of online lending institution
shall be limited to institutions which have entered into to the Data Submission System of Online Security Centre, and any institutions out of this scope
shall be treated as illegal fund raising. We submitted our application materials for the P2P registration, to the Shenzhen Financial Services Office, our
competent authority, in April 2018, and we have entered into the Data Submission System of Online Security Centre since November 2018. According
to Circular 175, for the institutions in the Data Submission System of Online Security Centre, only Normal Marketplaces are allowed to continue to
operate in the P2P lending industry. As of the date of this annual report, we have not received any notice that we have been classified as high-risk
characteristics and we do not believe we would fall into categories (i) to (v) above. Although Circular 175 does not require Normal Marketplaces to
exit the industry or shut down and imposes minimum restrictions, such as control the existing size and number of investors, on Normal Marketplaces,
we may be encouraged by PRC government authorities to convert into other types of online financing institutions such as online microcredit
companies or loan facilitation platforms, and we have already started taking various measures, such as expanding cooperation with institutional
partners, in order to reduce the adverse impact on our business volume. If we were encouraged or required to change the type of business we operate,
our business, financial condition and results of operation might be materially and adversely affected. However, due to the un-clarification of Circular
175, there is a risk that applicable regulatory authorities interpret the regulations differently than we do. See “Item 3. Key Information—3.D. Risk
Factors—Risks Relating to Our Business and Industry—We have ceased the P2P operation business, but we cannot assure you that our operations
were in full compliance with relevant legal requirements and would not be punished under relevant regulations.”
Requirements relating to risk reserve funds. The online lending information intermediaries shall cease setting aside additional fund as risk reserve
funds, and shall gradually reduce the existing scale of risk reserve funds. In addition, the online lending information intermediaries are encouraged to
seek third parties to provide guarantee to lenders.
We have taken considerable measures to comply with the Interim Measures, the Custodian Guidelines, Circular 141, Circular 57, the Inspection
Notice, the Compliance Checklist and other laws and regulations applicable to our business operations. For example, we have selected qualified banks
to deposit the funds of lenders and borrowers and manage our own funds separately from the funds of lenders and borrowers, enhanced the risk
disclosures of online lending on our platform, and set up systematic rules on cooperating with business partners to realize the isolation of risks.
However, given that detailed regulations and guidance in the area of online lending information services are yet to be promulgated, we cannot be
certain that our existing practices would not be deemed to violate any existing or future rules, laws and regulations. See “Item 3. Key Information—
3.D. Risk Factors—Risks Relating to Our Business and Industry—We have ceased the P2P operation business, but we cannot assure you that our
operations were in full compliance with relevant legal requirements and would not be punished under relevant regulations.”
In January 2019, the Head Office for Special Rectification of Peer-to-Peer Online Lending and the Head Office for Special Rectification of Online
Finance Risk jointly issued the Notice on Further Proceed with Compliance Inspection of P2P Online Lending and Follow-up Work, which stipulates
P2P online lending platform passed the inspections by the administrative authorities shall provide real time data step by step.
In September 2019, the Head Office for Special Rectification of Peer-to-Peer Online Lending and the Head Office for Special Rectification of
Online Finance Risk jointly issued the Circular of Strengthening the Construction of Credit Support System of Online Lending, as reported, which
encourages operating peer-to-peer online lending institutions connect to credit reporting system, including the professional agency of basic database
for financial credit information (i.e. the Credit Reference Center of the People’s Bank of China), Baihang Credit and etc, cracking down malicious debt
evasion behaviors of non-operating peer-to-peer online lending entities, increasing the punishment of discredited enterprise and strengthening publicity
and public opinion guidance.
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Regulations Relating to Microcredit Business
Chinese regulators also encourage Normal Marketplace under Circular 175 to transform into online microcredit companies. In late December,
2019, the Head Office for Special Rectification of Online Finance Risk and the Head Office for Special Rectification of Peer-to-Peer Online Lending
jointly issued Guiding Opinions on Pilot Program of Transforming Peer-to-Peer Lending Information Intermediaries to Microcredit Companies, or
Circular 83, which provides detailed guidelines for the conversion of peer-to-peer online lending information intermediaries into microcredit
companies from the following aspects: (i) compliance requirement; (ii) qualified shareholders and management team; (iii) the feasibility of the
transforming plan; and (iv) with strong financial technology and be capable to online operation requirement. However, uncertainties still exist in
relation to the interpretation and implementation of Circular 83.
On September 7, 2020, the China Banking and Insurance Regulatory Commission issued the Circular on Strengthening the Supervision and
Administration of Microcredit Companies, or the Microcredit Circular. The Microcredit Circular provides that the microcredit companies shall mainly
operate the lending business and shall act in accordance with the requirements regarding the loan concentration, loan purposes, fund management, debt
collection and disclosure. Local authorities shall enhance supervision and administration of the establishment of the microcredit companies and
suspend newly-incorporated microcredit companies from engaging in the Internet microcredit business and other inter-provincial business.
On November 2, 2020, CBIRC and PBOC published the Interim Administrative Measures for Online Microcredit Business (Draft for Comment),
or the Draft Interim Administrative Measures, for public review and comments. Pursuant to the Draft Interim Administrative Measures, “online
microcredit business” refers to any microcredit business engaged in by a microcredit company through using big data, cloud computing, mobile
internet and other technical means, utilizing internally generated data and information on customer operation, online consumption, online transaction,
etc., accumulated via internet platforms as well as other data and information obtained through legitimate channels to analyze and appraise the credit
risk of borrowing customers, determine the mode and quota of loans, and complete such processes as loan application, risk review, loan approval, loan
granting and loan recovery online. Online microcredit business engaged in by a microcredit company shall mainly be carried out in the provincial-level
administrative region to which its place of registration belongs. Without the approval of the banking regulator under the State Council, no microcredit
company may carry out online microcredit business across provincial-level administrative regions. The registered capital of a microcredit company
which engages in online microcredit business shall not be less than CNY1 billion and shall be one-off paid-up monetary capital. The registered capital
of a microcredit company which engages in online microcredit business across provincial-level administrative regions shall not be less than CNY5
billion and shall be one-off paid-up monetary capital. In principle, the balance of single-account online microcredit loans granted to a natural person
shall not exceed CNY300,000 or one-third of its average annual income in the last three years, between which the lower one shall be the maximum
loan amount; and in principle, the balance of single-account online microcredit loans granted to a legal person or any other organization and its related
parties shall not exceed CNY1 million. The Draft Interim Administrative Measures was released for public comment only, there remains substantial
uncertainty regarding the Draft Interim Administrative Measures, including with respect to its final content, adoption timeline or effective date.
On December 31, 2021, PBOC published the Regulations on Local Financial Supervision and Administration (Draft for Public Comments), or the
Draft Local Financial Supervision and Administration Regulation, for public review and comments. Pursuant to the Draft Local Financial Supervision
and Administration Regulation , “Local Financial Organizations” refers to microcredit companies, financing guarantee companies, regional equity
markets, pawn shops, financial leasing companies, commercial factoring companies, local asset management companies, and other institutions
engaged in local financial business that are supervised and managed by laws, administrative regulations, and provincial-level people’s governments
authorized by the State Council. The Draft Local Financial Supervision and Administration Regulation specify that provincial governments shall
perform their duties of supervision, management, and risk disposal of local financial organizations, and no individual or entity shall set up Local
Financial Organizations without prior approval. The merger, division, reduction of registered capital, change of the business scope or operating area,
the change of the shareholders holding more than 5% of its equity interests, as well as change of the actual controller of the Local Financial
Organization shall be subject to the approval of the provincial local financial supervision and management department. Also, Local Financial
Organization shall make filings to provincial local financial supervision and management department for setting up branches within the provincial
administrative region, changing the name or address of business, increasing the registered capital, changing the directors, supervisors and senior
management personnel. Penalties such as fines or criminal liability may be imposed if the Local Financial Organizations fail to comply with the Draft
Local Financial Supervision and Administration Regulation.
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Xiaoying Microcredit has obtained the approval of the business qualification to operate microcredit businesses as issued by the competent
supervising authority, which allows Xiaoying Microcredit to conduct microcredit businesses through the internet. However, as the regulatory regime
and practice with respect to online microcredit companies are evolving, there is uncertainty as to how the requirements in the above rules will be
interpreted and implemented and whether there will be new rules issued which would establish further requirements and restrictions on online
microcredit companies.
Regulation Relating to Money Market Funds
According to the Administrative Measures on Supervision of Money Market Funds issued by the CSRC and the PBOC on December 17, 2015 and
became effective on February 1, 2016, a fund manager or fund sales institution shall not carry out the sales of money market funds in cooperation with
any internet institution or other institution engaged in the promotion or the sale, subscription or redemption of units of funds or other relevant business
without adequate qualification for fund sales business registered with the CSRC.
The money market products we facilitated on Xiaoying Wealth Management platform are provided by certain qualified business partners of us
pursuant to the Administrative Measures on Supervision of Money Market Funds, and we do not carry out any of the sale, subscription or redemption
of any money market products on our Xiaoying Wealth Management platform by ourselves. Thus, we believe we are not subject to the above
mentioned regulations in China.
Regulations Relating to Loans between Individuals
On May 28, 2020, the National People’s Congress approved the PRC Civil Code, which came into effect on January 1, 2021 and repealed the PRC
Contract Law and the General Principles of the Civil Law of the PRC .The PRC Civil Code confirms the validity of loan agreement between
individuals and provides that a loan agreement becomes effective when an individual lender provides loan to an individual borrower provided that the
interest rates charged under the loan agreement do not violate the applicable provisions of the PRC laws and regulations.
Pursuant to the Provisions on Several Issues Concerning Laws Applicable to Trials of Private Lending Cases issued by the Supreme People’s
Court on August 6, 2015, or the Private Lending Judicial Interpretations, which came into force on September 1, 2015, in the event that loans are made
through an online lending information intermediary platform and the platform only provides intermediary services, courts shall dismiss any claim
concerned against the platform demanding the repayment of loans by the platform as a guarantor.
Pursuant further to the PRC Private Lending Judicial Interpretations, PRC courts shall uphold any interest rate below 24% as agreed between
borrowers and lenders; as to the loans with annual interest rate between 24% and 36%, if the interest rate has been paid to the lender, so long as the
interest payment does not damage or pose any threat to the state, the community or any third party, PRC courts will not support borrower’s request for
the return of the excess interest payment; if the annual interest rate agreed exceeds 36%, the agreement on the excess part of the interest shall be
invalid, and PRC courts shall support any claim against the return of the excess part of the interest payment.
On August 4, 2017, the Supreme People’s Court issued the Several Opinions on Further Strengthening the Judicial Work in the Finance Sector,
according to which if an online lending information intermediary and a lender attempt to evade the upper limit to the legally protected interest by
charging part of interest rate as intermediary fees or other service fees, such arrangements shall be deemed as invalid. In addition, PRC courts shall
support the borrower’s claim to reduce the overall annual interest rate to 24%, on the basis that the aggregate amount of interest, compound interest,
default interest, liquidated damages and other fees claimed by the lender is overly high.
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On August 19, 2020, the Private Lending Judicial Interpretations was amended by the Supreme People’s Court, pursuant to which where a lender
claims that corresponding borrower shall pay interest as per the interest rate contractually stipulated, relevant people’s court shall uphold such claim,
except where the interest rate agreed on by both parties concerned exceeds four times the LPR for one-year loan when the contract is concluded. “LPR
for one-year loan” refers to the LPR for one-year loan to be published on a monthly basis by the National Interbank Funding Center authorized by the
PBOC as of August 20, 2019. On December 29, 2020, the Supreme People’s Court issued the Official Reply of the Supreme People’s Court to the
Issues concerning the Scope of Application of the New Judicial Interpretation on Private Lending, or the Official Reply. According to the Private
Lending Judicial Interpretations and the Official Reply, for financial institutions and branches engaging in loan business and established upon the
approval of the financial regulatory authorities, including but not limited to microcredit company, Private Lending Judicial Interpretations shall not
apply to disputes caused by granting loans and relevant financial business.
Although the Judicial Interpretation Amendment and the Supreme People’s Court Reply provide that they do not apply to licensed financial
institutions including microcredit companies that conduct loan and consumer finance business, there remain uncertainties in the interpretation and
implementation of the Judicial Interpretation Amendment, including whether licensed financial institutions may be subject to its jurisdiction under
Circular 141 or in certain circumstances, the basis of calculation formula used to determine the interest limit, the scope of inclusion of related fees and
insurance premiums, as well as inconsistencies between the standard and level of enforcement by different PRC courts.
Apart from the above, pursuant to the PRC Civil Code, a creditor’s rights under a loan agreement is assignable to a third party, provided that the
debtor is notified before such assignment takes effect for the debtor. 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.
Regulations Relating to Guarantee
On March 8, 2010, CBRC, NDRC, MIIT, MOFCOM, PBOC, SAIC and Ministry of Finance of PRC promulgated the Tentative Administrative
Measures for Financing Guarantee Companies , or the Tentative Administrative Measure. The Tentative Administrative Measures require an entity or
individual to obtain a prior approval from the relevant regulatory body to engage in the financing guarantee business, and defines “financing
guarantee” as an activity whereby the guarantor and the creditor, such as a financial institution in the banking sector, agree that the guarantor shall bear
the guarantee obligations in the event that the secured party fails to perform its financing debt owed to the creditor.
On August 2, 2017, the State Council issued Regulations on the Supervision and Administration of Financing Guarantee Companies, or the
Financing Guarantee Rules, which came into effect on October 1, 2017. The Financing Guarantee Rules defines financing guarantee as activities
whereby guarantors provide guarantee for the borrowing of funds, issuance of bonds and other debt financing activities of the guaranteed parties, and
financing guarantee companies refer to limited liability companies or companies limited by shares that are duly established and engage in financing
guarantee business. Pursuant to the Financing Guarantee Rules, the establishment of a financing guarantee company shall be subject to the approval of
the relevant regulatory authority. In the event that a company commences financing guarantee business without first obtaining relevant approval, the
company will be ordered by the regulatory authority to cease financing guarantee business, be imposed a fine from RMB500,000 up to
RMB1,000,000, have its illegal gains confiscated, and be investigated for criminal liabilities.
We might be deemed as providing guarantee on some of the loans formed offline between institutional funding partners and the borrowers.
However, given the lack of further interpretations, the exact definition and scope of “operating financing guarantee business” under the Financing
Guarantee Rules is unclear, we cannot be certain that our existing practices will not be determined to violate any existing or future rules, laws and
regulations. See “Item 3. Key Information—3.D. Risk Factors—Risks Relating to Our Business and Industry—We may be deemed to operate financing
guarantee business by the PRC regulatory authorities.”
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Regulations Relating to Anti-Money Laundering
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 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 user identification program, the monitoring and
reporting of suspicious transactions, the preservation of user 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.
Pursuant to the Interim Measures, an online lending intermediary shall perform the anti-money laundering obligations by verifying client identity,
reporting suspicious transactions, keeping identity data and transaction records, etc. In addition, the Custodian Guidelines requires that the anti-money
laundering obligation be included in the fund custodian agreements between an online lending intermediary and the commercial bank acting as the
depositary, and the online lending intermediary shall fulfill and cooperate with depositary to fulfill anti-money laundering obligations. The Measures
for the Anti-money Laundering and Anti-terrorist Finance of Internet Finance, promulgated on October 10, 2018, further specified that, any Internet
finance institutions (including online lending intermediary) incorporated upon approval or upon record-filing by applicable regulatory authority, shall
report any forms of cash receipts and payments whose transaction value reaches or exceeds RMB50,000 or foreign currency equivalent of USD10,000
on a per-transaction or cumulative basis on a given day, within five working days from the date when such transaction takes place.
We have adopted and implemented various policies and procedures, such as internal controls and “know-your-customer” procedures, for anti-
money laundering purposes. However, our policies and procedures may not be completely effective in preventing other parties from using us for
money laundering without our knowledge. See “Item 3. Key Information—3.D. Risk Factors—Risks Relating to Our Business and Industry—Any
failure by us, institutional funding partners payment service providers or funds custody banks to comply with applicable anti-money laundering and
anti-terrorist financing laws and regulations could damage our reputation, expose us to significant penalties, and decrease our revenues and
profitability.”
Regulations Relating 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 amended in January 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.
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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 fundraising
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.
On January 26, 2021, the State Council promulgated the Regulations for the Prevention and Handling of Illegal Fund-raising, or the Illegal Fund-
raising Regulations, which became effective as of May 1, 2021. The Illegal Fund-raising Regulations stipulates that Internet information service
providers shall strengthen the management of information published by users, and shall not produce, reproduce, publish or spread information on
suspected illegal fund-raising practices. If any information on suspected illegal fund-raising practices is found, relevant records shall be kept and
reported to the authority handling illegal fund-raising. Competent authorities in charge of telecommunications shall shut down websites established
and mobile applications developed for illegal fund-raising and other Internet applications in accordance with the law.
We have taken measures to avoid conducting any activities that are prohibited under the illegal-funding related laws and regulations. For example,
we managed the funds of lenders, borrowers and the proprietary funds of us in separate accounts by entering into fund depositary agreement with a
qualified bank.
Regulations on Mobile Internet Applications Information Services
Mobile Internet applications and the Internet application store are especially regulated by the Administrative Provisions on Mobile Internet
Applications Information Services, or the APP Provisions, which was promulgated by the Cyberspace Administration of China or the CAC on June 28,
2016 and entered into force on August 1, 2016. The APP Provisions regulate the APP information and the APP store service providers, and the CAC
and local offices of cyberspace administration are responsible for the supervision and administration of nationwide or local APP information
respectively.
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The APP information service providers shall acquire relevant qualifications in accordance with laws and regulations and fulfill the information
security management obligations as follows: (1) shall authenticate the identity information of the registered users including their mobile telephone
number and other identity information under the principle that mandatory real name registration at the back-office end, and voluntary real name
display at the front-office end; (2) shall establish and perfect the mechanism for the protection of users’ information, and follow the principle of
legality, rightfulness and necessity, indicate expressly the purpose, method and scope of collection and use and obtain the consent of users while
collecting and using users’ personal information; (3) shall establish and perfect the mechanism for the examination and management of information
content, and in terms of any information content released that violates laws or regulations, take such measures as warning, restricting the functions,
suspending the update and closing the accounts as the case may be, keep relevant records and report the same to relevant competent authorities;
(4) shall safeguard users’ right to know and to make choices when users are installing or using such applications, and shall neither start such functions
as collecting the information of users’ positions, accessing users’ contacts, turning on the camera and recording the sound, or any other function
irrelevant to the services, nor forcefully install any other irrelevant applications without prior consent of users when noticed expressly; (5) shall respect
and protect the intellectual properties and shall neither produce nor release any application that infringes others’ intellectual properties; and (6) shall
record the users’ log information and keep the same for 60 days.
We have established necessary mechanisms and adopted data encryption and protection technology in our mobile application to ensure the
collection, protection and storage of user information are in compliance with the requirements of the APP Provisions in all material aspects.
Regulations on Internet Information Security
In 1997, 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.
Internet information in China is regulated and restricted from a national security standpoint. The Standing Committee of the National People’s
Congress, or the SCNPC, has enacted the Decisions on Maintaining Internet Security on December 28, 2000 and further amended on August 27, 2009,
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 PRC Cybersecurity Law was promulgated by the SCNPC on November 7, 2016 and became effective on June 1, 2017. Under this regulation,
network operators, including online lending information service providers, shall comply with laws and regulations and fulfill their obligations to
safeguard security of the network when conducting business and providing services, and take all necessary measures pursuant to laws, regulations and
compulsory national requirements to safeguard the safe and stable operation of the networks, respond to network security incidents effectively, prevent
illegal and criminal activities, and maintain the integrity, confidentiality and usability of network data.
On 10 June 2021, the SCNPC promulgated the PRC Data Security Law, or the Data Security Law, which took effect on 1 September 2021. The
Data Security Law imposes data security and privacy obligations on entities and individuals carrying out data activities, and introduces a data
classification and hierarchical protection system. The Data Security Law also provides that the state shall establish a data security review system,
where data handling activities that affect or may affect the national security will undergo national security review, and shall implement export controls
on certain data. In addition, Measures for Cybersecurity Review, which became effective on June 1, 2020, as amended on December 28, 2021, and
became effective on February 15, 2022, set forth the cybersecurity review mechanism for critical information infrastructure operators, and provide that
(i) critical information infrastructure operators who intend to purchase internet products and services that affect or may affect national security shall be
subject to a cybersecurity review; (ii) online platform operators who are engaged in data processing are also subject to the regulatory scope; (iii) the
CSRC is included as one of the regulatory authorities for purposes of jointly establishing the state cybersecurity review working mechanism; (iv) the
online platform operators holding more than one million users/users’ individual information and seeking a listing outside China shall file for
cybersecurity review; (v) the risks of core data, material data or large amounts of personal information being stolen, leaked, destroyed, damaged,
illegally used or illegally transmitted to overseas parties and the risks of critical information infrastructure, core data, material data or large amounts of
personal information being influenced, controlled or used maliciously shall be collectively taken into consideration during the cybersecurity review
process.
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We have, in accordance with relevant provisions on network security of the PRC, established necessary mechanisms to protect information
security, including, among others, adopting necessary network security protection technologies such as anti-virus firewalls, intrusion detection and data
encryption, keeping record of network logs, and implementing information classification framework. Although we do not believe we are a critical
information infrastructure provider, the PRC authorities could interpret such term broadly to capture a leading online personal finance company like
us. If we are deemed to be a critical information infrastructure operator under such rules, we could be subject to cybersecurity review by Cyberspace
Administration of China and other relevant PRC regulatory authorities and be required to change our existing practices in data privacy and
cybersecurity matters at substantial costs. During such cybersecurity review, we may be required to stop providing services to our customers, and such
review could also result in negative publicity to us and diversion of our managerial and financial resources.
Regulations on Privacy Protection
The Several Provisions on Regulating the Market Order of Internet Information Services, issued by the MIIT in December 2011, provide that, 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. An internet information service provider 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 any leak or likely leak of the user personal
information, online lending service providers 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.
The 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 user and transaction information. The Guidelines also prohibit Internet finance
service providers from illegally selling or disclosing users’ personal information. 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.
Pursuant to the PRC Civil Code, the personal information of a natural person shall be protected by the law. Any organization or individual that
needs to obtain personal information of others shall obtain such information legally and ensure the safety of such information, and shall not illegally
collect, use, process or transmit personal information of others, or illegally purchase or sell, provide or make public personal information of others.
Furthermore, information processors shall not divulge or tamper with personal information collected or stored by them; without the consent of a
natural person, information processors shall not illegally provide personal information of such person to others, except for information that has been
processed so that specific persons cannot be identified and that cannot be restored. In addition, an information processor shall take technical measures
and other necessary measures to ensure the security of the personal information that is collected and stored and to prevent the information from being
divulged, tampered with or lost; where personal information has been or may be divulged, tampered with or lost, the information processor shall take
remedial measures in a timely manner, inform the natural person concerned in accordance with the provisions and report the case to the relevant
competent department.
On 20 August 2021, the SCNP Congress promulgated the PRC Personal Information Protection Law, or the Personal Information Protection Law,
which took effect on 1 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, (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 it is necessary for personal information to be provided by a personal information processor to a recipient outside
the territory of the PRC due to any business need or any other need, a security assessment organized by the national cyberspace authority shall be
passed.
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Furthermore, the Interim Measures require online lending information service providers to reinforce the management of lenders’ and borrowers’
information, so as to ensure the legitimacy and security regarding the collection, processing and use of lenders’ and borrowers’ information. Also,
online lending information service providers should keep confidential the lenders’ and borrowers’ information collected in the course of their business,
and should not use such information for any other purpose except for services they provide without approval of lenders or borrowers. On February 13,
2020, the PBOC also 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.
We have obtained consent from users to collect and use their personal information in providing consumer finance service. While we have taken
measures to protect the personal information that we have access to, our security measures could be breached resulting in the leak of such confidential
personal information. Security breaches or unauthorized access to confidential information could also expose us to liability related to the loss of the
information, time-consuming and expensive litigation and negative publicity. See “Item 3. Key Information—3.D. Risk Factors—Risks Relating to Our
Business and Industry—If we are unable to protect the confidential information of our users and adapt to the relevant regulatory framework regarding
protection of such information, our business and operations may be adversely affected.”
Regulations Related to Credit Information
On September 27, 2021, the PBOC promulgated the Administrative Measures for Credit Information Services, or the Credit Information Services
Measures, which took effect on January 1, 2022. Pursuant to the Credit Information Services Measures, Credit Information Services, shall mean the
collection, sorting, retention, and processing of credit information of enterprises and individuals, and the provision of the foregoing information to
information users. Credit information, shall mean the basic individual information, lending information and other relevant information used for
identification and determination of creditworthiness status of enterprises and individuals, and collected pursuant to the law for the purpose of providing
services for financial activities, as well as the analyzed and evaluated information formed based on the foregoing information. Entities engaging in
personal credit information services shall obtain the personal credit information organization license pursuant to the Credit Information Services
Measures. Financial institutions shall not carry out commercial cooperation with entities who have not obtained business qualifications for engaging in
credit information services to obtain any credit information services.
Regulations Related to Intellectual Property
The SCNPC and the State Council have promulgated comprehensive laws and regulations to protect trademarks. The Trademark Law of the PRC,
or the PRC Trademark Law, promulgated on August 23, 1982 and most recently amended on November 1, 2019 and the Implementation Regulation of
the PRC Trademark Law issued by the State Council on August 3, 2002 and amended on April 29, 2014 are the main regulations protecting registered
trademarks. The Trademark Office under the State Administration of Industry and Commerce administrates the registration of trademarks on a “first-
to-file” basis, and grants a term of ten years to registered trademarks.
The PRC Copyright Law, adopted in 1990 and most recently revised on June 1, 2021 respectively, with its implementation rules adopted on
August 8, 2002 and revised in 2011 and 2013 respectively, and the Regulations for the Protection of Computer Software as promulgated on December
20, 2001 and amended in 2011 and 2013 provide protection for copyright of computer software in the PRC. Under these rules and regulations,
software owners, licensees and transferees may register their rights in software with the National Copyright Administration Center or its local branches
to obtain software copyright registration certificates.
The MIIT, promulgated the Administrative Measures on Internet Domain Name , or the Domain Name Measure on August 24, 2017 to protect
domain names. According to the Domain Name Measures, domain name applicants are required to duly register their domain names with domain
name registration service institutions. The applicants will become the holder of such domain names upon the completion of the registration procedure.
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We have adopted necessary mechanisms to register, maintain and enforce intellectual property rights in China. However, we cannot assure you
that we can prevent our intellectual property from all the unauthorized use by any third party, neither can we promise that none of our intellectual
property rights would be challenged any third party. See “Item 3. Key Information—3.D. Risk Factors—Risks Relating to Our Business and Industry—
We may not be able to prevent unauthorized use of our intellectual property, which could harm our business and competitive position.”
Regulation Relating to Insurance Brokers
The PRC Insurance Law and related regulations were amended in 2002, 2009, 2014 and 2015. The 2015 amendments involved a number of
significant changes to the regulatory regime, including eliminating the requirement for any insurance agent, broker or claims adjusting practitioners to
obtain a qualification certificate issued by the China Insurance Regulatory Commission (“CIRC”).
The principal regulation governing insurance brokers is the Provisions on the Supervision and Administration of Insurance Brokers, or the
POSAIB, promulgated by the CIRC on February 1, 2018 and effective May 1, 2018, replacing the Provisions on the Supervision of Insurance Brokers
issued on September 25, 2009, as amended on April 27, 2013 and October 19, 2015, and the Measures on the Supervision and Administration of
Insurance Brokers and Insurance Claims Adjustors issued by the CIRC on January 6, 2013.
The term of “insurance broker” refers to an entity which, representing the interests of insurance applicants, acts as an intermediary between
insurance applicants and insurance companies for entering into insurance contracts, and collects commissions for the provision of such brokering
services. The term of “insurance brokerage practitioner” refers to a person affiliated with an insurance broker who drafts insurance application
proposals or handle the insurance application formalities for insurance applicants or the insured or assists insurance applicants or the insured in
claiming compensation or who provides clients with disaster or loss prevention or risk assessment or management consulting services or engages in
reinsurance broker, among others.
To engage in insurance brokerage business within the territory of the PRC, an insurance broker shall satisfy the requirements prescribed by the
CIRC and obtain an insurance brokerage business permit issued by the CIRC, after obtaining a business license. An insurance broker may take any of
the following forms: (i) a limited liability company; or (ii) a joint stock limited company.
The minimum registered capital of an insurance broker company whose business area is not limited to the province in which it is registered is
RMB50 million while the minimum registered capital of an insurance broker whose business area is limited to its place of registration is RMB10
million. However, on October 28, 2021, CBIRC promulgated the Implementation Measures for Administrative Licensing and Filing of Insurance
Intermediaries, which took effect on February 1, 2022,according to which, the registered capital of regional insurance brokers will be changed to 20
million yuan.
The name of an insurance broker shall include the words “insurance brokerage.” An insurance broker must register the information of its affiliated
insurance brokerage practitioners with Insurance Intermediary Supervision Information System (“IISIS”). One person can only be registered with the
IISIS through one insurance broker.
An insurance broker may conduct the following insurance brokering businesses:
● making insurance proposals, selecting insurance companies and handling the insurance application procedures for the insurance applicants;
● assisting the insured or the beneficiary to claim compensation;
● reinsurance brokering business;
● providing consulting services to clients with respect to disaster and damage prevention, risk assessment and risk management; and
● other business activities approved by the CIRC.
An insurance broker shall submit a written report to the CIRC through the IISIS and make public disclosure within five days from the date of
occurrence of any of the following matters: (i) change of name, domicile or business premises; (ii) change of shareholders, registered capital or form of
organization; (iii) change of names of shareholders or capital contributions; (iv) amendment to the articles of association; (v) equity investment,
establishment of offshore insurance related entities or nonoperational organizations; (vi) division, merger and dissolution or termination of insurance
brokering business activities of its branches; (vii) change of the primary person in charge of its branches other than provincial branches; (viii) being a
subject of administrative or criminal penalties, or under investigation for suspected involvement in any violation of law or a crime; and (x) other
reportable events prescribed by the CIRC.
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The principal regulation governing insurance brokerage practitioners is the Provisions on the Supervision and Administration of Insurance
Brokers, or the POSAIB, promulgated by the CIRC on February 1, 2018 and effective May 1, 2018, replacing the Measures for the Supervision and
Administration of Insurance Brokerage Parishioners and Insurance Assessment Practitioners, which was issued by the CIRC on January 6, 2013 and
effective on July 1, 2013. Under this regulation, insurance brokerage practitioners shall have the professional ability required for engaging in insurance
brokerage business. Insurance brokers shall, in accordance with the relevant provisions, obtain registrations with the CIRC for their insurance
brokerage practitioners, who can only obtain his or her registration through one insurance broker
Insurance broker and its practitioners are not allowed to sell non-insurance financial products, except for those products approved by relevant
financial regulatory institutions and the insurance broker and its practitioners shall obtain relevant qualification in order to sell non-insurance related
financial products that meets regulatory requirements.
Personnel of an insurance broker and its branches who engage in any of the insurance brokering businesses described above must comply with the
qualification requirements prescribed by the CIRC. The senior managers of an insurance broker must meet specific qualification requirements set forth
in the POSAIB.
During 2018, we acquired an insurance broker license. As of the date hereof, we have not engaged in any insurance brokerage business.
Regulations Related to Employment
The PRC Labor Law, or the Labor Law, which was promulgated by the SCNPC in July 1994, became effective in January 1995, and was most
recently amended in December 2018. The PRC Labor Contract Law, or the Labor Law Contract Law, which took effect on January 1, 2008 and was
amended on December 28, 2012. Pursuant to the Labor Law and the Labor Contract Law, employers must execute written employment contracts with
full-time employees. All employers must compensate their employees with wages equal to at least the local minimum wage standards. Violations of
the PRC Labor Law and the Labor Contract Law may result in the imposition of fines and other administrative sanctions, and serious violations may
constitute criminal offences.
On December 28, 2012, the PRC Labor Contract Law was amended with effect on July 1, 2013 to impose more stringent requirements on labor
dispatch. Under such law, dispatched workers are entitled to pay equal to that of full-time employees for equal work, but the number of dispatched
workers that an employer hires may not exceed a certain percentage of its total number of employees as determined by the Ministry of Human
Resources and Social Security. Additionally, dispatched workers are only permitted to engage in temporary, auxiliary or substitute work. According to
the Interim Provisions on Labor Dispatch promulgated by the Ministry of Human Resources and Social Security on January 24, 2014, which became
effective on March 1, 2014, the number of dispatched workers hired by an employer shall not exceed 10% of the total number of its employees
(including both directly hired employees and dispatched workers). The Interim Provisions on Labor Dispatch require employers not in compliance
with the PRC Labor Contract Law in this regard to reduce the number of its dispatched workers to below 10% of the total number of its employees
prior to March 1, 2016.
Enterprises in China are required by PRC laws and regulations to participate in certain employee benefit plans, including social insurance funds,
namely a pension 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, and contribute to the plans or funds in amounts equal to certain percentages of salaries, including bonuses and
allowances, of the employees as specified by the local government from time to time at locations where they operate their businesses or where they are
located. The enterprise may be ordered to pay the full amount within a deadline if it fails to make adequate contributions to various employee benefit
plans and may be subject to fines and other administrative sanctions.
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Regulations Relating to Foreign Exchange
Regulations on Foreign Currency Exchange
Under the PRC Foreign Currency Administration Rules promulgated on January 29, 1996 and last amended on August 5, 2008 and various
regulations issued by the State Administration of Foreign Exchange, or the SAFE, and other relevant PRC government authorities, payment of current
account items in foreign currencies, such as trade and service payments, payment of interest and dividends can be made without prior approval from
SAFE by following the appropriate procedural requirements. By contrast, the conversion of RMB into foreign currencies and remittance of the
converted foreign currency outside the PRC for the purpose of capital account items, such as direct equity investments, loans and repatriation of
investment, requires prior approval from SAFE or its local office.
On February 13, 2015, SAFE promulgated the Circular on Simplifying and Improving the Foreign Currency Management Policy on Direct
Investment, or the SAFE Circular No. 13, effective from June 1, 2015 and amended on December 30, 2019, which cancels the requirement for
obtaining approvals of foreign exchange registration of foreign direct investment and overseas direct investment from SAFE. The application for the
registration of foreign exchange for the purpose of foreign direct investment and overseas direct investment may be filed with qualified banks, which,
under the supervision of SAFE, may review the application and process the registration.
The Circular of the SAFE on Reforming the Management Approach regarding the Settlement of Foreign Capital of Foreign-invested Enterprise, or
the SAFE Circular No. 19, was promulgated on March 30, 2015, became effective on June 1, 2015 and was further amended on December 30, 2019.
According to the SAFE Circular No. 19, a foreign-invested enterprise may, according to its actual business needs, settle with a bank the portion of the
foreign exchange capital in its capital account for which the relevant foreign exchange bureau has confirmed monetary contribution rights and interests
(or for which the bank has registered the account-crediting of monetary contribution). For the time being, foreign-invested enterprises are allowed to
settle 100% of their foreign exchange capitals on a discretionary basis; a foreign-invested enterprise shall truthfully use its capital for its own
operational purposes within the scope of business; where an ordinary foreign-invested enterprise makes domestic equity investment with the amount of
foreign exchanges settled, the invested enterprise shall first go through domestic re-investment registration and open a corresponding Account for
Foreign Exchange Settlement Pending Payment with the foreign exchange bureau (bank) at the place of registration. The Circular of the SAFE on
Reforming and Regulating Policies on the Control over Foreign Exchange Settlement of Capital Accounts, the SAFE Circular No. 16 was promulgated
and became effective on June 9, 2016. According to the SAFE Circular No. 16, enterprises registered in PRC may also convert their foreign debts from
foreign currency into Renminbi on self-discretionary basis. The SAFE Circular No. 16 provides an integrated standard for conversion of foreign
exchange under capital account items (including but not limited to foreign currency capital and foreign debts) on self—discretionary basis, which
applies to all enterprises registered in the PRC. The SAFE Circular No. 16 reiterates the principle that Renminbi converted from foreign currency-
denominated capital of a company may not be directly or indirectly used for purposes beyond its business scope and may not be used for investments
in securities or other investment with the exception of bank financial products that can guarantee the principal within the PRC unless otherwise
specifically provided. Besides, the converted Renminbi shall not be used to make loans for related enterprises unless it is within the business scope or
to build or to purchase any real estate that is not for the enterprise own use with the exception for the real estate enterprise.
On January 26, 2017, SAFE promulgated the Circular on Further Improving Reform of Foreign Exchange Administration and Optimizing
Genuineness and Compliance Verification, or Circular No. 3, which stipulates several capital control measures with respect to the outbound remittance
of profits from domestic entities to offshore entities, including (i) banks must check whether the transaction is genuine by reviewing board resolutions
regarding profit distribution, original copies of tax filing records and audited financial statements, and (ii) domestic entities must retain income to
account for previous years’ losses before remitting any profits. Moreover, pursuant to Circular 3, domestic entities must explain in detail the sources of
capital and how the capital will be used, and provide board resolutions, contracts and other proof as a part of the registration procedure for outbound
investment.
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Regulations on Foreign Exchange Registration of Overseas Investment by PRC Residents
SAFE issued the Circular on Relevant Issues Relating to Domestic Resident’s Investment and Financing and Roundtrip Investment through
Special Purpose Vehicles, or the SAFE Circular 37, which became effective in July 2014, to replace the Circular of the State Administration of Foreign
Exchange on Issues Concerning the Regulation of Foreign Exchange in Equity Finance and Roundtrip Investments by Domestic Residents through
Offshore Special Purpose Vehicles, or the SAFE Circular 75 to regulate 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. SAFE Circular 37 defines a
SPV as 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 interests, while “round trip investment” is defined as 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 stipulates that, prior to making contributions into an SPV, PRC residents or entities be required to complete
foreign exchange registration with SAFE or its local branch. In addition, SAFE promulgated the Notice on Further Simplifying and Improving the
Administration of the Foreign Exchange Concerning Direct Investment in February 2015, as amended in December 2019, which amended SAFE
Circular 37 and became effective on June 1, 2015, requiring PRC residents or entities to register with qualified banks rather than SAFE 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. See
“Item 3. Key Information—3.D. Risk Factors—Risks Relating to Doing Business in China—PRC regulations relating to investments in offshore
companies by PRC residents may subject our PRC-resident beneficial owners or our PRC subsidiary to liability or penalties, limit our ability to inject
capital into our PRC subsidiary or limit our PRC subsidiary’s ability to increase their registered capital or distribute profits.”
Regulations Relating to Stock Incentive Plans
SAFE promulgated the Notice on Issues Concerning the Foreign Exchange Administration for Domestic Individuals Participating in Stock
Incentive Plan of Overseas Publicly Listed Company, or the Stock Incentive Plan Notice, in February 2012, replacing the previous rules issued by
SAFE in March 2007. Pursuant to the Stock Incentive Plan Notice and other relevant rules and regulations, PRC residents participating in stock
incentive plan in an overseas publicly-listed company are required to register with SAFE or its local branches and follow certain other procedures.
Participants of a stock incentive plan who are PRC residents must conduct the SAFE registration and other procedures with respect to the stock
incentive plan through a qualified PRC agent, which could be a PRC subsidiary of the overseas publicly listed company or another qualified institution
appointed by the PRC subsidiary. In addition, the PRC agent is required to update the relevant SAFE registration should there be 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 stock 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 stock 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 prior to distribution to such PRC residents.
We have adopted a share incentive plan, under which we have the discretion to award incentives and rewards to eligible participants. See “Item 6.
Directors, Senior Management and Employees—6.B. Compensation—Share Incentive Plan.” We have advised the recipients of awards under our
Share Incentive Plan to handle relevant foreign exchange matters in accordance with the Stock Incentive Plan Notice. However, we cannot guarantee
that all employee awarded equity-based incentives can successfully register with SAFE in full compliance with the Stock Incentive Plan Notice. See
“Item 3. Key Information—3.D. Risk Factors—Risks Relating to Doing Business in China—Any failure to comply with PRC regulations regarding
employee share incentive plans may subject the PRC plan participants or us to fines and other legal or administrative sanctions.”
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In addition, the State Administration for Taxation has issued circulars concerning employee share options, under which our employees working in
the PRC who exercise share options will be subject to PRC individual income tax. Our PRC subsidiary and VIE have obligations to file documents
related to employee share options with relevant tax authorities and to withhold individual income taxes of those employees who exercise their share
options. If our employees fail to pay or if we fail to withhold their income taxes as required by relevant laws and regulations, we may face sanctions
imposed by the PRC tax authorities or other PRC government authorities.
Regulations Relating to Dividend Distribution
Distribution of dividends of foreign investment enterprises are mainly governed by the PRC Company Law promulgated in January 2006 and last
amended in October 2018 and the Wholly Foreign-owned Enterprise Law promulgated in April 1986 and amended in September 2016 and its
implementation regulations. The Wholly Foreign-owned Enterprise Law was replaced by the PRC Foreign Investment Law on January 1, 2020. Under
these regulations, foreign investment enterprises in the PRC may distribute dividends only out of their accumulative profits, if any, determined in
accordance with PRC accounting standards and regulations. In addition, no less than 10% of the accumulated profits of the foreign investment
enterprises in the PRC are required to be allocated to fund certain reserve funds each year unless these reserves have reached 50% of the registered
capital of the enterprises. A PRC company is not permitted to distribute any profits until any losses from previous fiscal years have been offset.
Profits retained from prior fiscal years may be distributed together with distributable profits from the current fiscal year. Under our current
corporate structure, our Cayman Islands holding company may rely on dividend payments from Xiaoying (Beijing) Information Technology Co., Ltd.,
which is a wholly foreign-owned enterprise incorporated in China, to fund any cash and financing requirements we may have. Limitation on the ability
of our consolidated VIEs to make remittance to the wholly-foreign owned enterprise and on the ability of our wholly-foreign owned enterprise to pay
dividends to us could limit our ability to access cash generated by the operations of those entities. See “Item 3. Key Information—3.D. Risk Factors—
Risks Relating to Doing Business in China—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.”
Regulations Related to Taxation
Dividend Withholding Tax
In March 2007, the National People’s Congress enacted the Enterprise Income Tax Law which became effective on January 1, 2008 and last
amended on December 29, 2018. According to 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. Pursuant to the Notice of the State Administration of
Taxation on Negotiated Reduction of Dividends and Interest Rates, issued on January 29, 2008 and supplemented and revised on February 29, 2008,
and the Arrangement between Mainland China and the Hong Kong Special Administrative Region for the Avoidance of Double Taxation and
Prevention of Fiscal Evasion with Respect to Taxes on Income, which became effective on December 8, 2006 and applicable to income derived in
any year of assessment commencing on or after April 1, 2007 in Hong Kong and in any year commencing on or after January 1, 2007 in the PRC, such
withholding tax rate may be lowered to 5% if a Hong Kong enterprise is deemed the beneficial owner of any dividend paid by a PRC subsidiary by
PRC tax authorities and holds at least 25% of the equity interest in that particular PRC subsidiary at all times within the 12-month period immediately
prior to the distribution of the dividends. Furthermore, pursuant to the Announcement on Issues concerning “Beneficial Owners” in Tax Treaties issued
on February 3, 2018 by the SAT, when determining the status of “beneficial owners”, a comprehensive analysis may be conducted through materials
such as articles of association, financial statements, records of capital flows, minutes of board of directors, resolutions of board of directors, allocation
of manpower and material resources, the relevant expenses, functions and risk assumption, loan contracts, royalty contracts or transfer contracts, patent
registration certificates and copyright certificates, etc. However, even if an applicant has the status as a “beneficiary owner”, if the competent tax
authority finds necessity to apply the principal purpose test clause in the tax treaties or the general anti-tax avoidance rules stipulated in domestic tax
laws, the general anti-tax avoidance provisions shall apply. On October 14, 2019, SAT promulgated the Administrative Measures for Non-Resident
Taxpayers to Enjoy Treatment under Treaties, or SAT Circular 35, which became effective on January 1, 2020. SAT Circular 35 provides that non-PRC
resident enterprises are not required to obtain pre-approval from the relevant tax authorities in order to enjoy the reduced withholding tax. Instead,
non-PRC 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 include necessary forms and supporting documents in the tax filings, which
will be subject to post-tax filing examinations by the relevant tax authorities.
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Enterprise Income Tax
In December 2007, the State Council promulgated the Implementing Rules of the Enterprise Income Tax Law , or the Implementing Rules, which
became effective on January 1, 2008 and amended on April 23, 2019. The Enterprise Income Tax Law and its relevant Implementing Rules (i) impose
a uniform 25% enterprise income tax rate, which is applicable to both foreign invested enterprises and domestic enterprises (ii) permits companies to
continue to enjoy their existing tax incentives, subject to certain transitional phase-out rules and (iii) introduces new tax incentives, subject to various
qualification criteria.
The Enterprise Income Tax Law also 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 be subject to PRC enterprise income tax at the
rate of 25% on their worldwide income. The Implementing Rules 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 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.
On October 17, 2017, the State Administration of Taxation issued the Bulletin on Issues Concerning the Withholding of Non-PRC Resident
Enterprise Income Tax at Source, or the Bulletin 37, as amended in June 2018, which replaced the Notice on Strengthening Administration of
Enterprise Income Tax for Share Transfers by Non-PRC Resident Enterprises, or Circular 698, issued by the State Administration of Taxation, on
December 10, 2009, and partially replaced and supplemented rules under the Bulletin on Issues of Enterprise Income Tax on Indirect Transfers of
Assets by Non-PRC Resident Enterprises, or the Bulletin 7, issued by the State Administration of Taxation, on February 3, 2015 and last amended in
December 2017. Under 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. In respect of an indirect offshore transfer of assets of a PRC establishment, the relevant gain is to be
regarded as effectively connected with the PRC establishment and therefore included in its enterprise income tax filing, and would consequently be
subject to PRC enterprise income tax at a rate of 25%. Where the underlying transfer relates to the immoveable properties in China or to equity
investments in a PRC resident enterprise, which is not effectively connected to a PRC establishment of a non-resident enterprise, a PRC enterprise
income tax at 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. Pursuant to Bulletin 37, the withholding party shall declare and pay the
withheld tax to the competent tax authority in the place where such withholding party is located within 7 days from the date of occurrence of the
withholding obligation. Both Bulletin 37 and Bulletin 7 do 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. See “Item 3. Key Information—3.D. Risk Factors—Risks
Relating to Doing Business in China—We and our existing 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.”
Value-Added Tax
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, or the Pilot Plan. 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, as amended from time to time. Pursuant to the Pilot Plan
and the relevant notice, VAT at a rate of 6% is generally imposed, on a nationwide basis, on the revenue generated from the provision of service in lieu
of business tax in the modern service industries. 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.
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Regulations Relating to Overseas Listing
On July 6, 2021, the General Office of the Communist Party of China Central Committee and the General Office of the State Council jointly
issued a document to crack down on illegal activities in the securities market and promote the high-quality development of the capital market, which,
among other things, requires the relevant governmental authorities to strengthen cross-border oversight of law-enforcement and judicial cooperation, to
enhance supervision over China-based companies listed overseas, and to establish and improve the system of extraterritorial application of the PRC
securities laws.
On December 24, 2021, the CSRC and relevant departments of the State Council published the Provisions of the State Council on the
Administration of Overseas Securities Offering and Listing by Domestic Companies (Draft for Comments), and Administrative Measures for the Filing
of Overseas Securities Offering and Listing by Domestic Companies (Draft for Comments), or, collectively, the Draft Overseas Listing Regulations,
which aim to regulate overseas securities offerings and listings by China-based companies, are available for public consultation. The Draft Overseas
Listing Regulations aim to lay out the filing regulation arrangement for both direct and indirect overseas listing, and clarify the determination criteria
for indirect overseas listing in overseas markers. The Draft Overseas Listing Regulations, among other things, stipulate that, after making initial
applications with overseas stock markets for initial public offerings or listings, all China-based companies shall file with the CSRC within three
working days. After completing the filing procedures for an overseas initial public offering and listing, for the purposes of implementing and
strengthening the CSRC’s supervision, issuer will need to comply with continuous filing and reporting requirements after such offering and listing,
among others, including the following: (i) a reporting obligation in respect of a material event which arose prior to such offering and listing, (ii) filing
for follow-on offerings after the initial offering and listing, (iii) filing for share exchanges where by the issuer issues securities to acquire assets, and
(iv) a reporting obligation for material events after the initial offering and listing. In a Q&A released on its official website, the respondent CSRC
official indicated that the CSRC will start applying the filing requirements to new offerings and listings. New initial public offerings and refinancing
by existing overseas listed Chinese companies will be required to go through the filing process. As for the other filings for the existing companies, the
regulator will grant adequate transition period to complete their filing procedures. However, the Draft Overseas Listing Regulations were released for
public comment only, there remains substantial uncertainty, including but not limited to its final content, adoption timeline, effective date or relevant
implementation rules.
On April 2, 2022, the CSRC published the Provisions on Strengthening the Management of Confidentiality and Archives Related to the draft
Overseas Issuance of Securities and Overseas Listing by Domestic Companies (Draft for Public Comments), or the Draft Archives Rules, for public
comments. In the overseas listing activities of domestic companies, domestic companies, as well as securities companies and securities service
institutions providing relevant securities services hereof, should establish a sound system of confidentiality and archival work, shall not disclose state
secrets, or harm the state and public interests. Where a domestic company provides or publicly discloses to the relevant securities companies, securities
service institutions, overseas regulatory authorities and other entities and individuals, or provides or publicly discloses through its overseas listing
entity, any document or material involving any state secret or any work secret of organs and organizations, it shall report to the competent authority for
approval in accordance with the law, and submit to the secrecy administration department for filing. domestic companies shall not provide accounting
records to an overseas accounting firm that has not performed the corresponding procedures. Securities companies and securities service organizations
shall comply with the confidentiality and archive management requirements, and keep the documents and materials properly. Securities companies and
securities service institutions that provide domestic enterprises with relevant securities services for overseas issuance and listing of securities shall
keep such archives they compile within the territory of the PRC and shall not transfer such archives to overseas institutions or individuals, by any
means such as carriage, shipment or information technology, without the approval of the relevant competent authorities. If the archives or duplicates of
such archives are of important value to the state and society and needed to be taken abroad, approval shall be obtained in accordance with relevant
provisions.
Regulations Related to Anti-Monopoly
The Anti-Monopoly Law took effect on 1 August 2008. Before the 2018 Institutional Reform Plan, the National Development and Reform
Commission, or the NDRC, the SAIC, and the MOFCOM were the three PRC anti-monopoly enforcement authorities and the NDRC and the SAIC,
had in recent years strengthened enforcement actions, including levying significant fines, with respect to cartel activity as well as abusive behavior of
companies having market dominance. According to the 2018 Institutional Reform Plan, the anti-monopoly functions performed by the NDRC, the
SAIC, and the MOFCOM were consolidated into the SAMR, which may place a profound impact on the PRC anti-monopoly law enforcement
practice.
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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 Investors, 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 Investors, 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 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.
The Anti-Monopoly Law also provides a private right of action for competitors or users to bring anti-monopoly claims against companies. In
recent years, an increased number of companies have been exercising their right to seek relief under the Anti-Monopoly Law. As public awareness of
the rights under the Anti-Monopoly Law increases, more companies, including our competitors, business partners and customers, may resort to the
remedies under the law to improve their competitive position, regardless of the merits of their claims. On 2 January 2020, the Draft Amendment to the
Anti-Monopoly Law (Draft for Comment, or the Draft Amendment was issued by SAMR to seek public comments. Among others, the Draft
Amendment provides that when determining an operator’s dominant market position in the field of Internet, network effect, economies of scale, lock-
in effect and the ability of mastering and processing relevant data would be expressly taken into consideration, and further substantially raises
maximum fines in gun-jumping cases to 10% of the sales revenue of the previous year. On 23 October 2021, the SCNP Congress issued a new Draft
Amendment to the Anti-Monopoly Law (Revised Draft for Comment), or the Revised Draft Amendment to seek public comments. Among others, the
Revised Draft Amendment provides that the State Council anti-monopoly enforcement agency may order the operators to stop the implementation of
the concentration, to dispose of shares, assets, and the business within a period of time, or take other necessary measures to restore the state before the
concentration, if operators have implemented the concentration and have or may have the effect of excluding or limiting competition. And a fine up to
RMB5,000,000 may be imposed on operators if the concentration does not have the effect of excluding or limiting competition.
On February 7, 2021, the Anti-Monopoly Committee of the State Council promulgated the Anti-monopoly Guidelines for the Platform Economy
Sector, or the Anti-monopoly Guideline, aiming to improve anti-monopoly administration on online platforms. The Anti-monopoly Guideline,
operating as the compliance guidance under the existing PRC anti-monopoly regulatory regime for platform economy operators, specifically prohibits
certain acts of the platform economy operators that may have the effect of eliminating or limiting market competition, such as concentration of
undertakings.
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4.C. Organizational Structure
The following diagram illustrates our corporate structure as of the date of this annual report. It omits certain entities that are immaterial to our
results of operations, business and financial condition and also omits certain trusts and limited partnership enterprises we consolidate (see “Item 5.
Operating and Financial Review and Prospects—5.A. Operating Results—Critical Accounting Policies, Judgments and Estimates, Consolidated
Trusts, Consolidated Partnerships”). The relationships between, on the one hand, each of Beijing Ying Zhong Tong, Shenzhen Tangren, Shenzhen
Xiaoying and Shenzhen Beier, and on the other, Beijing WFOE as illustrated in this diagram are governed by contractual arrangements and do not
constitute equity ownership.
(1) In December 2017, Beijing WFOE acquired 100% of the equity interest held by Shenzhen Xiaoying in Shenzhen Xiaoying Puhui Technology
Co., Ltd. and Shenzhen Xiaoying Information Technology Co., Ltd.
(2) Mr. Yue (Justin) Tang, Mr. Baoguo Zhu and entities controlled by Mr. Yue (Justin) Tang hold 42.9838%, 11.3381% and 45.6781% of equity
interest in Shenzhen Xiaoying, respectively.
(3) Xi’an Bailu holds 100% equity interest in Shenzhen Tangren.
(4) Mr. Yue (Justin) Tang and Mr. Baoguo Zhu holds 88.6619% and 11.3381% of the equity interest in Beijing Ying Zhong Tong, respectively.
(5) Shenzhen Gamma Capital Management Co., Ltd. holds 100% equity interest in Shenzhen Beier.
Contractual Arrangements with Consolidated VIEs and Their Shareholders (“VIE Agreements”)
Due to PRC legal restrictions on foreign ownership and investment in, among other areas, valued-added telecommunications, similar to all other
entities with foreign incorporated holding company structures operating in our industry in China, currently conduct these activities mainly through our
VIEs and its subsidiaries over which we exercise effective control through contractual arrangements among our VIEs and its shareholders.
The contractual arrangements allow us to:
● exercise effective control over our VIEs;
● receive substantially all of the economic benefits of our VIEs; and
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● have an exclusive call option to purchase all or part of the equity interest in and/or assets of our VIEs when and to the extent permitted
by laws.
As a result of these contractual arrangements, we are the primary beneficiary of the VIEs and their subsidiaries and, therefore, have consolidated
the financial results of the VIEs and their subsidiaries in our consolidated financial statements in accordance with U.S. GAAP.
● the ownership structure of the VIEs currently are in compliance with PRC laws or regulations currently in effect; and
● the contractual arrangements among the VIEs and the shareholders of the VIEs, governed by PRC law currently are valid and binding under
PRC law, and will not result in any violation of applicable PRC laws or regulations currently in effect, except that the pledge of equity in
Shenzhen Tangren, which holds a financial guarantee license, and the pledge of equity in Shenzhen Beier would not be deemed validly
created until they are registered with the competent administration for market regulation, and we may not be able to register the pledge of
equity in Shenzhen Tangren and the pledge of equity in Shenzhen Beier, in which case we must rely on the equity pledge agreement to
enforce the pledge.
The following is a summary of the currently effective contractual arrangements by and among our wholly-owned subsidiaries, the VIEs and the
shareholder(s) of the VIEs and their spouses.
Agreements that provide us with effective control over the VIEs
Shareholders’ Voting Rights Proxy Agreements. Pursuant to the Shareholders’ Voting Right Proxy Agreements among Beijing WFOE, each of
the VIEs and the shareholders of each of the VIEs. These shareholders irrevocably authorize Beijing WFOE or any person(s) designated by Beijing
WFOE to act as his or her attorney-in-fact to exercise all of his or her rights as a shareholder of the VIEs, including, but not limited to, the right to
convene shareholders’ meetings, vote and sign any resolution as a shareholder, appoint directors and other senior executives to be appointed and
removed by the shareholder, the right to sell, transfer, pledge and dispose of all or a portion of the shares held by such shareholder, and other
shareholders voting rights permitted by the Articles of Association of each VIE. For the agreements among Beijing WFOE, each of the VIEs other
than Shenzhen Beier, and their shareholders, the power of attorney will remain in force for ten years. Unless a thirty-day notice is given by Beijing
WFOE, these agreements shall be automatically renewed for another one year upon the expiration. The agreement among Beijing WFOE, Shenzhen
Beier and its shareholder does not specify its effective term.
Spousal Consent Letters. Spouse of each individual shareholder of each of the VIEs has each signed a spousal consent letter. Under the spousal
consent letters, each signing spouse unconditionally and irrevocably gives up his or her rights to such shares and any associated economic rights or
interests to which he or she may be entitled pursuant to applicable laws and undertakes not to make any assertion of rights to such shares and the
underlying assets. Each signing spouse agrees and undertakes that he or she will take all necessary actions to ensure the proper perform of the
contractual arrangements, and will be bound by the contractual arrangements in case he or she obtains any equity of the VIEs due to any reason.
Equity Pledge Agreements. Pursuant to the Equity Pledge Agreements among Beijing WFOE, each of the VIEs and the shareholders of each of
the VIEs, those shareholders have pledged 100% equity interest in the VIEs to Beijing WFOE to guarantee the performance by the VIEs and its
shareholders of their obligations under the Shareholders’ Voting Rights Proxy Agreements, the Equity Pledge Agreements and the Exclusive Business
Corporation Agreements. If the VIEs or those shareholders breach their contractual obligations under these agreements, Beijing WFOE, as pledgee,
will have the right to dispose of the pledged equity interests in the VIEs and will have priority in receiving the proceeds from such disposal. Those
shareholders also agree that, unless the contractual obligations as defined in the Equity Pledge Agreements are fully performed by them or the secured
debts under the Equity Pledge Agreements are paid in full (whichever later), they will not dispose of the pledged equity interests or create or allow any
encumbrance on the pledged equity interests. We have completed the registration of the pledge of equity interests in Beijing Ying Zhong Tong and
Shenzhen Xiaoying with the competent administration for market regulation. As of the date of this annual report, the pledge of equity interest in
Shenzhen Tangren and the pledge of equity interest in Shenzhen Beier have not been registered with the competent administration for market
regulation and we may not be able to register the pledge of equity in Shenzhen Tangren and the pledge in of equity Shenzhen Beier.
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Agreements that allow us to receive economic benefits from the VIEs
Exclusive Business Cooperation Agreements. Pursuant to the Exclusive Business Cooperation Agreements among Beijing WFOE and each of the
VIEs, Beijing WFOE or its designated person has the exclusive right to provide the VIEs with technical support, consulting and other services in return
for fees based on 100% total consolidated profit of the VIEs after making up any cumulative loss (if any) of the VIEs and its affiliated companies and
setting of the working capital, operational costs, taxes and other statutory contributions required. Without Beijing WFOE’s prior written consent, the
VIEs may not accept any services subject to these agreements from any third party. Beijing WFOE has the right to determine the service fee to be
charged to the VIEs under these agreements by considering, among other things, the complexity of the services, the time that may be spent for
providing such services, as well as the commercial value and specific content of the service provided. Beijing WFOE will have the exclusive
ownership of all intellectual property rights created as a result of the performance of these agreements. For the agreements between Beijing WFOE and
each of the VIEs other than Shenzhen Beier, unless Beijing WFOE terminates these agreements in advance, these agreements will remain effective for
ten years. Unless agreed by both parties in writing, these agreements shall be automatically renewed for another ten year upon its expiration. The
agreement between Beijing WFOE and Shenzhen Beier will remain effective permanently, unless early terminated by Beijing WFOE in writing
pursuant to this agreement or otherwise required by PRC laws.
Agreements that provide us with the option to purchase the equity interests in the VIEs
Exclusive Call Option Agreements. Pursuant to the Exclusive Call Option Agreements among Beijing WFOE, each of the VIEs and their
shareholders, their shareholders irrevocably granted Beijing WFOE or any third party designated by Beijing WFOE an exclusive option to purchase all
or part of their equity interests in the VIEs at the lowest price permitted by applicable PRC laws. Those shareholders further undertake that they will
neither create any pledge or encumbrance on their equity interests in the VIEs, nor transfer, gift or otherwise dispose of their equity interests in the
VIEs to any person other than Beijing WFOE or its designated third party. Without Beijing WFOE or its designated third party’s prior written consent,
those shareholders agree not to, among other things, amend its articles of association, increase or decrease the registered capital, permit the VIEs to
enter into transactions which materially and adversely affect the VIEs’ assets, liabilities, business operations, equity interests and other legal interests,
or merge with any other entities or make any investments, or distribute dividends. For the agreements among Beijing WFOE, each of the VIEs other
than Shenzhen Beier, and their shareholders, these agreements will remain effective for ten years. Unless notified by Beijing WFOE, the parties to
these agreements shall extend the term of these agreements for another ten years. The agreement among Beijing WFOE, Shenzhen Beier and its
shareholder does not specify its effective term.
4.D. Property, Plant and Equipment
Our corporate headquarters are located in Shenzhen, where we lease an area of approximately 5,198 square meters as of the date of this annual
report. We also lease office space of approximately 1,400 square meters in Beijing and office space of approximately 800 square meters in Shanghai.
We lease our premises from third parties under operating lease agreements. We believe that we will be able to obtain adequate facilities, principally
through leasing, to accommodate our future expansion plans.
ITEM 4A. UNRESOLVED STAFF COMMENTS
None.
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
You should read the following discussion together with our consolidated financial statements and the related notes included elsewhere in this
annual report. This discussion contains forward-looking statements about our business and operations. Our actual results may differ materially from
those we currently anticipate as a result of many factors, including those we describe under “Item 3.D. Risk Factors” and elsewhere in this annual
report on Form 20-F.
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5.A. Operating Results
Impact of COVID-19
On January 30, 2020, the International Health Regulations Emergency Committee of the World Health Organization (the “WHO”) declared the
COVID-19 coronavirus outbreak a public health emergency of international concern and on March 10, 2020, declared it to be a pandemic. Actions
taken around the world to help mitigate the spread of the coronavirus include restrictions on travel, and quarantines in certain areas, and forced
closures for certain types of public places and businesses. Our borrowers may negatively impacted by COVID-19, including healthcare, travel, offline
education, franchising, auto/transportation and real estate/home furnishing sectors, may reduce their liquidity to repay the loans, which may materially
adversely impact our loan performance. The loan facilitation amount may also decreased as our institutional funding partners adjusted their strategies
due to pessimistic expectations.
Our results of operations were adversely affected by the COVID-19 especially during the first half year of 2020. In the early onset of the third
quarter of 2020, our business was already on track for a steady recovery and our business operation has returned to the pre-COVID-19 pandemic level.
In 2021, our operational and financial results continued to show progress against our strategic objectives. In 2019, 2020 and 2021, the total loans we
facilitated amounted to RMB39,441 million, RMB29,676 million and RMB51,859 million, respectively. Our delinquency rate for all outstanding loans
that were 31-60 days past due decreased from 2.40% as of December 31, 2019 to 0.79% as of December 31, 2020, and then increased to 1.48% as of
December 31, 2021.
There are new confirmed COVID-19 cases reported in China in early 2022 and the recent COVID-19 resurgence in Chinese mainland has been in
general stabilized and under control. There is no obvious adverse change in our loan performance due to the recent COVID-19 resurgence as of the
date of this annual report. However, the potential impact brought by and the duration of the COVID-19 outbreak are difficult to assess or predict and
the full impact of the virus on our operations will depend on many factors beyond our control. We have provided additional credit losses for accounts
receivable and contract assets, other current assets and loans receivables in the year ended December 31, 2020 and 2021, due to the impact of COVID-
19, other economic conditions and other factors. 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, possibility of another wave in China, the development and progress of
distribution of COVID-19 vaccine and other medical treatment, the potential change in user behavior, especially on internet usage due to the prolonged
impact of COVID-19, the actions taken by government authorities, 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, certain of our estimates and assumptions, including the allowance for
credit losses, require significant judgments and carry a higher degree of variabilities and volatilities that could result in material changes to our current
estimates in future periods.
As of December 31, 2020 and 2021, we had cash and cash equivalents of RMB746.4 million and RMB584.8 million (US$91.8 million),
respectively. We believe this level of liquidity is sufficient to successfully navigate an extended period of uncertainty.
Key Factors Affecting Our Results of Operations
Economic Conditions and Regulatory Environment in China
The demand for personal finance services from prime borrowers depends on the overall economic conditions in China. General economic factors,
including the interest rate environment and unemployment rates, may have impacts on borrowers’ willingness to seek loans. For example, significant
increases in interest rates could lead to prospective borrowers to defer obtaining loans as they wait for interest rates to decrease. Additionally, a
slowdown in the economy, resulting in a rise in unemployment rate and possibly a decrease in real income, may affect individuals’ level of disposable
income. This may affect borrowers’ repayment capability and their willingness to seek loans, which may potentially affect the delinquency rates.
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The regulatory environment for the online personal finance industry in China is developing and evolving, creating both challenges and
opportunities that could affect our financial performance. Due to the relatively short history of online personal finance industry in China, a
comprehensive regulatory framework governing our industry is under development by the PRC government. See “Item 3. Key Information—3.D. Risk
Factors—Risks Relating to Our Business and Industry” for details. While new laws and regulations or changes to existing laws and regulations could
make facilitating loans to borrowers more difficult or expensive, or making such loan products more difficult for institutional funding partners to
accept or on terms favorable to us, these events could also provide new product and market opportunities. We will continue to diversify our funding
sources, expand our loan product mix and enhance our risk management to support our business growth.
Size of Borrower Base and Engagement
Our revenues are dependent on our ability to acquire new borrowers and retain existing borrowers. The size of our borrower base directly affects
the total amount of loans we facilitate and in turn the service fees that we collect. The number of active borrowers on our platform decreased from
2,152,962 borrowers in 2019 to 1,663,737 borrowers in 2020, and then increased to 2,371,537 borrowers in 2021, of which 1,437,143, or 66.8%,
1,000,714, or 60.1% and 1,543,794, or 65.1% were new borrowers, respectively. In 2019, 2020 and 2021, we have facilitated RMB39,441 million,
RMB29,676 million and RMB51,859 million of loans on our platform, respectively. The loan facilitation amount decreased in 2020 as we took a more
stringent risk policy to address COVID-19 impact and increased in 2021 as our business is fully back on its growth trajectory amid the subsiding
COVID-19 pandemic in China. We are a leading player in the online personal finance industry. To date, we rely on attractive fee rates, products and
services to acquire new borrowers. We also utilize various marketing efforts to attract and retain borrowers. Our new borrower acquisition cost of each
borrower for our loan products was RMB294 in 2019, RMB366 in 2020 and RMB401 in 2021. A change in our ability to attract or retain borrowers, or
a change in the acquisition cost of such borrowers, may potentially affect our revenue and profitability.
Loan Pricing
Our revenue and profitability are subject to the terms of our loan products, including the rate of service fees or interest fees charged, loan
durations and the size of loan products. To cater our loan products to each prime borrower segment, within each product category, we specify the
amount of fees per transaction considering the type, size and duration of the loan product. Loan products of longer duration and larger size generally
correspond to higher fees. We assign a credit assessment result to each prospective borrower leveraging on our proprietary credit scoring model, based
on an applicant’s basic information, credit history and behavior data and assign a credit line. Going forward, we also expect to assign differentiated fee
rates based on the credit assessment result of an applicant. The fee rate variation depends on various factors in the competitive market and our
adjustment in pricing will impact our revenues and profitability, as our revenues are generated from the service fees or interest fees.
Ability to Maintain Effective Risk Management
Our ability to effectively assess the credit risk of borrowers and classify borrowers into appropriate risk profiles impacts our ability to attract and
retain borrowers and institutional funding partners, both of which directly relate to users’ confidence in our platform. The delinquency rate for all
outstanding loans on our platform that were 31-60 days past due decreased from 2.40% as of December 31, 2019 to 0.79% as of December 31, 2020,
and then increase to 1.48% as of December 31, 2021. The primary reasons for an increase include (i) Xiaoying Card Loan has terms ranging from
three to twelve months, and therefore would require several months to determine the delinquent effect, and (ii) borrowers have been negatively
impacted by liquidity tightening since most of the consumer lending marketplaces took a more stringent risk control policy to address new regulation
requirements. We intend to optimize our fraud detection capabilities, improve accuracy of our credit scoring model and enhance our collection
effectiveness on a continuing basis through the combination of our big-data analytical capabilities and the increasing amount of data we accumulate
through our operations. See “Item 4. Information on the Company—4.B. Business Overview—Risk Management” for details.
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Ability to Maintain Stable Funding Sources and Diversify and Expand Our Funding Channels
Our revenue is dependent on our ability to maintain stable funding sources and diversify and continuously expand our funding sources. At the end
of 2019, we ceased funding our loan products from our individual investors through Xiaoying Wealth Management platform. We actively expanded
institutional funding, such as banks, consumer finance companies, trust companies and other institutions, and achieved 100% institutional funding for
the new loans facilitated by the end of the second quarter of 2020. In May 2021, we obtained a network microcredit license from the Local Financial
Regulatory Bureau of Shenzhen Municipality and started online microcredit business in July 2021. The availability of funds affects our liquidity and
the amount of transactions that we will be able to facilitate. In 2019, 68.1% of the total funding for loans we facilitated were provided by individual
investors, 26.6% were provided by corporate investors and institutional funding partners, and 5.3% were provided by our own funds. In 2020, 4.7% of
the total funding for loans we facilitated were provided by individual investors, 95.3% were provided by institutional funding partners. In 2021, 98.0%
of the total funding for loans we facilitated were provided by institutional funding partners, 2.0% were provided by our own funds.
The amount of funds invested by institutional funding partners significantly increased in 2020 and 2021. Our collaboration with institutional
funding partners affects our ability to secure sufficient and stable funding sources. The interest charged by the institutional funding partners that we
collaborate impacts our pricing strategy and profitability. In light of the requirements under Circular 141 and Circular 57 promulgated in
December 2017, we have reviewed and adjusted our cooperation with banking financial institution partners, such as suspending certain cooperation, to
better comply with the applicable regulatory requirements. However, as we have strong funding capabilities to attract and retain various institutional
funding partners, we believe adjustment in our cooperation with banking financial institution partners would not have any material and adverse impact
on our business operations.
Relationship with Financial Institutional cooperators
Our collaboration with financial institutional cooperators is an important factor affecting our results of operations. We benefit from the protection
of credit insurance or guarantee service which is provided by our financial institutional cooperators, including ZhongAn and external financing
guarantee companies, to investors or institutional funding in the event of borrower’s default. ZhongAn is a listed company on Hong Kong Stock
Exchange since September 2017. Substantially all of our financing guarantee partners have at least AA credit rating issued by rating companies
including China Lianhe Credit Rating Co., Ltd., China Chengxin Credit Management Co., Ltd. and Shenzhen Lianhe Credit Information Service Co.,
Ltd. Our financing guarantee partners provide guarantee services covering both the North China and South China areas, most of which have a
registered capital of more than RMB1 billion. Our financial institutional cooperators’ strong brand recognition in China assists us in expanding our
institutional funding base at reasonable expenses.
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We also collaborate with those financial institutional cooperators to strengthen our capabilities on risk management, given that we can get their
insurance or guarantee decision opinion. Our financial institutional cooperators’ credit assessment models are based on information from various
databases, including PBOC CRC that is only available to licensed financial institutions. In addition to our financial institutional cooperators’ decision
and input, we also factor in many layers of other decision variables to create a more comprehensive and accurate profile of the borrowers’
creditworthiness. See “Item 4. Information on the Company—4.B. Business Overview—Our Partnership with Financial Institutional Cooperators “ for
details. Changes to our arrangement with financial institutional cooperators in credit insurance or guarantee services, credit assessment and other
aspects of our business could affect our investors’ confidence, the growth of our business and our profitability. In addition to our financial institutional
cooperators’ insurance or guarantee protection, Shenzhen Tangren, our consolidated VIE with the financing guarantee license, currently provides a
guarantee for certain loan products we facilitate, when in the event of default, Shenzhen Tangren will compensate those financial institutional
cooperators for substantially all the loan principal and interest default but have not been subsequently collected. Shenzhen Tangren’s compensation
obligation is capped at a certain percentage of the principal at loan facilitation as pre-agreed with them, which will not be more than the contractual
guarantee fee collectible from the borrower by us across the entire portfolio. We may consider introducing other funding protection arrangements. We
cannot assure you that new arrangements would be perceived by our financial institutional cooperators or institutional funding partners, which may
have adverse impact on our business operations.
Loan Performance
Delinquency Rate by Balance
We define delinquency rate as the balance of the outstanding principal and accrued outstanding interest for loans that were 31 to 60 days past due
as a percentage of the total balance of outstanding principal and accrued outstanding interest for the loans we facilitated as of a specific date. Loans
that are delinquent for more than 60 days are charged-off and excluded in the calculation of delinquency rate by balance, except for Xiaoying Housing
Loan. As Xiaoying Housing Loan is a secured loan product and we are entitled to payment by exercising our rights to the collaterals, we do not
exclude Xiaoying Housing loan delinquent for more 60 days from the calculation of delinquency rate by balance. Xiaoying Housing Loan was
launched in July 2015 and ceased in February 2019, and all the outstanding loan balance of housing loan as of December 31, 2021 were overdue more
than 60 days. To make the delinquency rate by balance comparable, we exclude Xiaoying Housing Loan in the calculation of delinquency rate as of
December 31, 2021. The following table provides the delinquency rates for all outstanding loans on our platform and by major products as of the
respective dates indicated.
Delinquent for 31-60 days
All outstanding loans
Xiaoying Credit Loan
Xiaoying Revolving Loan(1)
Xiaoying Housing Loan
Loan facilitation services to other platforms
Notes:
2019
December 31,
2020
2021
2.40 %
2.69 %
2.05 %
0.00 %
0.01 %
1.48 %
0.79 %
1.48 %
0.73 %
2.54 % 100.00 %
0.00 %
0.00 %
N/A
N/A
(1) We have ceased the operation of Xiaoying Revolving Loan in 2020. The delinquency rate for Xiaoying Revolving Loan that were 31-60 days past
due was 100% as of December 31, 2021, which is because the balance of the outstanding principal and accrued outstanding interest for loans that
were 31 to 60 days past due equals the total balance of outstanding principal and accrued outstanding interest for the loans we facilitated.
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To make the delinquency rate by balance comparable to our peers, we also define the delinquency rate as the balance of the outstanding principal
and accrued outstanding interest for loans that were 31 to 90 and 91 to 180 days past due as a percentage of the total balance of outstanding principal
and accrued outstanding interest for the loans we facilitated as of a specific date. Loans that are delinquent for more than 180 days are excluded in the
calculation of delinquency rate by balance, except for Xiaoying Housing Loan. Xiaoying Housing Loan was launched in July 2015 and ceased in
February 2019, and all the outstanding loan balance of housing loan as of December 31, 2021 were overdue more than 180 days. To make the
delinquency rate by balance comparable, we exclude Xiaoying Housing Loan in the calculation of delinquency rate as of December 31, 2021. The
following table provides the delinquency rates for all outstanding loans on our platform and by major products as of the respective dates indicated.
December 31, 2019
All outstanding loans
Xiaoying Credit Loan
Xiaoying Revolving Loan
Xiaoying Housing Loan
Loan facilitation services to other platforms
December 31, 2020
All outstanding loans
Xiaoying Credit Loan
Xiaoying Revolving Loan
Xiaoying Housing Loan
Loan facilitation services to other platforms
December 31, 2021
All outstanding loans
Xiaoying Credit Loan
Xiaoying Revolving Loan(1)
Xiaoying Housing Loan
Loan facilitation services to other platforms
Delinquent for
31 - 90 days
91 - 180 days
4.05 %
4.56 %
3.29 %
0.00 %
0.02 %
1.50 %
1.38 %
4.93 %
0.00 %
0.00 %
2.65 %
2.65 %
4.52 %
N/A
N/A
5.11 %
5.92 %
2.51 %
0.76 %
0.00 %
2.53 %
2.10 %
14.34 %
0.00 %
0.00 %
2.62 %
2.62 %
95.48 %
N/A
N/A
Notes:
(1) We have ceased the operation of Xiaoying Revolving Loan in 2020. The delinquency rates for Xiaoying Revolving Loan that were 31-90 days
past due plus the delinquency rates that were 91-180 days past due were equal to 100% as of December 31, 2021, which is because the balances of
the outstanding principal and accrued outstanding interest for loans that were 31 to 180 days past due equal the total balance of outstanding
principal and accrued outstanding interest for the loans we facilitated.
The delinquency rate for all outstanding loans on our platform that were 31-60 days past due decreased from 2.40% as of December 31, 2019 to
0.79% as of December 31, 2020, and then increased to 1.48% as of December 31, 2021. The delinquency rate for all outstanding loans on our platform
that were 31-90 days past due increased from 4.05% as of December 31, 2019 to 1.50% as of December 31, 2020, and then increased to 2.65% as of
December 31, 2021. The delinquency rate for all outstanding loans on our platform that were 91-180 days past due decreased from 5.11% as of
December 31, 2019 to 2.53% as of December 31, 2020, and then increased to 2.62% as of December 31, 2021. The primary reasons for the increase
include (i) Xiaoying Card Loan has terms ranging from three to twelve months, and therefore would require several months to see the delinquent
effect, and (ii) borrowers have been negatively impacted by liquidity tightening since most of the consumer lending marketplaces took a more stringent
risk policy to address new regulation requirements.
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Delinquency Rate by Vintage of Xiaoying Credit Loan
We refer to loans facilitated during a specified time period as vintage. We define vintage delinquency rate as (i) the total amount of principal for
all loans in vintage that becomes delinquent, less (ii) the total amount of recovered past due principal for all loans in the same vintage, and divided by
(iii) the total amount of initial principal for all loans in such vintage. Loans that have been charged-off are included in the calculation of vintage
delinquency rates.
The following chart displays the historical cumulative 91-day plus past due delinquency rates by loan origination vintage for all continuing
Xiaoying Credit Loan facilitated through our platform up to December 31, 2021, excluding the Xiaoying Professional Loan with a term of two to
three years and the Xiaoying Preferred Loan with a term of three years.
The change in such delinquency rate of Xiaoying Credit Loan was primarily due to (i) Xiaoying Card Loan has terms ranging from three to twelve
months, and therefore would require several months to see the delinquent effect, and (ii) borrowers have been negatively impacted by liquidity
tightening since most of the consumer lending marketplaces took a more stringent risk policy to address new regulation requirements.
Funding
We used to obtain funding directly from individual investors and corporate investors where they can invest in loans listed on our Xiaoying Wealth
Management platform by choosing the loan products with their desired term and interest rate. Currently we obtain funding from institutional funding
partners such as banks, consumer finance companies, trust companies and other institutions. In May 2021, we obtained a network microcredit license
from the Local Financial Regulatory Bureau of Shenzhen Municipality and started online microcredit business in July 2021.
In 2019, 68.1% of the total funding for loans we facilitated were provided by individual investors, 26.6% were provided by corporate investors
and institutional funding partners, and 5.3% were provided by our own funds. In 2020, 4.7% of the total funding for loans we facilitated were provided
by individual investors, 95.3% were provided by institutional funding partners. In 2021, 98.0% of the total funding for loans we facilitated were
provided by institutional funding partners and 2.0% were provided by our own capital.
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Results of Operations
The following table sets forth a summary of our consolidated results of operations for the periods presented. This information should be read
together with our consolidated financial statements and related notes included elsewhere in this annual report. The results of operations in any period
are not necessarily indicative of our future trends.
2019
RMB
%
For the Year Ended December 31,
2020
RMB
%
(in thousands, except for percentages)
RMB
2021
US$
%
Net revenues
Loan facilitation service—Direct Model
Loan facilitation service- Intermediary Model
Post-origination service
Financing income
Other revenue
Total net revenue
Operating costs and expenses:
Origination and servicing
General and administrative
Sales and marketing
(Reversal of) provision for contingent guarantee
liabilities
Provision for accounts receivable and contract
1,986,003
238,867
330,695
408,401
124,084
3,088,050
64.3 %
7.7 %
10.7 %
13.2 %
4.1 %
100.0 %
1,266,533
41,373
203,842
612,863
68,346
2,192,957
57.8 %
1.9 %
9.3 %
27.9 %
3.1 %
100.0 %
2,545,432
161
315,590
671,901
93,381
3,626,465
399,434
25
49,523
105,436
14,654
569,072
70.2 %
0.0 %
8.7 %
18.5 %
2.6 %
100 %
1,634,822
227,481
103,158
52.9 %
7.4 %
3.3 %
2,071,506
179,226
35,629
94.4 %
8.2 %
1.6 %
1,963,006
187,858
20,830
308,038
29,479
3,269
54.1 %
5.2 %
0.6 %
7,748
0.3 %
881
0.0 %
(24)
(4)
(0.0)%
assets
241,187
7.8 %
121,485
5.5 %
77,248
12,122
2.1 %
(Reversal of) provision for loan receivable from
Xiaoying Housing Loans
Provision for loans receivable from Xiaoying
23,431
0.8 %
17,994
0.8 %
(378)
(59)
(0.0)%
Credit Loans and Xiaoying Revolving Loans
37,643
1.2 %
227,210
10.4 %
76,395
11,988
2.1 %
Impairment losses on deposits to institutional
cooperators:
(Reversal of) provision for credit losses on deposits
to institutional cooperators
Impairment loss on deposits to institutional
cooperators
Reversal of provision of credit losses for other
financial assets
Total operating expenses
Income (loss) from operations
Interest income (expense), net
Foreign exchange gain
Investment loss
Change in fair value of financial guarantee
—
—
10,318
0.5 %
(8,291)
(1,301)
(0.2)%
—
—
960,000
43.8 %
—
—
—
—
2,275,470
812,580
19,386
616
(12,538)
—
73.7 %
26.3 %
0.6 %
—
(0.4)%
(975)
3,623,274
(1,430,317)
21,724
15,399
—
0.0 %
(1,223)
165.2 % 2,315,421
(65.2)% 1,311,044
19,709
5,147
—
1.0 %
0.7 %
—
(192)
363,340
205,732
3,093
808
—
(0.0) %
63.9 %
36.1 %
0.5 %
0.1 %
—
derivative
(246,372)
(8.0)%
(163,670)
(7.5)%
(170,339)
(26,730)
(4.7)%
Fair value adjustments related to Consolidated
Trusts
Other income (loss), net
Income (Loss) before income taxes and gain (loss)
from equity in affiliates
Income tax benefit (expense)
Gain (loss) from equity in affiliates, net of tax
Net income (loss)
64,163
26,080
2.1 %
0.9 %
(57,380)
12,710
(2.6)%
0.6 %
(7,267)
32,506
(1,140)
5,101
(0.2)%
1.0 %
663,915
93,103
17,458
774,476
21.5 %
3.0 %
0.6 %
25.1 %
(1,601,534)
299,879
(6,806)
(1,308,461)
(73.0)%
13.7 %
(0.3)%
(59.6)%
1,190,800
(368,735)
3,342
825,407
186,864
(57,862)
524
129,526
32.8 %
(10.2)%
0.1 %
22.7 %
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Year Ended December 31, 2021 Compared to Year Ended December 31, 2020
Net Revenues
The following table sets forth the breakdown of our net revenues, both in absolute amount and as a percentage of our total net revenues, for the
periods presented:
Net revenues
Loan facilitation service—Direct Model
Loan facilitation service—Intermediary Model
Post-origination service
Financing income
Other revenue
Total net revenue
For the Year Ended December 31,
2020
2021
RMB
%
RMB
US$
%
(in thousands, except for percentages)
1,266,533
41,373
203,842
612,863
68,346
2,192,957
57.8 %
1.9 %
9.3 %
27.9 %
3.1 %
100.0 %
2,545,432
161
315,590
671,901
93,381
3,626,465
399,434
25
49,523
105,436
14,654
569,072
70.2 %
0.0 %
8.7 %
18.5 %
2.6 %
100 %
Loan Facilitation Service-Direct Model and Loan Facilitation Service-Intermediary Model
Loan facilitation service fees under the direct model increased from RMB1,266.5 million in 2020 to RMB2,545.4 million (US$399.4 million) in
2020, primarily due to an increase in the amount of Xiaoying Card Loan facilitated through the direct model in 2021.
Loan facilitation service fees under the intermediary model decreased from RMB41.4 million in 2020 to RMB0.2 million (US$0.03 million) in
2021, primarily due to the fact that substantially all of the institutional funding partners invested their funds in the loans facilitated under the direct
model and/or the trust model, depending on their investment strategies.
Post-origination Service
Post-origination service fees increased from RMB203.8 million in 2020 to RMB315.6 million (US$49.5 million) in 2021, primarily due to the
cumulative effect of increased volume of loans facilitated during the year. Revenues from post-origination services are recognized on a straight-line
basis over the term of the underlying loans as the services are being provided.
Financing Income
Financing income increased from RMB612.9 million in 2020 to RMB671.9 million (US$105.4 million) in 2021, primarily due to a change in the
product mix resulting from an increase in revenue generated by Xiaoying Card Loan in 2021 compared with 2020, which carried a higher service fee
rate; and also partially offset by a decrease in average loan balances held by the Company.
Other Revenue
Other revenue increased from RMB68.3 million in 2020 to RMB93.4 million (US$14.7 million) in 2021, primarily due to an increase in
technology service fees received for providing assistant technology development services and referral service fee for introducing borrowers to other
platforms.
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Table of Contents
Operating Expenses
The following table sets forth our operating expenses, both in absolute amount and as a percentage of our total revenues, for the periods presented.
Operating costs and expenses:
Origination and servicing
General and administrative
Sales and marketing
(Reversal of) provision for contingent guarantee liabilities
Provision for accounts receivable and contract assets
(Reversal of) provision for loan receivable from Xiaoying Housing Loans
Provision for loans receivable from Xiaoying Credit Loans and Xiaoying
Revolving Loans
Impairment losses on deposits to institutional cooperators:
(Reversal of) provision for credit losses on deposits to institutional
cooperators
Impairment loss on deposits to institutional cooperators
Reversal of provision for credit losses for other financial assets
Total operating expenses
Origination and servicing expenses
For the Year Ended December 31,
2020
RMB
%
RMB
2021
US$
%
(in thousands, except for percentages)
2,071,506
179,226
35,629
881
121,485
17,994
94.4 %
8.2 %
1.6 %
0.0 %
5.5 %
0.8 %
1,963,006
187,858
20,830
(24)
77,248
(378)
308,038
29,479
3,269
(4)
12,122
(59)
54.1 %
5.2 %
0.6 %
(0.0) %
2.1 %
(0.0) %
227,210
10.4 %
76,395
11,988
2.1 %
10,318
960,000
(975)
3,623,274
0.5 %
43.8 %
0.0 %
165.2 %
(8,291)
—
(1,223)
2,315,421
(1,301)
—
(192)
363,340
(0.2)%
—
(0.0) %
63.9 %
Origination and servicing expenses decreased from RMB2,071.5 million in 2020 to RMB1,963.0 million (US$308.0 million) in 2021, primarily
due to the decline in collection expenses resulting from the asset quality improvement and a decrease in interest expenses related to a decline in
average loan balances held by the Company, and partially offset by the increase in commission fees resulting from the increased in total loan amount
facilitated and provided in 2021.
General and administrative expenses
General and administrative expenses increased from RMB179.2 million in 2020 to RMB187.9 million (US$29.5 million) in 2021, primarily due to
the increase in share-based compensation expenses.
Sales and marketing expenses
Sales and marketing expenses decreased from RMB35.6 million in 2020 to RMB20.8 million (US$3.3 million) in 2021, primarily due to a
continuing cost reduction in promotional and advertising activities in the first half of 2021.
Provision for Accounts Receivable and Contract Assets
Provision for accounts receivable and contract assets decreased from RMB121.5 million in 2020 to RMB77.2 million (US$12.1 million) in 2021,
primarily due to a decrease in the average estimated default rate compared with 2020.
Provision for loans receivable from Xiaoying Credit Loans and Xiaoying Revolving Loans
Provision for loan receivables from Xiaoying Credit Loans and Xiaoying Revolving Loans decreased from RMB227.2 million in 2020 to
RMB76.4 million (US$12.0 million) in 2021, primarily due to a decrease in the average estimated default rate compared with 2020, and partially offset
by an increase in loans facilitated under Intermediary Model – Partnership Model and an increase in loans provided by our own fund from our
microcredit business.
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Table of Contents
Change in Fair Value of Financial Guarantee Derivative
Change in fair value of financial guarantee derivative increased from RMB163.7 million in 2020 to RMB170.3 million (US$26.7 million) in 2021,
primarily due to an increase of the estimated payment to financial institutional cooperators based on the pre-agreed cap from RMB1,796.4 million in
2020 to RMB2,139.7 million in 2021 and partially offset by the decline of the estimated net default rate.
Fair Value Adjustment Related to Consolidated Trusts
Fair value adjustment related to the Consolidated Trusts consists of the net change in the fair value of loans and payables to investors in the
Consolidated Trusts. We recorded loss of fair value adjustments related to Consolidated Trusts of RMB57.4 million and RMB7.3 million (US1.1
million) for the year ended December 31, 2020 and 2021, respectively.
Income Tax Benefit (Expense)
Income tax expense in 2021 was 368.7 million (US$57.9 million), compared with income tax benefit of RMB299.9 million in 2020, primarily due
to (i) the taxable income generated in 2021 compared with an increase net operating losses that can be carried forward to future years in 2020; and (ii)
an increase of valuation allowance for the portion of the deferred tax assets that is not more likely than not to be realized
Net Income (Loss)
As a result of the foregoing, our net income in 2021 was RMB825.4 million (US$129.5 million) , compared with net loss of RMB1,308.5 million
in 2020.
Year Ended December 31, 2020 Compared to Year Ended December 31, 2019
Net Revenues
The following table sets forth the breakdown of our net revenues, both in absolute amount and as a percentage of our total net revenues, for the
periods presented:
Net revenues
Loan facilitation service—Direct Model
Loan facilitation service—Intermediary Model
Post-origination service
Financing income
Other revenue
Total net revenue
For the Year Ended December 31,
2019
RMB
%
RMB
2020
US$
%
(in thousands, except for percentages)
1,986,003
238,867
330,695
408,401
124,084
3,088,050
64.3 %
7.7 %
10.7 %
13.2 %
4.1 %
100.0 %
1,266,533
41,373
203,842
612,863
68,346
2,192,957
194,105
6,341
31,240
93,925
10,475
336,086
57.8 %
1.9 %
9.3 %
27.9 %
3.1 %
100.0 %
Loan Facilitation Service-Direct Model and Loan Facilitation Service-Intermediary Model
Loan facilitation service fee under the direct model decreased from RMB1,986.0 million in 2019 to RMB1,266.5 million (US$194.1 million) in
2020, primarily due to a decline in total loan facilitation amount as a result of a more stringent risk policy put in place to address impact of COVID-19
when compared with 2019.
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Table of Contents
Loan facilitation service fee of the intermediary model in 2020 was RMB41.4 million (US$6.3 million), compared with RMB238.9 million in
2019, primarily due to the fact that substantially all of the institutional funding partners invested their funds in the loans facilitated under direct model
and/or trust model, depending on their investment strategies.
Post-origination Service
Post-origination service fee decreased from RMB330.7 million in 2019 to RMB203.8 million (US$31.2 million) in 2020 due to the cumulative
effect of decreased amount of loans facilitated during the year. Revenues from post-origination services are recognized on a straight-line basis over the
term of the underlying loans as the services are being provided.
Financing Income
Financing income increased significantly from RMB408.4 million in 2019 to RMB612.9 million (US$93.9 million) in 2020 as a result of an
increase in average loan balances held by the Company. These loans do not qualify for sales accounting, and the service fees are recognized as
financing income over the life of the underlying financing using the effective interest method.
Other Revenue
Other revenue decreased from RMB124.1 million in 2019 to RMB68.3 million (US$10.5 million) in 2020, primarily attributable to a decrease in
penalty fees for late or early repayment and commission fees for introducing borrowers to other platforms.
Operating Expenses
The following table sets forth our operating expenses, both in absolute amount and as a percentage of our total revenues, for the periods presented.
Operating costs and expenses:
Origination and servicing (1)
General and administrative (1)
Sales and marketing
Provision for contingent guarantee liabilities
Provision for accounts receivable and contract assets
Provision for loan receivable from Xiaoying Housing Loans
Provision for loans receivable from Xiaoying Credit Loans and Xiaoying
Revolving Loans
Impairment losses on deposits to institutional cooperators:
Provision for deposits to institutional cooperators
Impairment loss on deposits to institutional cooperators
Credit losses for other financial assets
Total operating expenses
2019
For the Year Ended December 31,
2020
RMB
%
RMB
US$
%
(in thousands, except for percentages)
1,634,822
227,481
103,158
7,748
241,187
23,431
52.9 %
7.4 %
3.3 %
0.3 %
7.8 %
0.8 %
2,071,506
179,226
35,629
881
121,485
17,994
317,472
27,468
5,460
135
18,618
2,758
94.4 %
8.2 %
1.6 %
0.0 %
5.5 %
0.8 %
37,643
1.2 %
227,210
34,821
10.4 %
—
—
—
2,275,470
—
—
—
73.7 %
10,318
960,000
(975)
3,623,274
1,581
147,126
(148)
555,291
0.5 %
43.8 %
(0.0)%
165.2 %
Note (1): To better reflect the origination and servicing expenses incurred in connection with the loans facilitated through the Consolidated Trusts, the
management fees paid to third party trust companies, amounting to RMB62.4 million compared with RMB17.4 million in 2019, have been
reclassified from general and administrative expenses to origination and servicing expenses. The comparative figures have been reallocated to
conform with the current period’s classification.
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Table of Contents
Origination and Servicing Expenses
Origination and servicing expenses increased from RMB1,634.8 million in 2019 to RMB2,071.5 million (US$317.5 million) in 2020, mainly due
to an increase in collection expenses resulting from a more active policy taken to address the impact of COVID-19 and an increase in interest expense
related to financing income. The increase was also effected by the insurance cost occurred during the year. For certain loans that were newly facilitated
in 2020, our institutional funding partners are required to enter into an insurance agreement with ZhongAn to pay the insurance premiums. To attract
institutional funding and maintain a relatively low funding cost, we at our sole discretion paid the insurance premiums for our institutional funding
partners.
General and Administrative Expenses
General and administrative expenses decreased from RMB227.5 million in 2019 to RMB179.2 million (US$27.5 million) in 2020, mainly due to a
decrease in share-based compensation expenses.
Sales and Marketing Expenses
Sales and marketing expenses decreased from RMB103.2 million in 2019 to RMB35.6 million (US$5.5 million) in 2020, mainly due to a
reduction in promotional and advertising expenses since the outbreak of COVID-19.
Provision for Contingent Guarantee Liabilities
Provision for contingent guarantee liabilities decreased from RMB7.7 million in 2019 to RMB0.9 million (US$0.1 million) in 2020, because there
was no deterioration in the estimated default rates of the loans subject to guarantee liabilities facilitated in prior periods.
Provision for Accounts Receivable and Contract Assets
Provision for accounts receivable and contract assets decreased from RMB241.2 million in 2019 to RMB121.5 million (US$18.6 million) in 2020,
primarily due to the combined effect of (i) a significant decrease in accounts receivable from facilitation services and post-origination services as a
result of the decline in total loan facilitation amount in 2020; and (ii) a decrease of the average estimated default rate of 2020 compared with that of
2019, resulting from the recovery of Chinese economy in the second half of 2020 which offset the increasing impact COVID-19 brought to default
rates during the first half year of 2020.
Provision for loan receivable from Xiaoying Housing Loans
Provision for loan receivable from Xiaoying Housing Loans were RMB23.4 million and RMB18.0 million (US$2.8 million) during the year ended
December 31, 2019 and 2020, respectively. In order to accelerate the collection process, we sold certain defaulted loans to third party companies at a
discount in 2019 and 2020, transferring the creditor’ right as well as the right to the underlying collateral. We have applied a discounted cash flow
methodology to measure the value of loan receivables and recognized as collectable amount. The provision for loan receivables from Xiaoying
Housing Loans is determined by the expected amount that we are unable to collect. We also instituted proceedings to collect the payout amount from
collaterals.
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Provision for loans receivable from Xiaoying Credit Loans and Xiaoying Revolving Loans
Provision for loan receivables from Xiaoying Credit Loans and Xiaoying Revolving Loans increased from RMB37.6 million in 2019 to
RMB227.2 million (US$34.8 million) in 2020, primarily due to an increase in loans facilitated under intermediary model (Non-Trust Model). Such
loans were transferred to external investors with recourse to us, which did not qualify for sale accounting, and therefore were subject to impairment
assessment in our consolidated financial statements.
Impairment losses on deposits to institutional cooperators
We collaborate with a number of institutions that provide guarantee or insurance for loans facilitated by us. We are required to pay deposits to
such institutional cooperators and the amount of deposit is separately agreed with each institutional cooperator. To maintain the collaborative
relationship with one of our institutional cooperator and to avoid any material adverse impact on our current business model and future transaction
cost, we used deposits amounting to approximately RMB970 million to compensate for such institutional cooperator’s loss for the amount it had paid
under investors’ claims arising from borrowers’ default to repay loans. We also assumed the right of subrogation and related rights against the
defaulting borrowers which were sold to a third party with the consideration of RMB10.0 million. We have recognized above loss of RMB960 million
as impairment of the deposits and has also provided an allowance for impairment of RMB10.3 million for the potential losses of the remaining
deposits in 2020.
Change in Fair Value of Financial Guarantee Derivative
Change in fair value of financial guarantee derivative decreased from RMB246.4 million in 2019 to RMB163.7 million (US$25.1 million) in
2020, primarily due to the decline of the estimated net default rate and the decrease of the estimated payment to financial institutional cooperators
based on the pre-agreed cap from RMB2,270.6 million in 2019 to RMB1,796.4 million in 2020.
Fair Value Adjustment Related to Consolidated Trusts
Fair value adjustment related to the Consolidated Trusts consists of the net change in the fair value of loans and payables to investors in the
Consolidated Trusts. We recorded income of fair value adjustments related to Consolidated Trusts of RMB64.2 million in 2019, compared with a loss
of fair value adjustments related to Consolidated Trusts of RMB57.4 million (US8.8 million) in 2020.
Income Tax Benefit (Expense)
Income tax benefit in 2020 was RMB299.9 million (US$46.0 million), compared with income tax benefit of RMB93.1 million in 2019, primarily
due to an increase net operating losses that can be carried forward to future years.
Net Income (Loss)
As a result of the foregoing, our net loss in 2020 was RMB1,308.5 million (US$200.5 million) , compared with net income of RMB774.5 million
in 2019.
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Discussion of Key Balance Sheet Items
The following table sets forth selected information from our consolidated balance sheet as of December 31, 2019, 2020 and 2021. This
information should be read together with our consolidated financial statements and related notes included elsewhere in this annual report.
Assets
Cash and cash equivalents
Restricted cash
Accounts receivable and contract assets, net
Loans receivable from Xiaoying Credit Loans and Revolving Loans, net
Loan receivable from Xiaoying Housing Loans, net
Loans at fair value
Deposits to institutional cooperators, net
Prepaid expenses and other current assets
Financial guarantee derivative
Deferred tax assets, net
Long-term investments
Financial investments
Property and equipment, net
Intangible assets, net
Other non-current assets
Total Assets
Liabilities
Payable to investors at fair value
Payable to institutional funding partners
Guarantee liabilities
Financial guarantee derivative
Short-term borrowings
Accrued payroll and welfare
Other tax payable
Income tax payable
Deposit payable to channel cooperators
Accrued expenses and other current liabilities
Other non-current liabilities
Deferred tax liabilities
Total Liabilities
As of December 31,
2019
RMB
2020
RMB
2021
RMB
US$
(in thousands)
1,005,980
514,323
771,154
289,553
89,536
2,782,333
518,720
707,450
719,962
465,441
292,142
—
20,139
35,127
68,772
8,280,632
3,006,349
—
17,475
—
—
63,649
58,087
340,995
108,923
274,440
42,300
1,309
3,913,527
746,388
852,134
413,307
1,236,026
47,490
1,585,732
907,923
403,776
297,928
605,656
295,615
6,000
11,137
37,440
51,458
7,498,010
1,914,184
1,460,395
9,790
130,442
350,545
34,781
73,077
75,917
21,472
323,748
27,615
—
4,421,966
584,762
407,276
747,480
2,484,073
12,083
389,679
1,500,407
213,127
11,817
274,869
560,038
82,844
6,188
36,817
31,279
7,342,739
462,714
1,487,379
—
565,953
166,500
44,605
219,544
117,148
21,012
268,967
12,022
—
3,365,844
91,762
63,910
117,296
389,805
1,896
61,149
235,447
33,444
1,854
43,133
87,882
13,000
971
5,777
4,910
1,152,236
72,610
233,402
—
88,810
26,127
6,999
34,452
18,383
3,297
42,207
1,887
—
528,174
Accounts receivable and contract assets, net. Accounts receivable and contract assets consist primarily of the service fees earned from our
customers. Our accounts receivable and contract assets increased by 80.9% from RMB413.3 million as of December 31, 2020 to RMB747.5 million
(US$117.3 million) as of December 31, 2021, primarily due to an increase in the total loan amount facilitated of Xiaoying Card Loan in 2021
compared with 2020. Our accounts receivable and contract assets decreased by 46.4% from RMB771.1 million as of December 31, 2019 to RMB413.3
million as of December 31, 2020
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Loans receivable from Xiaoying Credit Loans and Revolving Loans, net. For those loans that we provides credits to borrowers using its own fund
but fail to have certain marketing plans to transfer, or those transfer of loans that fails to meet to criteria of true sale under ASC 860 (see accounting
policy under “Sale and Transfers of Financial Instruments”), they are accounted for as loans receivables from Xiaoying Credit Loans and Xiaoying
Revolving Loans. Our loans receivable from Xiaoying Credit Loans and Revolving Loans increased from RMB1,236.0 million as of December 31,
2020 to RMB2,484.1 million as of December 31, 2021, primarily due to an increase in loans facilitated under Intermediary Model -- Partnership
Model and an increase in loans provided by our own fund from our microcredit business. Our loans receivable from Xiaoying Credit Loans and
Revolving Loans increased from RMB289.6 million as of December 31, 2019 to RMB1,236.0 million as of December 31, 2020
Loans at fair value. Loans at fair value consist primarily of the loans underlying our Consolidated Trusts. Our loans at fair value decreased from
RMB1585.7 million as of December 31, 2020 to RMB389.7 million (US$61.1 million) as of December 31, 2021, primarily due to the termination of a
portion of the Consolidated Trusts administered by unrelated third party trust companies that were offered to investors through our Consolidated Trust
business. Our loans at fair value decreased from RMB2,782.3 million as of December 31, 2019 to RMB1585.7 million as of December 31, 2020
Deposits to institutional cooperator. Deposits to cooperators relate to the pledged cash to our financial institutional cooperators and the amount of
deposit is separately agreed with each institutional cooperator. The deposits paid to our financial institutional cooperators increased from RMB907.9
million as of December 31, 2020 to RMB1,500.4 million (US$235.4 million) as of December 31, 2021, primarily due to an increase in the total loan
amount facilitated in 2021. The deposits paid to our financial institutional cooperators increased from RMB518.7 million as of December 31, 2019 to
RMB907.9 million as of December 31, 2020. As one of the risk management measures, our financial institutional cooperators started to request
deposits from us since November, 2019.
Financial investment. We invested in an aggregate amount of US$13 million in certain limited partnership interests in Dragonfly Ventures II, L.P.
and IOSG Fund II L.P. in 2021, which governed under the laws of the Cayman Islands. Both of them are focusing on the blockchain industry
investment with their long-term value investment strategy and research-driven process. We believe that those investments can bring an opportunity of
exploring innovative technologies and the potential for improved profitability in long term, which is in line with the Company’s business strategies. As
a limited partner, we do not have ability to take in the control or management of the affairs or the conduct of the business of both partnerships.
Prepaid expenses and other current assets. Prepaid expenses and other current assets decreased from RMB403.8 million as of December 31, 2020
to RMB213.1 million (US$33.4 million) as of December 31, 2020, primarily due to the repayment of earnings rights associated with loan assets,
amounting to RMB160 million and the decrease of prepaid expenses to various service providers in 2021. Prepaid expenses and other current assets
decreased from RMB707.5 million as of December 31, 2019 to RMB403.8 million as of December 31, 2020
Payable to institutional funding partners, net. As a result of the failure of satisfying the criteria of true sale under ASC 860, the corresponding
considerations received from the institutional funding partners were recorded in “Payable to institutional funding partners” in the consolidated balance
sheet. The considerations received by us were determined based on the outstanding loan balances on the transaction dates. As we entitles them to
receive a fixed interest rate in the loans which the institutional funding partners purchased, an accrued interest expenses payable to them was also
recorded in “Payable to institutional funding partners” in the consolidated balance sheet. As of December 31, 2019, 2020 and 2021, payable to
institutional funding partners was nil, RMB1,460.4 million and RMB1,487.4 million (US$233.4 million) respectively.
Payable to investors at fair value. Our payable to investors at fair value were RMB1,914.2 million and RMB462.7 million (US$72.6 million) as of
December 31, 2020 and 2021 respectively, primarily due to the termination of a portion of the Consolidated Trusts administered by unrelated third
party trust companies that were offered to investors and institutional funding partners through our Consolidated Trust business. Our payable to
investors at fair value were RMB3,006.3 million and RMB1,914.2 million as of December 31, 2019 and 2020 respectively.
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Financial Guarantee Derivative. For most of newly facilitated Xiaoying Card Loans and Xiaoying Revolving Loans, our exposure is limited to
the contractual guarantee fee that we cannot collect under the agreement from the borrower as a result of default or prepayment but are still obligated
to compensate our financial institutional cooperators based on the contractual guarantee fee up to the pre-agreed cap. The derivative liability is
increased by the guarantee fees collected from the borrowers upon receipt as we expect all the fees to be ultimately paid to our financial institutional
cooperators. When we settle the guarantee liability through performance of the guarantee by making payments to our financial institutional
cooperators, we record a corresponding deduction to the derivative liability. As of December 31, 2019, 2020 and 2021, financial guarantee derivatives
has an asset position of RMB720.0 million, RMB297.9 million and RMB11.8 million (US$1.9 million) respectively, primarily due to the time lag
between the payments to certain financial institutional cooperators and the collection of monthly guarantee service fees from borrowers. The
cumulative amount paid to those financial institutional cooperators was greater than the cumulative monthly guarantee service fees collected from
borrowers. However, the total amount paid to those financial institutional cooperators was still within the pre-agreed Cap. The pre-agreed Cap was
determined based on the market price and negotiated after a certain period of observation of the industry environment and economic risk to Company.
The excess is expected to be fully collected from the borrowers during the remaining term of the underlying loans. As of December 31, 2019, 2020 and
2021, financial guarantee derivatives has a liability position of nil, RMB130.4 million and RMB566.0 million (US$88.8 million) respectively.
Inflation
Since our inception, inflation in China has not materially affected our results of operations. According to the National Bureau of Statistics of
China, the year-over-year percent changes in the consumer price index for December 2019, 2020 and 2021 were increases of 4.5%, 2.5% and 0.9%,
respectively. Although we have not been materially affected by inflation in the past, we may be affected if China experiences higher rates of inflation
in the future.
Taxation
Cayman Islands
We are incorporated in the Cayman Islands. The Cayman Islands currently have no income, corporation or capital gains tax and no estate duty,
inheritance tax or gift tax. The Cayman Islands does not impose a withholding tax on payments of dividends to shareholders.
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
Our subsidiaries and consolidated VIEs established in the PRC are subject to an income tax rate of 25% in the years presented. As stipulated by
the Taxation Law of PRC, (i) one subsidiary became qualified enterprises to enjoy the preferential income tax rate of 15% from 2018 to 2019; (ii) one
VIE in Shenzhen became qualified enterprises to enjoy the preferential income tax rate of 15% from 2018 to 2020; and (iii) one of our major
consolidated subsidiaries was certified as software enterprise in early May 2019 to enjoy the preferential income tax rate of 12.5% from 2019 to 2021.
We are subject to value added tax, or VAT, at a rate of 6% on the services we provide to borrowers, investors and institutional funding partners,
and at a rate of 13% on the commodities we sold on our online shopping mall, less any deductible VAT we have already paid or borne. We are also
subject to surcharges on VAT payments in accordance with PRC law. VAT has been phased in since May 2012 to replace the business tax that was
previously applicable to the services we provide. During the periods presented, we were not subject to business tax on the services we provide.
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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%.
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%. See “Item 3. Key Information
—3.D. Risk Factors—Risks Relating to Doing Business in China—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.”
Critical Accounting Policies, Judgments and Estimates
We prepare our consolidated financial statements in accordance with U.S. GAAP, which requires us to make judgments, estimates and
assumptions that affect (i) the reported amounts of assets and liabilities, (ii) disclosure of contingent assets and liabilities at the end of each reporting
period and (iii) the reported amounts of revenues and expenses during each reporting period. We continually evaluate these estimates and assumptions
based on historical experience, knowledge and assessment of current business and other conditions, expectations regarding the future based on
available information and reasonable assumptions, which together form a basis for making judgments about matters not readily apparent from other
sources. The use of estimates is an integral component of the financial reporting process, though actual results could differ from those estimates. Some
of our accounting policies require higher degrees of judgment than others in their application. We consider the policies discussed below to be critical to
an understanding of our financial statements as their application places the most significant demands on the judgment of our management.
Revenue recognition
We provide services as an online marketplace connecting borrowers and investors or institutional funding partners primarily through the use of
two business models. The major products offered by us include Xiaoying Credit Loan and Xiaoying Revolving Loan. Xiaoying Credit Loan mainly
consists of Xiaoying Card Loan and Xiaoying Preferred Loan products. The major product under the category Xiaoying Revolving Loan is Yaoqianhua
which was previously named as Xiaoying Wallet. We ceased facilitation of Xiaoying Preferred Loan in 2019, and ceased facilitation of Xiaoying
Revolving Loan in 2020. Revenue is the transaction price we expect to be entitled to in exchange for the promised services in a contract in the ordinary
course of our activities and is recorded net of value-added tax. The services to be accounted for include loan facilitation service, post-origination
service (e.g. cash processing and collection services) and guarantee service.
The direct model involves matching borrowers with investors or institutional funding partners who directly funds the credit drawdowns to the
borrowers. We have determined that we are not the legal lender or borrower in the loan origination and repayment process, but act as an intermediary
to bring the lender and the borrower together. Therefore, we do not record the loans receivable or payable arising from the loans facilitated between the
investors or institutional funding partners and borrowers on our platform.
The intermediary model involves us initially providing credit to borrowers using our own funds through an intermediary and subsequently selling
the loans, including all of the creditor rights in the loans to external investors or institutional funding partners on our platform within a short period of
time.
Loans we facilitate typically have a term of less than 1 year. For each loan facilitated either through the direct model or intermediary model, we
charge a service fee from the borrower indirectly through one of our VIEs, Shenzhen Tangren or external financing guarantee company or from
institutional funding partner directly. No application fee is charged to borrowers or investors or institutional funding partners. For the loans we is
entitled to the full service fee regardless of whether the borrowers choose to early repay or not, we has the unconditional right to the consideration. For
the loans facilitated with borrowers who have the option of early repayment and upon termination they do not have the obligation to pay the remaining
monthly service fees, our right to consideration for the service fees of facilitation service is conditional on whether or not the borrowers repay in
advance. At contract inception, we determine that the collection of service fees is probable based on historical experiences as well as the credit due
diligence performed on each borrower prior to loan origination.
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In order to be more competitive by providing a certain level of assurance to the investors or institutional funding partners, for certain loans
facilitated by our platform, either borrowers or institutional investors or institutional funding partners are required to directly sign a credit insurance
agreement with ZhongAn to protect investors or institutional funding partners against the risk of borrower default.
In 2016 and during the period from January to September 2017, substantially all of the loans facilitated by our platform are insured by ZhongAn.
We did not have direct contractual obligation to the investors for defaulted principal and interest during that period. We entered into a strategic
cooperation agreement with ZhongAn pursuant to which ZhongAn provided insurance to the investors for the loans facilitated by us and reimbursed
the loan principal and interest to the investor upon borrower’s default. During the aforementioned period, in order to maintain a stable business
relationship with ZhongAn, although not contractually obligated by the agreement with ZhongAn, we at our sole discretion paid ZhongAn for
substantially all the defaulted loan principal and interest but have not been subsequently collected. We also provided direct guarantee to investors on
certain loan products via our consolidated entities. We are compensated for this reimbursement from the contractual service fees collected from the
borrowers. Given that we at our sole discretion are responsible for the uncollected claims paid, we effectively took on substantially all of the losses
incurred by the investors due to borrowers’ default, we deemed the guarantee as a guarantee service to the investors and recognized a stand ready
obligation for its guarantee exposure in accordance with ASC Topic 460, Guarantees .
From September 2017, we revised the arrangement with ZhongAn on substantially all of the Xiaoying Credit Loans. Starting from 2020, we enter
into a series of arrangements with various external financing guarantee companies, which is similar to the revised arrangement with ZhongAn.
For certain Xiaoying Card Loans newly facilitated since September 2017 and certain Xiaoying Revolving Loans that are repaid in installments by
borrowers, borrowers are required to enter into a guarantee agreement with us and an insurance/guarantee agreement with ZhongAn/financing
guarantee companies, to pay the guarantee fee and insurance fee to the respective party at a pre-agreed rate. For certain loans that were newly
facilitated in 2020, borrowers are required to enter into a guarantee agreement with us to pay the guarantee fee at a pre-agreed rate while at the same
time, it is the institutional investors who enter into an insurance agreement with ZhongAn and we voluntarily pay the insurance fee to ZhongAn. The
obligation/ credit risk/ exposure of us and ZhongAn to compensate the defaulted loans has no change. Upon borrower’s default, ZhongAn/financing
guarantee companies reimburse the full loan principal and interest to the investors or institutional funding partners first, and has the right to recourse to
both the borrower and us, but our contractual obligation at any time is limited to a cap (the “Cap”) which is the lower of (1) total amount of guarantee
fees contractually required to be collected from the borrowers for such loans facilitated during the current period on an aggregated basis, and (2) a
certain percentage of the total principal of the loans facilitated stated in annualized manner, as pre-agreed with ZhongAn/financing guarantee
companies (the “Rate”). The contractual guarantee fees in (1) is not influenced by default or early repayment of borrowers. We have no obligation or
intention to compensate ZhongAn/financing guarantee companies for any losses in excess of the contractual obligation. The Rate will be negotiated
prospectively at each quarter between the two parties based on the expected default rate. The actual loss in excess of the Cap was absorbed by
ZhongAn/financing guarantee companies. ZhongAn/financing guarantee companies ultimately bear substantially all of the credit risk. Our exposure in
this arrangement is limited to the default and prepayment risk in relation to the guarantee fee when we cannot collect the guarantee fee under the
agreement with the borrower on an individual basis but is still obligated to compensate ZhongAn/financing guarantee companies up to the Cap on a
pool basis. We evaluated the guarantee arrangement pursuant to ASC Topic 815 and concluded that the arrangement meets the definition of a
derivative and that it is not eligible for the guarantee scope exception. Therefore, the guarantee is recognized as a derivative liability/asset at fair value
and is not accounted for pursuant to ASC Topic 460 or 450.
For other Xiaoying Preferred Loan products newly facilitated from September 2017, the borrowers are required to enter into an insurance
agreement with ZhongAn only at a rate set by ZhongAn. No separate guarantee agreement is signed by the borrower with us and no additional
guarantee fee is charged from the borrower. Upon borrower’s default, ZhongAn reimburses the full loan principal and interest to the investor or
institutional funding partner. We collect the defaulted amount from borrowers on behalf of ZhongAn but has no obligation and it is no longer our
intention to compensate ZhongAn for the defaulted loan principal and interest not subsequently collected in the future. ZhongAn is fully liable for all
the borrower’s credit risk associated with the defaulted principal and interest of the loan. Therefore for these loans, we provide loan facilitation and
post-origination services but no longer provides guarantee service. We do not record guarantee liabilities associated with these loans or corresponding
account receivables from guarantee services. Under the Direct Model, the total transaction price is directly allocated to the facilitation service and post-
origination service. Under the Intermediary—non-trust model, upon transfer of the loan to third party investors, we recognize the difference between
(1) the proceeds received from the investors and accounts receivable and (2) the carrying value of the loan as a gain of sale, which effectively
represents the service fees earned from facilitation of the loans under Intermediary Model, as the “Loan facilitation service—Intermediary Model” in
the consolidated statements of comprehensive income (loss). We ceased facilitation of Xiaoying Preferred Loan in October 2019.
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Direct model
We have early adopted ASU 2014-09, Revenue from Contracts with Customers (Topic 606) and all subsequent ASUs that modified ASC 606 on
January 1, 2017 and have elected to apply it retrospectively for the year ended December 31, 2016. The core principle of the guidance is that an entity
should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the
entity expects to be entitled in exchange for those goods or services.
To achieve that core principle, we apply the following steps:
● Step 1: Identify the contract(s) with a customer
● Step 2: Identify the performance obligations in the contract
● Step 3: Determine the transaction price
● Step 4: Allocate the transaction price to the performance obligations in the contract
● Step 5: Recognize revenue when (or as) the entity satisfies a performance obligation
We determine our customers to be both the borrowers and the investors or institutional funding partners. We consider the loan facilitation service,
guarantee service and post-origination service as three separate services, of which, the guarantee service is accounted for in accordance with ASC
Topic 460, Guarantees . While the post-origination service is within the scope of ASC Topic 860, the ASC Topic 606 revenue recognition model is
applied due to the lack of definitive guidance in ASC Topic 860. The loan facilitation service and post-origination service are two separate
performance obligations under ASC 606, as these two deliverables are distinct in that customers can benefit from each service on its own and our
promises to deliver the services are separately identifiable from each other in the contract.
We determine the total transaction price to be the service fees chargeable from the borrowers indirectly through one of our VIEs, Shenzhen
Tangren or external financing guarantee companies or from certain institutional funding partners directly, including the guarantee fees charged by us
under the separate guarantee agreement with the borrowers for certain type of Xiaoying Card Loans that are newly facilitated since September 2017.
Our transaction price includes variable consideration in the form of default risk of the borrowers for the service fees collected from certain institutional
funding partners or through external financing guarantee companies and prepayment risk of the borrowers. We reflect, in the transaction price, the
default risk and the prepayment risk. We estimates variable consideration for these contracts using the expected value approach on the basis of
historical information and current trends of the default and prepayment percentage of the borrowers. The transaction price is allocated amongst the
guarantee service, if any, and two performance obligations.
We first allocate the transaction price to the guarantee liabilities or financial guarantee, if any, that is recognized in accordance with either (1) ASC
Topic 460, Guarantees which requires the guarantee to be measured initially at fair value based on the stand-ready obligation, or (2) ASC Topic 815
which requires the guarantee to be measured initially and subsequently at fair value. Then the remaining considerations are allocated to the loan
facilitation services and post-origination services using their relative standalone selling prices consistent with the guidance in ASC 606. For certain
loans facilitated since September 2017, the total transaction price is allocated to facilitation service and post-origination service only. We do not have
observable standalone selling price information for the loan facilitation services or post-origination services because we do not provide loan facilitation
services or post-origination services on a standalone basis. There is no direct observable standalone selling price for similar services in the market that
is reasonably available to us. As a result, the estimation of standalone selling price involves significant judgment. We use an expected cost plus margin
approach to estimate the standalone selling prices of loan facilitation services and post origination services as the basis of revenue allocation. In
estimating its standalone selling price for the loan facilitation services and post-origination services, we consider the cost incurred to deliver such
services, profit margin for similar arrangements, customer demand, effect of competitors on our services, and other market factors.
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For each type of service, we recognize revenue when (or as) the entity satisfies the service/performance obligation by transferring a promised
good or service (that is, an asset) to a customer. Revenues from loan facilitation are recognized at the time a loan is originated between the borrower
and the investor or institutional funding partner and the principal loan balance is transferred to the borrower, at which time the facilitation service is
considered completed. Revenues from post-origination services are recognized on a straight-line basis over the term of the underlying loans as the
services are provided. Revenues from guarantee services are recognized at the expiry of the guarantee term when there had been no defaults. Except
for certain loan products offered since September 2017, the collection of service fees is not conditional on the provision of subsequent post-origination
or guarantee services.
Intermediary model
Starting from 2018, we cooperate with several microcredit companies who use their own funds to provide credit to borrowers first. We provide
facilitation and post-origination services for these loans and receive service fee from borrowers. These microcredit companies transfer their rights as
creditors shortly to SPVs controlled by us at the price of the carrying amount of the outstanding loan principal balance and accumulated accrued
interest not paid by the borrowers as of the day on which the creditor’s rights are legally transferred to SPVs. The SPVs usually further transfer their
creditor’s rights to third party investors or institutional funding partners in a short period at the price of the carrying amount of the outstanding loan
principal balance and the accumulated accrued interest not paid by the borrowers as of the day on which the creditor’s rights are legally transferred to
investors or institutional funding partners. We account the relevant interest and service fees received from the borrowers as the financing income and
the fee charged by the microcredit companies, which is proportionate to the loans facilitated as the origination and servicing cost in its consolidated
financial statements.
Under the intermediary business model, we provide the funds that are loaned to borrowers and agree to take predominantly all the risk arising
from potential breaches of agreement by the borrowers receiving financing.
We provide financing to borrowers on our platform and the loans are initially recorded on the consolidated balance sheet as loans held for sale or
loans receivable from Xiaoying credit loans and Xiaoying revolving loans. These loans carry the same insurance/ guarantee agreement with external
financial institutional co-operators as loans facilitated under the direct model, which is attached to the loan and transfers along with the loan. We also
charge service fees in the same manner as loans facilitated under the direct model.
Intermediary Model—Non-Trust Model
The transfer of loans (including the creditor rights) to external investors or institutional funding partners not involving trust structure is accounted
for as a true sale under ASC 860 (see accounting policy under “Sales and Transfers of Financial Instruments”). Upon sale, we record a guarantee
liability in accordance with ASC 460 in relation to the on-going guarantee services to be provided to the investors or institutional funding partners,
consistent with the loans facilitated under the direct model. We continue to provide post-origination services to the loans subsequent to their sale in the
same manner as we service the loans facilitated under the direct model. No additional service fee is charged. Similar to the loans facilitated under the
direct model, we charge and collect service fees from the borrowers or institutional funding partners in relation to the transferred loans on a monthly
basis. The difference between (1) the proceeds received from the investors or institutional funding partners and accounts receivable and contract assets
(see accounting policy on “Accounts receivable and contract assets and allowance for uncollectible accounts receivable and contract assets”) and
(2) the sum of the carrying value of the loans and the fair value of the guarantee liability is recognized as a gain of sale, which effectively represents
the service fees earned from facilitation of the loans under intermediary model, as the “Loan facilitation service—Intermediary Model” in the
consolidated statements of comprehensive income (loss). For certain loans facilitated since September 2017, given that we no longer provide guarantee
services and we do not record any guarantee liabilities associated with those loans or related account receivable from guarantee services, the gain of
sale is the difference between (1) the proceeds received from the investors or institutional funding partners and accounts receivable and contract assets
and (2) the carrying value of the loan. The subsequent accounting for post-origination service and guarantee services is consistent with that for loans
facilitated under the direct model.
Loans that were not yet transferred to external investors or institutional funding partners or have been transferred but such transaction does not
qualify for sale accounting was recorded in “Loans receivable from Xiaoying Credit Loans and Xiaoying Revolving Loans” in the consolidated
balance sheets.
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Intermediary Model—Trust Model
The transfer of loans to institutional funding partners under the intermediary model often involves transferring the loans to a trust formed and
operated by unrelated third party trust companies. We consolidate such trusts under the VIE model. We also elect to apply fair value option to these
loans at the date of origination. Loans transferred to Consolidated Trusts do not qualify for sales accounting as the transfer is to a consolidated
subsidiary. The loans are recorded as “Loans at fair value” in the consolidated balance sheets. We recognize as revenue under “financing income” the
service fees and interests charged to the borrowers over the lifetime of the loans using effective interest method.
Intermediary Model—Partnership Model
The transfer of loans to institutional funding partners under the Intermediary Model involves transferring the loans to a limited partnership
enterprise, or LP, formed and operated by unrelated third-party trust companies and us. We consolidate such partnerships under the VIE model (see
accounting policy on “Consolidated Partnerships”). We also elect to measure these loans at amortized cost at the time of origination. Loans transferred
to Consolidated Partnerships do not qualify for sales accounting as the transfer is to a consolidated subsidiary. The loans are recorded as “Loans
receivables from Xiaoying Credit Loans and Xiaoying Revolving Loans” in the consolidated balance sheets. We recognize as revenue under “financing
income” the service fees and interests charged to the borrowers over the lifetime of the loans using effective interest method.
The online Intermediary Model ceased in April 2017 and the offline Intermediary Model with funding from banking financial institution partners
ceased in February 2018 to comply with the promulgated regulatory requirements. We continues the operations through the offline Intermediary Model
with funding from other partners to the extent permitted under applicable laws and regulations.
Contract balance
We did not enter into contracts with customers that were greater than one year for substantially all products for the years ended December 31,
2019, 2020 and 2021. We historically did not record any contract liabilities for both 2020 and 2021 and did not record any contract asset prior to
September 2017. For the loans we is entitled to the full service fee regardless of whether the borrowers choose to early repay or not, we has the
unconditional right to the consideration and an accounts receivable is recorded. For the loans facilitated with borrowers who have the option of early
repayment and upon termination they do not have the obligation to pay the remaining monthly service fees, our right to consideration for the service
fees of facilitation service is conditional on whether or not the borrowers repay in advance. In these instances, we records a corresponding contract
asset when recognizing revenue from loan facilitation service. The contract asset will not be reclassified to a receivable given that the right to invoice
and the payment due date is the same date. Revenue for these loan products are recognized when the collection of consideration becomes probable.
Incentives to investors
To expand its market presence, we provide incentives to investors in a variety of forms that either reduces the amount of investment required to
purchase financial products or entitle them to receive higher interest rates in the products they purchase. During the relevant incentive program period,
we set certain thresholds for the investor to qualify to enjoy the incentive. Such incentives are accounted for as a reduction of revenue in accordance
with ASC 606.
Financing Income
Financing income consists primarily the financing fees we charge for the loans facilitated through the Consolidated Trusts and Consolidated
Partnerships, including interest income and service fees generated from providing loan facilitation, guarantee and post-origination services to the
investors and institutional funding partners of the Consolidated Trusts and Consolidated Partnerships, and are recorded as revenue over the life of the
underlying financing using the effective interest method.
Financing income also includes financing fees, including interest income and service fee, from loans held for sale and loans receivables from
Xiaoying Credit Loans and Xiaoying Revolving Loans that have not yet been transferred to external investors or institutional funding partners or have
been transferred but such transaction does not qualify for sale accounting under the Intermediary Model.
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For the years ended December 31, 2021, financing income also includes interest income generated from providing loans by our own fund from
microcredit business, and are recorded as revenue over the life of the underlying financing using the effective interest method.
Other revenue
Other revenue primarily includes penalty fees for loan prepayment and late payment, referral service fees for introducing borrowers to other
platforms, technology service fees received for providing assistant technology development services and commission fees from Xiaoying Online Mall.
The penalty fees, which are fees paid to us, will be received as a certain percentage of past due amounts in the case of late payments or a
certain percentage of interest over the prepaid principal loan amount in the case of prepayment. Penalty fees are contingency-based variable
considerations and constrained by the occurrence of delinquency or prepayment. They are recognized when the uncertainty associated with the
variability is resolved, that is, when the underlying event occurs. The referral service fees for introducing borrowers to other platforms are recognized
when the obligation is fulfilled and is confirmed by the other platforms. The technology service fees are recognized when the assistant technology
development services to third parties provided.
Xiaoying Online Mall launched in March 2019 is a product that provides loan installments to our individual customers enabling them to purchase
goods online. The loan installment revenue is recognized as loan facilitation revenue and post origination revenue. The gross amount of product sales
and related costs or the net amount earned is recorded as commissions. We were evaluated as an agent and its obligation is to facilitate third parties in
fulfilling their performance obligation for specified goods or services, revenues should be recognized in the net amount for the amount of commission
which we earn in exchange for arranging for the specified goods or services to be provided by other parties. Revenue is recorded net of value-added
taxes.
Sales and Transfers of Financial Instruments
Sales and transfers of financial instruments are accounted under authoritative guidance for the transfers and servicing of financial assets and
extinguishment of liabilities. Specifically, a transfer of a financial asset, a group of financial assets, or a participating interest in a financial asset is
accounted for as a sale only if all the following conditions are met:
1. The financial assets are isolated from the transferor and its consolidated affiliates as well as its creditors;
2. The transferee or beneficial interest holders have the right to pledge or exchange the transferred financial assets; and
3. The transferor, its consolidated affiliates included in the financial statements being presented, or its agents do not maintain effective control
of the transferred asset. A transferor’s effective control over the transferred financial assets includes, but is not limited to, any of the
following:
a. An agreement that both entitles and obligates the transferor to repurchase or redeem the transferred financial assets before their maturity.
b. An agreement, other than through a cleanup call that provides the transferor with both of the following: (i) The unilateral ability to cause the
holder to return specific financial assets. (ii) A more-than-trivial benefit attributable to that ability; and
c. An agreement that permits the transferee to require the transferor to repurchase the transferred financial assets at a price that is so favorable to
the transferee that it is probable that the transferee will require the transferor to repurchase them.
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Under the intermediary model, we, through our Intermediary, facilitates credits to borrowers and subsequently transfers the loans (including the
creditor rights) to third party investors or institutional funding partners at face value within a short period of time. When the loan (including the
creditor rights) is transferred, the transferee becomes the direct counterparty to the borrower and the legal record holder of the loan upon transfer. The
transfer is accounted for as a sale, when (1) the transferred loans are considered legally isolated from the assets of us and its creditors even in the
bankruptcies under the PRC laws and regulations, (2) the investors or institutional funding partners (transferees) can freely pledge or exchange the
transferred loans, and (3) we do not maintain effective control over the transferred loans. The cash flows related to the origination and transfer of these
loans are presented as “Origination of loans held for sale” and “Sale of loans held for sale”, respectively, within operating cash flows in the
consolidated statement of cash flows. When a transfer does not qualify for sale accounting, e.g. when we sells loans with recourse to ourselves, the
transferred financial asset remains in the statement of financial position and a financial liability is recognized for any consideration received.
For Xiaoying Housing Loans facilitated through the intermediary model, borrowers are required to pledge properties to one of our consolidated
VIE entities (other than the intermediary or the SPV conducting the facilitation and transfer of the loan) as collateral for the guarantee that we are
providing to ZhongAn against borrower’s default. It is a separate arrangement with different counterparties from the loan provided by us. While the
loan (including creditor’s rights) is transferred to third party investors or institutional funding partners, the lien remains under our name and in security
for us agreeing to provide the guarantee to ZhongAn. The holding of the lien does not affect the creditor’s right in the loan being fully transferred.
Provided all aforementioned conditions under sales accounting are met, the transfer of such loans with collateral are accounted for as a sale. We ceased
facilitation of Xiaoying Housing Loan in 2019.
Guarantee Liabilities
We have guarantee service which is directly and indirectly provided to the investors or institutional funding partners. We also provide direct
guarantee to investors or institutional funding partners on certain loan products via our consolidated entities. If a borrower defaults, we make our best
efforts to collect the default loan. We directly or indirectly make payment to the defaulted principal and interest to each investor or institutional
funding partner. Prior to September 2017, ZhongAn initially reimbursed the loan principal and interest to the investor upon the borrower’s default. In
order to maintain stable business relationship with ZhongAn, we, although not contractually obligated, at our own discretion compensated ZhongAn
for substantially all the loan principal and interest default but have not been subsequently collected. At the inception of each loan, we recognize the
guarantee liability at fair value in accordance with ASC 460-10, which incorporates the expectation of potential future payments under the guarantee
and takes into both non-contingent and contingent aspects of the guarantee. Subsequent to the loan’s inception, the guarantee liability is composed of
two components: (i) ASC Topic 460 component; and (ii) ASC Topic 450 component. The liability recorded based on ASC Topic 460 is determined on
a loan by loan basis and it is reduced when we are released from the underlying risk, i.e. as the loan is repaid by the borrower or when the investor or
institutional funding partner is compensated in the event of a default. This component is a stand-ready obligation which is not subject to the probable
threshold used to record a contingent obligation. When we are released from the stand-ready liability upon expiration of the underlying loan, we record
a corresponding amount as “Other revenue” in the consolidated statement of comprehensive income. The other component is a contingent liability
determined based on probable loss considering the actual historical performance and current conditions, representing the obligation to make future
payouts under the guarantee liability in excess of the stand-ready liability, measured using the guidance in ASC Topic 450. The ASC Topic 450
contingent component is determined on a collective basis and loans with similar risk characteristics are pooled into cohorts for purposes of measuring
incurred losses. The ASC 450 contingent component is recognized as part of operating expenses in the consolidated statement of comprehensive
income. At all times the recognized liability (including the stand-ready liability and contingent liability) is at least equal to the probable estimated
losses of the guarantee portfolio.
We measure our guarantee liabilities at inception at fair value based on our expected payouts and also incorporating a markup margin. The
expected future payouts were estimated based on expected default rates and collection rates for each product type, taking into consideration of
historical loss experiences for both contingent and noncontingent elements. The expected collection rate of defaulted loans incorporates the proceeds
from liquidation of underlying collateral that would be expected to cover the payouts under the guarantee and was based on the average historical
collection rate of our products. The expected future payouts take into account missed payments initially compensated by ZhongAn within two
business days from borrowers’ payment due date.
The approximate term of the guarantee service correlates directly with the term of the loan product. As such, for predominantly all loans, the
approximate term for guarantee service is for a period of 12 months or less.
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Financial guarantee derivatives
Starting from September 2017, for newly facilitated Xiaoying Credit Loans and Xiaoying Revolving Loans, we entered into a series of
arrangements with various financial institutional cooperators in which it has agreed that our exposure is limited to the contractual guarantee fee that we
cannot collect under the agreement from the borrower as a result of default or prepayment but are still obligated to compensate those financial
institutional cooperators based on the contractual guarantee fee up to the pre-agreed cap. The Cap is the lower of (1) total amount of guarantee fees
contractually required to be collected from the borrowers for such loans facilitated during the current period on an aggregated basis, and (2) a certain
percentage of the total principal of the loans facilitated stated in annualized manner, as pre-agreed with financial institutional cooperators (the “Rate”).
The contractual guarantee fees in (1) is not influenced by default or early repayment of borrowers. We will be notified by email for any subsequent
adjustments to the Rate from financial institutional cooperators at every quarter and no separate written agreement is needed for execution for such
adjustments. The Rate will also be negotiated prospectively between financial institutional cooperators and us based on the expected default rate. See
accounting policy in Revenue Recognition. The financial guarantee is accounted for as a derivative under ASC 815 because the financial guarantee
scope exemption in ASC 815-10-15-58 is not met. The derivative is remeasured at each reporting period. The change in fair value of the derivative is
recorded as a change in fair value of financial guarantee derivatives in the consolidated statements of comprehensive income (loss). The derivative is
increased by the guarantee fees collected from the borrowers upon receipt as we expect all the fees to be ultimately paid to those financial institutional
cooperators. When we settle the guarantee through performance of the guarantee by making payments to those financial institutional cooperators, we
record a corresponding deduction to the derivative.
We use discounted cash flow model to value these financial guarantee derivatives at inception and subsequent valuation dates. This discounted
cash flow model incorporates assumptions such as the expected delinquency rates, prepayment rate and discount rate. The expected delinquency rate
and prepayment rate is estimated by taking into consideration of historical loss experiences. The discount rate is determined based on the market rates.
We consider that the impact of discount rate to the fair value of financial guarantee derivatives is immaterial.
Consolidation of Variable Interest Entity
As foreign-invested companies engaged in internet value-added businesses are subject to stringent requirements compared with Chinese domestic
enterprises under the current PRC laws and regulations, our PRC subsidiary, Beijing WFOE, and its subsidiaries, as foreign-invested companies, do
not meet all such requirements and therefore none of them is permitted to engage in such business in China. Therefore, we elected to conduct such
business in China through Shenzhen Ying Ai Gou Trading Co., Ltd., one of the subsidiaries of our consolidated VIEs, and Shenzhen Xiaoying, one of
our VIEs.
Since we do not have any equity interests in the VIEs in order to exercise effective control over their operations, through Beijing WFOE, we have
entered into a series of contractual arrangements with the VIEs and their shareholders, pursuant to which we are entitled to receive effectively all
economic benefits generated from the VIEs. The call option agreements and voting rights proxy agreement provide us effective control over the VIEs,
while the equity interest pledge agreement secure the equity owners’ obligations under the relevant agreements. Because we have both the power to
direct the activities of the VIEs that most significantly affect their economic performance and the right to receive substantially all of the benefits from
the VIEs, we are deemed the primary beneficiary of the VIEs. Accordingly, we have consolidated the financial statements of the VIEs. The
aforementioned contractual agreements are effective agreements between a parent and a consolidated subsidiary, neither of which is accounted for in
the consolidated financial statements (i.e., a call option on subsidiary shares under the call option agreement or a guarantee of subsidiary performance
under the equity pledge agreement) or are ultimately eliminated upon consolidation (i.e., service fees under the exclusive business cooperation).
We believe that our contractual arrangements with Shenzhen Xiaoying, Beijing Ying Zhong Tong, Shenzhen Tangren and Shenzhen Beier
(collectively known as the “VIEs”) are in compliance with PRC law and are legally enforceable. However, uncertainties in the PRC legal system could
limit our ability to enforce these contractual arrangements. The interests of the shareholders of the VIEs may diverge from that of our company, which
may potentially increase the risk that they would seek to act contrary to the contractual terms.
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Consolidated Trusts
As part of our efforts to develop new product offerings for investors and institutional funding partners, we established a business relationship with
certain trusts which were administered by third party trust companies. The trusts were set up to invest solely in the loans facilitated by us on its
platform to provide returns to the beneficiaries of the trusts through interest payments made by the borrowers. Both direct model and intermediary
model are adopted for these trusts. Under direct model, loans are originated from trusts to borrowers while under intermediary model, we typically
provide credit to the borrowers through an intermediary first and then transfers the loans to the trusts, which issue beneficial interests to the investors
and institutional funding partners. We determine to consolidate these trusts as we are the primary beneficiary, due to the following reasons: 1. We have
the power to direct the operating activities of the trusts; 2. We absorb or enjoys the potential residual losses or returns of these trusts. Under
intermediary model, the transfer of loans to the Consolidated Trusts are not eligible for sale accounting because the trust is consolidated and the loan
transfer is considered an intercompany transaction. We further elected to apply fair value option to the loans (at the date of origination) and liabilities
to investors and institutional funding partners to emphasize the relevancy of the accounting information of its consolidated financial statements. That
is, the loans are continued to be recorded on our consolidated balance sheets as loans held for investment under “Loans at fair value” and the proceeds
received from the investors and institutional funding partners are recorded as trust liabilities under “Payable to investors at fair value”.
Consolidated Partnerships
In 2021,we further developed a new business model with certain trust partners. we and certain trusts jointly established several limited partnership
enterprises, or LPs, to invest solely in the loans facilitated by us on our platform to provide returns to partners of LPs through interest payments made
by the borrowers. Intermediary model is adopted for the Consolidated Partnerships. We typically provide credit to the borrowers through an
intermediary first and then transfers the loans to the LPs. We determine to consolidate these LPs as we are the primary beneficiary due to the following
reasons: 1) we have the power to direct the operating activities of the LPs; and 2) we absorb or enjoy the potential residual losses or returns of these
LPs. The transfer of loans to the Consolidated Partnerships are not eligible for sale accounting because the LP is consolidated and the loan transfer is
considered an intercompany transaction. We apply amortized cost to the loans and liabilities to trust partners in its consolidated financial statements.
That is, the loans are recorded on our consolidated balance sheets under “Loans receivable from Xiaoying Credit Loans and Xiaoying Revolving
loans” and the proceeds received from the trust partners are recorded as LP liabilities under “Payable to institutional funding partners”.
Allowance for credit losses
We have the following financial assets or liabilities that are subject to credit losses assessment: accounts receivable and contract assets, loans
receivable from Credit Loans and Revolving Loans, loans receivable from Housing Loans, deposits to institutional cooperators, prepaid expenses and
other current assets, and guarantee liabilities.
Under the CECL methodology, the Allowance for credit losses consists of quantitative and qualitative components. Our quantitative component of
the Allowance for credit losses is model based and utilizes a forward-looking macroeconomic forecast in estimating expected credit losses. Our
qualitative component of the Allowance for credit losses considers (i) the uncertainty of forward-looking scenarios based on the likelihood and
severity of a possible recession as another possible scenario; (ii) certain portfolio characteristics, such as portfolio concentration and collateral
coverage; and (iii) model limitations as well as idiosyncratic events.
Income taxes
Current income taxes are provided for in accordance with the laws of the relevant tax authorities.
Deferred taxes are provided using the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the
expected future tax consequences of events that have been included in the financial statements or tax return. Under this method, deferred tax assets and
liabilities are recognized for the differences between financial statement carrying amount and the tax basis of assets and liabilities using enacted tax
rates in effect for the year in which the differences are expected to reverse. Deferred tax assets are then evaluated to determine the extent to which they
are more likely than not to be realized. In making such a determination, we consider all positive and negative evidence, including future reversals of
existing taxable temporary differences and projected future taxable income exclusive of reversing temporary differences and carryforwards. Deferred
tax assets are then reduced by a valuation allowance to the amount, in our opinion, that is more like than not to be realized.
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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 (defined as a likelihood of more than
fifty percent of being sustained upon an audit, based on the technical merits of the tax position), the tax position is then assessed to determine 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
has a greater than 50% likelihood of being realized upon settlement. Interest and penalties on income taxes will be classified as a component of income
taxes.
Fair value adjustments related to Consolidated Trusts
We have elected the fair value option for the loan assets and liabilities of the Consolidated Trusts that otherwise would not have been carried at
fair value. Such election is irrevocable and is applied to financial instruments on an individual basis at initial recognition. We estimate the fair value of
loans and payable using a discounted cash flow valuation methodology by discounting the estimated future net cash flows using an appropriate
discount rate. The future net cash flows are estimated based on contractual cash flows, taking into consideration of estimated delinquency rate,
prepayment rate and collection rate of the loans, and the pre-determined rate of our guarantee exposure for certain products. Changes in fair value of
loans and payable to investors are reported net as recorded in “Fair value adjustments related to Consolidated Trusts” in the consolidated statement of
comprehensive income.
Share-Based Compensation
Share-based payment transactions with employees, such as stock options and restricted stock units, are measured based on the grant date fair value
of the awards, with the resulting expense generally recognized on a straight line basis in the consolidated statements of income over the period during
which the employee is required to perform service in exchange for the award.
A summary of options and restricted stock units we granted as of December 31, 2021 are as below:
● On January 25, 2015, our then sole director approved a share incentive plan for the purpose of providing incentives and rewards to employees
and executives who contribute to the success of our operations and granted 13,843, 645 stock options. On June 29, 2015, our then sole
director granted 630,000 stock options to certain employees, directors and officers. On May 3, 2016, our then sole director granted 7,425,000
stock options to certain employees, directors and officers. The stock options expire 10 years from the date of grant and vest over a period
from three to four years.
● On October 11, 2017, we granted 16,616,000 stock options to certain employees and senior management. The options granted have exercise
prices from US$0.04 to US$4.01 per share. A portion of the stock options can only vest in the year 2021 whereas the remaining portion is
vested ratably each on the first, second, third and fourth anniversary from the vesting commencement date. Share-based compensation of
RMB437.3 million relating to the grant will be recognized on a straight-line basis over the vesting periods from two to four years.
● On April 30, 2018, we granted 841,054 stock options to certain employees and senior management. The exercise price of the options granted
was US$4.01 per share. The stock option is vested ratably each on the first, second, third and fourth anniversary from the vesting
commencement date. Share based compensation relating to this grant will be recognized on a straight-line basis over the vesting period from
3.6 to 4 years.
● On May 9, 2018, we granted 40,000,000 stock options to certain senior management. The exercise price is the offering price per share of our
initial public offering which is US$4.75. Such stock options are eligible to vest, in whole or in part, when the market capitalization milestone
as well as the targeted adjusted net earnings are achieved subsequent to our initial public offering. We determine the service inception date to
be May 9, 2018 and the grant date to be the date of our listing on NYSE. The offering price per share of our initial public offering was used
to determine the fair value of ordinary shares at grant date to estimate the share-based compensation expense. The total share-based
compensation expense of RMB16,210,135 (US$2,357,666) was recognized over a five-year period from the service inception date on a
straight line basis. The share-based compensation expense recognized upon our initial public offering was RMB9,163,461 (US$1,332,770).
● On October 31, 2018, we granted 475,000 stock options to certain employees, directors and officers. The stock options shall expire 10 years
from the date of grant and vest over a period from three to four years.
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● On April 15, 2019, the Board of Directors of X Financial granted 150,000 of restricted stock units to certain directors. The restricted stock
units shall vest over a period from two to three years. The restricted stock unites have no expiration period.
● On April 30, 2019, we granted 155,000 stock options to certain employees. The stock options shall expire 10 years from the date of grant and
vest over a period from three to four years.
● On November 20, 2019, the Board of Directors of X Financial granted 1,789,400 of restricted stock units to certain employees. The restricted
stock units shall expire 10 years from the date of grant and vest over a period from three to four years.
● On August 13, 2019 and November 20, 2019, the Board of Directors decided to cancel 1,500,000 and 250,000 of unvested options of certain
senior managements and concurrently granted 1,500,000 and 250,000 of restricted stock units as replacement awards to the senior
managements.
● On January 21, 2020, the Board of Directors of X Financial granted 4,600,000 of restricted stock units to certain employees and officers. The
restricted stock units shall expire 10 years from the date of grant and vest over a period from three to four years.
● On April 30, 2020, the Board of Directors of X Financial granted 673,300 of restricted stock units to certain employees. The restricted stock
units shall expire 10 years from the date of grant and vest over a period from three to four years.
● On October 31, 2020, the Board of Directors of X Financial granted 550,000 of restricted stock units to certain employees. The restricted
stock units shall expire 10 years from the date of grant and vest over a period from three to four years.
● On November 10, 2021, the board of directors of X Financial granted 26,657,998 of restricted stock unites to certain senior managements and
employees. The restricted stock unites shall expire 10 years from the date of grant and vest over a period from three to four years.
● On November 10, 2021, the board of directors of X Financial decided to cancel 9,429,984 of unvested share options granted to certain senior
management.
A summary of option activity during the years ended December 31, 2019, 2020 and 2021 are presented below:
Outstanding, as of January 1, 2019
Granted
Exercised
Forfeited/Cancelled
Outstanding, as of December 31, 2019
Vested and expected to vest as of December 31, 2019
Exercisable as of December 31, 2019
Outstanding, as of January 1, 2020
Granted
Exercised
Forfeited/Cancelled
Outstanding, as of December 31, 2020
Vested and expected to vest as of December 31, 2020
Exercisable as of December 31, 2020
Number of
Options
77,466,699
155,000
14,007,474
3,452,998
60,161,227
60,161,227
9,959,062
Number of
Options
60,161,227
—
2,009,564
5,953,060
52,198,603
52,198,603
8,301,673
135
Exercise
Price RMB
0.27-30.27
31.96
0.27-10.71
0.27-31.96
0.27-31.96
0.27-31.96
0.28-25.42
Remaining
Contractual
6.07-9.83
—
—
—
5.07-9.33
5.07-9.33
5.07-9.33
Exercise
Price RMB
0.27-31.96
—
0.27
0.27-31.96
0.27-31.96
0.27-31.96
0.27-31.96
Remaining
Contractual
5.07-9.33
—
—
—
4.07-8.33
4.07-8.33
4.07-8.33
Intrinsic value
of options
457,386,371
—
—
—
74,834,115
74,834,115
30,925,254
Intrinsic value
of options
74,834,115
—
—
—
19,538,815
19,538,815
13,364,215
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Outstanding, as of January 1, 2021
Granted
Exercised
Forfeited/Cancelled
Outstanding, as of December 31, 2021
Vested and expected to vest as of December 31, 2021
Exercisable as of December 31, 2021
Number of
Options
52,198,603
—
3,490,378
9,959,692
38,748,533
38,748,533
6,154,008
Exercise
Price RMB
0.27-31.96
—
0.27
0.27-30.27
0.27-31.96
0.27-31.96
0.27-31.96
Remaining
Contractual
4.07-8.33
—
—
—
3.07-7.33
3.07-7.33
3.07-7.33
Intrinsic value
of options
19,538,815
—
—
—
20,378,161
20,378,161
14,821,392
A summary of restricted share units activity during the year ended December 31, 2019, 2020 and 2021 is presented below:
Outstanding, as of January 1, 2019
Granted
Vested
Forfeited
Outstanding, as of December 31, 2019
Outstanding, as of January 1, 2020
Granted
Vested
Forfeited
Outstanding, as of December 31, 2020
Outstanding, as of January 1, 2021
Granted
Vested
Forfeited
Outstanding, as of December 31, 2021
Number of
Restricted Shares
Weighted-Average
Grant-Date
Fair Value RMB
—
3,689,400
49,998
—
3,639,402
—
8.21
17.60
—
8.21
Number of
Restricted Shares
3,639,402
5,823,300
631,680
1,295,728
7,535,294
Weighted-Average
Grant-Date
Fair Value RMB
8.21
5.65
8.61
6.16
6.49
Number of
Restricted Shares
Weighted-Average
Grant-Date
Fair Value RMB
7,535,294
26,657,998
1,469,751
307,926
32,415,615
6.49
4.97
6.19
5.65
5.18
We used the Binomial model to estimate the fair value of the options granted on the respective grant dates with assistance from independent
valuation firms. The fair value per option was estimated at the date of grant. We determined the fair value of RSUs based on its stock price on the date
of grant.
For the years ended December 31, 2019, 2020 and 2021, we recorded compensation expenses of RMB157.1 million, RMB80.1 million and
RMB88.4 million (US$13.9 million), respectively, for the stock options and restricted stocks granted to our employees. As of December 31, 2019,
2020 and 2021, we had 60,161,227, 52,198,603 and 38,748,533 stock options outstanding, respectively. As of December 31, 2019, 2020 and 2021,
there was RMB232.1 million, RMB85.8 million and RMB11.1 million(US$1.7 million) of total unrecognized compensation expense related to
unvested stock options granted, respectively. As of December 31, 2021, such cost was expected to be recognized over a weighted average period of
1.27 years.
As of December 31, 2021, there was RMB141.1 million (US$21.9 million) of total unrecognized compensation expense related to unvested
restricted shares granted. As of December 31, 2021 that cost is expected to be recognized over a weighted-average period of 3.66 years.
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Recent Accounting Pronouncements
The recent accounting pronouncements that are relevant to us are included in note 2 to our audited consolidated financial statements, which are
included in this annual report.
5.B. Liquidity and Capital Resources
To date, we have financed our operations primarily through cash generated by operating activities and proceeds from issuance and sales of our
shares. As of December 31, 2019, 2020 and 2021, we had RMB1,006.0 million, RMB746.4 million and RMB584.8 million (US$91.8 million),
respectively, in cash and cash equivalents. In September 2018, we completed an initial public offering of 11,763,478 ADSs (including the ADSs sold
upon the exercise of the over-allotment option granted to the underwriters), representing 23,526,956 Class A ordinary shares, resulting in net proceeds
to us of approximately US$103.9 million. Our cash and cash equivalents solely consist of cash on hand. We believe that our current cash and cash
equivalents and our anticipated cash flows from operations and financing activities will be sufficient to meet our anticipated working capital
requirements and capital expenditures for next 12 months. We may, however, need additional capital in the future to fund our continued operations. If
we determine that our cash requirements exceed the amount of cash and cash equivalents we have on hand at the time, we may seek to issue equity or
debt securities or obtain credit facilities. The issuance and sale of additional equity would result in further dilution to our shareholders. The incurrence
of indebtedness would result in increased fixed obligations and could result in operating covenants that might restrict our operations. We cannot assure
you that financing will be available in amounts or on terms acceptable to us, if at all.
Cash Flows and Working Capital
The following table sets forth a summary of our cash flows for the periods presented:
Summary Consolidated Cash Flows Data:
Cash provided by (used in) operating activities
Cash used in investing activities
Cash provided by (used in) financing activities
Net increase (decrease) in cash and cash equivalents, and restricted cash
Cash and cash equivalents, and restricted cash at beginning of year
Cash and cash equivalents, and restricted cash at year end
Operating Activities
For the Year Ended December 31,
2019
RMB
2020
RMB
2021
RMB
US$
(in thousands)
600,567
(3,079,781)
2,711,188
242,596
1,277,707
1,520,303
(679,235)
(3,704,848)
4,490,712
78,220
1,520,303
1,598,523
449,171
(2,347,594)
(1,301,312)
(606,484)
1,598,523
992,039
70,485
(368,389)
204,204
(95,170)
250,843
155,673
Cash provided by operating activities was RMB449.2 million (US$70.5 million) in 2021. In 2021, the difference between our cash provided by
operating activities and our net income of RMB825.4 million (US$129.5 million) in 2021 resulted mainly from (i) the increase in loans receivable
from Xiaoying Credit Loans and Xiaoying Revolving Loans of RMB890.4 million (US$139.7 million) provided by our own fund from our microcredit
business, (ii) the increase of deposits to institutional cooperators of RMB584.2 million (US$91.7 million), and (iii) the increase of accounts receivable
and contract assets of RMB411.4 million (US$64.6 million), which were partially offsets by (i) the change of financial guarantee derivatives due to the
lag between payments to the financing guarantee companies and the collection of monthly guarantee derivative of RMB551.3 million (US$86.5
million), (ii) the deferred tax benefits of RMB333.4 million (US$52.3 million), and (iii) the change in fair value of financial guarantee derivative of
RMB170.3 million (US$26.7 million).
Cash used in operating activities was RMB679.2 million (US$104.1 million) in 2020. In 2020, the difference between our cash used in operating
activities and our net loss of RMB1,308.5 million (US$200.5 million) in 2020 resulted mainly from the impairment loss of deposits of institutional
cooperators of RMB960 million (US$147.1 million), the change of financial guarantee derivatives due to the lag between payments to the financing
guarantee companies and the collection of monthly guarantee derivative of RMB388.8 million (US$59.6 million), the decrease of accounts receivable
and contract assets of RMB220.8 million (US$33.8 million), the provision for loans receivable from Xiaoying Credit Loans and Xiaoying Revolving
Loans of RMB227.2 million (US$34.8 million) , which were partially offsets by (i) the increase of deposits to institutional cooperators of RMB1,369.5
million (US$209.9 million), and (ii) the decrease of income tax payables of RMB265.1 million (US$40.6 million).
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Cash provided by operating activities was RMB600.6 million in 2019. In 2019, the difference between our cash provided by operating activities
and our net income of RMB774.5 million in 2019 resulted mainly from the change in fair value of financial guarantee derivative of RMB246.4 million
and provision for accounts receivable and contract assets of RMB241.2 million, which were partially offset by (i) the decrease in financial guarantee
derivative of RMB608.1 million due to the lag between payments to ZhongAn and the collection of monthly guarantee service fees from borrowers,
and (ii) the decrease in prepaid expenses and other current assets due to the deposits paid to our financial institutional cooperators and our investments
in earnings rights associated with loan assets.
Investing Activities
Cash used in investing activities was RMB2,347.6 million (US$368.4 million) in 2021, which was primarily attributable to (i) an aggregate
amount of RMB6,531.7 million (US$1,025.0 million) for the principal payment of loans at fair value and loans receivables under Consolidated
partnership model, and origination of loans receivables from Xiaoying Credit Loans and Xiaoying Revolving Loans which have been transferred but
such transaction does not qualify for sale accounting, (ii) purchase of long-term investment of RMB315.0 million (US$49.4 million), (iii) purchase of
financial investments of RMB112.8 million (US$17.7 million), and (iv) loan to a related party of RMB150.0 million (US$23.5 million), which
partially offset by (i) an aggregate amount of RMB4,378.3 million (US$687.1 million) for principal collection of loans at fair value and loans
receivables under Consolidated partnership model, sale and collection of loans receivables from Xiaoying Credit Loans and Xiaoying Revolving Loans
of which have been transferred but such transaction does not qualify for sale accounting, (ii) the collection of loans’ earnings rights from a related
party of RMB160.0 million (US$25.1 million), and (iii) loan repayment from a related party of RMB150.0 million (US$23.5 million).
Cash used in investing activities was RMB3,704.8 million (US$567.8 million) in 2020, which was primarily attributable to sale and collection of
loans receivables from Xiaoying Credit Loans and Xiaoying Revolving Loans and principal collection of loans at fair value of RMB9,762.5 million
(US$1,496.2 million) and the collection of loans’ earnings rights from a related party, partially offset by principal payment of loans at fair value and
origination of loans receivables from Xiaoying Credit Loans and Xiaoying Revolving Loans of RMB5,952.5 million (US$912.3 million).
Cash used in investing activities was RMB3,079.8 million in 2019, which was primarily attributable to principal payment of loans at fair value of
RMB5,646.7 million, partially offset by principal collection of loans at fair value of RMB2,961.9 million.
Financing Activities
Cash provided by financing activities was RMB1,301.3 million (US$204.2 million) in 2021, which was attributable to by cash receipt from
investors related to loans at fair value and institutional funding partners of RMB3,972.7 million (US$623.4 million) and proceeds from short-term
bank borrowings of RMB266.5 million(US$41.9 million) , which was partially offset by cash paid to investors related to loans at fair value and to
institutional funding partners of RMB2,489.1 million(US$390.6) and repayment of short-term bank borrowings of RMB450.5 million(US$70.7
million).
Cash provided by financing activities was RMB4,490.7 million (US$688.2 million) in 2020, which was attributable to cash receipt from investors
related to loans at fair value and institutional funding partners of RMB7,244.9 million (US$1,110.3 million) and proceeds from short-term bank
borrowings of RMB511.5 million(US$78.4 million), which was partially offset by cash paid to investors related to loans at fair value and to
institutional funding partners of RMB3,105.3 million(US$475.9) and repayment of short-term bank borrowings of RMB161 million(US$24.7 million).
Cash provided by financing activities was RMB2,711.2 million in 2019, which was attributable to cash receipt from investors — Consolidated
Trusts of RMB4,313.1 million and proceeds from short-term bank borrowings of RMB203 million, which was partially offset by cash paid to
investors — Consolidated Trusts of RMB1,306.7 million and repayment of short-term bank borrowings of RMB401 million.
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Holding Company Structure
X Financial is a holding company with no material operations of its own. We conduct our operations primarily through our Beijing WFOE and its
subsidiaries, variable interest entities and its subsidiaries in China. As a result, X Financial’s ability to pay dividends depends upon dividends paid by
Beijing WFOE. If Beijing WFOE or any newly formed subsidiaries 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, our wholly foreign-owned subsidiary in China 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 subsidiaries
and variable interest entities 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, each of our subsidiaries may allocate a portion of its after-tax profits based on PRC
accounting standards to enterprise expansion funds and staff bonus and welfare funds at its discretion, and our variable interest entity may allocate a
portion of its after-tax profits based on PRC accounting standards to a discretionary surplus fund at its 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 Beijing WFOE has not paid dividends and will not be able to pay dividends until it generates
accumulated profits and meet the requirements for statutory reserve funds.
5.C. Research and Development
We have focused on and will continue to invest in our technology system, which supports all key aspects of our online platform and is designed to
optimize for scalability and flexibility.
5.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 and adverse effect on our net revenues, income, profitability, liquidity
or capital resources, or that would cause the disclosed financial information to be not necessarily indicative of future results of operations or financial
condition.
5.E. Off-Balance Sheet Arrangements
We did not have any off-balance sheet arrangements as of December 31, 2021.
5.F. Tabular Disclosure of Contractual Obligations
The following table sets forth our contractual obligations, including interest payments, as of December 31, 2021:
Contractual Obligations:
Operating lease obligations (1)
Note:
Total
Less than 1
year
Payment Due by Period
1-2 years
(RMB in thousands)
2-3 years
More than 3
years
30,661
17,559
4,754
4,844
3,504
(1) Operating lease obligations represent our obligations for office premises, which include all future cash outflows under ASC Topic 842, Leases.
Please see “Leases” under Note 2 to our audited consolidated financial statements
Other than those shown above, we did not have any significant capital and other commitments, long-term obligations, or guarantees other than the
guarantees provided to investors and institutional funding partners for certain loan products as of December 31, 2021.
5.G. Safe harbor
See “Forward-Looking Information.”
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ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
6.A. Directors and Senior Management
The following table sets forth the name, age and position of each of our directors and executive officers as of the date of this annual report.
Name
Yue (Justin) Tang
Shaoyong (Simon) Cheng
Kan (Kent) Li
Ding (Gardon) Gao
Frank Fuya Zheng
Shengwen Rong
Zheng Xue
Longgen Zhang
Age
51
52
48
35
55
53
51
57
Position/Title
Chief Executive Officer, Chairman
Vice Chairman, Director
President, Director, Chief Risk Officer
Chief Technology Officer
Chief Financial Officer
Independent Director
Independent Director
Independent Director
Mr. Yue (Justin) Tang is our founder, Chief Executive Officer and Chairman of our board of directors. Mr. Tang is responsible for our overall
business strategies and operation. Before starting our company, Mr. Tang co-founded eLong.com, an online travel service company in China in 1999.
From 2006 to 2014, Mr. Tang was the founder and managing partner of Blue Ridge China, an investment and consulting company. Mr. Tang received a
bachelor’s degree in business administration from Concordia College.
Mr. Shaoyong (Simon) Cheng has served as our Vice Chairman since May, 2021 and our Director since December 2017. Mr. Cheng joined us in
2015. Prior to serving as our Vice Chairman, Mr. Cheng served as our President from 2017 to 2021 and Chief Risk Officer from 2015 to 2017. Prior to
that, Mr. Cheng served as deputy General Manager in charge of retail lending management at Bank of Communications, senior credit risk manager at
HSBC North America and HSBC Asia Pacific. Mr. Cheng also served as head of CEO office and head of business banking at Hang Seng Bank China
Limited, and manager at Capital One. Mr. Cheng received a bachelor’s degree and a master’s degree in engineering and a bachelor’s degree in
economics from Tsinghua University, a master’s degree in industrial engineering and an MBA degree from University of Southern California.
Mr. Kan (Kent) Li has served as our President since May, 2021, our Chief Risk Officer since November 2017 and Director since December, 2021.
Mr. Li joined us in 2015. Prior to that, Mr. Li served as a division director in charge of unsecured loan risk from 2015 to 2017. From September 2008
to November 2015, he served as a manager at Capital One from September 2008 to November 2015. Mr. Li received his bachelor’s degree and
master’s degree in economics from Southwestern University of Economics and Finance.
Mr. Ding (Gardon) Gao is a co-founder of the Company. He has served as our Chief Technology Officer since April 2014 and was our Director
from December 2017 to December 2021. Mr. Gao joined us in 2014. Prior to that, Mr. Gao served as software architect from 2010 to 2014 at Tencent
Holdings Limited. Mr. Gao received a bachelor’s degree in management of information system from Dalian Maritime University.
Mr. Frank Fuya Zheng has served as our Chief Financial Officer since August 24, 2020. From 2008 to 2012, Mr. Zheng was the Chief Financial
Officer of Cogo Group, Inc., a company previously listed on NASDAQ that provided customized module design solutions and manufactured electronic
products in China. Mr. Zheng was also a director of the same company from 2005 to 2012. Since April 2020, Mr. Zheng was an independent director
of Lianluo Smart Limited (NASDAQ: LLIT), as well as chairman of the audit committee and a member of the compensation and nomination
committee. From 2018 to 2019, Mr. Zheng was an independent director of ChinaCache International Holdings Ltd. Mr. Zheng also served as an
independent director of Yingde Gases Group Company (02168.HK) from 2009 to 2017. Mr. Zheng received a bachelor’s degree in Business
Administration majoring in accounting from the City University of New York in 1994.
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Mr. Shengwen Rong has served as our independent director since September 2018. From February 2017 to September 2018, Mr. Rong served as
the Senior Vice President and then the Chief Financial Officer at 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 of
Qudian Inc. (NYSE: QD). Mr Rong is a Certified Public Accountant in the United States. 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. Zheng Xue has served as our independent director since September 2018. Since August 2011, Mr. Xue has served as an independent director at
Yingli Solor (YGE). Mr. Xue served as the Chief Financial Officer of China Music Corporation from 2015 to 2017, the Chief Financial Officer of
Lightinthebox Inc. from 2011 to 2014, partner at Softbank China & India Fund from 2008 to 2010, the Chief Financial Officer of Target Media from
2005 to 2007, and the Chief Financial Officer of eLong Inc. from 2003 to 2005. Mr. Xue received a bachelor’s degree in physics from University of
Illinois and an MBA degree from University of Chicago.
Mr. Longgen Zhang has served as our independent director since September 2018. Since January 2018, Mr. Zhang has served as the Chief
Executive Officer at Daqo New Energy Corp., an NYSE-listed company, and an independent non-executive director at ZZ Capital International
Limited, a company listed on the HKEx’s Main Board. Since May 2014, Mr. Zhang has served as a director at JinkoSolar Holding Co., Ltd., an NYSE-
listed company. Mr. Zhang served as the Chief Financial Officer at JinkoSolar Holding Co., Ltd. from 2008 to 2014, and the Chief Financial Officer
and director at Xinyuan Real Estate Co., Ltd., an NYSE-listed company, from 2006 to 2008. Mr. Zhang received a master’s degree in professional
accounting from New Texas A&M University and a master’s degree in business administration from New Texas A&M University.
6.B. Compensation
Compensation
For the fiscal year ended December 31, 2021, the aggregate cash compensation and benefits that we paid to our directors and executive officers
was approximately RMB5.1million (US$0.8 million). No pension, retirement or similar benefits have been set aside or accrued for our executive
officers or directors. We have no service contracts with any of our directors providing for benefits upon termination of employment.
Employment Agreements and Indemnification Agreements
We have entered into employment agreements with our executive officers. Each of our executive officers is employed for a specified time period,
which will be automatically extended unless either we or the executive officer gives prior notice to terminate such employment. We may terminate the
employment for cause, at any time, without notice or remuneration, for certain acts of the executive officer, including but not limited to the
commitments of any serious or persistent breach or non-observance of the terms and conditions of the employment, conviction of a criminal offense
other than one which in the opinion of the board does not affect the executive’s position, willful, disobedience of a lawful and reasonable order,
misconducts being inconsistent with the due and faithful discharge of the executive officer’s material duties, fraud or dishonesty, or habitual neglect of
his or her duties. An executive officer may terminate his or her employment at any time with not less than one-month prior written notice.
Each executive officer has agreed to hold, both during and after the employment agreement expires or is earlier terminated, in strict confidence
and not to use or disclose to any person, corporation or other entity without written consent, any confidential information. Each executive officer has
also agreed to assign to our company all his or her inventions, improvements, designs, original works of authorship, formulas, processes, compositions
of matter, computer software programs, databases, mask works, concepts and trade secrets which the executive officer may solely or jointly conceive
or develop or reduce to practice, or cause to be conceived or developed or reduced to practice, during the period of the executive officer’s employment
with us that are either related to the scope of the employment or make use of the resources of the company. In addition, all executive officers have
agreed to be bound by non-competition and non-solicitation restrictions set forth in their agreements. Specifically, each executive officer has agreed to
devote all his or her working time and attention to our business and use best efforts to develop our business and interests. Moreover, each executive
officer has agreed not to, for a certain period following termination of his or her employment or expiration of the employment agreement: (i) carry on
or be engaged, concerned or interested directly or indirectly whether as shareholder, director, employee, partner, agent or otherwise carry on any
business in direct competition with us, (ii) solicit or entice away any of our user, client, representative or agent, or (iii) employ, solicit or entice away or
attempt to employ, solicit or entice away any of our officer, manager, consultant or employee.
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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 two years following the last date of employment. Specifically, each executive officer has agreed not to (i) approach our
suppliers, clients, users or contacts 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 our directors and executive officers, pursuant to which we will 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 such a director or officer.
Share Incentive Plan
The 2015 Global Share Option Plan (the “Share Incentive Plan”) was adopted by our then sole director on January 25, 2015, and amended and
restated as the Amended and Restated 2015 Global Share Incentive Plan by our board of directors on May 9, 2018.
The purpose of the Share Incentive Plan is to enhance our ability to attract and retain the best available personnel for positions of substantial
responsibility and to promote the value of our company, by providing such persons an opportunity to acquire or increase a direct interest in our
operations and future success. The maximum aggregate number of ordinary shares which may be issued pursuant to all awards under the Share
Incentive Plan is 95,849,500 ordinary shares. The ordinary shares subject to the Share Incentive Plan may be authorized but unissued or reacquired
ordinary shares.
The following paragraph summarize the terms of the Share Incentive Plan.
Share reserve. The maximum aggregate number of ordinary shares that will be subject to award and sold under the Share Incentive Plan is
95,849,500 shares. During the term of this Plan, we will at all times reserve and keep available such number of ordinary shares as will be sufficient to
satisfy the requirements of the Share Incentive Plan. If an award expires or becomes unexercisable without having been exercised in full, the ordinary
shares unvested which were subject thereto will become available for future grant or sale under the Share Incentive Plan. Ordinary shares used to pay
the exercise price of an award or to satisfy the tax withholding obligations related to an award will become available for future grant or sale under the
Share Incentive Plan.
Administration. The Share Incentive Plan will be administered by (A) our board of directors; or (B) where a committee has been established in our
company, the committee (in either event, the “Administrator”). These administrative powers include, but are not limited to, approving forms of award
documents, determining the terms and conditions of any award granted, determining the fair market value of an ordinary share, prescribing, amending
and rescinding rules and regulations relating to the Share Incentive Plan and modifying and amending each award.
Types of Awards. The Share Incentive Plan permits the grants of stock options, SARs, restricted stock, RSUs, performance awards, deferred
awards and other share-based awards.
● Stock Options. A stock option is a right to purchase ordinary shares at a future date at a specified exercise price. Stock options that are
intended to qualify as incentive stock options must meet the requirements of Section 422 of the Internal Revenue Code of 1986, as amended.
The per share exercise price of a stock option (except in the case of substitute awards) will be determined by the Administrator at the time of
grant but will be no less than one hundred percent of the fair market value per ordinary share on the date of grant, subject to certain
exceptions. No stock option will be exercisable more than ten years from the grant date, except that the Administrator may generally provide
for an extension of such ten-year term in the event the exercise of the stock option would be prohibited by law on the expiration date. In the
case of an incentive stock option granted to an employee who has owned ordinary shares representing more than ten percent of the voting
power of all classes of ordinary shares of the company or any parent or subsidiary, the per share exercise price will be no less than one
hundred ten percent of the fair market value per ordinary share on the date of grant, and the term of the incentive stock option will be
five years from the date of grant or such shorter term as may be provided in the award document.
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● SARs. A SAR represents a right to receive, in cash or ordinary shares, upon exercise by a participant or settlement, the excess of (i) the fair
market value of one ordinary share on the date of exercise or settlement over (ii) the exercise price of the right on the date of grant, or if
granted in connection with an option, on the date of grant of the option. The per share exercise price for the ordinary shares to be issued
pursuant to the exercise of a SAR (except in the case of substitute awards) will be determined by the Administrator, but will be no less than
one hundred percent of the fair market value per ordinary share on the date of grant. The Administrator will determine the date on which each
SAR may be exercised or settled and the expiration date of each SAR. However, no SAR will be exercisable more than ten years from the
grant date.
● Restricted Stock. Restricted stock is an award of ordinary shares of our common stock that are subject to restrictions on transfer and a
substantial risk of forfeiture.
● RSU. An RSU represents a right to receive the value of one ordinary share, subject to specified vesting and other restrictions.
● Performance Awards. Performance awards, which may be denominated in cash or ordinary shares, will be earned upon the satisfaction of
performance conditions specified by the Administrator. These performance criteria may be measured on an absolute (e.g., plan or budget) or
relative basis, may be established on a corporate-wide basis or with respect to one or more business units, divisions, subsidiaries or business
segments, and may be made relative to an index or other acceptable objective and quantifiable indices. The Administrator may specify that
any other award shall constitute a performance award by conditioning the right of a participant to exercise the award or have it settled, and
the timing thereof, upon achievement or satisfaction of such performance conditions as may be specified by the Administrator.
● Deferred Awards. The Administrator is authorized to grant awards denominated in a right to receive ordinary shares on a deferred basis.
● Other Share-Based Awards. The Administrator is authorized to grant other awards that may be denominated or payable in, valued in whole or
in part by reference to, or otherwise based on, or related to, ordinary shares or factors that may influence the value of ordinary shares.
Eligibility. Equity incentive awards may be granted to employees, directors, consultants or any other person providing services to the company, or
any parent, subsidiary or affiliate of the company.
Term of Plan. The Share Incentive Plan became effective upon its initial adoption by our then sole director on January 15, 2015. Unless sooner
terminated by the board of directors, the Share Incentive Plan will continue in effect for a term of ten years from the later of (a) the effective date of the
Share Incentive Plan, or (b) the earlier of the most recent board of directors or shareholder approval of an increase in the number of ordinary shares
reserved for issuance under the Share Incentive Plan, which occurred on May 9, 2018 in connection with the approval of the resolutions effecting the
amendment and restatement of the Share Incentive Plan.
Termination of Service. The Administrator will determine the effect of a termination of service on outstanding awards, including whether the
awards will vest, become exercisable, settle or be forfeited.
Adjustment upon Merger or Change in Control. In the event of a merger or a change of control, except as otherwise provided in the applicable
award agreement, the Administrator may provide for the treatment of each outstanding award without a Plan participant’s consent, including without
limitation, that
● Awards will be assumed, or substantially equivalent awards be substituted, by the acquiring or succeeding corporation (or an affiliate thereof)
with appropriate adjustments as to the number and kind of shares and prices;
● Upon written notice to a participant, the participant’s awards will terminate upon or immediately prior to the consummation of such merger or
change in control;
● Outstanding awards will vest and become exercisable, realizable or payable, or restrictions applicable to an award will lapse, in whole or in
part prior to or upon consummation of such merger or change in control;
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● The awards will terminate in exchange for an amount of cash and/or property, if any, equal to the amount that would have been attained upon
the exercise of such awards or realization of the participant’s rights as of the date of the occurrence of the transaction (and, for the avoidance
of doubt, if as of the date of the occurrence of the transaction the Administrator determines in good faith that no amount would have been
attained upon the exercise of such awards or realization of the participant’s rights, then such award may be terminated by the company
without payment), or such awards will be replaced with other rights or property selected by the Administrator in its sole discretion; or
● Any combination of the foregoing.
Amendment and Termination. Our board of directors may amend, alter, suspend, discontinue or terminate the Share Incentive Plan. The
Administrator may also amend, alter, suspend, discontinue or terminate, or waive any conditions or rights under, any outstanding award. However,
subject to the adjustment provision and change in control provision, any such action by the Administrator that would materially adversely affect the
rights of a holder of an outstanding award may not be taken without the holder’s consent, except to the extent that such action is taken to cause the
Share Incentive Plan to comply with applicable laws, stock market or exchange rules and regulations, or accounting or tax rules and regulations, or to
impose any “clawback” or recoupment provisions on any awards in accordance with the Share Incentive Plan.
On January 25, 2015, we granted 13,843,645 stock options to employees and executives. On June 29, 2015, we granted 630,000 stock options to
certain employees, directors and officers. On May 3, 2016, we granted 7,425,000 stock options to certain employees, directors and officers. On
October 11, 2017, we granted 16,616,000 stock options to certain employees and senior management. On April 30, 2018, we granted 841,054 stock
options to certain employees and senior management. On May 9, 2018, we granted 40,000,000 stock options to certain senior management. The
exercise price of such 40,000,000 stock options is US$4.75, the offering price per share of our initial public offering, and such options have become
exercisable upon the completion of our initial public offering and in accordance with the vesting schedule, which is specified in the relevant award
agreement. On October 31, 2018, we granted 475,000 stock options to certain employees. On April 15, 2019, we granted 150,000 restricted stock units
to certain directors, which are subject to the vesting schedule specified in the relevant award agreement. On April 30, 2019, we granted 155,000 stock
options to certain employees. On November 20, 2019, we granted 1,789,400 restricted stock units to certain employees. On August 13, 2019 and
November 20, 2019, the Board of Directors decided to cancel 1,500,000 and 250,000 of unvested options of certain senior managements and
concurrently granted 1,500,000 and 250,000 of restricted stock units as replacement awards to the senior managements. On January 21, 2020, we
granted 4,600,000 restricted stock units to certain employees and officers. On April 30, 2020, we granted 673,300 restricted stock units to certain
employees. On October 31, 2020, we granted 550,000 restricted stock units to certain employees. On November 10, 2021, we granted 26,657,998
restricted stock units to certain senior managements and employees. On November 10, 2021, the Board of Directors decided to cancel 9,429,984 of
unvested share options granted to certain senior management.
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The table below summarizes, as of the date of this annual report, the awards we have granted (excluding those cancelled, forfeited or expired) to
our directors and executive officers.
Name
Yue (Justin) Tang
Shaoyong (Simon) Cheng
Ding (Gardon) Gao
Position
Chief Executive
Officer and
Director
President and
Director
Chief Technology
Officer and
Director
Frank Fuya Zheng
Chief Financial Officer
Kan (Kent) Li
Chief Risk Officer
Shengwen Rong
Independent Director
Zheng Xue
Independent Director
Longgen Zhang
Independent Director
*
Less than 1% of our total outstanding shares.
Ordinary Shares
Underlying
Options Awarded
Option Exercise
Price
3,803,645 US$
0.04
Grant Date
January 25, 2015
Option
Expiration
Date
January 24, 2025
24,000,000 US$
6,000,000 US$
* US$
* US$
* US$
* US$
* US$
* US$
* US$
* US$
* US$
* US$
* US$
* US$
* US$
* US$
* US$
* US$
* US$
* US$
* US$
* US$
4.75
0
0.04
0.04
4.75
0
0.04
0.04
4.75
0
0
0.04
1.575
4.75
0
0
0
0
0
0
0
0
May 9, 2018
November 10, 2021
May 3,2016
May 8, 2023
November 10, 2031
May 2, 2026
October 11,2017
May 9,2018
January 21,2020
January 25,2015
October 10,2027
May 8,2023
January 19,2030
January 24,2025
October 11,2017
May 9,2018
October 31,2020
November 10, 2021
May 3,2016
October 11,2017
May 9,2018
January 21,2020
November 10, 2021
April 15,2019
March 3, 2022
April 15,2019
March 3, 2022
April 15,2019
March 3, 2022
October 10,2027
May 8,2023
October 30,2030
November 10, 2031
May 2,2026
October 10,2027
May 8,2023
January 19,2030
November 10, 2031
—
—
—
—
—
—
For discussions of our accounting policies and estimates for awards granted pursuant to the Share Incentive Plan, see “Item 5. Operating and
Financial Review and Prospects—5.A. Operating Results—Critical Accounting Policies, Judgments and Estimates—Share-based compensation.”
6.C. Board Practices
Board of Directors
Our board of directors consists of six directors. A director is not required to hold any shares in our company to qualify to serve as a director. The
Corporate Governance Rules of the NYSE generally require that a majority of an issuer’s board of directors must consist of independent directors.
However, the Corporate Governance Rules of the NYSE permit foreign private issuers like us to follow “home country practice” in certain corporate
governance matters. We rely on this “home country practice” exception and do not have a majority of independent directors serving on our board of
directors.
Our board of directors may exercise all the powers of our company to borrow money, mortgage or charge its undertaking, property and uncalled
capital, and to issue debentures, bonds and other securities whenever money is borrowed or as security for any debt, liability or obligation of the
company or of any third party.
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A director who is in any way, whether directly or indirectly, interested in a contract or proposed contract with our company is required to declare
the nature of his interest at a meeting of our directors. A director may vote in respect of any contract, proposed contract, or arrangement
notwithstanding that he may be interested therein, 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.
We have no service contracts with any of our directors providing for benefits upon termination of employment. See “ Item 6.B. Directors, Senior
Management and Employees—Compensation.”
Board Committees
We have established an audit committee, a compensation committee and a nominating and corporate governance committee under our board of
directors. We have adopted a charter for each of the three committees. Each committee’s members and functions are described below.
Audit Committee
Our audit committee consists of three directors, namely Shengwen Rong, Longgen Zhang and Zheng Xue, and is chaired by Shengwen Rong. Our
board of directors has determined that each of the three directors satisfy the “independence” requirements of Rule 10A-3 under the Securities
Exchange Act of 1934, as amended, and Section 303A of the Corporate Governance Rules of the NYSE. The audit committee oversees our accounting
and financial reporting processes and the audits of the financial statements of our company. The audit committee is responsible for, among other
things: selecting the independent auditors and pre-approving all auditing and non-auditing services permitted to be performed by the independent
auditors;
● setting clear hiring policies for employees or former employees of the independent auditors;
● reviewing with the independent auditors any audit problems or difficulties and management’s response;
● reviewing and approving all related-party transactions;
● discussing the annual audited financial statements with management and the independent auditors;
● 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;
● reviewing with management and the independent auditors related-party transactions and off-balance sheet transactions and structures;
● reviewing with management and the independent auditors the effect of regulatory and accounting initiatives;
● reviewing policies with respect to risk assessment and risk management;
● reviewing our disclosure controls and procedures and internal control over financial reporting;
● reviewing reports from the independent auditors regarding all critical accounting policies and practices to be used by our company;
● establishing procedures for the receipt, retention and treatment of complaints we received regarding accounting, internal accounting controls
or auditing matters and the confidential, anonymous submission by our employees of concerns regarding questionable accounting or auditing
matters;
● periodically reviewing and reassessing the adequacy of our audit committee charter;
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● such other matters that are specifically delegated to our audit committee by our board of directors from time to time; and
● meeting separately, periodically, with management, the internal auditors and the independent auditors.
Compensation Committee
Our compensation committee consists of three directors, namely Longgen Zhang, Shengwen Rong and Zheng Xue, and is chaired by Longgen
Zhang. Our board of Directors has determined that each of the three directors satisfy the “independence” requirements of Rule 10A-3 under the
Securities Exchange Act of 1934, as amended, and Section 303A of the Corporate Governance Rules of the NYSE. Our compensation committee
assists the board in reviewing and approving the compensation structure of our executive officers, including all forms of compensation to be provided
to our executive officers. The compensation committee is responsible for, among other things:
● reviewing and approving the compensation for our senior executives;
● reviewing and evaluating our executive compensation and benefits policies generally;
● reporting to our board of directors periodically;
● evaluating its own performance and reporting to our board of directors on such evaluation;
● periodically reviewing and assessing the adequacy of the compensation committee charter and recommending any proposed changes to our
board of directors; and
● such other matters that are specifically delegated to the compensation committee by our board of directors from time to time.
Nominating and Corporate Governance Committee
Our nominating and corporate governance committee consists of three directors, namely Zheng Xue, Shengwen Rong and Longgen Zhang, and is
chaired by Zheng Xue. Our board of Directors has determined that each of the three directors satisfy the “independence” requirements of Rule 10A-3
under the Securities Exchange Act of 1934, as amended, and Section 303A of the Corporate Governance Rules of the NYSE. The nominating and
corporate governance committee assists the board in identifying 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:
● identifying and recommending to the board of directors qualified individuals for membership on the board of directors and its committees;
● evaluating, at least annually, its own performance and reporting to the board of directors on such evaluation;
● overseeing compliance with the corporate governance guidelines and code of business conduct and ethics and reporting on such compliance
to the board of directors; and
● reviewing and assessing periodically the adequacy of its charter and recommending any proposed changes to the board of directors
for approval.
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Duties of Directors
Under Cayman Islands law, our directors have a fiduciary duty to our company to act honestly, in good faith and with a view to our best interests.
Our directors also owe to our company a duty to act with skill and care. It was previously considered that a director need not exhibit in the
performance of his duties a greater degree of skill than may reasonably be expected from a person of his knowledge and experience. However, English
and Commonwealth courts have moved towards an objective standard with regard to the required skill and care and these authorities are likely to be
followed in the Cayman Islands. In fulfilling their duty of care to us, our directors must ensure compliance with our second amended and restated
memorandum and articles of association, as amended and re-stated from time to time. Our company has the right to seek damages if a duty owed by
our directors is breached. In limited exceptional circumstances, a shareholder may have the right to seek damages in our name if a duty owed by our
directors is breached. You should refer to “Description of Share Capital—Differences in Corporate Law” for additional information on our standard of
corporate governance under Cayman Islands law.
A director who is in any way, whether directly or indirectly, interested in a contract or proposed contract with our company is required to declare
the nature of his interest at a meeting of our directors. A director may vote in respect of any contract, proposed contract, or arrangement
notwithstanding that he may be interested therein, 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. Our directors may exercise all the powers of our company
to borrow money, and to mortgage or charge its undertaking, property and uncalled capital, and issue debentures, debenture stock or other securities
whenever money is borrowed or as security for any debt, liability or obligation of the company or of any third party.
The functions and powers of our board of directors include, among others:
● convening shareholders’ annual general meetings and reporting its work to shareholders at such meetings;
● declaring dividends and distributions;
● appointing officers and determining the term of office of officers;
● exercising the borrowing powers of our company and mortgaging the property of our company; and
● approving the transfer of shares of our company, including the registering of such shares in our share register.
Terms of Directors and Officers
Our officers are elected by and serve at the discretion of our board of directors. Our directors are not subject to a term of office and hold office
until such time as they are removed from office by ordinary resolution of the shareholders or until the expiration of his term or his successor has been
elected and qualified. If a Management Director (as defined in our second amended and restated memorandum and articles of association), Mr Yue
(Justin) Tang shall have the right to appoint another person as a director (such director shall be a Managing Director) by delivering a written notice to
our company and such replacement shall become effective automatically upon the delivery of such notice without any further action or resolution of
the board or the shareholders, provided that Mr. Tang shall not be entitled to exercise such right if he and his affiliates do not hold any shares. Subject
to the foregoing sentence with respect to the appointment of a Managing Director, a vacancy on the board created by the removal of a director may be
filled by an ordinary resolution or by the affirmative vote of a simple majority of the remaining directors present and voting at a board meeting. A
director will be removed from office automatically if, among other thing, the director (i) dies; (ii) becomes bankrupt or makes any arrangement or
composition with his creditors generally; (iii) is found to be or becomes of unsound mind; (iv) resigns his office by notice in writing to our company;
(v) is prohibited by law from being a director; and (vi) is removed from the office pursuant to any other provisions of our second amended and restated
memorandum and articles of association.
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6.D. Employees
As of December 31, 2021, we had a total of 424 employees based in China. The following table sets forth the breakdown of our employees as of
December 31, 2021 by function:
Technology Development
Financial Products
Risk Management
General Management
Marketing
Total
As of December 31, 2021
Number of Employee
% of Total Employees
186
129
38
62
9
424
44 %
30 %
9 %
15 %
2 %
100 %
We have entered into individual employment contracts with our employees to cover matters such as salaries, benefits, and grounds for termination.
As required by regulations in China, we participate in various government statutory social security plans, including a pension contribution plan, a
medical insurance plan, an unemployment insurance plan, a work-related injury insurance plan, a maternity insurance plan and a housing provident
fund. We are required under PRC law to contribute to social security plans at specified percentages of the salaries, bonuses and certain allowances of
our employees up to a maximum amount specified by the local government from time to time.
We maintain a good working relationship with our employees, and as of the date of this annual report, we have not experienced any material labor
disputes in the past. None of our employees are represented by labor unions.
6.E. Share Ownership
The following table sets forth information with respect to the beneficial ownership of our ordinary shares, as of March 31, 2022, by:
● each of our directors and executive officers;
● all of our directors and executive officers as a group; and
● each person known to us to own beneficially more than 5% of our ordinary shares.
The calculations in the table below are based on 329,117,943 ordinary shares issued and outstanding as of March 31, 2022 comprised of
231,517,943 Class A ordinary shares and 97,600,000 Class B ordinary shares.
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Beneficial ownership is determined in accordance with the rules and regulations of the SEC and includes voting or investment power with respect
to the ordinary shares. In 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, warrant or other right or the
conversion of any other security. These shares, however, are not included in the computation of the percentage ownership of any other person, except
with respect to the percentage ownership of all executive officers and directors as a group.
Ordinary Shares Beneficially Owned as of March 31, 2022
Class A ordinary share
Class B ordinary share
Number
%
Number
%
6,323,172
*
*
*
*
*
*
*
6,323,172
2.73 % 97,600,000
—
—
—
—
—
—
—
97,600,000
*
*
*
*
*
*
*
2.73 %
100.00 %
—
—
—
—
—
—
—
100.00 %
6,323,172
28,201,772
27,113,806
20,000,000
2.73 %
12.18 %
11.71 %
8.64 %
97,600,000
—
—
—
100.00 %
—
—
—
Percentage of
total ordinary
shares on an as
converted basis
Percentage of
aggregate
voting power**
31.58 %
*
*
*
*
*
*
*
31.58 %
31.58 %
8.57 %
8.24 %
6.08 %
89.69 %
*
*
*
*
*
*
*
89.69 %
89.69 %
1.29 %
1.24 %
0.92 %
Directors and Executive Officers:
Yue (Justin) Tang(1)
Shaoyong (Simon) Cheng
Ding (Gardon) Gao
Frank Fuya Zheng
Kan (Kent) Li
Shengwen Rong
Zheng Xue
Longgen Zhang
All directors and executive officers as a group
Principal Shareholders:
Mangrove Coast Investment Limited(1)
All Trade Base Investment Limited(2)
Dragon Destiny Limited(3)
Pine Cove Global Limited(4)
*
Less than 1% of our total 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 20 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 (i) 97,600,000 Class B ordinary shares held by Mangrove Coast Investment Limited, a British Virgin Islands company controlled by
Mangrove Coast Trust, (ii) 3,803,645 Class A ordinary shares held by Mr. Yue (Justin) Tang, and (iii) 2,519,527 Class A ordinary shares held by
Purple Mountain Holding Ltd., which is ultimately controlled by Mr. Yue (Justin) Tang. The registered address of Mangrove Coast Investment
Limited is Geneva Place, Waterfront Drive, P.O. Box 3469, Road Town, Tortola, British Virgin Islands. Mangrove Coast Trust is a trust
established under the laws of Bahamas and managed by RHONE TRUSTEES (BAHAMAS) LTD. as the trustee. Mr. Yue (Justin) Tang is the
settlor of the trust and Mr. Tang and his family members are the trust’s beneficiaries. The registered address of Purple Mountain Holding Ltd. is at
Ellen Skelton Building, 3076 Sir Francis Darke Highway, Road Reef, P.O. Box 765, Road Town, Tortola VG 1110, British Virgin Islands.
(2) Represents 28,201,772 Class A ordinary shares held by All Trade Base Investment Limited, a British Virgin Islands company wholly owned by
Baoguo Zhu. The registered address of All Trade Base Investment Limited is Geneva Place, Waterfront Drive, P.O. Box 3469, Road Town,
Tortola, British Virgin Islands.
(3) Represents 27,113,806 Class A ordinary shares held by Dragon Destiny Limited, a British Virgin Islands company wholly owned by Chung Kiu
Cheung. The registered address of Dragon Destiny Limited is Vistra Corporate Services Centre, Wickhams Cay II, Road Town, Tortola, VG1110,
British Virgin Islands.
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(4) Represents 20,000,000 Class A ordinary shares held by Pine Cove Global Limited, a British Virgin Islands company wholly owned by Nexus Asia
Growth Fund SPC and ultimately controlled by David Fung. The registered address of Pine Cove Global Limited is Vistra Corporate Services
Centre, Wickhams Cay II, Road Town, Tortola, VG1110, British Virgin Islands.
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
7.A. Major Shareholders
Please refer to “Item 6. Directors, Senior Management and Employees—6.E. Share Ownership.”
7.B. Related Party Transactions
Transactions with Mr. Yue (Justin) Tang
In 2019, we transferred loan portfolios with an aggregate amount of RMB108.7 million to Zijinzhonghao (Zhejiang) Investment Co., Ltd.
(“ZJZH”), an entity controlled by Mr. Tang Yue. The considerations received by us were determined based on the outstanding loan balances on the
transaction dates.
We did not receive related party loans from shareholders other than Mr. Yue (Justin) Tang and his controlled entities.
Transactions with Jiangxi Ruijing
In 2019, we purchased earnings rights of two loans from Jiangxi Ruijing. The considerations paid amounted to RMB100.0 million and RMB280.0
million, respectively, which equal to the principal amounts of the underlying loans. The former loan (Loan#1) had been fully repaid by the end of
2020, and the interest rate applied is 15.6%. The latter loan (Loan#2) had been fully repaid in January 2022, and the interest rate applied is 8%. The
associated interest income amounted to RMB27.1million, RMB28.8 million and RMB17.3 million (US$2.7 million) in 2019, 2020 and 2021,
respectively.
Transactions with a subsidiary of one of our equity investees
In 2021, we entered into agreements with a financing guarantee company, which is a wholly-owned subsidiary of our equity investee obtained in
2020. This financing guarantee company provides guarantee service for an identified portfolio of loans we facilitated and charges borrowers a
guarantee fee, a portion of which will be subsequently paid to us as the service fee for the intermediary service we provide. During the year of 2021,
this financing guarantee company provided guarantee service for 5.9% of the total loans we facilitated. We recognized total net revenue of
RMB78,801,582(US$12,365,688) during the year of 2021 in connection with the service fees of facilitation service for loans that covered by this
financing guarantee company. As of December 31, 2021, contract assets of RMB66,761,250(US$10,476,297) will be subsequently collected from this
financing guarantee company.
Transactions with Shenyang Tianxinhao Technology Limited
In 2021, we provided a loan of RMB150.0 (US$23.5 million) million to an associate of us, Shenyang Tianxinhao Technology Limited. The loan
had been fully repaid in 2021, and the monthly interest rate applied is 0.5%. The associated interest income amounted to RMB0.75 million in 2021.
Contractual Arrangement with our VIEs and their Shareholders
PRC laws and regulations currently restrict foreign ownership and foreign investment in VIE in China. As a result, we operate our relevant
business through contractual arrangements among Xiaoying Beijing, our wholly-owned PRC subsidiary, VIEs, our consolidated VIE, and their
shareholders. For a description of these contractual arrangements, see “Item 4. Information on the Company—C. Organizational Structure—
Contractual Arrangements with Consolidated VIEs and their Shareholders”
Employment Agreements and Indemnification Agreements
See “Item 6. Directors, Senior Management and Employees—6.B. Compensation— Employment Agreements and Indemnification Agreements”
for a description of the employment agreements we have entered into with our senior executive officers.
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Share Incentives
See “Item 6. Directors, Senior Management and Employees—6.B. Compensation—Share Incentive Plan” for a description of share awards we
have granted to our directors, officers and other individuals as a group.
7.C. Interests of Experts and Counsel
Not applicable.
ITEM 8. FINANCIAL INFORMATION
8.A. Consolidated Statements and Other Financial Information
We have appended consolidated financial statements filed as part of this annual report.
Litigation
From time to time, we become subject to legal proceedings and claims in the ordinary course of our business. We are currently involved in several
lawsuits in PRC courts primarily including lawsuits initiated by us to recover defaulted loan repayment, including our claim against one corporate
borrower for the repayment of loan principal, interest, penalty fees and service fees for our services.
On November 26, 2019, a putative class action complaint captioned Shivakumar Ningappa v. X Financial, et al., No. 657033/2019, was filed in
the Supreme Court of the State of New York, New York County against the Company, certain of our officers and directors, and the underwriters of our
initial public offering, asserting violations of the Securities Act of 1933 based on our September 2018 initial public offering. Two additional lawsuits
were subsequently filed in the same court, containing substantially identical allegations. On February 5, 2020, all three lawsuits were consolidated
under the caption “In re X Financial Securities Litigation,” No. 657033/2019, and a consolidated amended complaint (the “CAC”) was filed on
February 14, 2020. On May 11, 2020, we filed a motion to dismiss the CAC in its entirety. On February 8, 2022, the matter was reassigned to a new
judge. Following such reassignment, oral argument on Defendants’ motion to dismiss was scheduled for July 12, 2022.
On December 9, 2019 a putative class action complaint captioned Xiangdong Chen v. X Financial, et al., No. 1:19-cv-06908-KAM-SJB, was filed
in the Eastern District of New York against the Company and certain of our officers and directors, asserting violations of the Securities Act of 1933
based on our September 2018 initial public offering. The lead plaintiff filed an amended complaint (the “AC”) on July 13, 2020. We filed a motion to
dismiss the AC on December 7, 2020. The court has referred the motion to the magistrate judge for a report and recommendation. On December 9,
2021, the magistrate judge issued a report and recommendation (the “R&R”) concluding that Defendants’ motion to dismiss the Federal Action should
be granted in full. The magistrate judge determined that all claims under the Securities Act of 1933 were time-barred by the applicable one-year statute
of limitations and should be dismissed with prejudice, while the claims under the Securities Exchange Act of 1934 failed for deficient allegations of
fraudulent scienter and should be dismissed with leave to replead. The lead plaintiff in the Federal Action timely filed objections to the R&R on
December 23, 2021, and Defendants submitted a response to plaintiff’s objections on January 6, 2022. On March 13, 2022, presiding District Judge
issued a memorandum and order overruling plaintiffs’ objections, adopting the R&R in full, dismissing the Securities Act claims without leave to
replead, and dismissing the Exchange Act claims with leave to file a further amended complaint within 30 days. On April 12, 2022, plaintiffs
voluntarily dismiss the above-captioned action, with prejudice, as to all defendants.
The Company has been served in both proceedings and intends to vigorously defend both actions. For risks and uncertainties relating to the
pending cases against us, please see “Item 3. Key Information —D. Risk Factors —Risks Relating to Our Business and Industry—We may be subject to
risks related to litigation and regulatory proceedings.”
Mr. Yue (Justin) Tang, our founder, Chairman of the board and Chief Executive Officer, has been named in a lawsuit filed by ChinaCast Education
Corporation in the United States, there is uncertainty as to the outcome of this lawsuit and its impact on us. For further details regarding this lawsuit,
see “Item 3. Key Information—3.D. Risk Factors—Risks Relating to Our Business and Industry—Mr. Yue (Justin) Tang, our founder, Chairman of the
board and Chief Executive Officer, named in a lawsuit filed by ChinaCast Education Corporation in the United States; there is uncertainty as to the
outcome of this lawsuit and its impact on us.”
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While we do not believe that such currently pending proceedings are likely to have a material adverse effect on our business, financial condition,
or results of operations, we cannot guarantee that they will be decided or resolved favorably for us, and such pending proceedings or any future legal
proceedings or claims, even if not meritorious, could result in our expenditure of significant financial, legal, and management resources.
Dividend Policy
We currently intend to retain most, if not all, of our available funds and any future earnings to operate and expand our business. Although we have
declared dividend historically, we do not expect to pay cash dividends periodically in the foreseeable future.
Our board of directors has complete discretion, subject to certain requirements of Cayman Islands law, in deciding whether to distribute dividends.
Even if our board of directors decides to pay dividends, the timing, amount and form of future dividends, if any, will depend on, among other things,
our future results of operations and cash flow, our capital requirements and surplus, the amount of distributions, if any, received by us from our
subsidiaries, our financial condition, contractual restrictions and other factors deemed relevant by our board of directors.
We are a holding company with no material operations of our own. PRC regulations may restrict the ability of Beijing WFOE to pay dividends to
us. As a result, our ability to pay dividends and to finance any debt we may incur depends upon dividends paid by Beijing WFOE. If Beijing WFOE or
any newly formed subsidiaries incur debt on their own behalf in the future, the instruments governing their debt may restrict their ability to pay
dividends to us.
If we pay any dividends on our ordinary shares, we will pay those dividends which are payable in respect of the underlying Class A ordinary
shares represented by our ADSs to the depositary, as the registered holder of such Class A ordinary shares, and the depositary then will pay such
amounts to our ADS holders in proportion to the underlying Class A ordinary shares represented by the ADSs held by such ADS holders, subject to the
terms of the deposit agreement, including the fees and expenses payable thereunder. See “Item 12. Description Of Securities Other Than Equity
Securities—12.D. American Depositary Shares.”
Cash dividends on our Class A ordinary shares and Class B ordinary shares, if any, will be paid in U.S. dollars.
8.B. Significant Changes
Except as otherwise disclosed in this annual report on Form 20-F, we have not experienced any significant changes since the date of our audited
consolidated financial statements included in this annual report.
ITEM 9. THE OFFER AND LISTING
9.A. Offering and Listing Details
Our ADSs have been listed on the NYSE since September 19, 2018 under the symbol “XYF.” Each ADS represents two ordinary shares, par value
US$0.0001 per share. Effective from November 19, 2020, we adjusted the ratio of our ADSs to the Class A ordinary shares from one (1) ADS
representing two (2) Class A ordinary shares to one (1) ADS representing six (6) Class A ordinary shares.
9.B. Plan of Distribution
Not applicable.
9.C. Markets
Our ADSs have been listed on the NYSE since September 19, 2018 under the symbol “XYF.”
9.D. Selling Shareholders
Not applicable.
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9.E. Dilution
Not applicable.
9.F. Expenses of the Issue
Not applicable.
ITEM 10. ADDITIONAL INFORMATION
10.A. Share Capital
Not applicable.
10.B. Memorandum and Articles of Association
We are a Cayman Islands company and our affairs are governed by our Second Amended and Restated Memorandum and Articles of Association
and the Companies Law (as amended) of the Cayman Islands, or Companies Law, and the common law of the Cayman Islands.
We incorporate by reference into this annual report our Second Amended and Restated Memorandum and Articles of Association, the form of
which was filed as Exhibit 3.2 to our registration statement on Form F-1 (File Number 333-227065) filed with the Securities and Exchange
Commission on August 28, 2018. Our board of directors adopted our Second Amended and Restated Memorandum and Articles of Association by a
special resolution on August 24, 2018, which became effective immediately prior to completion of our initial public offering of ADSs representing our
ordinary shares.
The following are summaries of material provisions of our Second Amended and Restated Memorandum and Articles of Association and the
Companies Law as they relate to the material terms of our ordinary shares.
Registered Office and Objects
Our registered office in the Cayman Islands is at the offices of Maples Corporate Services Limited at PO Box 309, Ugland House, Grand Cayman,
KY1-1104, Cayman Islands.
According to Clause 3 of our Amended and Restated Memorandum of Association, the objects for which we are established are unrestricted and
we have full power and authority to carry out any object not prohibited by the Companies Law or any other law of the Cayman Islands.
Board of Directors
See “Item 6. Directors, Senior Management and Employees.”
Ordinary Shares
General. Our ordinary shares are divided into Class A ordinary shares and Class B ordinary shares. Holders of Class A ordinary shares and
Class B ordinary shares have the same rights except for voting and conversion rights. Our ordinary shares are issued in registered form and are issued
when registered in our register of members (shareholders). We may not issue shares to bearer. Our shareholders who are non-residents of the Cayman
Islands may freely hold and transfer their ordinary shares.
Dividends. The holders of our ordinary shares are entitled to such dividends as may be declared by our board of directors or declared by our
shareholders by ordinary resolution (provided that no dividend may be declared by our shareholders which exceeds the amount recommended by our
directors). Our second amended and restated memorandum and articles of association provide that dividends may be declared and paid out of our
profits, realized or unrealized, or from any reserve set aside from profits which our board of directors determine is no longer needed. Under the laws of
the Cayman Islands, our company may pay a dividend out of either profit or share premium account, provided that in no circumstances may a dividend
be paid if this would result in our company being unable to pay its debts as they fall due in the ordinary course of business. Holders of Class A
ordinary shares and Class B ordinary shares will be entitled to the same amount of dividends, if declared.
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Voting Rights. 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 20 votes, voting together as one class. A resolution put to the vote of the general meeting shall be decided on the vote of
the requisite majority pursuant to a poll of the shareholders. An ordinary resolution to be passed at a meeting by the shareholders requires the
affirmative vote of a simple majority of the votes attaching to the ordinary shares cast at a meeting, while a special resolution requires the affirmative
vote of no less than two-thirds of the votes cast attaching to the outstanding ordinary shares at a meeting. A special resolution will be required for
important matters such as a change of name or making changes to our second amended and restated memorandum and articles of association.
Conversion. Each Class B ordinary share is convertible into one Class A ordinary share at any time at the option of the holder thereof. Class A
ordinary shares are not convertible into Class B ordinary shares under any circumstances. Upon any sale, transfer, assignment or disposition of Class B
ordinary shares by a holder to any person or entity which is not an affiliate of such holder, or upon a change of beneficial ownership of any Class B
ordinary share as a result of which any person who is not an affiliate of the registered holders of such Class B ordinary shares becomes the beneficial
owner of such Class B ordinary shares, such Class B ordinary shares shall be automatically and immediately converted into the equivalent number of
Class A ordinary shares.
Transfer of Ordinary Shares. Subject to the restrictions contained in our second amended and restated memorandum and articles of association,
any of our shareholders may transfer all or any of his or her ordinary shares by an instrument of transfer in the usual or common form or any other
form approved by our board of directors.
Our board of directors may, in its absolute discretion, decline to register any transfer of any ordinary share which is not fully paid up or on which
we have a lien. Our board of directors may also decline to register any transfer of any ordinary share unless
● the instrument of transfer is lodged with us, accompanied by the certificate for the ordinary shares to which it relates and such other evidence
as our board of directors may reasonably require to show the right of the transferor to make the transfer;
● the instrument of transfer is in respect of only one class of ordinary shares;
● the instrument of transfer is properly stamped, if required;
● in the case of a transfer to joint holders, the number of joint holders to whom the ordinary share is to be transferred does not exceed four; and
● a fee of such maximum sum as the NYSE may determine to be payable or such lesser sum as our directors may from time to time require is
paid to us in respect thereof.
If our directors refuse to register a transfer, they shall, within two calendar months after the date on which the instrument of transfer was lodged,
send to each of the transferor and the transferee notice of such refusal.
The registration of transfers may, after compliance with any notice required of the NYSE, be suspended and the register of members closed at such
times and for such periods as our board of directors may from time to time determine, provided, however, that the registration of transfers shall not be
suspended nor the register of members closed for more than 30 days in any year as our board may determine.
Liquidation. On the winding up of our company, if the assets available for distribution amongst our shareholders shall be more than sufficient to
repay the whole of the share capital at the commencement of the winding up, the surplus shall be distributed amongst our shareholders in proportion to
the par value of the shares held by them at the commencement of the winding up, subject to a deduction from those shares in respect of which there are
monies due, of all monies payable to our company for unpaid calls or otherwise. If our assets available for distribution are insufficient to repay all of
the paid-up capital, the assets will be distributed so that the losses are borne by our shareholders proportion to the par value of the shares held by them.
Any distribution of assets or capital to a holder of a Class A ordinary share and a holder of a Class B ordinary share will be the same in any liquidation
event.
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Calls on Ordinary Shares and Forfeiture of Ordinary Shares. Our board of directors may from time to time make calls upon shareholders for
any amounts unpaid on their ordinary shares in a notice served to such shareholders at least 14 clear days prior to the specified time of payment. The
ordinary shares that have been called upon and remain unpaid are subject to forfeiture.
Redemption, Repurchase and Surrender of Shares. We may issue shares on terms that such shares are subject to redemption, at our option or at
the option of the holders of these shares, on such terms and in such manner as may be determined by our board of directors. Our company may also
repurchase any of our shares on such terms and in such manner as have been approved by our board of directors, or are otherwise authorized by the
articles of association. Under the Companies Law, the redemption or repurchase of any share may be paid out of our Company’s profits or out of the
proceeds of a new issue of shares made for the purpose of such redemption or repurchase, or out of capital (including share premium account and
capital redemption reserve) if our company can, immediately following such payment, pay its debts as they fall due in the ordinary course of business.
In addition, under the Companies Law no such share may be redeemed or repurchased (a) unless it is fully paid up, (b) if such redemption or
repurchase would result in there being no shares outstanding or (c) if the company has commenced liquidation. In addition, our company may accept
the surrender of any fully paid share for no consideration.
Variations of Rights of Shares. If at any time, our share capital is divided into different classes or series of shares, all or any of the rights attached
to any class or series of shares (unless otherwise provided by the terms of issue of the shares of that class or series) may, whether or not our Company
is being wound up, be varied with the consent in writing of the holders of a majority of the issued shares of that class, or the sanction of an ordinary
resolution passed at a general meeting of the holders of the shares of that class. The rights conferred upon the holders of the shares of any class issued
shall not, unless otherwise expressly provided by the terms of issue of the shares of that class, be deemed to be varied by the creation or issue of
further shares ranking pari passu with such existing class of shares.
General Meetings of Shareholders
Shareholders’ meetings may be convened by a majority of our board of directors or our chairman. Advance notice of at least fifteen calendar days
is required for the convening of our annual general shareholders’ meeting and any other general meeting of our shareholders. A quorum required for
and throughout a meeting of shareholders consists of at least one shareholder entitled to vote and present in person or by proxy or (in the case of a
shareholder being a corporation) by its duly authorized representative representing a majority of all votes attaching to all of our shares in issue and
entitled to vote.
As a Cayman Islands exempted company, we are not obliged by the Companies Law to call shareholders’ annual general meetings. Our second
memorandum and articles of association provide that we may (but are not obliged to) in each year hold a general meeting as our annual general
meeting in which case we shall specify the meeting as such in the notices calling it, and the annual general meeting shall be held at such time and place
as may be determined by our directors.
The Companies Law provides shareholders with only limited rights to requisition a general meeting, and does not provide shareholders with any
right to put any proposal before a general meeting. However, these rights may be provided in a company’s articles of association. Our second
memorandum and articles of association provide that upon the requisition of any one or more of our shareholders who together hold shares which carry
in aggregate not less than ten percent (10%) of the total number of votes attaching to all issued and outstanding shares of our company entitled to vote
at general meetings, our board will convene an extraordinary general meeting and put the resolutions so requisitioned to a vote at such meeting.
However, our second memorandum and articles of association do not provide our shareholders with any right to put any proposals before annual
general meetings or extraordinary general meetings not called by such shareholders.
Inspection of Books and Records
Holders of our ordinary shares will have no general right under Cayman Islands law to inspect or obtain copies of our list of shareholders or our
corporate records (other than copies of our memorandum and articles of association and the register of mortgages and charges, and any special
resolutions passed by our shareholders). However, we will provide our shareholders with the right to receive annual audited financial statements.
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Changes in Capital
We may from time to time by ordinary resolution:
● increase the share capital by such sum, to be divided into shares of such classes and amount, as the resolution shall prescribe;
● consolidate and divide all or any of our share capital into shares of a larger amount than our existing shares;
● sub-divide our existing shares, or any of them into shares of a smaller amount; or
● cancel any shares which, at the date of the passing of the resolution, have not been taken or agreed to be taken by any person and diminish the
amount of our share capital by the amount of the shares so canceled.
However, no alteration contemplated above, or otherwise, may be made to the par value of the Class A ordinary shares or Class B ordinary shares
unless an identical alteration is made to the par value of the Class B ordinary shares and Class A ordinary shares, as the case may be.
We may by special resolution, subject to any confirmation or consent required by the Companies Law, reduce our share capital or any capital
redemption reserve in any manner permitted by law.
Exempted Company
We are an exempted company with limited liability incorporated under the Companies Law. The Companies Law in the Cayman Islands
distinguishes between ordinary resident companies and exempted companies. Any company that is registered in the Cayman Islands but conducts
business mainly outside of the Cayman Islands may apply to be registered as an exempted company. The requirements for an exempted company are
essentially the same as for an ordinary company except for the exemptions and privileges listed below:
● an exempted company does not have to file an annual return of its shareholders with the Registrar of Companies;
● an exempted company’s register of members is not open to inspection;
● an exempted company does not have to hold an annual general meeting;
● an exempted company may issue no par value shares;
● an exempted company may obtain an undertaking against the imposition of any future taxation (such undertakings are usually given for
20 years in the first instance);
● an exempted company may register by way of continuation in another jurisdiction and be deregistered in the Cayman Islands;
● an exempted company may register as a limited duration company; and
● an exempted company may register as a segregated portfolio company.
“Limited liability” means that the liability of each shareholder is limited to the amount unpaid by the shareholder on the shares of the company.
We are subject to reporting and other informational requirements of the Exchange Act, as applicable to foreign private issuers. We currently comply
with the NYSE rules in lieu of following home country practice. The NYSE rules require that every company listed on the NYSE hold an annual
general meeting of shareholders. In addition, our second amended and restated memorandum and articles of association allow directors to call special
meeting of shareholders pursuant to the procedures set forth in our articles.
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10.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” and in “Item 7. Major shareholders and Related Party Transactions” or elsewhere in this annual report.
10.D. Exchange Controls
The Cayman Islands currently has no exchange control regulations or currency restrictions. See “Item 4. Information of the Company—B.
Business Overview—Regulation—Regulations Relating to Foreign Exchange.”
10.E. Taxation
The following sets forth material Cayman Islands, PRC and U.S. federal income tax consequences of the ownership of our Class A ordinary
shares or ADSs. It is based upon laws and relevant interpretations thereof as of the date hereof, all of which are subject to change. This discussion
does not address all possible tax consequences relating to an investment in our Class A ordinary shares or ADSs, such as the tax consequences under
state, local and other tax laws.
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 are not party
to any double tax treaties that are applicable to any payments made to or by the Company. There are no exchange control regulations or currency
restrictions in the Cayman Islands.
Payments of dividends and capital in respect of the ADSs or ordinary shares will not be subject to taxation in the Cayman Islands and no
withholding will be required on the payment of a dividend or capital to any holder of the ADSs or ordinary shares, nor will gains derived from the
disposal of the ADSs or ordinary shares be subject to Cayman Islands income or corporation tax.
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PRC Taxation
In March 2007, the National People’s Congress of China enacted the Enterprise Income Tax Law, which became effective on January 1, 2008 and
was amended on February 24, 2017. 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 further defines the term “de
facto management body” 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 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. Under the Enterprise Income Tax Law and its implementation
regulations issued by the State Council, a 10% PRC withholding tax is applicable to dividends paid 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. In addition,
any gain realized on the transfer of shares by such investors is also subject to PRC tax at a rate of 10%, 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 ordinary shares or ADSs, and any gain realized from the
transfer of our ordinary shares or ADSs, may be treated as income derived from sources within the PRC and may as a result be subject to PRC
taxation. Furthermore, if we are deemed a PRC resident enterprise, dividends paid to individual investors who are non-PRC residents and any gain
realized on the transfer of ADSs or ordinary shares by such investors may be subject to PRC tax at a current rate of 20% (which in the case of
dividends may be withheld at source). Any PRC tax liability may be reduced under applicable tax treaties or tax arrangements between China and
other 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 ordinary shares would be able to claim the benefit of income tax treaties or agreements entered into between China and other countries or
areas.
U.S. Federal Income Taxation
The following are material U.S. federal income tax consequences to the U.S. Holders described below of owning and disposing of the ADSs or
Class A ordinary shares (“ordinary shares”), but this discussion does not purport to be a comprehensive description of all of the tax considerations that
may be relevant to a particular person’s decision to hold ADSs or ordinary shares.
This discussion applies only to a U.S. Holder that holds the ADSs or ordinary shares as capital assets for U.S. federal income tax purposes. In
addition, it does not describe all of the tax consequences that may be relevant in light of a U.S. Holder’s particular circumstances, including the
alternative minimum tax, the Medicare contribution tax on net investment income and tax consequences applicable to U.S. Holders subject to special
rules, such as:
● certain financial institutions;
● dealers or traders in securities that use a mark-to-market method of tax accounting;
● persons holding ADSs or ordinary shares as part of a hedging transaction, straddle, conversion transaction, integrated transaction or similar
transaction;
● persons whose functional currency for U.S. federal income tax purposes is not the U.S. dollar;
● entities classified as partnerships for U.S. federal income tax purposes and their partners;
● tax-exempt entities, “individual retirement accounts” or “Roth IRAs”;
● persons that own or are deemed to own ADSs or ordinary shares representing 10% or more of our voting power or value;
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● persons who acquired our ADSs or ordinary shares pursuant to the exercise of an employee stock option or otherwise as compensation; or
● persons holding ADSs or ordinary shares in connection with a trade or business conducted outside the United States.
If a partnership (or other entity that is classified as a partnership for U.S. federal income tax purposes) owns ADSs or ordinary shares, the U.S.
federal income tax treatment of a partner will generally depend on the status of the partner and the activities of the partnership. Partnerships owning
ADSs or ordinary shares and partners in such partnerships should consult their tax advisers as to the particular U.S. federal income tax consequences
of owning and disposing of ADSs or ordinary shares.
This discussion is based on the Internal Revenue Code of 1986, as amended (the “Code”), administrative pronouncements, judicial decisions,
final, temporary and proposed Treasury regulations, and the income tax treaty between the United States and the PRC (the “Treaty”), all as of the date
hereof, any of which is subject to change, possibly with retroactive effect.
As used herein, a “U.S. Holder” is a beneficial owner of our ADSs or ordinary shares that is, for U.S. federal income tax purposes:
● a citizen or individual resident of the United States;
● a corporation, or other entity taxable as a corporation, created or organized in or under the laws of the United States, any state therein or the
District of Columbia; or
● an estate or trust the income of which is subject to U.S. federal income taxation regardless of its source.
In general, a U.S. Holder who owns ADSs will be treated as the owner of the underlying ordinary shares represented by those ADSs for U.S.
federal income tax purposes. Accordingly, no gain or loss will be recognized if a U.S. Holder exchanges ADSs for the underlying ordinary shares
represented by those ADSs.
This discussion does not address the effects of any state, local or non-U.S. tax laws, or any U.S. federal taxes other than income taxes (such as
U.S. federal estate or gift tax consequences). U.S. Holders should consult their tax advisers concerning the U.S. federal, state, local and non-U.S. tax
consequences of owning and disposing of ADSs or ordinary shares in their particular circumstances.
THIS DISCUSSION IS ONLY A SUMMARY OF THE MATERIAL U.S. FEDERAL INCOME TAX CONSEQUENCES OF THE
ACQUISITION, OWNERSHIP AND DISPOSITION OF OUR ADS OR ORDINARY SHARES. IT IS NOT TAX ADVICE. EACH HOLDER OF
OUR ADS OR ORDINARY SHARES IS URGED TO CONSULT ITS OWN TAX ADVISOR IN RESPECT TO THE PARTICULAR TAX
CONSEQUENCES TO SUCH HOLDER OF THE ACQUISITION, OWNERSHIP AND DISPOSITION OF OUR ADS OR ORDINARY SHARES,
INCLUDING THE APPLICABILITY AND EFFECT OF ANY STATE, LOCAL, AND NON-U.S. TAX LAWS, AS WELL AS U.S. FEDERAL TAX
LAWS AND ANY APPLICABLE TAX TREATIES.
Passive Foreign Investment Company
In general, a non-U.S. corporation is a PFIC for any taxable year in which (i) 75% or more of its gross income consists of passive income or
(ii) 50% or more of the quarterly value of its assets (generally determined on a quarterly basis) consists of assets that produce, or are held for the
production of, passive income. For purposes of the above calculations, a non-U.S. corporation that owns at least 25% by value of the shares of another
corporation is treated as if it held its proportionate share of the assets of the other corporation and received directly its proportionate share of the
income of the other corporation. Passive income generally includes interest (and income equivalent to interest), dividends, rents, royalties and gains
from financial investments. Cash is generally a passive asset for these purposes. Goodwill (which may be determined by reference to the excess of the
sum of the corporation’s market capitalization and liabilities over the value of its assets) is an active asset to the extent attributable to business
activities that produce active income.
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Due to the decrease in our market capitalization and uncertainties as to the proper classification of certain items of our income and assets for
purposes of the PFIC rules, there is a significant risk that we were a PFIC for our 2020 taxable year. The proper application of the PFIC rules to us is
not clear. For example, it is uncertain whether for purposes of the PFIC rules we should be treated as the owner of the Consolidated Trusts’ assets.
Although such trusts are consolidated on our financial statements for accounting purposes, based on the manner in which we and the trusts currently
operate and the nature of our rights and obligations with respect to the trusts, we believe it is reasonable to treat the trusts’ assets (to the extent not
attributable to any investment by us in the trusts) as not owned by us for purposes of the PFIC rules, but there can be no assurance in this regard. If the
trusts’ assets were treated as owned by us for PFIC purposes, we would be a PFIC for our 2020 taxable year. Moreover, the value of our goodwill for
2020 was not a positive amount and it is not entirely clear how the percentage of our active assets should be calculated in such circumstances, and to
what extent certain assets shown on our balance sheet should be treated as active for purposes of determining our PFIC status. In addition, it is not
entirely clear how the contractual arrangements between us and our VIEs will be treated for purposes of the PFIC rules. Because we exercise effective
control over the operation of our VIEs and are entitled to substantially all of their income, we believe it is appropriate to treat the VIEs as owned by us
for purposes of the PFIC rules. However, there can be no assurance in this regard and we may be a PFIC for any taxable year if our VIEs are not
treated as owned by us for such purposes. For these reasons, there is a significant risk that we were a PFIC for our taxable 2020 year and that we will
be a PFIC for our current and future taxable years.
If we are a PFIC for any taxable year and any of our subsidiaries, VIEs or other companies in which we own or are treated as owning equity
interests is also a PFIC (any such entity, a “Lower-tier PFIC”), U.S. Holders will be deemed to own a proportionate amount (by value) of the shares of
each Lower-tier PFIC and will be subject to U.S. federal income tax according to the rules described in the subsequent paragraph on (i) certain
distributions by a Lower-tier PFIC and (ii) dispositions of shares of Lower-tier PFICs, in each case as if the U.S. Holders held such shares directly,
even though the U.S. Holders will not receive the proceeds of those distributions or dispositions.
In general, if we are a PFIC for any taxable year during which a U.S. Holder holds ADSs or ordinary shares, gain recognized by such U.S. Holder
on a sale or other disposition (including certain pledges) of its ADSs or ordinary shares will be allocated ratably over that U.S. Holder’s holding
period. The amounts allocated to the taxable year of the sale or disposition and to any year before we became a PFIC will be taxed as ordinary income.
The amount allocated to each other taxable year will be subject to tax at the highest rate in effect for individuals or corporations, as appropriate, for
that taxable year, and an interest charge will be imposed on the resulting tax liability for each such year. Furthermore, to the extent that distributions
received by a U.S. Holder in any year on its ADSs or ordinary shares exceed 125% of the average of the annual distributions on the ADSs or ordinary
shares received during the preceding three years or the U.S. Holder’s holding period, whichever is shorter, such distributions will be subject to taxation
in the same manner. In addition, if we are a PFIC (or with respect to a particular U.S. Holder are treated as a PFIC) for a taxable year in which we pay
a dividend or for the prior taxable year, the favorable tax rate described below with respect to dividends paid to certain non-corporate U.S. Holders will
not apply. If we are a PFIC for any taxable year during which a U.S. Holder owns ADSs or ordinary shares, we will generally continue to be treated as
a PFIC with respect to the U.S. Holder for all succeeding years during which the U.S. Holder owns ADSs or ordinary shares, even if we cease to meet
the threshold requirements for PFIC status, unless the U.S. Holder makes a “deemed sale” election, which will allow the U.S. Holder to eliminate the
continuing PFIC status under certain circumstances but will require the U.S. Holder to recognize gain taxed under the general PFIC rules described
above.
Alternatively, if we are a PFIC and if the ADSs are “regularly traded” on a “qualified exchange,” a U.S. Holder of ADSs could make a mark-to-
market election that will result in tax treatment different from the general tax treatment for PFICs described in the preceding paragraph. The ADSs will
be treated as “regularly traded” for any calendar year in which more than a de minimis quantity of the ADSs are traded on a qualified exchange on at
least 15 days during each calendar quarter. The NYSE, where our ADSs are listed, is a qualified exchange for this purpose. If a U.S. Holder makes the
mark-to-market election, the U.S. Holder generally will recognize as ordinary income any excess of the fair market value of the ADSs at the end of
each taxable year over their adjusted tax basis, and will recognize an ordinary loss in respect of any excess of the adjusted tax basis of the ADSs over
their fair market value at the end of the taxable year (but only to the extent of the net amount of income previously included as a result of the mark-to-
market election). If a U.S. Holder makes the election, the U.S. Holder’s tax basis in the ADSs will be adjusted to reflect the income or loss amounts
recognized. Any gain recognized on the sale or other disposition of ADSs in a year in which the Company is a PFIC will be treated as ordinary income
and any loss will be treated as an ordinary loss (but only to the extent of the net amount of income previously included as a result of the mark-to-
market election, with any excess treated as capital loss). If a U.S. Holder makes the mark-to-market election, distributions paid on ADSs will be
treated as discussed under “—Taxation of Distributions” below. U.S. Holders will not be able to make a mark-to-market election with respect to our
ordinary shares, or with respect to any shares of a Lower-tier PFIC, because such shares will not trade on any stock exchange.
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The rules dealing with PFICs and mark-to-market elections are very complex and are affected by various factors in addition to those described
above. Accordingly, U.S. Holders of our ADS or ordinary shares should consult their own tax advisors concerning the application of the PFIC rules to
our ADS or ordinary shares under their particular circumstances.
We do not intend to provide the information necessary for U.S. Holders to make qualified electing fund elections, which if available could
materially affect the tax consequences of the ownership and disposition of our ADSs or ordinary shares if we are a PFIC for any taxable year.
Therefore, U.S. Holders will not be able to make such elections.
If we are a PFIC for any taxable year during which a U.S. Holder owns any ADSs or ordinary shares, the U.S. Holder will generally be required to
file annual reports with the Internal Revenue Service. U.S. Holders should consult their tax advisers regarding the determination of whether we are a
PFIC for any taxable year and the potential application of the PFIC rules to their ownership of ADSs or ordinary shares.
Taxation of Distributions
The following discussion is subject to the discussion under “—Passive Foreign Investment Company” above.
Distributions paid on our ADSs or ordinary shares, other than certain pro rata distributions of ADSs or ordinary shares, will be treated as
dividends to the extent paid out of our current or accumulated earnings and profits, as determined under U.S. federal income tax principles. Because
we do not maintain calculations of our earnings and profits under U.S. federal income tax principles, it is expected that distributions generally will be
reported to U.S. Holders as dividends. Dividends will not be eligible for the dividends-received deduction generally available to U.S. corporations
under the Code. Subject to applicable limitations, dividends paid to certain non-corporate U.S. Holders may be taxable at a favorable rate provided that
we are not a PFIC for the taxable year of the distribution or the preceding year. Due to the significant risk that we were or will be a PFIC, non-
corporate U.S. Holders should not assume that any distribution will be eligible for this favorable rate.
Dividends will be included in a U.S. Holder’s income on the date of the U.S. Holder’s, or in the case of ADSs, the depositary’s, receipt. The
amount of any dividend income paid in foreign currency will be the U.S. dollar amount calculated by reference to the spot rate in effect on the date of
receipt, regardless of whether the payment is in fact converted into U.S. dollars on such date. If the dividend is converted into U.S. dollars on the date
of receipt, a U.S. Holder generally should not be required to recognize foreign currency gain or loss in respect of the amount received. A U.S. Holder
may have foreign currency gain or loss if the dividend is converted into U.S. dollars after the date of receipt.
Dividends will be treated as foreign-source income for foreign tax credit purposes. As described in “—PRC Taxation”, dividends paid by the
Company may be subject to PRC withholding tax. For U.S. federal income tax purposes, the amount of the dividend income will include any amounts
withheld in respect of PRC withholding tax (if any). Subject to applicable limitations, which vary depending upon the U.S. Holder’s circumstances,
PRC taxes withheld from dividend payments (at a rate not exceeding the applicable rate provided in the Treaty in the case of a U.S. Holder that is
eligible for the benefits of the Treaty) generally will be creditable against a U.S. Holder’s U.S. federal income tax liability. The rules governing foreign
tax credits are complex and U.S. Holders should consult their tax advisers regarding the creditability of foreign tax credits in their particular
circumstances. In lieu of claiming a credit, a U.S. Holder may elect to deduct any such PRC taxes in computing its taxable income, subject to
applicable limitations. An election to deduct foreign taxes instead of claiming foreign tax credits must apply to all foreign taxes paid or accrued in the
taxable year.
Sale or Other Taxable Disposition of ADSs or Ordinary Shares
The following discussion is subject to the discussion under “—Passive Foreign Investment Company” above.
A U.S. Holder will generally recognize capital gain or loss on a sale or other taxable disposition of ADSs or ordinary shares in an amount equal to
the difference between the amount realized on the sale or other taxable disposition and the U.S. Holder’s tax basis in such ADSs or ordinary shares
disposed of, in each case as determined in U.S. dollars. The gain or loss will be long-term capital gain or loss if, at the time of the sale or disposition,
the U.S. Holder has owned the ADSs or ordinary shares for more than one year. Long-term capital gains recognized by non-corporate U.S. Holders
may be subject to tax rates that are lower than those applicable to ordinary income. The deductibility of capital losses is subject to limitations.
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As described in “—PRC Taxation” gains on the sale of ADSs or ordinary shares may be subject to PRC taxes. A U.S. Holder is entitled to use
foreign tax credits to offset only the portion of its U.S. federal income tax liability that is attributable to foreign-source income. Because under the
Code capital gains of U.S. persons are generally treated as U.S.-source income, this limitation may preclude a U.S. Holder from claiming a credit for
all or a portion of any PRC taxes imposed on any such gains. However, U.S. Holders that are eligible for the benefits of the Treaty may be able to elect
to treat the gain as PRC-source and therefore claim foreign tax credits in respect of PRC taxes on such disposition gains. Proposed Treasury
regulations, if finalized in their current form, may impose additional restrictions on the creditability of any PRC taxes on disposition gains. U.S.
Holders should consult their tax advisers regarding the creditability or deductibility of any PRC tax on disposition gains in general and in their
particular circumstances.
Additional Taxes
Under current law, U.S. Holders that are individuals, estates or trusts and whose income exceeds certain thresholds generally will be subject to a
3.8% Medicare contribution tax on unearned income, including, without limitation, dividends on, and gains from the sale or other taxable disposition
of, our ordinary shares, subject to certain limitations and exceptions. U.S. Holders should consult their own tax advisors regarding the effect, if any, of
such tax on their ownership and disposition of our ordinary shares.
Information Reporting and Backup Withholding
Payments of dividends and sales proceeds that are made within the United States or through certain U.S.-related financial intermediaries may be
subject to information reporting and backup withholding, unless (i) the U.S. Holder is a corporation or other “exempt recipient” and (ii) in the case of
backup withholding, the U.S. Holder provides a correct taxpayer identification number and certifies that it is not subject to backup withholding.
Backup withholding is not an additional tax.The amount of any backup withholding from a payment to a U.S. Holder will be allowed as a credit
against the U.S. Holder’s U.S. federal income tax liability and may entitle it to a refund, provided that the required information is timely furnished to
the Internal Revenue Service.
Certain U.S. Holders who are individuals (or certain specified entities) may be required to report information relating to their ownership of ADSs
or ordinary shares, unless the ADSs or ordinary shares are held in accounts at financial institutions (in which case the accounts may be reportable if
maintained by non-U.S. financial institutions). U.S. Holders should consult their tax advisers regarding their reporting obligations with respect to the
ADSs or ordinary shares.
10.F. Dividends and Paying Agents
Not applicable.
10.G. Statement by Experts
Not applicable.
10.H. Documents on Display
We previously filed with the SEC registration statement on Form F-1 (File Number 333-227065), as amended, including annual report contained
therein, to register additional securities that become effective immediately upon filing, to register our ordinary shares in relation to our initial public
offering. We also filed with the SEC related registration statement on Form F-6 (File Number 333-227070) to register the ADSs and registration
statement on Form S-8 (File Number 333-227938) to register our securities to be issued under our Amended and Restated 2015 Global Share Incentive
Plan.
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We are subject to the periodic reporting and other informational requirements of the Exchange Act as applicable to foreign private issuers. Under
the Exchange Act, we are required to file reports and other information with the SEC. Specifically, we are required to file annually a Form 20-F within
four months after the end of each fiscal year. Copies of reports and other information, when so filed with the SEC, can be inspected and copied at the
public reference facilities maintained by the SEC at 100 F Street, N.E., Room 1580, Washington, D.C. 20549. You can request copies of these
documents, upon payment of a duplicating fee, by writing to the SEC. The public may obtain information regarding the Washington, D.C. Public
Reference Room by calling the Commission at 1-800-SEC-0330. The SEC also maintains a web site at www.sec.gov that contains reports, proxy and
information statements, and other information regarding registrants that make electronic filings with the SEC using its EDGAR system. As a foreign
private issuer, we are exempt from the rules of the Exchange Act prescribing the furnishing and content of quarterly reports and proxy statements, and
our executive officers, directors and principal shareholders are exempt from the reporting and short-swing profit recovery provisions contained in
Section 16 of the Exchange Act. In addition, we are not required under the Exchange Act to file periodic reports and financial statements with the SEC
as frequently or as promptly as U.S. companies whose securities are registered under the Exchange Act.
We will furnish The Bank of New York Mellon, the depositary of our ADSs, with our annual reports, which will include a review of operations
and annual audited consolidated financial statements prepared in conformity with U.S. GAAP, and all notices of shareholders’ meetings and other
reports and communications that are made generally available to our shareholders. The depositary will make such notices, reports and communications
available to holders of ADSs and, upon our request, will mail to all record holders of ADSs the information contained in any notice of a shareholders’
meeting received by the depositary from us.
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Foreign Exchange Risk
All of our revenues and substantially all of our expenses are denominated in RMB. Our exposure to foreign exchange risk primarily relates to cash
and cash equivalent denominated in U.S. dollars and financial investment in VC funds which would be settled in US dollars. We do not believe that we
currently have any significant direct foreign exchange risk and have not used derivative financial instruments to hedge exposure to such risk. Although
our exposure to foreign exchange risks should be limited in general, 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 our business is effectively denominated in RMB, while our ADSs will be traded in U.S. dollars.
The conversion of RMB into foreign currencies, including U.S. dollars, is based on rates set by the People’s Bank of China. The value of RMB is
subject to changes in central government policies and to international economic and political developments affecting supply and demand in the China
Foreign Exchange Trading System market. The PRC government allowed the RMB to appreciate by more than 20% against the U.S. dollar between
July 2005 and July 2008. Between July 2008 and June 2010, this appreciation halted and the exchange rate between the RMB and the U.S. dollar
remained within a narrow band. Between June 2010 and August 2015, the PRC government has allowed the RMB to appreciate slowly against the
U.S. dollar again. Since August 2015, the RMB has significantly depreciated against the U.S. dollar. It is difficult to predict how market forces or PRC
or U.S. government policy may impact the exchange rate between the RMB and the U.S. dollar in the future.
To the extent that we need to convert U.S. dollars into RMB for our operations, appreciation of the RMB against the U.S. dollar would have an
adverse effect on the RMB amount we receive from the conversion. Conversely, if we decide to convert RMB 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 RMB would
have a negative effect on the U.S. dollar amounts available to us.
Certain risks and concentrations
As of December 31, 2019, 2020 and 2021, substantially all of our cash and cash equivalents, restricted cash were held in major financial
institutions located in the PRC and in Hong Kong, which management considers to be high credit quality.
Financial investments that potentially subject us to credit risk mainly consist of investments in VC funds. We limits its exposure to credit risks
associated with financial instruments by regularly conducting a credit review of the funds and their underlying investments.
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Accounts receivable and contract assets are typically unsecured and are derived from revenue earned from customers in the PRC. The risk with
respect to accounts receivable and contract assets is mitigated through our consistent credit risk management framework to the entire portfolio of loans
in accordance with ASC 450-20. We also constantly monitor the financial condition and evaluates the credit quality of certain institutional funding
partners and external financing guarantee companies from which our service fees are collected.
Deposits to institutional cooperators are placed with financial institutional cooperators. We regularly monitors the financial condition and
evaluates the credit quality of each institutional cooperator.
Credit of loans receivables and loans at fair value is controlled by the application of credit approval, limit and monitoring procedures.
No investor or institutional funding partner represented greater than 10% or more of the total net revenues for the years ended December 31, 2019,
2020 and 2021.
We manage current payment risk of guarantee liabilities and financial guarantee derivative through a 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 activities. As of December 31, 2021, substantially all of the loans facilitated by us were
insured/guaranteed by external insurance company or financing guarantee companies.
Interest Rate Risk
We have not been exposed to material risks due to changes in market interest rates, and we have not used any derivative financial instruments to
manage our interest risk exposure.
The fluctuation of interest rates may affect the demand for loan services on our platform. For example, a decrease in interest rates may cause
potential borrowers to seek lower-priced loans from other channels. A high interest rate environment may lead to an increase in competing investment
options and dampen institutional funding partners’ desire to invest on our products. We do not expect that the fluctuation of interest rates will have a
material impact on our financial condition. However, we cannot provide assurance that we will not be exposed to material risks due to changes in
market interest rate in the future. See “Item 3. Key Information on the Company—3.D. Risk Factors—Risks Relating to Our Business and Industry—
Increase in market interest rates could negatively affect the amount of loans facilitated by us and cost of funds provided to borrowers.”
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
12.A. Debt Securities
Not applicable.
12.B. Warrants and Rights
Not applicable.
12.C. Other Securities
Not applicable.
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12.D. American Depositary Shares
$.05 (or less) per ADS
A fee equivalent to the fee that would be payable if
securities distributed to you had been shares and the
shares had been deposited for issuance of ADSs
$.05 (or less) per ADS per calendar year
Registration or transfer fees
Expenses of the depositary
Persons depositing or withdrawing shares or ADS holders must pay:
$5.00 (or less) per 100 ADSs (or portion of 100 ADSs)
For:
Issuance of ADSs, including issuances resulting from a distribution of shares or rights or other property
Cancellation of ADSs for the purpose of withdrawal, including if the deposit agreement terminates
Any cash distribution to ADS holders
Distribution of securities distributed to holders of deposited securities (including rights) that are
distributed by the depositary to ADS holders
Depositary services
Transfer and registration of shares on our share register to or from the name of the depositary or its
agent when you deposit or withdraw shares
Cable and facsimile transmissions (when expressly provided in the deposit agreement)
Converting foreign currency to U.S. dollars
Taxes and other governmental charges the depositary or
the custodian has to pay on any ADSs or shares
underlying ADSs, such as stock transfer taxes, stamp duty
or withholding taxes
Any charges incurred by the depositary or its agents for
servicing the deposited securities
As necessary
As necessary
The depositary collects its fees for delivery and surrender of ADSs directly from investors depositing shares or surrendering ADSs for the purpose
of withdrawal or from intermediaries acting for them. The depositary collects fees for making distributions to investors by deducting those fees from
the amounts distributed or by selling a portion of distributable property to pay the fees. The depositary may collect its annual fee for depositary
services by deduction from cash distributions or by directly billing investors or by charging the book-entry system accounts of participants acting for
them. The depositary may collect any of its fees by deduction from any cash distribution payable (or by selling a portion of securities or other property
distributable) to ADS holders that are obligated to pay those fees. The depositary may generally refuse to provide fee-attracting services until its fees
for those services are paid.
From time to time, the depositary may make payments to us to reimburse us for costs and expenses generally arising out of establishment and
maintenance of the ADS program, waive fees and expenses for services provided to us by the depositary or share revenue from the fees collected from
ADS holders. In performing its duties under the deposit agreement, the depositary may use brokers, dealers, foreign currency dealers or other service
providers that are owned by or affiliated with the depositary and that may earn or share fees, spreads or commissions.
The depositary may convert currency itself or through any of its affiliates and, in those cases, acts as principal for its own account and not as
agent, advisor, broker or fiduciary on behalf of any other person and earns revenue, including, without limitation, transaction spreads, that it will retain
for its own account. The revenue is based on, among other things, the difference between the exchange rate assigned to the currency conversion made
under the deposit agreement and the rate that the depositary or its affiliate receives when buying or selling foreign currency for its own account. The
depositary makes no representation that the exchange rate used or obtained in any currency conversion under the deposit agreement will be the most
favorable rate that could be obtained at the time or that the method by which that rate will be determined will be the most favorable to ADS holders,
subject to the depositary’s obligations under the deposit agreement. The methodology used to determine exchange rates used in currency conversions is
available upon request.
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ITEM 13. ITEM DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
PART II
None.
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS
14.A. — 14.D. Material Modifications to the Rights of Security Holders
See “Item 10. Additional Information” for a description of the rights of shareholders, which remain unchanged.
14.E. Use of Proceeds
The following “Use of Proceeds” information relates to the registration statement on Form F-1, as amended (File Number 333-227065), as
amended, including the annual report contained therein, which registered 11,000,000 ordinary shares representing by ADSs and was declared effective
by the SEC on September 18, 2018, for our initial public offering, which closed in September 21, 2018, and the underwriters’ exercise of their option
to purchase from us an additional 763,478 ADSs representing 1,526,956 ordinary shares, or the optional offering, which closed in September 21, 2018,
at an initial offering price of US$ 9.50 per ADS. Deutsche Bank Securities Inc. and Morgan Stanley & Co. International plc were the representatives of
the underwriters.
The F-1 Registration was declared effective by the SEC on September 18, 2018. For the period from the effective date of the registration statement
on Form F-1 to December 30, 2020, our expenses incurred and paid to others in connection with the issuance and distribution of the ADSs in our
initial public offering and the optional offering totaled US$12.3 million, which included US$7.8 million for underwriting discounts and commissions
and US$4.5 million for other expenses. We received an aggregated net proceeds of approximately US$103.9 million from our initial public offering
and the option offering. None of the transaction expenses included payments to directors or officers of our company or their associates, persons
owning more than 10% or more of our equity securities or our affiliates or others.
None of the net proceeds from the initial public offering and the optional offering was paid, directly or indirectly, to any of our directors or officers
or their associates, persons owning 10% or more of our equity securities or our affiliates.
For the period from the date that the F-1 Registration Statement was declared effective by the SEC to December 31, 2021, we used the net
proceeds from our initial public offering for as follows:
● Approximately US$14.8 million for dividend distribution;
● Approximately US$29.1 million for restricted cash as collateral for our local borrowings in China;
● Approximately US$30.0 million for capital contributions to our PRC subsidiary; and
● Approximately US$5.4 million for general corporate purposes.
ITEM 15. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has performed an evaluation of the
effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) as of the end of the period covered by
this report, as required by Rule 13a-15(b) under the Exchange Act.
Based upon that evaluation, our management has concluded that, as of December 31, 2021, our disclosure controls and procedures were
ineffective, due to the material weaknesses in internal control over financial reporting identified below, in ensuring that the information required to be
disclosed by us in the reports that we file or submit under the Exchange Act was recorded, processed, summarized and reported, within the time
periods specified in the SEC’s rules and forms, and that the information required to be disclosed by us in the reports that we file or submit under the
Exchange Act is accumulated and communicated to our management, including our chief executive officer and chief financial officer, to allow timely
decisions regarding required disclosure.
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(b) 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 Rule 13a-
15(f) under the Exchange Act.
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.
Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2021. Based on this assessment,
our management has concluded that our internal control over financial reporting as of December 31, 2021 was ineffective, due to the material
weaknesses in internal control over financial reporting identified below.
(c) Internal Control over Financial Reporting
Our independent registered public accounting firm has not conducted an audit of our internal control over financial reporting. However, in
connection with the audits of our consolidated financial statements for the year ended December 31, 2016 and 2017 and as of December 31, 2016 and
2017, we and our predecessor independent registered public accounting firm identified two “material weaknesses” in our internal control over financial
reporting and other control deficiencies. As defined in standards established by the PCAOB, a “material weakness” is a deficiency, or a combination of
deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim
financial statements will not be prevented or detected on a timely basis. The material weaknesses identified related to (1) our lack of sufficient skilled
staff with U.S. GAAP knowledge and SEC reporting knowledge for the purpose of financial reporting as well as the lack in formal accounting policies
and procedures manual to ensure proper financial reporting in accordance with U.S. GAAP and SEC reporting requirements; and (2) our internal audit
function is still in the process of establishing formal risk assessment process and internal control framework. In connection with the audits of our
consolidated financial statements for the year ended December 31, 2019 and as of December 31, 2019, we and our successor independent registered
public accounting firm determined that these two material weaknesses remain as of December 31, 2019, and identified two additional material
weaknesses in our internal control over financing reporting. The two additional material weaknesses identified by us and our successor independent
registered public accounting firm related to: (1) the Company did not maintain effective controls over the accounting treatments of new business
arrangements, including new Consolidated Trusts related arrangements; and (2) there was not adequate management oversight of accounting activities
in relating to certain tax practices to conform to the U.S. GAAP. In connection with the audits of our consolidated financial statements for the year
ended December 31, 2020 and as of December 31, 2020, we and our successor independent registered public accounting firm determined that three
material weaknesses remain as of December 31, 2020, which related to (1) our lack of sufficient skilled staff with U.S. GAAP knowledge and SEC
reporting knowledge for the purpose of financial reporting as well as the lack in formal accounting policies and procedures manual to ensure proper
financial reporting in accordance with U.S. GAAP and SEC reporting requirements; (2) our internal audit function is still in the process of establishing
formal risk assessment process and internal control framework; and (3) there was not adequate management oversight of accounting activities in
relating to certain tax practices to conform to the U.S. GAAP. In connection with the audits of our consolidated financial statements for the year ended
December 31, 2021, we and our successor independent registered public accounting firm determined that these three material weaknesses remain as of
December 31, 2021.
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We have implemented and plan to implement a number of measures to address the material weaknesses that have been identified, including: we
hired skilled financial and accounting staff with U.S. GAAP and SEC reporting experience; and we provided relevant training to our accounting
personnel and established internal audit function and audit committee with members who have an appropriate level of financial expertise to oversee
our accounting and financial reporting process as well as our internal audit function. We have engaged an independent internal control advisor to assist
us to establish the formal risk assessment process and internal control framework, and review the appropriateness and sufficiency of the process to
identify and address risk of material misstatement related to U.S. GAAP reporting. We have set up a position, namely financial business partner, who
is required to monitor the whole process of the conduct of business and has adequate experiences and qualifications to timely make professional
judgements of the accounting treatment of new business arrangements. We have also formalized an accounting manual for the accounting treatment of
Consolidation Trusts and required a timely review process from qualified reviewers. We have hired an experienced and qualified tax manager and
provided tax related training to our accounting personnel. We have also taken other steps to strengthen our internal control over financial reporting,
including formalizing a set of comprehensive U.S. GAAP accounting manual, formalizing risk assessment process and internal control framework.
As of the date of this annual report, progress has been made to remediate our internal deficiencies and remediation measures are to be further
implemented and executed. The material weaknesses will not be considered remediated until the applicable remedial processes and procedures have
been in place for a sufficient period of time and management has concluded, through testing, that these controls are effective. We will continue to
implement measures to remediate our internal control deficiencies to comply with Section 404 of the Sarbanes Oxley Act. We expect that we will incur
significant costs in the implementation of such measures. However, we cannot assure you that all these measures will be sufficient to remediate our
material weakness in time, or at all. See “Item 3. Key Information—D. Risk Factors—Risks Relating to Our Business and Industry—If we fail to
implement and maintain an effective system of internal controls over financial reporting, we may be unable to accurately report our results of
operations, meet our reporting obligations or prevent fraud.”
(d) Attestation Report of the Independent Registered Public Accounting Firm
This annual report on Form 20-F does not include an attestation report of the company’s registered public accounting firm because the Company is
an emerging growth company.
(e) Changes in Internal Control over Financial Reporting
Other than as described above in “Item 15. Control and Procedures— Internal Control over Financial Reporting”, there were no changes in our
internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the period covered by this annual
report on Form 20-F that have materially affected, or that are reasonably likely to materially affect, our internal control over financial reporting.
ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT
Our board of directors has determined that Mr. Shengwen Rong, an independent director and the chairperson of our audit committee, the qualifies
as an “audit committee financial expert” within the meaning of the SEC rules and possesses financial sophistication within the meaning of Listing
Rules of the New York Stock Exchange. Mr. Shengwen Rong satisfy the “independence” requirements of Rule 10A-3 under the Securities Exchange
Act of 1934, as amended, and Section 303A of the Corporate Governance Rules of the NYSE.
ITEM 16B. CODE OF ETHICS
Our board of directors has adopted a code of business conduct and ethics that applies to all of our directors, officers, employees, including certain
provisions that specifically apply to our principal executive officer, principal financial officer, principal accounting officer or controller and any other
persons who perform similar functions for us. We have filed our code of business conduct and ethics as Exhibit 99.1 of our registration statement on
Form F-1 (file No. 333-227065) filed with the SEC on August 28, 2018 and posted a copy of our code of business conduct and ethics on our website at
ir.xiaoyinggroup.com. 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.
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ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Auditor Fees
The following table sets forth the aggregate fees by categories specified below in connection with certain professional services rendered by our
principal external accounting firms.
Services
Audit Fees(1)
Deloitte Touche Tohmatsu Certified Public Accountants LLP
KPMG Huazhen LLP
Audit-Related Fees(2)
Tax Fees(3)
Deloitte Touche Tohmatsu Certified Public Accountants LLP
KPMG Huazhen LLP
Other Fees(4)
Total
Year Ended December 31,
2021
2020
RMB
RMB
(in thousands)
348
10,722
—
—
123
—
11,193
—
9,569
—
1,509
—
11,078
(1) Audit Fees. Audit fees mean the aggregate fees for each of the fiscal periods listed for professional services rendered by our principal auditors for
the audit of our annual consolidated financial statements and assistance with and review of documents filed with the SEC.
(2) Audit-related Fees. Audit-related fees mean the aggregate fees billed for professional services rendered by our principal auditors for the assurance
and related services, which were not included under Audit Fees above.
(3) Tax Fees. Tax fees mean fees incurred from professional services related to tax compliance.
(4) Other Fees. Other fees mean fees incurred from professional services related to training, advisory and assurance for corporate and social
responsibility reporting and professional services related to tax advice.
The policy of our audit committee is to pre-approve all audit and non-audit services permitted to be performed by our independent registered
public accounting firm.
ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES
Not applicable.
ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS
Neither we nor any “affiliated purchaser,” as defined in Rule 10b-18(a)(3) of the Exchange Act, purchased any of our equity securities during the
period covered by this annual report.
In March 2022, our board of directors has approved a share repurchase plan under which we may repurchase up to US$15 million worth of its
Class A ordinary shares in the form of American depositary shares (“ADSs”) over the next eighteen months, effective until September, 2023. Under
the share repurchase plan, the repurchase may be made from time to time through various means, including open market transactions, privately
negotiated transactions, and through other legally permissible means, depending on market conditions and in accordance with applicable rules and
regulations. The manner, timing and amount of any share repurchases will be determined by the our management in its discretion based on its
evaluation of various factors. We expect to fund repurchases out of its existing cash balance.
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ITEM 16F. CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT
The disclosure called for by paragraph (a) of this Item 16F was previously reported, as that term is defined in Rule 12b-2 under the Exchange Act,
in “Item 16.F. Change in Registrant’s Certifying Accountant” of our annual report on Form 20-F for the fiscal year ended December 31, 2019 filed
with the SEC on June 4, 2020.
ITEM 16G. CORPORATE GOVERNANCE
As a Cayman Islands company listed on the NYSE, we are subject to the NYSE corporate governance listing standards. However, NYSE
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. Currently, we do not
plan to rely on home country practice with respect to our corporate governance. However, if we choose to follow home country practice in the future,
our shareholders may be afforded less protection than they otherwise would enjoy under the NYSE corporate governance listing standards applicable
to U.S. domestic issuers. See “Item 3. Key Information—D. Risk Factors— Risks Relating to Our Ordinary Shares and ADSs—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.”
ITEM 16H. MINE SAFETY DISCLOSURE
Not applicable.
ITEM 16I. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS
Not applicable.
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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 X Financial 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
4.6
4.7
4.8
4.9
Description of Document
Second Amended and Restated Memorandum and Articles of Association (incorporated by reference to Exhibit 3.2 from our
registration statement on Form F-1 (File No. 333-227065) filed publicly with the SEC on August 28, 2018)
Form of Registrant’s Specimen American Depositary Receipt (incorporated by reference to Exhibit 4.1 from our registration
statement on Form F-1 (File No. 333-227065) filed publicly with the SEC on August 28, 2018)
Registrant’s Specimen Certificate for Class A Ordinary Shares (incorporated by reference to Exhibit 4.2 from our registration
statement on Form F-1 (File No. 333-227065) filed publicly with the SEC on August 28, 2018)
Form of Deposit Agreement (incorporated by reference to Exhibit 4.3 from our registration statement on Form F-1 (File No. 333-
227065) filed publicly with the SEC on August 28, 2018)
Description of Securities registered under Section 12 of the Exchange Act (incorporated by reference to Exhibit 2.4 of our Annual
Report on Form 20-F (File No. 001-38652) filed with the Securities and Exchange Commission on June 4, 2020)
Amended and Restated 2015 Global Share Incentive Plan (incorporated by reference to Exhibit 10.1 from our registration statement
on Form F-1 (File No. 333-227065) filed publicly with the SEC on August 28, 2018)
Form of Indemnification Agreement between the Registrant and the directors and executive officers of the Registrant (incorporated
by reference to Exhibit 10.2 from our registration statement on Form F-1 (File No. 333-227065) filed publicly with the SEC on
August 28, 2018)
Form of Employment Agreement between the Registrant and the executive officers of the Registrant (incorporated by reference to
Exhibit 10.3 from our registration statement on Form F-1 (File No. 333-227065) filed publicly with the SEC on August 28, 2018)
Strategic Framework Agreement between ZhongAn Online P&C Insurance Co., Ltd. and Shenzhen Ying Zhong Tong Financial
Information Service Co., Ltd., dated March 31, 2016 (incorporated by reference to Exhibit 10.4 from our registration statement on
Form F-1 (File No. 333-227065) filed publicly with the SEC on August 28, 2018)
Tripartite Cooperation Agreement among ZhongAn Online P&C Insurance Co., Ltd., Shenzhen Ying Zhong Tong Financial
Information Service Co., Ltd. and Shenzhen Tangren Financing Guarantee Co., Ltd. dated September 15, 2017 (incorporated by
reference to Exhibit 10.5 from our registration statement on Form F-1 (File No. 333-227065) filed publicly with the SEC on
August 28, 2018)
Supplementary Agreement among ZhongAn Online P&C Insurance Co., Ltd., Shenzhen Ying Zhong Tong Financial Information
Service Co., Ltd. and Shenzhen Tangren Financing Guarantee Co., Ltd. dated January 5, 2018 (incorporated by reference to
Exhibit 10.6 from our registration statement on Form F-1 (File No. 333-227065) filed publicly with the SEC on August 28, 2018)
Supplementary Agreement among ZhongAn Online P&C Insurance Co., Ltd., Shenzhen Ying Zhong Tong Financial Information
Service Co., Ltd. and Shenzhen Tangren Financing Guarantee Co., Ltd. dated April 2, 2018 (incorporated by reference to
Exhibit 10.7 from our registration statement on Form F-1 (File No. 333-227065) filed publicly with the SEC on August 28, 2018)
Exclusive Business Cooperation Agreement between Xiaoying (Beijing) Information Technology Co., Ltd. and Beijing Ying Zhong
Tong Rongxun Technology Service Co., Ltd., dated December 22, 2017 (English Translation) (incorporated by reference to
Exhibit 10.8 from our registration statement on Form F-1 (File No. 333-227065) filed publicly with the SEC on August 28, 2018)
Shareholders’ Voting Rights Proxy Agreement concerning Beijing Ying Zhong Tong Rongxun Technology Service Co., Ltd., among
Yue Tang, Baoguo Zhu and Xiaoying (Beijing) Information Technology Co., Ltd., dated December 22, 2017 (English Translation)
(incorporated by reference to Exhibit 10.9 from our registration statement on Form F-1 (File No. 333-227065) filed publicly with the
SEC on August 28, 2018)
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Exhibit
Number
4.10
4.11
4.12
4.13
4.14
4.15
4.16
4.17
4.18
4.19
4.20
4.21
4.22
4.23
Description of Document
Equity Pledge Agreement concerning Beijing Ying Zhong Tong Rongxun Technology Service Co., Ltd., between Yue Tang and
Xiaoying (Beijing) Information Technology Co., Ltd., dated December 22, 2017 (English Translation) (incorporated by reference to
Exhibit 10.10 from our registration statement on Form F-1 (File No. 333-227065) filed publicly with the SEC on August 28, 2018)
Equity Pledge Agreement concerning Beijing Ying Zhong Tong Rongxun Technology Service Co., Ltd., between Baoguo Zhu and
Xiaoying (Beijing) Information Technology Co., Ltd., dated December 22, 2017 (English Translation) (incorporated by reference to
Exhibit 10.11 from our registration statement on Form F-1 (File No. 333-227065) filed publicly with the SEC on August 28, 2018)
Exclusive Call Option Agreement concerning Beijing Ying Zhong Tong Rongxun Technology Service Co., Ltd., among Yue Tang,
Baoguo Zhu and Xiaoying (Beijing) Information Technology Co., Ltd., dated December 22, 2017 (English Translation)
(incorporated by reference to Exhibit 10.12 from our registration statement on Form F-1 (File No. 333-227065) filed publicly with
the SEC on August 28, 2018)
Spousal Consent Letter of Yue Tang concerning Beijing Ying Zhong Tong Rongxun Technology Service Co., Ltd., dated
December 22, 2017 (English Translation) (incorporated by reference to Exhibit 10.13 from our registration statement on Form F-1
(File No. 333-227065) filed publicly with the SEC on August 28, 2018)
Spousal Consent Letter of Baoguo Zhu concerning Beijing Ying Zhong Tong Rongxun Technology Service Co., Ltd., dated
December 22, 2017 (English Translation) (incorporated by reference to Exhibit 10.14 from our registration statement on Form F-1
(File No. 333-227065) filed publicly with the SEC on August 28, 2018)
Exclusive Business Cooperation Agreement between Xiaoying (Beijing) Information Technology Co., Ltd. and Shenzhen Xiaoying
Technology Co., Ltd., dated December 22, 2017 (English Translation) (incorporated by reference to Exhibit 10.15 from our
registration statement on Form F-1 (File No. 333-227065) filed publicly with the SEC on August 28, 2018)
Shareholders’ Voting Rights Proxy Agreement concerning Shenzhen Xiaoying Technology Co., Ltd., among Yue Tang, Baoguo Zhu,
Zijinzhonghao (Zhejiang) Investment Co., Ltd., Shenzhen Ao Li Hua Investment Management Partnership, Shenzhen Gu Fo
Investment Management Partnership (Limited Partnership), Shenzhen Man Ni Ou Investment Management Partnership (Limited
Partnership), Shenzhen Bo Li Fu Investment Management Partnership (Limited Partnership) and Xiaoying (Beijing) Information
Technology Co., Ltd., dated December 22, 2017 (English Translation) (incorporated by reference to Exhibit 10.16 from our
registration statement on Form F-1 (File No. 333-227065) filed publicly with the SEC on August 28, 2018)
Equity Pledge Agreement concerning Shenzhen Xiaoying Technology Co. Ltd., between Yue Tang and Xiaoying (Beijing)
Information Technology Co., Ltd., dated December 22, 2017 (English Translation) (incorporated by reference to Exhibit 10.17 from
our registration statement on Form F-1 (File No. 333-227065) filed publicly with the SEC on August 28, 2018)
Equity Pledge Agreement concerning Shenzhen Xiaoying Technology Co. Ltd., between Baoguo Zhu and Xiaoying (Beijing)
Information Technology Co., Ltd., dated December 22, 2017 (English Translation) (incorporated by reference to Exhibit 10.18 from
our registration statement on Form F-1 (File No. 333-227065) filed publicly with the SEC on August 28, 2018)
Equity Pledge Agreement concerning Shenzhen Xiaoying Technology Co. Ltd., between Zijinzhonghao (Zhejiang) Investment
Co., Ltd. and Xiaoying (Beijing) Information Technology Co., Ltd., dated December 22, 2017 (English Translation) (incorporated by
reference to Exhibit 10.19 from our registration statement on Form F-1 (File No. 333-227065) filed publicly with the SEC on
August 28, 2018)
Equity Pledge Agreement concerning Shenzhen Xiaoying Technology Co. Ltd., between Shenzhen Ao Li Hua Investment
Management Partnership (Limited Partnership) and Xiaoying (Beijing) Information Technology Co., Ltd., dated December 22, 2017
(English Translation) (incorporated by reference to Exhibit 10.20 from our registration statement on Form F-1 (File No. 333-
227065) filed publicly with the SEC on August 28, 2018)
Equity Pledge Agreement concerning Shenzhen Xiaoying Technology Co. Ltd., between Shenzhen Man Ni Ou Investment
Management Partnership (Limited Partnership) and Xiaoying (Beijing) Information Technology Co., Ltd., dated December 22, 2017
(English Translation) (incorporated by reference to Exhibit 10.21 from our registration statement on Form F-1 (File No. 333-
227065) filed publicly with the SEC on August 28, 2018)
Equity Pledge Agreement concerning Shenzhen Xiaoying Technology Co. Ltd., between Shenzhen Gu Fo Investment Management
Partnership (Limited Partnership) and Xiaoying (Beijing) Information Technology Co., Ltd., dated December 22, 2017 (English
Translation) (incorporated by reference to Exhibit 10.22 from our registration statement on Form F-1 (File No. 333-227065) filed
publicly with the SEC on August 28, 2018)
Equity Pledge Agreement concerning Shenzhen Xiaoying Technology Co. Ltd., between Shenzhen Bo Li Fu Investment
Management Partnership (Limited Partnership and Xiaoying (Beijing) Information Technology Co., Ltd.,
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Exhibit
Number
4.24
4.25
4.26
4.27
4.28
4.29
4.30
4.31
4.32
4.33
4.34
4.35
4.36
Description of Document
dated December 22, 2017 (English Translation) (incorporated by reference to Exhibit 10.23 from our registration statement on
Form F-1 (File No. 333-227065) filed publicly with the SEC on August 28, 2018)
Exclusive Call Option Agreement concerning Shenzhen Xiaoying Technology Co. Ltd., among Yue Tang, Baoguo Zhu,
Zijinzhonghao (Zhejiang) Investment Co., Ltd., Shenzhen Ao Li Hua Investment Management Partnership, Shenzhen Gu Fo
Investment Management Partnership (Limited Partnership), Shenzhen Man Ni Ou Investment Management Partnership (Limited
Partnership), Shenzhen Bo Li Fu Investment Management Partnership (Limited Partnership) and Xiaoying (Beijing) Information
Technology Co., Ltd., dated December 22, 2017 (English Translation) (incorporated by reference to Exhibit 10.24 from our
registration statement on Form F-1 (File No. 333-227065) filed publicly with the SEC on August 28, 2018)
Spousal Consent Letter of Yue Tang concerning Shenzhen Xiaoying Technology Co. Ltd., dated December 22, 2017 (English
Translation) (incorporated by reference to Exhibit 10.25 from our registration statement on Form F-1 (File No. 333-227065) filed
publicly with the SEC on August 28, 2018)
Spousal Consent Letter of Baoguo Zhu concerning Shenzhen Xiaoying Technology Co. Ltd., dated December 22, 2017 (English
Translation) (incorporated by reference to Exhibit 10.26 from our registration statement on Form F-1 (File No. 333-227065) filed
publicly with the SEC on August 28, 2018)
Exclusive Business Cooperation Agreement between Xiaoying (Beijing) Information Technology Co., Ltd. and Shenzhen Tangren
Financing Guarantee Co., Ltd., dated December 16, 2016 (English Translation) (incorporated by reference to Exhibit 10.27 from our
registration statement on Form F-1 (File No. 333-227065) filed publicly with the SEC on August 28, 2018)
Shareholders’ Voting Rights Proxy Agreement concerning Shenzhen Tangren Financing Guarantee Co., Ltd., between Xi’an Bailu
Enterprise Management Co., Ltd. and Xiaoying (Beijing) Information Technology Co., Ltd., dated December 16, 2016 (English
Translation) (incorporated by reference to Exhibit 10.28 from our registration statement on Form F-1 (File No. 333-227065) filed
publicly with the SEC on August 28, 2018)
Equity Pledge Agreement concerning Shenzhen Tangren Financing Guarantee Co., Ltd., between Xi’an Bailu Enterprise
Management Co., Ltd. and Xiaoying (Beijing) Information Technology Co., Ltd., dated December 16, 2016 (English Translation)
(incorporated by reference to Exhibit 10.29 from our registration statement on Form F-1 (File No. 333-227065) filed publicly with
the SEC on August 28, 2018)
Exclusive Call Option Agreement concerning Shenzhen Tangren Financing Guarantee Co., Ltd., between Xi’an Bailu Enterprise
Management Co., Ltd. and Xiaoying (Beijing) Information Technology Co., Ltd., dated December 16, 2016 (English Translation)
(incorporated by reference to Exhibit 10.30 from our registration statement on Form F-1 (File No. 333-227065) filed publicly with
the SEC on August 28, 2018)
Exclusive Business Cooperation Agreement between Xiaoying (Beijing) Information Technology Co., Ltd. and Shenzhen Beier
Capital Management Co., Ltd. dated July 1, 2018 (English Translation) (incorporated by reference to Exhibit 4.31 of our Annual
Report on Form 20-F (File No. 001-38652) filed with the Securities and Exchange Commission on June 4, 2020)
Exclusive Call Option Contract among Xiaoying (Beijing) Information Technology Co., Ltd., Shenzhen Gamma Capital
Management Co., Ltd. and Shenzhen Beier Capital Management Co., Ltd. dated July 1, 2018 (English Translation) (incorporated by
reference to Exhibit 4.32 of our Annual Report on Form 20-F (File No. 001-38652) filed with the Securities and Exchange
Commission on June 4, 2020)
Equity Pledge Contract among Xiaoying (Beijing) Information Technology Co., Ltd., Shenzhen Gamma Capital Management
Co., Ltd. and Shenzhen Beier Capital Management Co., Ltd. dated July 2018 (English Translation) (incorporated by reference to
Exhibit 4.33 of our Annual Report on Form 20-F (File No. 001-38652) filed with the Securities and Exchange Commission on
June 4, 2020)
Shenzhen Gamma Capital Management Co., Ltd.’s Power of Attorney authorizing Xiaoying (Beijing) Information Technology
Co., Ltd. to exercise certain rights dated July 2018 (English Translation) (incorporated by reference to Exhibit 4.34 of our Annual
Report on Form 20-F (File No. 001-38652) filed with the Securities and Exchange Commission on June 4, 2020)
Tripartite Cooperation Agreement among ZhongAn Online P&C Insurance Co., Ltd., Shenzhen Xiaoying Puhui Technology Co.,
Ltd. and Shenzhen Tangren Financing Guarantee Co., Ltd. dated November 8, 2019 (English Translation) (incorporated by reference
to Exhibit 4.35 of our Annual Report on Form 20 F (File No. 001 38652) filed with the Securities and Exchange Commission on
May 14, 2021)
Security Deposit Pledge Agreement between ZhongAn Online P&C Insurance Co., Ltd. and Shenzhen Tangren Financing Guarantee
Co., Ltd. dated December 23, 2019 (English Translation) (incorporated by reference to Exhibit 4.36 of our Annual Report on Form
20 F (File No. 001 38652) filed with the Securities and Exchange Commission on May 14, 2021)
174
Table of Contents
Exhibit
Number
4.37
4.38
4.39
8.1*
10.1*
10.2*
11.1
12.1*
12.2*
13.1**
13.2**
15.1*
15.2
99.1*
101.INS*
101.SCH*
101.CAL*
101.DEF*
101.LAB*
101.PRE*
104**
Description of Document
Supplemental Agreement to Security Deposit Pledge Agreement between ZhongAn Online P&C Insurance Co., Ltd. and Shenzhen
Tangren Financing Guarantee Co., Ltd. dated July 8, 2020 (English Translation) (incorporated by reference to Exhibit 4.37 of our
Annual Report on Form 20 F (File No. 001 38652) filed with the Securities and Exchange Commission on May 14, 2021)
Security Deposit Pledge Agreement between ZhongAn Online P&C Insurance Co., Ltd. and Shenzhen Xiaoying Puhui Technology
Co., Ltd. dated June 19, 2020 (English Translation) (incorporated by reference to Exhibit 4.38 of our Annual Report on Form 20 F
(File No. 001 38652) filed with the Securities and Exchange Commission on May 14, 2021)
Supplemental Agreement to Security Deposit Pledge Agreement between ZhongAn Online P&C Insurance Co., Ltd. and Shenzhen
Xiaoying Puhui Technology Co., Ltd. dated June 19, 2020 (English Translation) (incorporated by reference to Exhibit 4.39 of our
Annual Report on Form 20 F (File No. 001 38652) filed with the Securities and Exchange Commission on May 14, 2021)
List of subsidiaries, VIEs and subsidiaries of the VIEs of the Registrant
Share Purchase Agreement dated November 1, 2021 (English Translation)
Shareholder Agreement dated November 1, 2021 (English Translation)
Code of Business Conduct and Ethics of the Registrant (incorporated by reference to Exhibit 99.1 from our registration statement on
Form F-1 (File No. 333-227065) filed publicly with the SEC on August 28, 2018)
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 KPMG Huazhen LLP
Letter from Deloitte Touche Tohmatsu Certified Public Accountants LLP (incorporated by reference to Exhibit 15.3 of our Annual
Report on Form 20-F (File No. 001-38652) filed with the Securities and Exchange Commission on June 4, 2020)
Consolidated Financial Statements of Shenyang Tianxinhao Technology Limited as of December 31, 2021
XBRL Instance Document
XBRL Taxonomy Extension Schema Document
XBRL Taxonomy Extension Calculation Linkbase Document
XBRL Taxonomy Extension Definition Linkbase Document
XBRL Taxonomy Extension Label Linkbase Document
XBRL Taxonomy Extension Presentation Linkbase Document
Cover Page Interactive Data File (embedded within the Inline XBRL document)
* Filed herewith
** Furnished herewith
175
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
Date: April 28, 2022
X Financial
By: /s/ Yue (Justin) Tang
Name: Yue (Justin) Tang
Title: Chief Executive Officer and Chairman
176
Table of Contents
X FINANCIAL
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of independent registered public accounting firm (PCAOB ID: 1186)
Consolidated balance sheets as of December 31, 2020 and 2021
Consolidated statements of comprehensive income (loss) for the years ended December 31, 2019, 2020 and 2021
Consolidated statements of changes in 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 for the years ended December 31, 2019, 2020 and 2021
Schedule I—Condensed financial information of parent company
Page
F-2
F-3
F-4
F-5
F-6
F-7
F-64
F-1
Table of Contents
Report of Independent Registered Public Accounting Firm
To the Shareholders and Board of Directors
X Financial:
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of X Financial and its subsidiaries and variable interest entities (the “Company”) as of
December 31, 2021 and 2020, the related consolidated statements of comprehensive income, changes in shareholders’ equity, and cash flows for each
of the years in the three-year period ended December 31, 2021, and the related notes and financial statement Schedule I (collectively, the consolidated
financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company
as of December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the years in the three-year period ended December
31, 2021, in conformity with U.S. generally accepted accounting principles.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight
Board (United States) (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 the consolidated financial statements are free of material misstatement, whether due to error or fraud. The
Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are
required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of
the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated 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 consolidated 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 consolidated financial statements. We believe that our audits provide a reasonable
basis for our opinion.
/s/ KPMG Huazhen LLP
We have served as the Company’s auditor since 2020.
Shenzhen, China
April 28, 2022
F-2
Table of Contents
X FINANCIAL
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2020 AND 2021
ASSETS
Cash and cash equivalents
Restricted cash (including RMB476,854,616 and RMB212,812,257 from Consolidated Trusts and Partnerships as of
December 31, 2020 and 2021, respectively)
Accounts receivable and contract assets, net of allowance of RMB38,681,680 and RMB25,867,957 as of December 31, 2020
and 2021, respectively (including nil and RMB8,335,518 from Consolidated Trusts and Partnerships as of December 31,
2020 and 2021, respectively)
Loans receivable from Xiaoying Credit Loans and Xiaoying Revolving loans, net (including nil and RMB1,622,699,799 from
Consolidated Trusts and Partnerships as of December 31, 2020 and 2021, respectively)
Loan receivable from Xiaoying Housing Loans, net
Loans at fair value (including RMB1,585,731,888 and RMB389,679,352 from Consolidated Trusts and Partnerships as of
December 31, 2020 and 2021, respectively)
Deposits to institutional cooperators, net
Prepaid expenses and other current assets, net (including RMB11,359,212 and RMB7,889,836 from Consolidated Trusts and
Partnerships as of December 31, 2020 and 2021, respectively)
Financial guarantee derivative
Deferred tax assets, net
Long-term investments
Financial investments
Property and equipment, net
Intangible assets, net
Other non-current assets
TOTAL ASSETS
LIABILITIES
Payable to investors at fair value (including RMB1,914,183,650 and RMB462,714,400 from the Consolidated VIEs, Trusts
and Partnerships, without recourse to the Company as of December 31, 2020 and 2021, respectively)
Payable to institutional funding partners (including nil and RMB1,466,068,260 from the Consolidated VIEs, Trusts and
Partnerships, without recourse to the company as of December 31, 2020 and 2021, respectively)
Guarantee liabilities
Financial guarantee derivative (including RMB130,442,090 and RMB565,953,269 from the Consolidated VIEs, Trusts and
Partnerships, without recourse to the Company as of December 31, 2020 and 2021, respectively)
Short-term bank borrowings (including RMB18,700,000 and nil from the Consolidated VIEs, Trusts and Partnerships, without
recourse to the Company as of December 31, 2020 and 2021, respectively)
Accrued payroll and welfare (including RMB10,017,308 and RMB8,959,248 from the Consolidated VIEs, Trusts and
Partnerships, without recourse to the Company as of December 31, 2020 and 2021, respectively)
Other tax payable (including RMB37,103,700 and RMB100,333,129 from the Consolidated VIEs, Trusts and Partnerships,
without recourse to the Company as of December 31, 2020 and 2021, respectively)
Income tax payable (including RMB48,349,593 and RMB8,189,833 from the Consolidated VIEs, Trusts and Partnerships,
without recourse to the Company as of December 31, 2020 and 2021, respectively)
Deposit payable to channel cooperators
Accrued expenses and other current liabilities (including RMB230,564,165 and RMB85,485,440 from the Consolidated VIEs,
Trusts and Partnerships, without recourse to the Company as of December 31, 2020 and 2021, respectively)
Other non-current liabilities (including RMB1,739,541 and nil from the Consolidated VIEs, Trusts and Partnerships, without
recourse to the Company as of December 31, 2020 and 2021, respectively)
TOTAL LIABILITIES
Commitments and Contingencies (Note 18)
Equity:
Common shares(US$0.0001 par value; 1,000,000,000 and 1,000,000,000 shares authorized, 323,117,943 and 329,117,943
shares issued and outstanding as of December 31, 2020 and 2021, respectively)
Additional paid-in capital
Retained earnings (accumulated deficit)
Other comprehensive income
Total X Financial shareholders’ equity
Non-controlling interests
TOTAL EQUITY
TOTAL LIABILITIES AND EQUITY
Notes
As of
December 31,
2020
RMB
As of December 31,
2021
RMB
2021
US$
746,388,408
584,762,494
91,761,996
852,134,486
407,276,342
63,910,545
413,307,108
747,480,118
117,295,942
1,236,026,461
47,490,437
1,585,731,888
907,923,380
403,776,319
297,928,066
605,652,593
295,615,200
6,000,000
11,136,599
37,440,407
51,458,356
7,498,009,708
2,484,072,931
12,083,317
389,679,352
1,500,406,750
213,127,478
11,816,799
274,868,534
560,038,353
82,843,800
6,188,262
36,816,984
31,277,378
7,342,738,892
389,805,249
1,896,136
61,149,194
235,446,560
33,444,352
1,854,314
43,132,871
87,882,238
13,000,000
971,073
5,777,388
4,908,103
1,152,235,961
2(l)
2(n)
2(p)
3
5
4
3
14
10
9
6
7
3
1,914,183,650
462,714,400
72,609,987
2(n)
12
3
8
14
2(w)
11
1,460,395,100
9,789,626
1,487,378,613
—
233,402,161
—
130,442,090
565,953,269
88,810,418
350,545,000
166,500,000
26,127,483
34,780,834
44,605,137
6,999,519
73,077,245
219,545,929
34,451,547
75,916,903
21,472,235
117,148,450
21,012,235
18,383,148
3,297,278
323,748,430
268,966,550
42,206,721
27,614,943
4,421,966,056
12,019,348
3,365,843,931
1,886,098
528,174,360
202,870
3,068,045,239
(14,551,146)
21,059,073
3,074,756,036
1,287,616
3,076,043,652
7,498,009,708
206,793
3,159,522,737
810,855,877
6,309,554
3,976,894,961
—
3,976,894,961
7,342,738,892
32,450
495,798,063
127,240,981
990,107
624,061,601
—
624,061,601
1,152,235,961
The accompanying notes are an integral part of these consolidated financial statements.
F-3
Table of Contents
X FINANCIAL
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
FOR THE YEARS ENDED DECEMBER 31, 2019, 2020 AND 2021
Net revenues
Loan facilitation service—Direct Model
Loan facilitation service—Intermediary Model
Post-origination service
Financing income
Other revenue
Total net revenue
Operating costs and expenses
Origination and servicing
General and administrative
Sales and marketing
(Reversal of) provision for contingent guarantee liabilities
Provision for accounts receivable and contract assets
(Reversal of) provision for loan receivable from Xiaoying Housing Loans
Provision for loans receivable from Xiaoying Credit Loans and Xiaoying Revolving Loans
Impairment losses on deposits to institutional cooperators:
(Reversal of) provision for credit losses on deposits to institutional cooperators
Impairment loss on deposits to institutional cooperators
Reversal of provision of credit losses for other financial assets
Total operating expenses
Income (Loss) from operations
Interest income (expenses), net
Foreign exchange gain
Investment loss
Change in fair value of financial guarantee derivative
Fair value adjustments related to Consolidated Trusts
Other income (loss), net
Income (Loss) before income taxes and gain (loss) from equity in affiliates
Income tax benefit (expense)
Gain (loss) from equity in affiliates, net of tax
Net income (loss)
Less: net gain (loss) attributable to non-controlling interests
Net income (loss) attributable to X Financial
Net income (loss)
Other comprehensive income (loss), net of tax of nil:
Foreign currency translation adjustments
Comprehensive income (loss)
Less: comprehensive (income) loss attributable to non-controlling interests
Comprehensive income (loss) attributable to X Financial
Net income (loss) per share—basic
Weighted average number of ordinary shares outstanding—basic
Net income (loss) per share—diluted
Weighted average number of ordinary shares outstanding—diluted
Notes
Year ended
December 31,
2019
RMB
Year ended
December 31,
2020
RMB
1,986,003,343
238,867,054
330,695,212
408,400,792
124,083,594
3,088,049,995
1,634,822,450
227,481,772
103,157,613
7,747,561
241,186,823
23,430,641
37,643,244
—
—
—
2,275,470,104
812,579,891
19,385,973
616,395
(12,538,280)
(246,371,828)
64,162,533
26,080,766
663,915,450
93,102,643
17,457,899
774,475,992
199,863
774,276,129
774,475,992
14,606,045
789,082,037
199,863
788,882,174
2.47
313,757,887
2.42
319,747,392
1,266,532,773
41,372,812
203,841,829
612,863,477
68,346,567
2,192,957,458
2,071,506,464
179,225,336
35,629,022
880,948
121,485,215
17,993,570
227,210,026
10,318,117
960,000,000
(975,040)
3,623,273,658
(1,430,316,200)
21,724,308
15,398,932
—
(163,670,115)
(57,380,274)
12,709,213
(1,601,534,136)
299,878,635
(6,805,940)
(1,308,461,441)
41,134
(1,308,502,575)
(1,308,461,441)
(46,041,729)
(1,354,503,170)
41,134
(1,354,544,304)
(4.07)
321,236,089
(4.07)
321,236,089
2(d)
12
2(l)
2(p)
2(n)
5
10
3
3
14
10
15
15
Year ended
December 31,
2021
RMB
2,545,431,636
161,313
315,590,118
671,901,495
93,380,543
3,626,465,105
1,963,006,006
187,859,411
20,829,534
(24,284)
77,247,810
(377,559)
76,395,168
(8,291,421)
—
(1,223,360)
2,315,421,305
1,311,043,800
19,709,140
5,147,137
—
(170,338,993)
(7,266,784)
32,506,084
1,190,800,384
(368,735,701)
3,341,862
825,406,545
(478)
825,407,023
825,406,545
(14,749,519)
810,657,026
(478)
810,657,504
2.51
329,230,273
2.45
336,881,082
2021
US$
399,433,769
25,314
49,522,976
105,436,006
14,653,445
569,071,510
308,038,478
29,479,241
3,268,608
(3,811)
12,121,867
(59,247)
11,988,069
(1,301,105)
—
(191,972)
363,340,128
205,731,382
3,092,794
807,698
—
(26,729,905)
(1,140,317)
5,100,914
186,862,566
(57,862,678)
524,411
129,524,299
(75)
129,524,374
129,524,299
(2,314,521)
127,209,778
(75)
127,209,853
0.39
329,230,273
0.38
336,881,082
The accompanying notes are an integral part of these consolidated financial statements.
F-4
Table of Contents
Balance at December 31, 2018
Exercise of share option
Share-based compensation (Note 16)
Net income
Foreign currency translation adjustments
Dividend to shareholders
Balance at December 31, 2019
Cumulative effect of accounting change (1)
Balance at January 1, 2020
Issuance of new shares
Exercise of share option
Cancellation of shares
Share-based compensation (Note 16)
Net income (loss)
Foreign currency translation adjustments
Balance at December 31, 2020
Issuance of new shares
Exercise of share option
Share-based compensation (Note 16)
Acquisition of non-controlling interests
Net income (loss)
Foreign currency translation adjustments
Balance at December 31, 2021
Balance at December 31, 2020
Issuance of new shares
Exercise of share option
Share-based compensation (Note 16)
Acquisition of non-controlling interests
Net income (loss)
Foreign currency translation adjustments
Balance at December 31, 2021
X FINANCIAL
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2019, 2020 AND 2021
Common
share
number
303,614,298
17,053,645
—
—
—
—
320,667,943
—
320,667,943
2,700,000
—
(250,000)
—
—
—
323,117,943
6,000,000
—
—
—
—
—
329,117,943
Common
share
number
323,117,943
6,000,000
—
—
—
—
—
329,117,943
Common
share
amount
(RMB)
189,586
11,654
—
—
—
—
201,240
—
201,240
1,806
—
(176)
—
—
—
202,870
3,923
—
—
—
—
—
206,793
Common
share
amount
(US$)
31,834
616
—
—
—
—
—
32,450
Additional
paid-in capital
(RMB)
2,824,223,031
6,024,011
157,116,095
—
—
—
2,987,363,137
—
2,987,363,137
(1,806)
612,530
(68,760)
80,140,138
—
—
3,068,045,239
(3,923)
2,959,511
88,434,772
87,138
—
—
3,159,522,737
Additional
paid-in capital
(US$)
481,443,247
(616)
464,412
13,877,346
13,674
—
—
495,798,063
Retained
earnings
(Accumulated
deficit)
(RMB)
640,114,859
—
—
774,276,129
—
(103,196,981)
1,311,194,007
(17,242,578)
1,293,951,429
—
—
—
—
(1,308,502,575)
—
(14,551,146)
—
—
—
—
825,407,023
—
810,855,877
Accumulated
other
comprehensive
income
(RMB)
52,494,757
—
—
—
14,606,045
—
67,100,802
—
67,100,802
—
—
—
—
—
(46,041,729)
21,059,073
—
—
—
—
—
(14,749,519)
6,309,554
Equity
attributable
to
X Financial
(RMB)
3,517,022,233
6,035,665
157,116,095
774,276,129
14,606,045
(103,196,981)
4,365,859,186
(17,242,578)
4,348,616,608
—
612,530
(68,936)
80,140,138
(1,308,502,575)
(46,041,729)
3,074,756,036
—
2,959,511
88,434,772
87,138
825,407,023
(14,749,519)
3,976,894,961
Retained
earnings
(Accumulated
deficit)
(US$)
(2,283,393)
—
—
—
—
129,524,374
—
127,240,981
Accumulated
other
comprehensive
income
(US$)
3,304,628
—
—
—
—
—
(2,314,521)
990,107
Equity
attributable
to
X Financial
(US$)
482,496,316
—
464,412
13,877,346
13,674
129,524,374
(2,314,521)
624,061,601
Non-
controlling
interests
(RMB)
1,046,619
—
—
199,863
—
—
1,246,482
—
1,246,482
—
—
—
—
41,134
—
1,287,616
—
—
—
(1,287,138)
(478)
—
—
Non-
controlling
interests
(US$)
202,055
—
—
—
(201,980)
(75)
—
—
Total
equity
(RMB)
3,518,068,852
6,035,665
157,116,095
774,475,992
14,606,045
(103,196,981)
4,367,105,668
(17,242,578)
4,349,863,090
—
612,530
(68,936)
80,140,138
(1,308,461,441)
(46,041,729)
3,076,043,652
—
2,959,511
88,434,772
(1,200,000)
825,406,545
(14,749,519)
3,976,894,961
Total
equity
(US$)
482,698,371
—
464,412
13,877,346
(188,306)
129,524,299
(2,314,521)
624,061,601
(1) The Group adopted ASU 2016-13 on January 1, 2020. See Note 2 (Summary of Significant Accounting Policies) for more information.
The accompanying notes are an integral part of these consolidated financial statements.
F-5
Table of Contents
X FINANCIAL
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2019, 2020 AND 2021
Year ended
December 31,
2019
RMB
Year ended
December 31,
2020
RMB
Year ended December 31,
2021
RMB
2021
US$
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation and amortization
Share-based compensation
Impairment of long-term investments
Loss (gain) from equity in affiliates
Loss (gain) from disposal of property and equipment
Provision for accounts receivable and contract assets
Provisions for loans receivable from Xiaoying Credit Loans and Xiaoying Revolving Loans
(Reversal of) provision for loan receivable from Xiaoying Housing Loans
Impairment losses on deposits to institutional cooperators:
(Reversal of) provision for credit losses on deposits to institutional cooperators
Impairment loss on deposits to institutional cooperators
Reversal of provision of credit losses for other financial assets
Fair value adjustments related to Consolidated Trusts
Change in fair value of financial guarantee derivative
Deferred tax expenses (benefits)
Other non-cash expenses (income)
Changes in operating assets and liabilities:
Accounts receivable and contract assets
Deposits to institutional cooperators
Prepaid expenses and other current assets
Amount due from related party
Origination of loans held for sale
Sales and maturity of loans held for sale
Loan receivable from Xiaoying Housing Loans
Loan receivable from Xiaoying Credit Loans and Xiaoying Revolving Loans
Other non-current assets
Guarantee liabilities
Financial guarantee derivative
Accrued payroll and welfare
Other tax payable
Income tax payable
Deposit payable to channel cooperators
Accrued expenses and other current liabilities
CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment and intangible assets
Disposal of property and equipment
Purchase of financial investments
Collection of financial investments
Purchase of long-term investment
Collection of long-term investment
Loan to a related party
Loan repayment from a related party
Origination of loans receivables from Xiaoying Credit Loans and Xiaoying Revolving Loans
Sale and collection of loans receivables from Xiaoying Credit Loans and Xiaoying Revolving Loans
Principle payment of loans at fair value
Principal collection of loans at fair value
Principle payment of loans receivables of the Consolidated Partnerships
Principal collection of loans receivables of the Consolidated Partnerships
Purchase of loans’ earnings rights from related party
Collection of loans’ earnings rights from related party
CASH USED IN INVESTING ACTIVITIES
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from exercise of options
Acquisition of non-controlling interests
Cancelling of shares
Dividends to shareholders
Proceeds from short-term bank borrowings
Repayments of short-term bank borrowings
Cash received from institutional funding partners
Cash paid to institutional funding partners
Cash received from investors and institutional funding partners of the Consolidated Trusts
Cash paid to investors and institutional funding partners of the Consolidated Trusts
Cash received from investors and institutional funding partners of the Consolidated Partnerships
CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES
Effect of foreign exchange rate changes
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS AND RESTRICTED CASH
CASH AND CASH EQUIVALENTS AND RESTRICTED CASH AT BEGINNING OF YEAR
CASH AND CASH EQUIVALENTS AND RESTRICTED CASH AT YEAR END
Supplemental disclosures of cash flow information:
Income taxes paid
Interest paid for bank borrowings
Reconciliation to amounts on consolidated balance sheets:
Cash and cash equivalents
Restricted cash
Total cash and cash equivalents and restricted cash
774,475,992
11,379,697
157,116,095
12,538,280
(17,457,899)
(2,389)
241,186,823
37,643,244
23,430,641
—
—
—
(64,162,533)
246,371,828
(164,911,933)
247,954
366,952,171
(518,720,216)
(197,141,775)
20,000,000
(8,056,664,647)
8,362,184,896
15,134,973
—
299,925
(3,422,898)
(608,084,177)
(29,815,450)
(76,043,291)
28,757,234
(25,118,739)
64,392,936
600,566,742
(15,143,162)
115,402
—
—
—
—
—
—
—
—
(4,938,191,061)
2,253,437,828
—
—
(380,000,000)
—
(3,079,780,993)
6,035,665
—
—
(103,196,981)
203,000,000
(401,000,000)
—
—
4,313,060,000
(1,306,710,525)
—
2,711,188,159
10,622,885
242,596,793
1,277,706,639
1,520,303,432
43,052,057
3,474,745
1,005,980,251
514,323,181
1,520,303,432
(1,308,461,441)
825,406,545
129,524,299
11,915,528
80,140,138
—
6,805,940
59,213
121,485,215
227,210,026
17,993,570
10,318,117
960,000,000
(975,040)
57,380,274
163,670,115
(142,551,916)
(978,897)
220,837,490
(1,369,521,281)
123,901,899
—
—
—
24,051,658
—
265,846
(7,983,299)
388,806,171
(28,867,642)
14,991,468
(265,078,543)
(87,451,225)
102,802,015
(679,234,601)
(5,365,436)
79,344
(6,000,000)
—
(3,500,000)
—
—
—
(5,746,369,142)
797,086,381
(4,016,159,473)
5,155,380,196
—
—
—
120,000,000
(3,704,848,130)
612,530
—
(68,936)
—
511,545,000
(161,000,000)
5,707,175,065
(475,385,721)
1,537,760,000
(2,629,925,825)
—
4,490,712,113
(28,409,920)
78,219,462
1,520,303,432
1,598,522,894
107,751,825
11,405,162
746,388,408
852,134,486
1,598,522,894
8,135,552
88,434,772
—
(3,341,862)
(180,537)
77,247,810
76,395,168
(377,559)
(8,291,421)
—
(1,223,360)
7,266,784
170,338,993
333,420,104
(117,889)
(411,420,820)
(584,191,949)
21,232,196
—
—
—
35,784,679
(890,372,164)
162,653
(9,789,626)
551,283,453
9,824,303
146,468,684
41,231,547
(460,000)
(33,694,875)
449,171,181
(2,620,038)
236,783
(112,843,800)
36,000,000
(315,000,000)
40,000,000
(150,000,000)
150,000,000
(1,755,301,405)
35,848,676
(2,238,372,299)
3,427,158,051
(2,538,004,837)
915,305,038
—
160,000,000
(2,347,593,831)
2,959,511
(1,200,000)
—
—
266,500,000
(450,545,000)
2,052,099,474
(583,101,169)
454,490,000
(1,905,959,250)
1,466,068,260
1,301,311,826
(9,373,234)
(606,484,058)
1,598,522,894
992,038,836
30,958,576
6,719,912
584,762,494
407,276,342
992,038,836
1,276,646
13,877,346
—
(524,411)
(28,330)
12,121,867
11,988,069
(59,247)
(1,301,105)
—
(191,972)
1,140,317
26,729,905
52,320,890
(18,499)
(64,560,904)
(91,672,465)
3,331,795
—
—
—
5,615,397
(139,718,822)
25,524
(1,536,206)
86,508,404
1,541,648
22,984,133
6,470,129
(72,184)
(5,287,461)
70,484,763
(411,141)
37,156
(17,707,655)
5,649,186
(49,430,374)
6,276,873
(23,538,273)
23,538,273
(275,445,094)
5,625,440
(351,249,458)
537,795,884
(398,268,342)
143,631,334
—
25,107,491
(368,388,700)
464,412
(188,306)
—
—
41,819,665
(70,700,342)
322,019,187
(91,501,298)
71,319,399
(299,086,597)
230,058,102
204,204,222
(1,470,865)
(95,170,583)
250,843,124
155,672,541
4,858,076
1,054,501
91,761,996
63,910,545
155,672,541
The accompanying notes are an integral part of these consolidated financial statements.
F-6
Table of Contents
X FINANCIAL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2019, 2020 AND 2021
1. Organization and principal activities
X Financial (the “Company” or “X Financial”) is an exempted company incorporated with limited liabilities in the Cayman Islands under the
laws of the Cayman Islands on January 5, 2015. The Company, its subsidiaries and its variable interest entities (collectively referred to as the “Group”)
provides personal finance services in the People’s Republic of China (“PRC”) by connecting borrowers and investors through a proprietary internet
platform.
The Group began the operations through Shenzhen Ying Zhong Tong Financial Information Service Co., Ltd. (“Shenzhen Ying Zhong
Tong”), which was founded in March 2014 in the PRC by Mr. Tang, Chief Executive Officer and Mr. Zhu (the “Founders”) who collectively held more
than 50% of the equity holdings.
During the period of 2015 to 2016, the Founders also established a number of special purpose vehicles(“SPVs”) to carry out personal finance
business in the PRC. At the formation date of each SPV, Shenzhen Ying Zhong Tong entered into a series of contractual agreements with the SPV and
its nominal shareholder(s) include Shareholders’ Voting Rights Proxy Agreements, Exclusive Call Option Agreements, Exclusive Business
Cooperation Agreements, and Equity Pledge Agreements, through which Shenzhen Ying Zhong Tong (1) has power to direct the activities that most
significantly affects the economic performance of the SPV and (2) can receive the economic benefits of the SPVs that could be significant to the SPV.
Accordingly, Shenzhen Ying Zhong Tong is the primary beneficiary of the SPVs.
On January 5, 2015, X Financial was incorporated in the Cayman Islands by the Founders and one other individual. The Founders collectively
held more than 50% of the equity holdings of X Financial. Further, Mr. Zhu designated all of his shareholder rights to Mr. Tang through a proxy
agreement. As such, Mr. Tang effectively was the controlling shareholder of the Company since its incorporation.
On August 7, 2015, the Company completed its equity financing by issuing 38,095,238 ordinary shares to an unrelated third party investor at
a consideration of US$60,000,000. In conjunction with the equity financing, the Company also issued an additional 40,000,000 ordinary shares to
Mr. Yue Tang. Mr. Tang remained as the effective controlling shareholder.
In order to raise capital through its initial public offering (“IPO”) in the United States, the Group undertook a series of transactions since late
2016 with X Financial being proposed as the listing entity(“Reorganization”):
As PRC laws and regulations prohibit and restrict foreign ownership of internet value-added businesses, the Company established a wholly-
owned foreign invested subsidiary in the PRC, Xiaoying (Beijing) Information Technology Co., Ltd (“Beijing WFOE”)on October 28, 2015. The
existing contractual agreements with the SPVs and SPVs’ shareholders held by Shenzhen Ying Zhong Tong were assigned to Beijing WFOE.
On October 19, 2016, Shenzhen Xiaoying Technology Co., Ltd. (“Shenzhen Xiaoying”) was incorporated in the PRC by the same
shareholders of the Company with identical shareholdings. In December 2016, Shenzhen Xiaoying acquired Shenzhen Ying Zhong Tong for nominal
consideration and Shenzhen Ying Zhong Tong became the wholly owned subsidiary of Shenzhen Xiaoying. As both Shenzhen Xiaoying and Shenzhen
Ying Zhong Tong were controlled by Mr. Tang at the time, the transaction was a reorganization under common control.
F-7
Table of Contents
X Financial, through its PRC subsidiary, Beijing WFOE, entered into a series of contractual arrangements with Shenzhen Xiaoying, Beijing
Ying Zhong Tong Rongxun Technology Service Co., Ltd (“Beijing Ying Zhong Tong”) in December 2017, and Shenzhen Tangren Financing
Guarantee Co., Ltd (“Shenzhen Tangren”) in December 2016 and the shareholders of these entities respectively. Shenzhen Xiaoying, Beijing Ying
Zhong Tong, Shenzhen Tangren and the SPVs are collectively referred to as “VIEs”. The series of contractual agreements included Shareholders’
Voting Rights Proxy Agreements, Spouse Consent Agreement, Exclusive Call Option Agreements, Exclusive Business Cooperation Agreements, and
Equity Pledge Agreements. The Group believed that these contractual agreements would enable Beijing WFOE to (1) have power to direct the
activities that most significantly affects the economic performance of the new VIEs and (2) receive the economic benefits of the VIEs that could be
significant to the new VIEs. Accordingly, the Group believes that Beijing WFOE is the primary beneficiary of the VIEs.
In conjunction with the Reorganization, the Group completed equity financing of RMB1 billion in June 2017. This round of equity financing
was initially conducted by increasing registered capital of Shenzhen Xiaoying by 9 existing and new investors. Subsequently, X Financial issued
additional shares to the affiliates of the same shareholders of this round of equity financing such that the shareholder ownership in X Financial
mirrored those in Shenzhen Xiaoying.
The Group considered the Reorganization as a reorganization of entities under common control. Accordingly, the accompanying financial
statements have been prepared using historical cost basis as if the Reorganization had occurred at the beginning of the first period presented.
During December 2017, Beijing WFOE acquired two subsidiaries from Shenzhen Xiaoying at cost. During February and March 2018, one of
the Group’s wholly owned subsidiaries Shenzhen Xiaoying Puhui Technology Co., Ltd (“Shenzhen Puhui”) acquired four subsidiaries from one of the
VIE entities Shenzhen Ying Zhong Tong at cost. During 2018, predominantly all of the SPVs under Shenzhen Xiaoying had been transferred to
Shenzhen Xiaoying Puhui Technology Co., Ltd. (“Shenzhen Puhui”). These transactions represented a reorganization of entities under common control
as they were already within the consolidated Group, with no impact to the consolidated financials.
During September 2018, the Group completed an initial public offering of 11,763,478 American depositary shares (“ADSs”) at an initial
offering price of US$9.50 which included the ADSs sold upon the exercise of the over-allotment option granted to the underwriters, representing
23,526,956 Class A ordinary shares.
On May 31, 2021, Shenzhen Xiaoying Microcredit Co., Ltd. (“Xiaoying Microcredit”) was incorporated in the PRC with online microcredit
business operating license by Shenzhen Xiaoying. Shenzhen Xiaoying had completed the capital contributions of RMB1 billion to Xiaoying
Microcredit by the end of November, 2021.
F-8
Table of Contents
As of December 31, 2021, the Company’s principal subsidiaries, VIEs and subsidiaries of the VIEs are as follows:
Date of
incorporation/
establishment
Place of
incorporation/
Percentage
of legal
establishment ownership
Principal activities
Wholly owned subsidiaries
YZT (HK) Limited
Xiaoying (Beijing) Information Technology Co., Ltd. (“Beijing WFOE”)
Shenzhen Xiaoying Puhui Technology Co., Ltd. (“Shenzhen Puhui”)
Shenzhen Xiaoying Information Technology Co., Ltd. (“Shenzhen Xiaoying
IT”)
VIEs
Shenzhen Xiaoying Technology Co., Ltd. (“Shenzhen Xiaoying”)
Beijing Ying Zhong Tong Rongxun Technology Service Co., Ltd. (“Beijing
Ying Zhong Tong”)
Shenzhen Tangren Financing Guarantee Co., Ltd. (“Shenzhen Tangren”)
Shenzhen Beier Asset Management Co., Ltd ("Shenzhen Beier")
Significant subsidiaries of the VIEs
Shenzhen Ying Zhong Tong Financial Information Service Co., Ltd.
(“Shenzhen Ying Zhong Tong”)
Shenzhen Ying Ai Gou Trading Co., Ltd. ("Shenzhen Ying Ai Gou")
Shenzhen Xiaoying Microcredit Co., Ltd. (“Xiaoying Microcredit”)
January 14, 2015
Hong Kong
October 28, 2015
Beijing
December 6, 2016
Shenzhen
November 28, 2016
Shenzhen
October 19, 2016
Shenzhen
March 27, 2015
December 16, 2016
July 1, 2018
Beijing
Shenzhen
Shenzhen
March 7, 2014
October 25, 2018
May 31,2021
Shenzhen
Shenzhen
Shenzhen
100 %
100 %
100 %
100 %
Investment holding
Technology development and
service, sale of products
Technology development and
service, sale of products
Technology development and
service, sale of products
Technology development and
service, sale of products
Technology development and
service, sale of products
Guarantee services
Capital management
100 %
100 %
100 %
100 %
Technology development and
service, sale of products
E-commerce services
Microcredit services
100 %
100 %
100 %
2. Summary of significant accounting policies
(a)
Basis of Presentation and Consolidation
The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the
United States of America (“U.S. GAAP”).
(b)
Principles of Consolidation
Variable interest entity
The consolidated financial statements include the financial statements of the Company, its wholly-owned subsidiaries, and consolidated VIEs.
All intercompany transactions and balances have been eliminated.
The Company, through its wholly-owned foreign invested subsidiary, Beijing WFOE in the PRC, entered into a series of contractual
arrangements (“VIE agreements”) with Shenzhen Xiaoying, Beijing Ying Zhong Tong, Shenzhen Tangren, and Shenzhen Beier (collectively known as
“the VIEs”) and their respective shareholders that enable the Company to (1) have power to direct the activities that most significantly affects the
economic performance of the VIEs, and (2) receive the economic benefits of the VIEs that could be significant to the VIEs.
As PRC laws and regulations prohibit and restrict foreign ownership of internet value-added businesses, the Company operates its business,
primarily through the VIEs and the subsidiaries of the VIEs.
F-9
Table of Contents
Despite the lack of technical majority ownership, there exists a parent-subsidiary relationship between Beijing WFOE and the VIEs through
the aforementioned agreements with the nominee shareholders of the VIEs. The following is a summary of the VIE agreements:
(1) Shareholders’ Voting Rights Proxy Agreement:
Pursuant to the voting rights proxy agreements signed between the VIEs’ nominee shareholders and Beijing WFOE, each nominee
shareholder irrevocably appointed Beijing WFOE as its attorney-in-fact to exercise on each shareholder’s behalf 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 the voting rights and the right to appoint
directors and executive officers of the VIEs). The nominee shareholders cannot revoke the authorization and entrustment as long as the nominee
shareholders remain a shareholder of the VIEs. For the arrangements among Beijing WFOE, each of the VIEs other than Shenzhen Beier, and their
shareholders, the power of attorney will remain in force for ten years. Unless a thirty-day notice is given by Beijing WFOE, this agreement shall be
automatically renewed for another one year upon its expiration.The arrangement among Beijing WFOE, Shenzhen Beier and its shareholder does not
specify its effective term.
(2) Spouse Consent Agreement
Under the spouse consent agreement, each signing spouse acknowledges that the shares of the VIEs held by the relevant shareholder of the
VIEs are the personal assets of such shareholder and not jointly owned by the couple. Each signing spouse also unconditionally and irrevocably gives
up his or her rights to such shares and any associated economic rights or interests to which he or she may be entitled pursuant to applicable laws and
undertakes not to make any assertion of rights to such shares and the underlying assets. Each signing spouse agrees that he or she will not carry out in
any circumstances any conduct that are contradictory to the contractual arrangements and this consent agreement.
(3) Executive Call Option Agreement:
Pursuant to the exclusive call option agreement entered into between the VIEs’ nominee shareholders and Beijing WFOE, the nominee
shareholders irrevocably granted Beijing WFOE a call option to request the nominee shareholders to transfer or sell any part or all of its equity
interests in the VIEs, to Beijing WFOE, or their designees. The purchase price of the equity interests in the VIEs shall be equal to the minimum price
required by PRC law. Without Beijing WFOE’s prior written consent, the VIEs and its nominee shareholders shall not amend its articles of association,
increase or decrease the registered capital, sell or otherwise dispose of its assets or beneficial interest, issue any additional equity or right to receive
equity, provide any loans, distribute dividends in any form, etc. For the agreements among Beijing WFOE, each of the VIEs other than Shenzhen
Beier, and their shareholders, these arrangements will remain effective for ten years. Unless notified by Beijing WFOE, the parties to these agreements
shall extend the term of these agreements for another ten years. The agreement among Beijing WFOE, Shenzhen Beier and its shareholder does not
specify its effective term.
(4) Exclusive Business Cooperation Agreement:
Pursuant to the exclusive business cooperation agreement entered into by Beijing WFOE and the VIEs, Beijing WFOE provides exclusive
technical support and consulting services in return for fees based on 100% of the VIE’s total consolidated profit, which is adjustable at the sole
discretion of Beijing WFOE. Without Beijing WFOE’s consent, the VIEs cannot procure services from any third party or enter into similar service
arrangements with any other third party, except for those from Beijing WFOE. For the agreements between Beijing WFOE and each of the VIEs other
than Shenzhen Beier, unless Beijing WFOE terminates these agreements in advance, these agreements will remain effective for ten years. Unless
agreed by both parties in writing, this agreement shall be automatically renewed for another ten years upon its expiration. The agreement between
Beijing WFOE and Shenzhen Beier will remain effective permanently, unless early terminated by Beijing WFOE in writing pursuant to this agreement
or otherwise required by PRC laws.
F-10
Table of Contents
(5) Equity Pledge Agreement
Each nominee shareholder of the VIEs has also entered into an equity pledge agreement with Beijing WFOE, pursuant to which each
shareholder pledged his/her interest in Beijing WFOE to guarantee the performance of obligations of Beijing WFOE and its shareholders under the
exclusive business cooperation agreement, exclusive call option agreement, and shareholders’ voting rights proxy agreement. If the VIEs or any of the
nominee shareholder breaches its contractual obligations, Beijing WFOE will be entitled to certain rights and interests regarding the pledged equity
interests including the right to dispose the pledged equity interests. None of the nominee shareholders shall, without the prior written consent of
Beijing WFOE, assign or transfer to any third party, 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. This agreement is not terminated until all of the agreements under the shareholders’ voting rights
proxy agreement, exclusive call option agreement and the exclusive business cooperation agreement are fully performed.
The irrevocable power of attorney has conveyed all shareholder rights held by the VIEs’ shareholders to Beijing WFOE or any person
designated by Beijing WFOE, including the right to appoint executive directors of the VIEs to conduct day to day management of the VIEs’
businesses, and to approve significant transactions of the VIEs. In addition, the exclusive call option agreement provides Beijing WFOE with a
substantive kick-out right of the VIEs shareholders through an exclusive option to purchase all or any part of the shareholders’ equity interest in the
VIEs. In addition, through the exclusive business cooperation agreement, Beijing WFOE demonstrates its ability and intention to continue to exercise
the ability to absorb substantially all of the profits and all of the expected losses of the VIEs. The equity pledge agreements further secure the
obligations of the shareholders of the VIEs under the above agreements.
Based on these contractual arrangements, the Company consolidates the VIEs in accordance with SEC Regulation S-X Rule 3A-02 and
Accounting Standards Codification (“ASC”) topic 810 (“ASC 810”), Consolidation.
The Company believes that the contractual arrangements with the VIEs are in compliance with PRC law and are legally enforceable.
However, uncertainties in the PRC legal system could limit the Company’s ability to enforce the contractual arrangements. If the legal structure and
contractual arrangements were found to be in violation of PRC laws and regulations, the PRC government could:
● revoke the Group’s and operating licenses;
● levy fines on the Group;
● confiscate any of the Group’s income that they deem to be obtained through illegal operations;
● shut down the Group’s services;
● discontinue or restrict the Group’s operations in China;
● impose conditions or requirements with which the Group may not be able to comply;
● require the Group to change corporate structure and contractual arrangements;
● restrict or prohibit the use of the proceeds from overseas offerings to finance the Group’s PRC consolidated VIEs’ business and
operations; and
● take other regulatory or enforcement actions that could be harmful to the Group’s business.
F-11
Table of Contents
Consolidated Trusts
As part of the Group’s efforts to develop new product offerings for investors and institutional funding partners, the Group established a
business relationship with certain trusts which were administered by third-party trust companies. The trusts were set up to invest solely in the loans
facilitated by the Group on its platform to provide returns to the beneficiaries of the trusts through interest payments made by the borrowers. Both
direct model and intermediary model are adopted for these trusts. Under direct model, loans are originated from trusts to borrowers while under
intermediary model, the Group typically provides credit to the borrowers through an intermediary first and then transfers the loans to the trusts, which
issue beneficial interests to the investors and institutional funding partners. The Group determines to consolidate these trusts as the Group is the
primary beneficiary, due to the following reasons: 1) the Group has the power to direct the operating activities of the trusts; 2) the Group absorbs or
enjoys the potential residual losses or returns of these trusts. Under intermediary model, the transfer of loans to the Consolidated Trusts are not eligible
for sale accounting because the trust is consolidated and the loan transfer is considered an intercompany transaction. The Group further elected to
apply fair value option to the loans (at the date of origination) and liabilities to investors and institutional funding partners to emphasize the relevancy
of the accounting information of its consolidated financial statements. That is, the loans are continued to be recorded on the Group’s consolidated
balance sheets as loans held for investment under “Loans at fair value” and the proceeds received from the investors and institutional funding partners
are recorded as trust liabilities under “Payable to investors at fair value”.
During 2020 and 2021, certain of the subsidiaries of the Group funded RMB64,375,517 and RMB74,051,199 to loan products facilitated on
the Group’s platform through third-party trust companies. The trusts are consolidated by the Group and the underlying loans are recorded on the
Group’s consolidated balance sheets as loans held for investment under “Loans at fair value”.
Consolidated Partnerships
In 2021, the Group further developed a new business model with certain trust partners. The Group and certain trusts jointly established
several limited partnership enterprises, or LPs, to invest solely in the loans facilitated by the Group on its platform to provide returns to partners of the
LPs through interest payments made by the borrowers. Intermediary model is adopted for the Consolidated Partnerships, the Group typically provides
credit to the borrowers through an intermediary first and then transfers the loans to the LPs. The Group determines to consolidate these LPs as the
Group is the primary beneficiary, due to the following reasons: 1) the Group has the power to direct the operating activities of the LPs; 2) the Group
absorbs or enjoys the potential residual losses or returns of these LPs. The transfer of loans to the Consolidated Partnerships are not eligible for sale
accounting because the LP is consolidated and the loan transfer is considered an intercompany transaction. The Group further apply amortized cost to
the loans and liabilities to trust partners in its consolidated financial statements. That is, the loans are recorded on the Group’s consolidated balance
sheets under “Loans receivables from Xiaoying Credit Loans and Xiaoying Revolving Loans” and the proceeds received from the trust partners are
recorded as LP liabilities under “Payable to institutional funding partners”.
During 2021,one of the subsidiaries of the Group funded RMB141,326,511 to loan products facilitated on the Group’s platform through the
limited partnership enterprises. The LPs are consolidated by the Group and the underlying loans are recorded on the Group’s consolidated balance
sheets under “Loans at receivables from Xiaoying Credit Loans and Xiaoying Revolving Loans”.
F-12
Table of Contents
The following financial statement amounts and balances of the Consolidated Trusts and Partnerships are included in the accompanying
consolidated financial statements after elimination of intercompany transactions and balances:
Assets:
Restricted cash
Accounts receivable and contract assets, net
Loans receivable from Xiaoying Credit Loans and Xiaoying Revolving loans, net
Loans at fair value
Prepaid expenses and other current assets
Total assets
Liabilities:
Payable to investors at fair value
Payable to institutional funding partners
Other tax payable
Accrued expenses and other current liabilities
Total liabilities
Net revenue
Net income (loss)
Net cash provided by (used in) operating activities
Net cash provided by (used in) investing activities
Net cash provided by (used in) financing activities
As of
December 31,
2020
RMB
476,854,616
—
—
1,585,731,888
11,359,212
2,073,945,716
1,914,183,650
—
3,357,513
74,596,014
1,992,137,177
Year ended
December 31,
2020
RMB
331,300,043
(19,795,471)
As of December 31,
2021
RMB
2021
US$
212,812,257
8,335,518
1,622,699,799
389,679,352
7,889,836
2,241,416,762
462,714,400
1,466,068,260
5,631,031
3,259,339
1,937,673,030
33,394,887
1,308,025
254,637,008
61,149,194
1,238,087
351,727,201
72,609,987
230,058,102
883,632
511,460
304,063,181
Year ended December 31,
2021
2021
US$
RMB
285,859,862
105,610,429
44,857,650
16,572,581
Year ended
December 31,
2019
RMB
340,613,941
227,051,351
Year ended
December 31,
2019
RMB
123,521,027
(2,684,753,233)
3,006,349,475
Year ended
December 31,
2020
RMB
(20,179,042)
1,139,220,723
(1,092,165,825)
Year ended December 31,
2021
2021
US$
RMB
155,272,678
(433,914,047)
14,599,010
24,365,672
(68,090,582)
2,290,904
F-13
Table of Contents
The following financial statement amounts and balances of the VIEs and Consolidated Trusts and Partnerships were included in the
accompanying consolidated financial statements after elimination of intercompany transactions and balances:
Assets:
Cash and cash equivalents
Restricted cash
Accounts receivable and contract assets, net
Financial investments
Loans receivable from Xiaoying Credit Loans and Xiaoying Revolving Loans, net
Loan receivable from Xiaoying Housing Loans, net
Loans at fair value
Deposits to institutional cooperators, net
Prepaid expenses and other current assets, net
Financial guarantee derivative
Deferred tax assets, net
Long-term investments
Property and equipment, net
Intangible assets, net
Other non-current assets
Total assets
Liabilities:
Payable to investors at fair value
Payable to institutional funding partners
Financial guarantee derivative
Short-term bank borrowings
Accrued payroll and welfare
Other tax payable
Income tax payable
Accrued expenses and other current liabilities
Other non-current liabilities
Total liabilities
As of
December 31,
2020
RMB
170,390,218
484,877,600
—
6,000,000
—
47,490,437
1,585,731,888
565,372
66,235,998
297,928,066
287,606,896
292,115,200
6,220,398
30,431,482
6,914,006
3,282,507,561
1,914,183,650
—
130,442,090
18,700,000
10,017,308
37,103,700
48,349,593
230,564,165
1,739,541
2,391,100,047
As of December 31,
2021
RMB
2021
US$
212,766,581
220,812,257
67,917,846
—
2,458,221,481
12,083,317
389,679,352
2,702,000
104,088,188
11,816,799
128,554,651
556,571,016
2,673,157
29,554,089
4,850,671
4,202,291,405
462,714,400
1,466,068,260
565,953,269
—
8,959,248
100,333,129
8,189,833
85,485,440
—
2,697,703,579
33,387,719
34,650,262
10,657,792
—
385,748,593
1,896,136
61,149,194
424,003
16,333,708
1,854,314
20,173,030
87,338,138
419,477
4,637,681
761,176
659,431,223
72,609,987
230,058,102
88,810,418
—
1,405,902
15,744,457
1,285,164
13,414,531
—
423,328,561
Net revenue
Net income (loss)
Net cash provided by (used in) operating activities
Net cash provided by (used in) investing activities
Net cash provided by (used in) financing activities
Year ended
December 31,
2019
RMB
2,650,594,409
(14,609,225)
Year ended
December 31,
2020
RMB
754,755,127
(180,518,614)
Year ended December 31,
2021
RMB
1,388,255,858
695,892,749
2021
US$
217,847,638
109,200,756
Year ended
December 31,
2019
RMB
442,501,953
(2,706,673,269)
2,808,349,475
Year ended
December 31,
2020
RMB
(190,951,068)
1,133,193,197
(1,073,465,825)
Year ended December 31,
2021
2021
US$
RMB
485,090,529
(702,678,519)
(4,100,990)
76,121,289
(110,265,593)
(643,535)
The VIEs and Consolidated Trusts and Partnerships contributed 86%, 34% and 38% of the Group’s consolidated revenue for the years ended
December 31, 2019, 2020 and 2021 respectively. As of December 31, 2020 and 2021, the VIEs and Consolidated Trusts and Partnerships accounted
for an aggregate of 44% and 57% of the consolidated total assets, and 54% and 80% of the consolidated total liabilities.
F-14
Table of Contents
There are no terms in any arrangements, considering both explicit arrangements and implicit variable interests that require the Company or its
subsidiaries to provide financial support to the VIEs and Consolidated Trusts and Partnerships. However, if the VIEs were ever to need financial
support, the Group may, at its option and subject to statutory limits and restrictions, provide financial support to its VIEs through loans to the
shareholders of the VIEs or entrustment loans to the VIEs.
The Group believes that there are no assets held in the VIEs that can be used only to settle obligations of the VIEs, except for registered
capital and the PRC statutory reserves. As the VIEs are incorporated as limited liability companies under the PRC Company Law, creditors of the VIEs
do not have recourse to the general credit of the Company for any of the liabilities of the VIEs. Relevant PRC laws and regulations restrict the VIEs
from transferring a portion of their net assets, equivalent to the balance of its statutory reserve and its share capital, to the Company in the form of
loans and advances or cash dividends. Please refer to Note 17 for disclosure of restricted net assets.
(c)
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and the disclosures of contingent assets and liabilities at the date of the financial statements and the
reported amounts of revenue and expense during the reporting period. Actual results could differ materially from such estimates. Significant
accounting estimates reflected in the Group’s consolidated financial statements include share-based compensation, allowance for credit losses of
accounts receivables and contract assets, deposits to institutional cooperators, prepaid expenses and other current assets, loans receivables from
Xiaoying Housing Loans and loans receivables from Xiaoying Credit Loans and Xiaoying Revolving Loans, allocation of considerations under
revenue arrangements with various performance obligations, variable considerations of revenue recognition, valuation allowance for deferred tax
assets, unrecognized tax benefits, the indefinite reinvestment assertion, fair value of guarantee liabilities and financial guarantee derivatives, loans at
fair value and payable to investors at fair value, impairment of long-term investments and financial investments.
(d)
Revenue recognition
The Group provides services as an online marketplace connecting borrowers and investors or institutional funding partners primarily through
the use of two business models. The major products offered by the Group include Xiaoying Credit Loan and Xiaoying Revolving Loan. Xiaoying
Credit Loan mainly consists of Xiaoying Card Loan and Xiaoying Preferred Loan products. The major product under the category Xiaoying Revolving
Loan is Yaoqianhua which was previously named as Xiaoying Wallet. The Group ceased facilitation of Xiaoying Preferred Loan in 2019, and ceased
facilitation of Xiaoying Revolving Loan in 2020.Revenue is the transaction price the Group expects to be entitled to in exchange for the promised
services in a contract in the ordinary course of the Group’s activities and is recorded net of value-added tax (“VAT”). The services to be accounted for
include loan facilitation service, post-origination service (e.g. cash processing and collection services) and guarantee service.
The first business model (“Direct Model”) involves the Group matching borrowers with investors or institutional funding partners who
directly funds the credit drawdowns to the borrowers. The Group has determined that it is not the legal lender or borrower in the loan origination and
repayment process, but acting as an intermediary to bring the lender and the borrower together. Therefore, the Group does not record the loans
receivable or payable arising from the loans facilitated between the investors or institutional funding partners and borrowers on its platform.
The second business model (“Intermediary Model”) involves the Group initially providing credit to borrowers using its own funds through an
intermediary and subsequently selling the loans including all of the creditor rights in the loans to external investors or institutional funding partners on
its platform within a short period of time.
Loans facilitated by the Group typically have a term of less than 1 year. For each loan facilitated either through the Direct Model or
Intermediary Model, the Group charges a service fee from the borrower indirectly through one of the Group’s VIEs, Shenzhen Tangren or external
financing guarantee company or from institutional funding partner directly. No application fee is charged to borrowers or investors or institutional
funding partners. For the loans the Group is entitled to the full service fee regardless of whether the borrowers choose to early repay or not, the Group
has the unconditional right to the consideration. For the loans facilitated with borrowers who have the option of early repayment and upon termination
they do not have the obligation to pay the remaining monthly service fees, the Group’s right to consideration for the service fees of facilitation service
is conditional on whether or not the borrowers repay in advance. At contract inception, the Group determines that the collection of service fees is
probable based on historical experiences as well as the credit due diligence performed on each borrower prior to loan origination.
F-15
Table of Contents
In order to be more competitive by providing a certain level of assurance to the investors or institutional funding partners, for certain loans
facilitated by the Group’s platform, either borrowers or institutional funding partners are required to directly sign a credit insurance agreement with
ZhongAn Online P&C Insurance Co., Ltd (“ZhongAn”) to protect investors or institutional funding partners against the risk of borrower default.
In 2016 and January to September 2017, substantially all of the loans facilitated by the Group’s platform are insured by ZhongAn. The Group
did not have direct contractual obligation to the investors for defaulted principal and interest during that period. The Group entered into a strategic
cooperation agreement with ZhongAn pursuant to which ZhongAn provided insurance to the investors for the loans facilitated by the Group and
reimbursed the loan principal and interest to the investor upon borrower’s default. During the aforementioned period, in order to maintain stable
business relationship with ZhongAn, although not contractually obligated by the agreement with ZhongAn, the Group at its sole discretion paid
ZhongAn for substantially all the defaulted loan principal and interest but have not been subsequently collected. The Group also provides direct
guarantee to investors on certain loan products via its consolidated entities. The Group is compensated for this reimbursement from the contractual
service fees collected from the borrowers. Given that the Group is at its sole discretion responsible for the uncollected claims paid, the Group
effectively took on substantially all of the losses incurred by the investors due to borrowers’ default, the Group deemed the guarantee as a guarantee
service to the investors and recognizes a stand ready obligation for its guarantee exposure in accordance with ASC Topic 460, Guarantees.
From September 2017, the Group revised the arrangement with ZhongAn on substantially all of the Xiaoying Credit Loans Starting from
2020, the Group enters into a series of arrangements with various external financing guarantee companies, which is similar to the revised arrangement
with ZhongAn.
For certain Xiaoying Card Loans newly facilitated since September 2017 and certain Xiaoying Revolving Loans that are repaid in
installments by borrowers, borrowers are required to enter into a guarantee agreement with the Group and an insurance/guarantee agreement with
ZhongAn/financing guarantee companies, to pay the guarantee fee and insurance fee to the respective party at a pre-agreed rate. For certain loans that
were newly facilitated in 2020, borrowers are required to enter into a guarantee agreement with the Group to pay the guarantee fee at a pre-agreed rate
while at the same time, it is the institutional investors who enter into an insurance agreement with ZhongAn and the Group voluntarily pay the
insurance fee to ZhongAn. The obligation/ credit risk/ exposure of the Group and Zhongan to compensate the defaulted loans has no change.
Upon borrower’s default, ZhongAn/financing guarantee companies reimburse the full loan principal and interest to the investors or
institutional funding partner first, and has the right to recourse to both the borrower and the Group, and the Group’s contractual obligation is at any
time it limited to a cap (the “Cap”) which is the lower of (1) total amount of guarantee fees contractually required to be collected from the borrowers
for such loans facilitated during the current period on an aggregated basis, and (2) a certain percentage of the total principal of the loans facilitated
stated in an annualized manner, as pre-agreed with ZhongAn/financing guarantee companies (the “Rate”). The contractual guarantee fees in (1) is not
influenced by default or early repayment of borrowers. The Group has no obligation or intention to compensate ZhongAn/financing guarantee
companies for any losses in excess of the contractual obligation. The Rate will be negotiated prospectively at each quarter between the two parties
based on the expected default rate. The actual loss in excess of the Cap is absorbed by ZhongAn/financing guarantee companies. ZhongAn/financing
guarantee companies ultimately bear substantially all of the credit risk. The Group’s exposure in this arrangement is limited to the default and
prepayment risk in relation to the guarantee fee when the Group cannot collect the guarantee fee under the agreement with the borrower on an
individual basis but is still obligated to compensate ZhongAn/financing guarantee companies up to the Cap on a pool basis. The Group evaluated the
guarantee arrangement pursuant to ASC Topic 815, and concluded that the arrangement meets the definition of a derivative and that it is not eligible
for the guarantee scope exception. Therefore, the guarantee is recognized as a derivative liability/asset at fair value and is not accounted for pursuant to
ASC Topic 460 or 450. See accounting policy for financial guarantee derivative.
F-16
Table of Contents
For other Xiaoying Preferred Loan products newly facilitated from September 2017, the borrowers are required to enter into an insurance
agreement with ZhongAn only at a rate set by ZhongAn. No separate guarantee agreement is signed by the borrower with the Group and no additional
guarantee fee is charged from the borrower. Upon borrower’s default, ZhongAn reimburses the full loan principal and interest to the investor or
institutional funding partner. The Group collects the defaulted amount from borrowers on behalf of ZhongAn but has no obligation and it is no longer
the Group’s intention to compensate ZhongAn for the defaulted loan principal and interest not subsequently collected in the future. ZhongAn is fully
liable for all the borrower’s credit risk associated with the defaulted principal and interest of the loan. Therefore, for these loans, the Group provides
loan facilitation and post-origination services but no longer provides guarantee service. The Group does not record guarantee liabilities associated with
these loans or corresponding account receivables from guarantee services. Under the Direct Model, the total transaction price is directly allocated to
the facilitation service and post-origination service. Under the Intermediary—non-trust model, upon transfer of the loan to third party investors, the
Group recognize the difference between (1) the proceeds received from the investors and accounts receivable and (2) the carrying value of the loan as a
gain of sale, which effectively represents the service fees earned from facilitation of the loans under Intermediary Model, as the “Loan facilitation
service—Intermediary Model” in the consolidated statements of comprehensive income (loss). The Group ceased facilitation of Xiaoying Preferred
Loan in October 2019.
Direct Model
The Group has early adopted ASU 2014-09, Revenue from Contracts with Customers (Topic 606) and all subsequent ASUs that modified
ASC 606 on January 1, 2017 and has elected to apply it retrospectively for the year ended December 31, 2016.
The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers
in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve that core
principle, the Group applies the following steps:
● Step 1: Identify the contract (s) with a customer
● Step 2: Identify the performance obligations in the contract
● Step 3: Determine the transaction price
● Step 4: Allocate the transaction price to the performance obligations in the contract
● Step 5: Recognize revenue when (or as) the entity satisfies a performance obligation
The Group determines its customers to be both the borrowers and the investors or institutional funding partners. The Group considers the loan
facilitation service, guarantee service and post-origination service as three separate services of which the guarantee service is accounted for in
accordance with ASC Topic 460, Guarantees. While the post-origination service is within the scope of ASC Topic 860, the ASC Topic 606 revenue
recognition model is applied due to the lack of definitive guidance in ASC Topic 860. The loan facilitation service and post-origination service are two
separate performance obligations under ASC 606, as these two deliverables are distinct in that customers can benefit from each service on its own and
the Group’s promises to deliver the services are separately identifiable from each other in the contract.
The Group determines the total transaction price to be the service fees chargeable from the borrowers indirectly through one of the VIEs,
Shenzhen Tangren or external financing guarantee companies or from certain institutional funding partners directly, including the guarantee fees
charged by the Group under the separate guarantee agreement with the borrowers for certain type of Xiaoying Card Loans that are newly facilitated
since September 2017. The Group’s transaction price includes variable consideration in the form of default risk of the borrowers for the service fees
collected from certain institutional funding partners or through external financing guarantee companies and prepayment risk of the borrowers. The
Group reflects, in the transaction price, the default risk and the prepayment risk. The Group estimates variable consideration for these contracts using
the expected value approach on the basis of historical information and current trends of the default and prepayment percentage of the borrowers. The
transaction price is allocated amongst the guarantee service, if any, and two performance obligations.
F-17
Table of Contents
The Group first allocates the transaction price to the guarantee liabilities or financial guarantee, if any, that is recognized in accordance with
either (1) ASC Topic 460, Guarantees which requires the guarantee to be measured initially at fair value based on the stand-ready obligation or (2)
ASC Topic 815, which requires the guarantee to be measured initially and subsequently at fair value. Then the remaining considerations are allocated
to the loan facilitation services and post-origination services using their relative standalone selling prices consistent with the guidance in ASC 606. For
certain loans facilitated since September 2017, the total transaction price is allocated to facilitation service and post-origination service only. The
Group does not have observable standalone selling price information for the loan facilitation services or post-origination services because it does not
provide loan facilitation services or post-origination services on a standalone basis. There is no direct observable standalone selling price for similar
services in the market that is reasonably available to the Group. As a result, the estimation of standalone selling price involves significant judgment.
The Group uses an expected cost plus margin approach to estimate the standalone selling prices of loan facilitation services and post origination
services as the basis of revenue allocation. In estimating its standalone selling price for the loan facilitation services and post-origination services, the
Group considers the cost incurred to deliver such services, profit margin for similar arrangements, customer demand, effect of competitors on the
Group’s services, and other market factors.
For each type of service, the Group recognizes revenue when (or as) the entity satisfies the service/performance obligation by transferring a
promised good or service (that is, an asset) to a customer. Revenues from loan facilitation are recognized at the time a loan is originated between the
borrower and the investor or institutional funding partner and the principal loan balance is transferred to the borrower, at which time the facilitation
service is considered completed. Revenues from post-origination services are recognized on a straight-line basis over the term of the underlying loans
as the services are provided. Revenues from guarantee services are recognized at the expiry of the guarantee term when there had been no defaults.
Except for certain loan products offered since September 2017, the collection of service fees is not conditional on the provision of subsequent post-
origination or guarantee services.
Intermediary Model
Starting from 2018, the Group cooperate with several microcredit companies who use their own funds to provide credit to borrowers first; the
Group provide facilitation and post-origination services for these loans and receive service fee from borrowers. These microcredit companies transfer
their rights as creditors shortly to SPVs controlled by the Group at the price of the carrying amount of the outstanding loan principal balance and
accumulated accrued interest not paid by the borrowers as of the day on which the creditor’s rights are legally transferred to SPVs. The SPVs usually
further transfer their creditor’s rights to third party investors or institutional funding partners in a short period at the price of the carrying amount of the
outstanding loan principal balance and the accumulated accrued interest not paid by the borrowers as of the day on which the creditor’s rights are
legally transferred to investors or institutional funding partners. The Group accounts the relevant interest and service fees received from the borrowers
as the financing income and the fee charged by the microcredit companies which is proportionate to the loans facilitated as the origination and
servicing cost in its consolidated financial statements.
Under the Intermediary business model, the Group provides the funds that are loaned to borrowers and agrees to take predominantly all the
risk arising from potential breaches of agreement by the borrowers receiving financing.
The Group provides financing to borrowers on their platform and the loans are initially recorded on the consolidated balance sheet as loans
held for sale or loans receivable from Xiaoying credit loans and Xiaoying revolving loans. These loans carry the same insurance/ guarantee agreement
with external financial institutional co-operators as loans facilitated under the Direct Model, which is attached to the loan and transfers along with the
loan. The Group also charges service fees in the same manner as loans facilitated under the Direct Model.
F-18
Table of Contents
Intermediary Model—Non-Trust Model
The transfer of loans (including the creditor rights) to external investors or institutional funding partners not involving trust structure is
accounted for as a true sale under ASC 860 (see accounting policy under “Sales and Transfers of Financial Instruments”). Upon sale, the Group
records a guarantee liability in accordance with ASC 460 in relation to the on-going guarantee services to be provided to the investors or institutional
funding partners, consistent with the loans facilitated under the Direct Model. The Group continues to provide post-origination services to the loans
subsequent to their sale in the same manner as the Group services the loans facilitated under the Direct Model. No additional service fee is charged.
Similar to the loans facilitated under the Direct Model, the Group charges and collects service fees from the borrowers or institutional funding partners
in relation to the transferred loans on a monthly basis. The difference between (1) the proceeds received from the investors or institutional funding
partners and accounts receivable and contract assets (see accounting policy on “Accounts receivable and contract assets and allowance for
uncollectible accounts receivable and contract assets”) and (2) the sum of the carrying value of the loans and the fair value of the guarantee liability is
recognized as a gain of sale, which effectively represents the service fees earned from facilitation of the loans under Intermediary Model, as the “Loan
facilitation service—Intermediary Model” in the consolidated statements of comprehensive income (loss). For certain loans facilitated since September
2017, given the Group no longer provides guarantee services and the Group does not record any guarantee liabilities associated with those loans or
related account receivable from guarantee services, the gain of sale is the difference between (1) the proceeds received from the investors or
institutional funding partners and accounts receivable and contract assets and (2) the carrying value of the loan. The subsequent accounting for post-
origination service and guarantee services is consistent with that for loans facilitated under the Direct Model.
Intermediary Model—Trust Model
The transfer of loans to institutional funding partners under the Intermediary Model often involves transferring the loans to a trust formed and
operated by unrelated third party trust companies. The Group consolidates such trusts under the VIE model (see accounting policy on “Consolidated
Trusts”). The Group also elects to apply fair value option to these loans at the date of origination. Loans transferred to Consolidated Trusts do not
qualify for sales accounting as the transfer is to a consolidated subsidiary. The loans are recorded as “Loans at fair value” in the consolidated balance
sheets. The Group recognizes as revenue under “financing income” the service fees and interests charged to the borrowers over the lifetime of the
loans using effective interest method.
Intermediary Model—Partnership Model
The transfer of loans to institutional funding partners under the Intermediary Model involves transferring the loans to a limited partnership
enterprise, or LP, formed and operated by unrelated third-party trust companies and the Group. The Group consolidates such partnerships under the
VIE model (see accounting policy on “Consolidated Partnerships”). The Group also elects to measure these loans at amortized cost at the time of
origination. Loans transferred to Consolidated Partnerships do not qualify for sales accounting as the transfer is to a consolidated subsidiary. The loans
are recorded as “Loans receivables from Xiaoying Credit Loans and Xiaoying Revolving Loans” in the consolidated balance sheets. The Group
recognizes as revenue under “financing income” the service fees and interests charged to the borrowers over the lifetime of the loans using effective
interest method.
The online Intermediary Model ceased in April 2017 and the offline Intermediary Model with funding from banking financial institution
partners ceased in February 2018 to comply with the promulgated regulatory requirements. The Group continues the operations through the offline
Intermediary Model with funding from other partners to the extent permitted under applicable laws and regulations.
F-19
Table of Contents
Disaggregation of revenues
All of the Group’s revenue for the years ended December 31, 2019, 2020 and 2021 were generated from the PRC. As the remaining duration
of the Group’s performance obligations of the contracts is one year or less, the Group elects to apply the exemption of disclosing the aggregate amount
of transaction price allocated to the performance obligations at the end of 31 December, 2019, 2020 and 2021, The following table illustrates the
disaggregation of revenue by product the Group offered in 2019, 2020 and 2021:
2019
Major products
Xiaoying Credit Loan
Xiaoying Revolving Loan
Xiaoying Housing Loan
Internet Channel(1)
Other loan products
Other service(2)
Total
2020
Major products
Xiaoying Credit Loan
Xiaoying Revolving Loan
Xiaoying Housing Loan
Internet Channel(1)
Other loan products
Other service(2)
Total
2021
Major products
Xiaoying Credit Loan
Xiaoying Revolving Loan
Other loan products
Other service(2)
Total
Loan
facilitation
service-Direct
Model
(RMB)
Loan
facilitation
service-
Intermediary
Model
(RMB)
Post-origination
service
(RMB)
Financing
income
(RMB)
Other
revenue
(RMB)
1,834,813,952
63,667,334
578,598
86,733,843
209,616
—
223,668,549
13,174,930
88,225
1,703,032
232,318
—
314,767,947
8,163,362
132,382
7,568,757
62,764
—
1,986,003,343
238,867,054
330,695,212
396,039,771
12,361,021
—
—
—
—
408,400,792
71,024,093
9,069,408
264,644
1,890,227
10,403
41,824,819
124,083,594
Loan
facilitation
service-Direct
Model
(RMB)
1,190,088,566
76,444,207
—
—
—
—
1,266,532,773
Loan
facilitation
service-Direct
Model
(RMB)
2,545,431,636
—
—
—
2,545,431,636
Loan
facilitation
service-
Intermediary
Model
(RMB)
19,755,482
21,571,881
—
45,449
—
—
41,372,812
Loan
facilitation
service-
Intermediary
Model
(RMB)
Post-origination
service
(RMB)
Financing
income
(RMB)
Other
revenue
(RMB)
176,229,908
26,000,468
—
1,611,453
—
—
203,841,829
538,869,175
73,991,011
—
3,291
—
—
612,863,477
39,537,661
597,911
172,960
11
226,720
27,811,304
68,346,567
Post-origination
service
(RMB)
Financing
income
(RMB)
Other
revenue
(RMB)
161,313
—
—
—
161,313
312,373,187
3,216,931
—
—
315,590,118
644,009,587
27,891,908
—
—
671,901,495
31,877,690
537,311
130,768
60,834,774
93,380,543
Total
(RMB)
2,840,314,312
106,436,055
1,063,849
97,895,859
515,101
41,824,819
3,088,049,995
Total
(RMB)
1,964,480,792
198,605,478
172,960
1,660,204
226,720
27,811,304
2,192,957,458
Total
(RMB)
3,533,853,413
31,646,150
130,768
60,834,774
3,626,465,105
F-20
Table of Contents
2021
Major products
Xiaoying Credit Loan
Xiaoying Revolving Loan
Other loan products
Other services(2)
Total
Loan
facilitation
service-Direct
Model
(US$)
Loan
facilitation
service-
Intermediary
Model
(US$)
399,433,769
25,314
—
—
—
—
—
—
Post-origination
service
(US$)
Financing
income
(US$)
Other
revenue
(US$)
Total
(US$)
49,018,169
504,807
101,059,157
4,376,849
—
—
—
—
5,002,305
84,316
20,520
9,546,304
14,653,445
554,538,714
4,965,972
20,520
9,546,304
569,071,510
399,433,769
25,314
49,522,976
105,436,006
(1)
Represents loans facilitated to borrowers referred by other platforms. The Group ceased to facilitate loans for other platforms in
2020.
(2)
Primarily consists of penalty fees for loan prepayment and late payment, commission fees from Xiaoying Online Mall, referral
service fees for introducing borrowers to other platforms and technology service fees received for providing assistant technology development
services.
Contract balances
The Group did not enter into contracts with customers that were greater than one year for substantially all products for the years ended
December 31, 2019, 2020 and 2021. The Group historically did not record any contract liabilities for both 2020 and 2021 and did not record any
contract asset prior to September 2017. For the loans the Group is entitled to the full service fee regardless of whether the borrowers choose to early
repay or not, the Group has the unconditional right to the consideration and an accounts receivable is recorded. For the loans facilitated with borrowers
who have the option of early repayment and upon termination they do not have the obligation to pay the remaining monthly service fees, the Group’s
right to consideration for the service fees of facilitation service is conditional on whether or not the borrowers repay in advance. In these instances, the
Group records a corresponding contract asset when recognizing revenue from loan facilitation service. The contract asset will not be reclassified to a
receivable given that the right to invoice and the payment due date is the same date. Revenue for these loan products are recognized when the
collection of consideration becomes probable.
Remaining unsatisfied performance obligations as of December 31, 2019, 2020 and 2021 pertained to post-origination service in the amount
of RMB106,147,877 , RMB61,415,170 , and RMB113,840,873 (US$17,864,117) respectively. All remaining unsatisfied performance obligations
would be recognized as revenue in the subsequent year. The revenues recognized in 2019, 2020 and 2021 from performance obligations satisfied (or
partially satisfied) in prior periods are RMB2,240,572, nil and nil, respectively.
Incentives to investors
To expand its market presence, the Group provides incentives to investors in a variety of forms that either reduces the amount of investment
required to purchase financial products or entitles them to receive higher interest rates in the products they purchase. During the relevant incentive
program period, the Group sets certain thresholds for the investor to qualify to enjoy the incentive. Such incentives are accounted for as a reduction of
revenue in accordance with ASC 606.
Financing income
Financing income consists primarily the financing fees the Group charges for the loans facilitated through the Consolidated Trusts and
Consolidated Partnerships, including interest income and service fees generated from providing loan facilitation, guarantee and post-origination
services to the investors and institutional funding partners of the Consolidated Trusts and Consolidated Partnerships, and are recorded as revenue over
the life of the underlying financing using the effective interest method.
Financing income also includes financing fees, including interest income and service fee, from loans held for sale and loans receivables from
Xiaoying Credit Loans and Xiaoying Revolving Loans that have not yet been transferred to external investors or institutional funding partners or have
been transferred but such transaction does not qualify for sale accounting under the Intermediary Model.
F-21
Table of Contents
For the years ended December 31, 2021, financing income also includes interest income generated from providing loans by the Group’s own
fund from microcredit business, and are recorded as revenue over the life of the underlying financing using the effective interest method.
Other revenue
Other revenue primarily includes penalty fees for loan prepayment and late payment, referral service fees for introducing borrowers to other
platforms, technology service fees received for providing assistant technology development services and commission fees from Xiaoying Online Mall.
The penalty fees, which are fees paid to the Group, will be received as a certain percentage of past due amounts in the case of late payments or a
certain percentage of interest over the prepaid principal loan amount in the case of prepayment. Penalty fees are contingency-based variable
considerations and constrained by the occurrence of delinquency or prepayment. They are recognized when the uncertainty associated with the
variability is resolved, that is, when the underlying event occurs. The referral service fees for introducing borrowers to other platforms are recognized
when the obligation is fulfilled and is confirmed by the other platforms. The technology service fees are recognized when the assistant technology
development services to third parties provided.
Xiaoying Online Mall launched in March 2019 is a product that provides loan installments to the Group’s individual customers enabling them
to purchase goods online. The loan installment revenue is recognized as loan facilitation revenue and post origination revenue. The gross amount of
product sales and related costs or the net amount earned is recorded as commissions. The Group was evaluated as an agent and its obligation is to
facilitate third parties in fulfilling their performance obligation for specified goods or services, revenues should be recognized in the net amount for the
amount of commission which the Group earns in exchange for arranging for the specified goods or services to be provided by other parties. Revenue is
recorded net of value-added taxes.
(e)
Sales and transfers of financial instruments
Sales and transfers of financial instruments are accounted under authoritative guidance for the transfers and servicing of financial assets and
extinguishment of liabilities. Specifically, a transfer of a financial asset, a group of financial assets, or a participating interest in a financial asset is
accounted for as a sale only if all the following conditions are met:
1.
2.
The financial assets are isolated from the transferor and its consolidated affiliates as well as its creditors;
The transferee or beneficial interest holders have the right to pledge or exchange the transferred financial assets; and
The transferor, its consolidated affiliates included in the financial statements being presented, or its agents do not maintain effective
control of the transferred asset. A transferor’s effective control over the transferred financial assets includes, but is not limited to, any of the following:
3.
maturity.
a.
b.
An agreement that both entitles and obligates the transferor to repurchase or redeem the transferred financial assets before their
An agreement, other than through a cleanup call that provides the transferor with both of the following: (i) The unilateral ability to
cause the holder to return specific financial assets. (ii) A more-than-trivial benefit attributable to that ability; and
c.
An agreement that permits the transferee to require the transferor to repurchase the transferred financial assets at a price that is so
favorable to the transferee that it is probable that the transferee will require the transferor to repurchase them.
Under the Intermediary Model, the Group, through its Intermediary, facilitates credits to borrowers and subsequently transfers the loans
(including the creditor rights) to third party investors or institutional funding partners at face value within a short period of time.
F-22
Table of Contents
When the loan (including the creditor rights) is transferred, the transferee becomes the direct counterparty to the borrower and the legal record
holder of the loan upon transfer. The transfer is accounted for as a sale, when (1) the transferred loans are considered legally isolated from the assets of
the Group and its creditors even in the bankruptcies under the PRC laws and regulations, (2) the investors or institutional funding partners (transferees)
can freely pledge or exchange the transferred loans, and (3) the Group does not maintain effective control over the transferred loans. The cash flows
related to the origination and transfer of these loans are presented as “Origination of loans held for sale”and “Sale of loans held for sale”, respectively,
within operating cash flows in the consolidated statement of cash flows. When a transfer does not qualify for sale accounting, e.g. when the Group
sells loans with recourse to the Group, the transferred financial asset remains in the statement of financial position and a financial liability is
recognized for any consideration received.
For Xiaoying Housing Loans facilitated through the Intermediary Model, borrowers are required to pledge properties to one of the Group’s
consolidated VIE entities (other than the Intermediary or the SPV conducting the facilitation and transfer of the loan) as collateral for the guarantee
that the Group is providing to ZhongAn against borrower’s default. It is a separate arrangement with different counterparties from the loan provided by
the Group. While the loan (including creditor’s rights) is transferred to third party investors or institutional funding partners, the lien remains under the
Group’s name and in security for the Group agreeing to provide the guarantee to ZhongAn. The holding of the lien does not affect the creditor’s right
in the loan being fully transferred. Provided all aforementioned conditions under sales accounting are met, the transfer of such loans with collateral are
accounted for as a sale. The Group ceased facilitation of Xiaoying Housing Loan in 2019.
(f)
Foreign currency translation
The functional currency of X Financial is in US dollars (“US$”). The functional currency of the Group’s subsidiaries and VIEs in the PRC is
Renminbi (“RMB”). The determination of the respective functional currency is based on the criteria stated in ASC 830, Foreign Currency Matters. The
Group also uses RMB as its 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 are measured and recorded in the functional currency at the exchange rate prevailing on the transaction date. Translation gains and losses are
recognized in the statements of comprehensive income (loss).
The Company with functional currency of US$ translates its operating results and financial positions into RMB, the Group’s reporting
currency. Assets and liabilities are translated using the exchange rates in effect on the balance sheet date. Equity amounts are translated at historical
exchange rates. Revenues, expenses, gains and losses are translated using the average rates for the year. Translation adjustments are reported as
cumulative translation adjustments and are shown as a separate component in the statements of comprehensive income (loss).
F-23
Table of Contents
(g)
Guarantee liabilities
The Group has guarantee service which is directly and indirectly provided to the investors or institutional funding partners. The Group also
provides direct guarantee to investors or institutional funding partners on certain loan products via its consolidated entities. If a borrower defaults, the
Group makes its best efforts to collect the default loan. The Group directly or indirectly makes payment to the defaulted principal and interest to each
investor or institutional funding partner. Prior to September 2017, ZhongAn initially reimbursed the loan principal and interest to the investor or
institutional funding partner upon the borrower’s default. In order to maintain stable business relationship with ZhongAn, although not contractually
obligated, the Group at its sole discretion compensated ZhongAn for substantially all loan principal and interest default but not subsequently collected.
At the inception of each loan, the Group recognizes the guarantee liability at fair value in accordance with ASC 460-10, which incorporates the
expectation of potential future payments under the guarantee and takes into both non-contingent and contingent aspects of the guarantee. Subsequent to
the loan’s inception, the guarantee liability is composed of two components: (i) ASC Topic 460 component; and (ii) ASC Topic 450 component. The
liability recorded based on ASC Topic 460 is determined on a loan by loan basis and it is reduced when the Group is released from the underlying risk,
i.e. as the loan is repaid by the borrower or when the investor or institutional funding partner is compensated in the event of a default. This component
is a stand-ready obligation which is not subject to the probable threshold used to record a contingent obligation. When the Group is released from the
stand-ready liability upon expiration of the underlying loan, the Group records a corresponding amount as “Other revenue” in the consolidated
statement of comprehensive income. The other component is a contingent liability determined based on probable loss considering the actual historical
performance and current conditions, representing the obligation to make future payouts under the guarantee liability in excess of the stand-ready
liability, measured using the guidance in ASC Topic 450. The ASC Topic 450 contingent component is determined on a collective basis and loans with
similar risk characteristics are pooled into cohorts for purposes of measuring incurred losses. The ASC 450 contingent component is recognized as part
of operating expenses in the consolidated statement of comprehensive income. At all times the recognized liability (including the stand-ready liability
and contingent liability) is at least equal to the probable estimated losses of the guarantee portfolio.
The Group measures its guarantee liabilities at inception at fair value based on the Group’s expected payouts and also incorporating a markup
margin. As the Group’s guarantee liabilities are not traded in an active market with readily observable prices, the Group applies a discounted cash flow
methodology to measure the fair value of guarantee liabilities. The impact of credit losses is also considered by applying discounted cash flow method
for the subsequent measurement of guarantee liabilities, based on the consideration of reasonable and supportable forecasts of future economic
conditions. The significant unobservable inputs used include expected future payout and discount rate. The expected future payouts were estimated
based on expected default rates and collection rates for each product type, taking into consideration of historical loss experiences for both contingent
and noncontingent elements. The expected future payouts take into account missed payments initially compensated by ZhongAn within two
business days from borrowers’ payment due date. The expected collection rate of defaulted loans incorporates the proceeds from liquidation of
underlying collateral that would be expected to cover the payouts under the guarantee and was based on the average historical collection rate of the
Group’s products. These inputs in isolation can cause significant increases or decreases in fair value. Increase in the expected default rates can
significantly increase the fair value of guarantee liabilities; conversely a decrease in the expected default rates can significantly decrease the fair value
of guarantee liabilities. The discount rate applied discounted cash flow methodology to present value the projected cash flows which is based on
market rates. The Group also estimated the markup margin by looking at several comparable business models. The approximate term of the guarantee
service correlates directly with the term of the loan product.
Refer to Note 12 for additional information about guarantee liabilities for the years ended December 31, 2019, 2020 and 2021.
From September 2017, the Group revised the arrangement with Zhongan on Xiaoying Credit Loan products, which is the major product
offered by Group. The Group no longer records any guarantee liabilities in accordance with ASC Topic 460 for substantially all Xiaoying Preferred
Loans. For most Xiaoying Card Loans, the Group records financial guarantee derivatives in accordance with ASC 815. See accounting policy of
revenue recognition and financial guarantee derivatives.
F-24
Table of Contents
(h)
Financial guarantee derivatives
Starting from September 2017, for newly facilitated Xiaoying Credit Loans and Xiaoying Revolving Loans, the Group entered into a series of
arrangements with various financial institutional cooperators in which it has agreed that the Group’s exposure is limited to the contractual guarantee
fee that the Group cannot collect under the agreement from the borrower as a result of default or prepayment but are still obligated to compensate those
financial institutional cooperators based on the contractual guarantee fee up to the pre-agreed cap. See accounting policy in Revenue Recognition. The
financial guarantee is accounted for as a derivative under ASC 815 because the financial guarantee scope exemption in ASC 815-10-15-58 is not met.
The derivative is remeasured at each reporting period. The change in fair value of the derivative is recorded as a change in fair value of financial
guarantee derivatives in the consolidated statements of comprehensive income(loss). The derivative is increased by the guarantee fees collected from
the borrowers upon receipt as the Group expects all the fees to be ultimately paid to those financial institutional cooperators. When the Group settles
the guarantee through performance of the guarantee by making payments to those financial institutional cooperators, the Company records a
corresponding deduction to the derivative.
The Group uses the discounted cash flow model to value these financing guarantee derivatives at inception and subsequent valuation dates.
This discounted cash flow model incorporates assumptions such as the expected delinquency rates, prepayment rate and discount rate. The expected
delinquency rate and prepayment rate is estimated by taking into consideration of historical loss experiences. The discount rate is determined based on
the market rates. The Group considers that the impact of discount rate to the fair value of financial guarantee derivatives is immaterial.
(i)
Fair value
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 Group considers the principal or most advantageous market in which it would transact and it considers assumptions that market
participants would use when pricing the asset or liability.
Authoritative literature provides a fair value hierarchy, which prioritizes the inputs to valuation techniques used to measure fair value into
three broad levels. The level in the hierarchy within which the fair value measurement in its entirety falls is based upon the lowest level of input that is
significant to the fair value measurement as follows:
● Level 1—inputs are based upon unadjusted quoted prices for identical assets or liabilities traded in active markets.
● Level 2—inputs are based upon 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 and model-based valuation techniques for which all significant assumptions are
observable in the market or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
● Level 3—inputs are generally unobservable and typically reflect management’s estimates of assumptions that market participants would
use in pricing the asset or liability. The fair value is therefore determined using model-based techniques that include option pricing
models, discounted cash flow models, and similar techniques.
(j)
Cash and Cash Equivalents
Cash and cash equivalents primarily consist of cash on hand and cash in bank which are highly liquid. As of December 31, 2021, cash
equivalents were comprised of current deposits and money market funds stated at cost plus accrued interest. All cash and cash equivalents are
unrestricted as to withdrawal and use.
(k)
Restricted Cash
Restricted cash consists primarily of cash held by the Consolidated Trusts and Partnerships through segregated bank accounts which can only
be used by the Trusts and Partnerships to specified activities as stipulated in the Trust or Partnership agreements. Cash in the Consolidated Trusts and
Partnerships is not available to fund the general liquidity needs of the Group.
F-25
Table of Contents
Restricted cash also includes cash deposited with banks as collateral for borrowings from the respective banks. Restriction on the use of such
cash and the interest earned thereon is imposed by the banks and remains effective throughout the terms of the borrowings. See Note 8.
(l) Accounts receivable and contract assets, net
Accounts receivable and contract assets consist of accounts receivable and contract assets from the facilitation and post-origination service in
relation to loans facilitated under both Direct and Intermediary Models. Contract assets represent the Group’s right to consideration in exchange for
facilitation services that the Company has transferred to the customer before payment is due. The Group only recognizes accounts receivable and
contract assets to the extent that the Group believes it is probable that they will collect substantially all of the consideration to which it will be entitled
in exchange for the services transferred to the customer. The general life time of accounts receivable and contract assets lasts no more than 12 months.
Accounts receivable and contract assets from facilitation service is stated at the historical carrying amount net of write-offs and allowance for
credit losses. The Group establishes an allowance for credit losses in accordance with ASC 326 based on estimates, historical experience of net default
rates, current economic conditions, reasonable and supportable forecasts of future economic conditions and other factors surrounding the credit risk of
customers. The profile of the borrowers is similar under each product therefore the Group applies a consistent credit risk management framework to
the entire portfolio of borrowers under each product. For individual customers where there is an observable indicator of impairment such as fraud, a
specific allowance is provided. The Group also constantly monitor the financial condition and evaluates the credit quality of certain institutional
funding partners and external financing guarantee companies from which the Group’s service fees are collected directly or indirectly. The Group
evaluates and adjusts its allowance for credit losses for accounts receivable and contract assets on a quarterly basis or more often as necessary.
Uncollectible accounts receivable or contract assets are written off when a settlement is reached for an amount that is less than the outstanding
historical balance or when accounts receivable or contract assets are deemed uncollectible.
The following table presents the accounts receivable and contract assets from facilitation and post-origination as of December 31, 2020 and
2021, respectively:
As of December 31, 2020
Xiaoying Credit Loan
Xiaoying Revolving Loan
Total
As of December 31, 2021
Accounts receivable:
Xiaoying Credit Loan
Contract assests:
Xiaoying Credit Loan
Total
Accounts
receivable
from
facilitation
services
RMB
422,694,249
14,438,096
437,132,345
Accounts
receivable
and contract
assests from
facilitation
services
RMB
Accounts
receivable from
post-origination
services
RMB
1,897,119
1,295,993
3,193,112
Accounts
receivable
and contract
assests from
post-origination
services
RMB
Accounts
receivable from
financing income
RMB
9,160,182
2,503,149
11,663,331
Accounts
receivable
and contract
assests from
financing income
RMB
Allowance for
credit losses
RMB
(37,529,193)
(1,152,487)
(38,681,680)
Total
RMB
396,222,357
17,084,751
413,307,108
Allowance for
credit losses
RMB
Total
RMB
189,556,149
2,468,496
26,080,407
(8,092,404)
210,012,648
529,311,240
718,867,389
25,931,783
28,400,279
—
26,080,407
(17,775,553)
(25,867,957)
537,467,470
747,480,118
F-26
Table of Contents
.
As of December 31, 2021
Accounts receivable:
Xiaoying Credit Loan
Contract assests:
Xiaoying Credit Loan
Total
Accounts
receivable
and contract
assests from
facilitation
services
US$
Accounts
receivable
and contract
assests from
post-origination
services
US$
Accounts
receivable
and contract
assests from
financing income
US$
Allowance for
credit losses
US$
Total
US$
29,745,496
387,361
4,092,585
(1,269,875)
32,955,567
83,060,484
112,805,980
4,069,263
4,456,624
—
4,092,585
(2,789,372)
(4,059,247)
84,340,375
117,295,942
The following tables present the aging of accounts receivable as of December 31, 2020 and 2021 respectively. The Group charges off
accounts receivable overdue more than 60 days.
As of December 31, 2020
Aging
Xiaoying Credit Loan
Xiaoying Revolving Loan
Total
As of December 31, 2021
Aging
Xiaoying Credit Loan
Total
As of December 31, 2021
Aging
Xiaoying Credit Loan
Total
Not past-due
RMB
426,728,851
16,016,508
442,745,359
1 - 30 days
RMB
3,680,132
986,663
4,666,795
30 - 60 days
RMB
3,342,567
1,234,067
4,576,634
Total
RMB
433,751,550
18,237,238
451,988,788
Not past-due
RMB
205,943,964
205,943,964
1 - 30 days
RMB
6,352,735
6,352,735
30 - 60 days
RMB
5,808,353
5,808,353
Total
RMB
218,105,052
218,105,052
Not past-due
US$
32,317,102
32,317,102
1 - 30 days
US$
996,883
996,883
30 - 60 days
US$
911,457
911,457
Total
US$
34,225,442
34,225,442
The following tables present the movement of provision for accounts receivable and contract assets as of December 31, 2019 and in the
allowance for credit losses for accounts receivables and contract assets as of December 31, 2020 and 2021:
As of
January 1,
2019
RMB
206,575,845
—
119,616
133,707
14,384,158
221,213,326
Provision for
accounts receivable
(net of recovery)
(1)
RMB
230,589,301
10,303,996
—
—
293,526
241,186,823
Charge-off for
accounts
receivable
RMB
(252,080,117)
(2,479,118)
(119,616)
(133,707)
(14,677,684)
(269,490,242)
As of
January 1,
2020
RMB
185,085,029
7,824,878
—
192,909,907
Adoption of ASU
2016-13
RMB
Provision for
accounts receivable
(net of recovery) (1)
RMB
Charge-off for
accounts
receivable
RMB
11,480,592
811,579
3,232,265
15,524,436
112,833,743
11,883,737
(3,232,265)
121,485,215
(271,870,171)
(19,367,707)
—
(291,237,878)
As of
December 31,
2019
RMB
185,085,029
7,824,878
—
—
—
192,909,907
As of
December 31,
2020
RMB
37,529,193
1,152,487
—
38,681,680
Xiaoying Credit Loan
Xiaoying Revolving Loan
Xiaoying Housing Loan
Internet Channel
Other products
Total
Xiaoying Credit Loan
Xiaoying Revolving Loan
Internet Channel
Total
F-27
Table of Contents
Accounts receivable:
Xiaoying Credit Loan
Xiaoying Revolving Loan
Contract assests:
Xiaoying Credit Loan
Total
Accounts receivable:
Xiaoying Credit Loan
Xiaoying Revolving Loan
Contract assests:
Xiaoying Credit Loan
Total
As of
January 1,
2021
RMB
Provision for
accounts receivable
and contract assets
(net of recovery)
(1)
RMB
Charge-off for
accounts
receivable and
contract assets
RMB
As of
December 31,
2021
RMB
37,529,193
1,152,487
46,512,298
1,612,419
(75,949,087)
(2,764,906)
8,092,404
—
—
38,681,680
29,123,093
77,247,810
(11,347,540)
(90,061,533)
17,775,553
25,867,957
As of
January 1,
2021
US$
5,889,150
180,850
—
6,070,000
Provision for
accounts receivable
and contract assets
(net of recovery) (1)
US$
Charge-off for
accounts
receivable and
contract assets
US$
As of
December 31,
2021
US$
7,298,794
253,024
(11,918,069)
(433,874)
4,570,049
12,121,867
(1,780,677)
(14,132,620)
1,269,875
—
2,789,372
4,059,247
(1) The recoveries of charge-off of accounts receivables and contract assets amounted to RMB3,690,460, RMB4,243,262 and RMB850,597
(US$133,477) during the year ended December 31, 2019, 2020 and 2021, respectively.
(m)
Loans held for sale
From time to time, the Group provides credits to borrowers through an intermediary first to enhance borrowers’ service satisfaction and
transfers the loans to third party investors or institutional funding partners on its platform immediately thereafter (typically within a short period of
time). These loans are accounted for as held for sale at lower of cost or fair value, as the Group has a clear marketing plan to transfer these loans to
external investors or institutional funding partners and does not have intention to hold loans for the foreseeable future. During the period presented, the
direct origination costs were inconsequential and were expensed as incurred. As at December 31, 2019, the Group reclassified loans held for sale to
loans receivables from Xiaoying Credit Loans and Xiaoying Revolving loans after reassessing its intent and ability to transfer these loans.
Loans receivables from Xiaoying Credit Loans and Xiaoying Revolving Loans includes those loans that the Group acquired from unaffiliated
third parties who were the initial lenders of such loans. The Group believes that acquiring loans from unaffiliated third parties is not prohibited under
the Interim Measures on Administration of Business Activities of Online Lending Information Intermediaries (the “Interim Measures”) because the
Interim Measures prohibit an online finance information intermediary from providing its own funds to borrowers on the platform directly but do not
prohibit an online finance information intermediary acquiring loans from others. The Group acquired loans from unaffiliated third parties who were the
initial lenders of such loans in 2020 and 2021. As of December 31, 2020 and 2021, such loans had a weighted average term of 10~11 months and a
remaining weighted average term of 7 ~ 8 months, respectively. The loans were initially recognized as “Loans held for sale” as the Group did not have
intention to retain such loans. The loans were not covered by any credit enhancement from qualified institutional partners. And the Group had no
ability to transfer out the loans without recourse to the Group due to the illiquid market. Therefore, as of December 31,2019, the Group reclassified
loans held for sale to loans receivables from Xiaoying Credit Loans and Xiaoying Revolving loans after reassessing its ability to transfer these loans.
The cash flows related to the origination and transfer of these loans are presented as “Origination of loans held for sale” and “Sale of loans held for
sale”, respectively, within operating cash flows in the consolidated statement of cash flows.
F-28
Table of Contents
(n)
Loans receivables from Xiaoying Credit Loans and Xiaoying Revolving Loans, net
For those loans that the Group provides credits to borrowers using its own fund and has intention to hold for the foreseeable future, or has no
intention to hold but fail to have certain marketing plans to transfer, or those transfer of loans that fails to meet to criteria of true sale under ASC 860
(see accounting policy under “Sale and Transfers of Financial Instruments”), they are accounted for as loans receivables from Xiaoying Credit Loans
and Xiaoying Revolving Loans at amortized cost. As of December 31, 2020 and 2021, loans receivables from Xiaoying Credit Loans and Xiaoying
Revolving Loans amounted to RMB1,236,026,461 and RMB2,484,072,931(US$389,805,249) respectively. The general life time of Loans receivables
from Xiaoying Credit Loans and Xiaoying Revolving Loans lasts no more than 12 months. For the loans that were unable to be transferred to external
investors or institutional funding partners in a transaction that fails to meet to the criteria of true sale under ASC 860, the corresponding considerations
received from the institutional funding partners were recorded in “Payable to institutional funding partners” in the consolidated balance sheet. The
considerations received by the Group were determined based on the outstanding loan balances on the transaction dates. As the Group entitles them to
receive a fixed interest rate in the loans which the institutional funding partners purchased, an accrued interest expenses payable to them was also
recorded in “Payable to institutional funding partners” in the consolidated balance sheet.
Loans receivables from Xiaoying Credit Loans and Xiaoying Revolving Loans are stated at the historical carrying amount net of write-offs
and allowance for credit losses. The Group establishes an allowance for credit losses in accordance with ASC 326 based on estimates, historical
experience of net default rates, current economic conditions, reasonable and supportable forecasts of future economic conditions and other factors
surrounding the credit risk of customers. The profile of the borrowers is similar under each product therefore the Group applies a consistent credit risk
management framework to the entire portfolio of borrowers under each product. For individual customers where there is an observable indicator of
impairment such as fraud, a specific allowance is provided. The Group evaluates and adjusts its allowance for credit losses for loans receivables on a
quarterly basis or more often as necessary. Uncollectible loans receivables are written off when a settlement is reached for an amount that is less than
the outstanding historical balance or when loans receivables are deemed uncollectible.
The Group excluded the accrued interest receivable balance from the disclosed amortized cost basis, amounting to
RMB26,080,407(US$4,092,585) as of December 31, 2021. The accrued interest receivables were recorded in Accounts receivables in the consolidated
balance sheet. The Group does not measure the allowance for credit losses for accrued interest receivables as the Group writes off the uncollectable
accrued interest receivables when the corresponding Loans receivables from Xiaoying Credit Loans and Xiaoying Revolving Loans are written off. In
2020 and 2021, the Group charges off Loan receivables from Xiaoying Credit Loans and Xiaoying Revolving Loans overdue more than 60 days.
The following table presents the loans receivable from Xiaoying Credit Loans and Xiaoying Revolving Loans originated and retained by the
Company as of December 31,2020 and 2021, respectively:
As of December 31, 2020
Xiaoying Credit Loan
Xiaoying Revolving Loan
Total
As of December 31, 2021
Xiaoying Credit Loan
Xiaoying Revolving Loan
Total
Loans receivables
from Xiaoying
Credit Loans and
Xiaoying Revolving
Loans
RMB
1,027,762,930
310,819,315
1,338,582,245
Loans receivables
from Xiaoying
Credit Loans and
Xiaoying Revolving
Loans
RMB
2,537,161,361
2,247,311
2,539,408,672
Allowance for
credit losses
RMB
(70,615,780)
(31,940,004)
(102,555,784)
Total
RMB
957,147,150
278,879,311
1,236,026,461
Allowance for
credit losses
RMB
(54,725,057)
(610,684)
(55,335,741)
Total
RMB
2,482,436,304
1,636,627
2,484,072,931
F-29
Table of Contents
As of December 31, 2021
Xiaoying Credit Loan
Xiaoying Revolving Loan
Total
Loans receivables
from Xiaoying
Credit Loans and
Xiaoying Revolving
Loans
US$
398,135,982
352,652
398,488,634
Allowance for
credit losses
US$
(8,587,555)
(95,830)
(8,683,385)
Total
US$
389,548,427
256,822
389,805,249
The following tables present the movement of provision for loans receivable from Xiaoying Credit Loans and Xiaoying Revolving Loans as
of December 31, 2020 and 2021, respectively:
Xiaoying Credit Loans
Xiaoying Revolving Loans
Total
As of December Adoption of ASU
31, 2019
RMB
—
24,709,468
24,709,468
2016-13
RMB
—
4,205,046
4,205,046
Provision for loans
receivable
from Xiaoying Credit
Loans and Revolving
Loans (net of
recovery) (1)
RMB
74,934,783
152,275,243
227,210,026
As of December
Charge-off
RMB
(4,319,003)
(149,249,753)
(153,568,756)
31, 2020
RMB
70,615,780
31,940,004
102,555,784
(Reversal of)
provision for
loans receivable
from Xiaoying Credit
Loans and
Revolving Loans (net of
recovery) (1)
RMB
80,823,776
(4,428,608)
76,395,168
(Reversal of)
provision for loans
receivable from
Xiaoying Credit Loans and
Revolving Loans (net of
recovery) (1)
US$
12,683,014
(694,945)
11,988,069
As of December 31,
2020
RMB
70,615,780
31,940,004
102,555,784
As of December 31,
2020
US$
11,081,156
5,012,084
16,093,240
Charge-off
RMB
(96,714,499)
(26,900,712)
(123,615,211)
As of December 31,
2021
RMB
54,725,057
610,684
55,335,741
Charge-off
US$
(15,176,615)
(4,221,309)
(19,397,924)
As of December 31,
2021
US$
8,587,555
95,830
8,683,385
Xiaoying Credit Loans
Xiaoying Revolving Loans
Total
Xiaoying Credit Loans
Xiaoying Revolving Loans
Total
(1)
The recoveries of charge-off of loans receivables from Xiaoying Credit Loans and Xiaoying Revolving Loans amounted to
RMB11,249,305 and RMB8,803,265(US$1,318,424) during the years ended December 31, 2020 and 2021, respectively.
The following table presents the aging of loans receivable from Xiaoying Credit Loans and Revolving Loans as of December 31, 2020 and
2021, respectively:
As of December
31, 2020
Aging
Xiaoying Credit Loans
Xiaoying Revolving Loans
Total
Not past-due
RMB
1,012,188,463
294,056,208
1,306,244,671
1 - 30 days
RMB
10,394,739
9,930,164
20,324,903
30 - 60 days
RMB
5,179,728
6,832,943
12,012,671
Total
RMB
1,027,762,930
310,819,315
1,338,582,245
F-30
Table of Contents
As of December
31, 2021
Aging
Xiaoying Credit Loans
Xiaoying Revolving Loans
Total
As of December
31, 2021
Aging
Xiaoying Credit Loans
Xiaoying Revolving Loans
Total
Not past-due
RMB
2,514,735,264
2,241,915
2,516,977,179
1 - 30 days
RMB
13,800,724
—
13,800,724
30 - 60 days
RMB
8,625,373
5,396
8,630,769
Total
RMB
2,537,161,361
2,247,311
2,539,408,672
Not past-due
US$
394,616,838
351,805
394,968,643
1 - 30 days
US$
2,165,635
—
2,165,635
30 - 60 days
US$
1,353,509
847
1,354,356
Total
US$
398,135,982
352,652
398,488,634
(o)
Loans and payable to investors of Consolidated Trusts
The Group has elected the fair value option for the loan assets and liabilities of the Consolidated Trusts that otherwise would not have been
carried at fair value. Such election is irrevocable and is applied to financial instruments on an individual basis at initial recognition. The Group
estimates the fair value of loans and payable using a discounted cash flow valuation methodology by discounting the estimated future net cash flows
using an appropriate discount rate. The future net cash flows are estimated based on contractual cash flows, taking into consideration of estimated
delinquency rate, prepayment rate and collection rate of the loans, and the pre-determined Rate of the Group’s guarantee exposure for certain products.
Loans and payable to investors of Consolidated Trusts are recorded as “Loans at fair value” and “Payable to investors at fair value” in the consolidated
balance sheet. Changes in fair value of loans and payable to investors are reported net as recorded in “Fair value adjustments related to Consolidated
Trusts” in the consolidated statement of comprehensive income. See Note 3 for further disclosure on financial instruments of the Consolidated Trusts
for which the fair value option has been elected.
(p)
Loan receivable from Xiaoying Housing Loans, net
The Group directly or indirectly guarantees on borrowers’ defaults to the investors or institutional funding partners of Xiaoying Housing Loan
products and obtains a collateral right from the borrowers for such guarantees. The collaterals include apartments, houses and properties, which can
fully cover the underlying loan principle and interest. Upon default of the loan, the Group compensates the investor or ZhongAn for defaulted loan
principal and interest and obtains the creditor’s right of the underlying loan. The payout amount in relation to the original guarantee provision provided
at loan inception was recorded as a deduction of guarantee liability, reflected in net payouts in the guarantee liabilities rollforward. The remaining
payout amount in relation to the acquisition of the creditor’s right of the underlying loan is recorded as loan receivable upon payment of compensation
in “Loan receivable from Xiaoying Housing Loans” in the consolidated balance sheets as the collection cycle typically will be more than one year. No
loan receivables are recorded at loan inception.
Loan receivable from Xiaoying Housing Loans is recorded based on the present value of the expected amount to be collected from the
exercise of the collateral right. Given the deterioration of the credit related to those loans upon acquisition, the Group determined that those loans are
in non-accrual status and should only recognize related service and penalty fees upon cash received in other revenues.
Allowance for loan receivable is established through periodic charges to the provision for loan receivable when the Group believes that the
future collection of defaulted loan principal and interest is unlikely. Allowance for credit losses for loan receivables from Xiaoying Housing loans is
also recognized when the fair value is below the original recorded present value of the expected amount to be collected. In order to accelerate the
collection process, the Group transferred the creditor rights of certain defaulted loans as well as the underlying collateral right to third party companies
at a discount in 2019, 2020 and 2021. The discounted amount was recorded as an allowance for loan receivables which represent the amount that the
Group expects not able to collect from the proceedings. In addition, the Group also recorded an allowance for the remaining outstanding loans not
transferred benchmarked to the discounted amount. The Group also institutes proceedings to collect the payout amount from collaterals. Uncollectible
loan receivable from Xiaoying Housing Loans is written off when a settlement is reached for an amount that is less than the outstanding historical
balance or when loan receivables are deemed uncollectible.
F-31
Table of Contents
The outstanding balance of loan receivable from Xiaoying Housing Loans were RMB47,490,437 and RMB12,083,317 (US$1,896,136)as of
December 31, 2020 and 2021, respectively. The contractually required payments that are receivable for loans acquired during 2020 and 2021 were
RMB14,165,030 and nil, respectively. The outstanding undiscounted balance including the principal, interest, fees, penalties under Xiaoying Housing
Loans receivable were RMB129,940,425 and RMB121,854,733(US$19,121,667), as of December 31, 2020 and 2021, respectively.
The following tables presents the movement in provision for loans receivable from Xiaoying Housing Loans for the years ended December
31, 2020 and 2021.
As of December 31, 2019
RMB
As of December 31, 2020
RMB
As of December 31, 2020
US$
Provision for Loans Receivable
from Xiaoying Housing Loans
RMB
48,211,512
17,993,570
Charge-off
RMB
(66,205,082)
As of December 31, 2020
RMB
—
Reversal of provision for Loans Receivable
from Xiaoying Housing Loans
RMB
Recoveries of
charge-off
RMB
(377,559)
377,559
As of December 31, 2021
RMB
—
Reversal of provision for Loans Receivable
from Xiaoying Housing Loans
US$
Recoveries of
charge-off
US$
(59,247)
59,247
As of December 31, 2021
US$
—
—
—
The following tables presents the aging of Loan receivables from Xiaoying Housing Loans as of December 31, 2020 and 2021, respectively:
As of December 31, 2020
Aging
Xiaoying Housing Loans
As of December 31, 2021
Aging
Xiaoying Housing Loans
As of December 31, 2021
Aging
Xiaoying Housing Loans
(q)
Financial investments
Over due 1 – 2 Over due 2 – 3 Over due over 3
years
RMB
years
RMB
years
RMB
3,043,453
8,691,640
35,755,344
Over due 1 – 2 Over due 2 – 3 Over due over 3
years
RMB
years
RMB
years
RMB
—
1,392,439
10,690,878
Over due
1 – 2 years
US$
—
Over due
2 – 3 years
US$
218,504
Over due
over 3 years
US$
1,677,632
Total
RMB
47,490,437
Total
RMB
12,083,317
Total
US$
1,896,136
The Group classifies certain financial assets such as financial products issued by banks expected to be realized in cash with highly liquid as
financial investments. Those financial assets were accounted as fair value. Interest income, related realized and unrealized gains and losses are
included in earnings. The Group regularly evaluates its financial investments for impairment or when events or changes in circumstances indicate that
it might be impaired.
Financial investments also include investments in the Venture Capital funds (“VC funds”). The Group elected to use the measurement
alternative to measure these investments at cost minus impairment, because their fair value is not readily determinable and do not qualify for the NAV
practical expedient according to ASC topic 321, Investment-Equity Securities.
F-32
Table of Contents
(r)
Deposits to institutional cooperators, net
Starting from November 2019, the Group enter into a series of deposit arrangements with financing institutional cooperators, such as
insurance company and financing guarantee company. The Group is required to pay deposits to those financial institutional cooperators monthly or in
accordance with an agreed payment schedule. The amount of deposit is separately agreed with each institutional cooperator, usually calculated by
multiplying the outstanding loan balance on the reconciliation date by an agreed percent rate (“the standard amount “). The agreed percent rate may be
adjusted from time to time. If the balance of the deposits exceeds the standard amount or supplementary payment of deposit is needed, the financial
institutional cooperators shall refund the excess part to the Group or the Group shall make supplementary payment of deposit in accordance with an
agreed payment schedule.
Deposits to institutional cooperators is stated at the historical carrying amount net of write-offs and allowance for credit losses. The Group
establishes an allowance based on estimates, the current and expected default rates, insurance premium/guarantee fee, the historical pay-out amounts,
the outstanding loan balances, the forecasted loan facilitation amounts and the credit risk of institutional cooperators. The Group evaluates and adjusts
its allowance for deposits to institutional cooperators on a quarterly basis or more often as necessary. Deposits to institutional cooperators are written
off when deposits are deemed uncollectible. Deposits to institutional cooperators are recorded as current assets because the term of the underlying loan
assets was 12 months or less. As of December 31, 2021, all deposits are refundable and none of them passed the original due date.
(s)
Property and equipment, net
Furniture and equipment are recorded at cost less accumulated depreciation and amortization. Depreciation and amortization are calculated on
a straight-line basis over the following estimated useful lives:
Computer and transmission equipment
Furniture and office equipment
Motor vehicles
Leasehold improvements
3 years
5 years
4 years
Over the shorter of the lease term or expected useful lives
Gains and losses from the disposal are included in ‘Other income (loss), net’.
(t)
Intangible assets
Intangible assets with finite lives represent domain name and purchased computer software. These intangible assets are amortized on a
straight line basis over their estimated useful lives of the respective asset, which varies from 1 to 10 years.
Intangible assets with an indefinite useful life represent the insurance broker license purchased during 2018 and insurance sale on line license
authorized in 2019, See Note 7. Intangible assets with an indefinite life is not amortized and is tested for impairment annually or more frequently if
events or changes in circumstances indicate that it might be impaired.
(u)
Impairment of long-lived assets
Long-lived assets including intangible assets with definite lives, are assessed for impairment, whenever events or changes in circumstances
indicate the carrying value of an asset may not be recoverable in accordance with ASC 360, Property, Plant and Equipment. If circumstances require a
long-lived asset or asset group be tested for possible impairment, the Group measures the carrying amount of long-lived assets against the estimated
undiscounted future cash flows associated with it. Impairment exists when the estimated undiscounted future cash flows are less than the carrying
value of the asset being evaluated. Impairment loss is calculated as the amount by which the carrying value of the asset exceeds its fair value. No
impairment loss was recognized for the years ended December 31, 2019, 2020 and 2021. Intangible assets with an indefinite useful life are tested for
impairment annually or more frequently, if events or changes in circumstances indicate that they might be impaired accordance with ASC subtopic
350-30, Intangibles-Goodwill and Other: General Intangibles Other than Goodwill (“ASC 350-30 “).
(v)
Long-term investments
The Group accounts for long-term investments using either the cost or equity method of accounting depending upon whether the Group has
the ability to exercise significant influence over investments. As part of this evaluation, the Group considers the participating and protective rights in
the investments as well as its legal form.
F-33
Table of Contents
The Group uses the equity method of accounting for the long-term investments when the Group has the ability to significantly influence the
operations or financial activities of the investee. The Group record the equity method long-term investments at historical cost and subsequently adjusts
the carrying amount each period for share of the earnings or losses of the investee and other adjustments required by the equity method of accounting.
Dividends received from the equity method investments are recorded as reductions in the cost of such investments.
The Group records the cost method long-term investments at historical cost and subsequently record any dividends received from the net
accumulated earnings of the investee as income. Dividends received in excess of earnings are considered a return of investment and are recorded as
reductions in the cost of the investments.
Long-term investments are evaluated for impairment when facts or circumstances indicate that the fair value of the long-term investments is
less than its carrying value. An impairment is recognized when a decline in fair value is determined to be other-than-temporary. The Group reviews
several factors to determine whether a loss is other-than-temporary. These factors include, but are not limited to, the: (i) nature of the investment;
(ii) cause and duration of the impairment; (iii) extent to which fair value is less than cost; (iv) financial condition and near term prospects of the
investments; and (v) ability to hold the security for a period of time sufficient to allow for any anticipated recovery in fair value. Long-term
investments of the Group consist of five equity investments of PRC private companies.
(w)
Deposit payable to channel cooperators
The Group co-operates with selected Fintech and other financial companies by connecting the borrowers referred by those companies to
investors on the Group’s platform. As part of the arrangements, the selected companies also provide credit enhancements on the loans facilitated to the
borrowers referred by them and are required to pay a certain amount of cash as deposit to the Group, from which the Group is entitled to deduct if they
fail to compensate the defaulted loans on a timely basis. Any remaining balance of the deposit is released upon expiry of the co-operation agreements.
As of December 31, 2020 and 2021 the total deposit amount that the Group received from Fintech and other financial companies were
RMB21,472,235 and RMB21,012,235 (US$3,297,278) respectively.
(x)
Employee defined contribution plan
Full time employees of the Group 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 Group make contributions to the government for these benefits based on a certain percentage of the
employee’s salaries. The Group has no legal obligation for the benefits beyond the contributions. The total amount that was expensed as incurred were
RMB53,997,224 , RMB28,891,339 and RMB35,601,429(US$5,586,641) for the years ended December 31, 2019, 2020 and 2021 respectively.
(y)
Advertising cost
Advertising costs are expensed as incurred in accordance with ASC 720-35 Other Expense—Advertising costs. Advertising costs were
RMB64,357,939,RMB25,594,249 and RMB7,395,353 (US$1,160,492) for the years ended December 31, 2019, 2020 and 2021 respectively.
Advertising costs are included in sales and marketing expense in the consolidated statements of comprehensive income (loss).
(z)
Origination and servicing expense
Origination and servicing expense consists primarily of variable expenses and vendor costs, including labor costs, costs related to credit
assessment, borrower acquisitions, payment processing services, fees paid to third party collection agencies, as well as interest expense paid to
institutional investors and institutional funding partners of the Consolidated Trusts and Partnerships.
(aa)
Income taxes
Current taxes are provided for in accordance with the laws of the relevant tax authorities.
F-34
Table of Contents
Deferred taxes are provided using the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the
expected future tax consequences of events that have been included in the financial statements or tax return. Under this method, deferred tax assets and
liabilities are recognized for the differences between financial statement carrying amount and the tax basis of assets and liabilities using enacted tax
rates in effect for the year in which the differences are expected to reverse. Deferred tax assets are then evaluated to determine the extent to which they
are more likely than not to be realized. In making such a determination, management considers all positive and negative evidence, including future
reversals of existing taxable temporary differences and projected future taxable income exclusive of reversing temporary differences and
carryforwards. Deferred tax assets are then reduced by a valuation allowance to the amount, in the opinion of management, that is more like than not to
be realized.
The Group 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 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 (defined as a likelihood of more than
fifty percent of being sustained upon an audit, based on the technical merits of the tax position), the tax position is then assessed to determine 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
has a greater than 50 percent likelihood of being realized upon settlement. Interest and penalties on income taxes are classified as a component of
income taxes.
(ab)
Value added taxes (“VAT”)
The Group is subject to VAT at the rate of 6% and 13% given that they are classified as general tax payers and at the rate of 3% as certain
Consolidated Trusts and Consolidated Partnerships of the Group are classified as small-scale tax payers. VAT is reported as a deduction to revenue
when incurred and amounted to RMB231,454,037 , RMB197,016,590 and RMB228,029,948(US$35,782,875) 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. Net VAT balance between input VAT and output VAT is recorded in the line item of accrued expense and other liabilities on the consolidated
balance sheets.
(ac)
Segment information
The Group uses management approach to determine operation segment. The management approach considers the internal organization and
reporting used by the Group’s chief operating decision maker (“CODM”)for making decisions, allocation of resource and assessing performance.
The Group’s CODM has been identified as the Chief Executive Officer who reviews the consolidated results of operations when making
decisions about allocating resources and assessing performance of the Group. The Group operates and manages its business as a single segment.
All of the Group’s revenue for the years ended December 31, 2019, 2020 and 2021 were generated from the PRC. As of December 31, 2019,
2020 and 2021, all of long-lived assets of the Group were located in the PRC.
As the Group generates all of its revenues in the PRC, no geographical segments are presented.
(ad)
Leases
The Group adopted ASU No. 2016-02, Leases (Topic 842) (“ASU 2016-02”) from January 1, 2019 by using the modified retrospective
method and did not restate the comparable periods. The Group has elected the package of practical expedients, which allows the Group not to reassess
(1) whether any expired or existing contracts as of the adoption date are or contain a lease, (2) lease classification for any expired or existing leases as
of the adoption date and (3) initial direct costs for any expired or existing leases as of the adoption date. The Group also elected the practical expedient
not to separate lease and non-lease components of contracts. Lastly, the Group elected the short-term lease exemption for all contracts with lease terms
of 12 months or less.
F-35
Table of Contents
The Group determines if an arrangement is a lease or contains a lease at lease inception. For operating leases, the Group recognizes a ROU
asset and a lease liability based on the present value of the lease payments over the lease term on the consolidated balance sheets at commencement
date. For finance leases, assets are included in property and equipment on the consolidated balance sheets. As most of the Group’s leases do not
provide an implicit rate, the Group estimates its incremental borrowing rate based on the information available at the commencement date in
determining the present value of lease payments. The incremental borrowing rate is estimated to approximate the interest rate on a collateralized basis
with similar terms and payments, and in economic environments where the leased asset is located. The Group’s leases often include options to extend
and lease terms include such extended terms when the Group is reasonably certain to exercise those options. Lease terms also include periods covered
by options to terminate the leases when the Group is reasonably certain not to exercise those options. Lease expense is recorded on a straight-line basis
over the lease term. The ROU assets were recorded as “Other non-current assets”, and the current and non-current portions of the lease liabilities were
recorded as “Accrued expenses and other current liabilities” and “Other non-current liabilities” in the Consolidated Balance Sheets.
As of December 31, 2020 and 2021, the Group recognized operating lease ROU assets of RMB45,217,671 and RMB25,199,346
(US$3,954,327), total lease liabilities RMB44,486,728 and RMB24,350,514 (US$3,821,127), including current portion of RMB16,871,785 and
RMB12,331,166 (US$1,935,029) for operating leases.
The Group’s operating leases mainly related to office facilitates. As of December 31 2021, the weighted average remaining lease term was
1.38 years and the weighted average discount rate was 6.2% for the Group’s operating leases.
Operating lease cost for the year ended 31 December, 2021 was RMB17,943,753(US$2,815,766), which excluded cost of short-term
contracts. Short-term lease cost for the year ended 31 December, 2021 was insignificant. For the year ended 31 December, 2021, no lease cost for
operating or finance leases was capitalized. Supplemental cash flow information related to operating leases was as follows:
Cash payments for operating leases
ROU assets obtained in exchange for operating lease liabilities
Future lease payments under operating leases as of December 31, 2021 were as follows:
Year ending December 31,
2022
2023
2024
2025 and thereafter
Total future lease payments
Less: Imputed interest
Total lease liability balance
As of December 31, 2021
RMB
20,298,560
—
US$
3,185,287
—
Operating leases
RMB
US$
17,559,142
4,753,618
4,844,256
3,503,856
30,660,872
6,310,358
24,350,514
2,755,413
745,946
760,169
549,831
4,811,359
990,232
3,821,127
As of December 31, 2021, additional operating leases that have not yet commenced were immaterial.
(ae)
Net income (loss) per share
Basic income (loss) per share is computed by dividing net income (loss) attributable to the holders of ordinary shares by the weighted average
number of ordinary shares outstanding during the year. Diluted income (loss) per share is calculated by dividing net income (loss) attributable to the
holders of ordinary shares as adjusted for the effect of dilutive ordinary share equivalents, if any, by the weighted average number of ordinary shares
and dilutive ordinary share equivalents outstanding during the period. Ordinary share equivalents of stock options are calculated using the treasury
stock method. However, ordinary share equivalents are not included in the denominator of the diluted earnings per share calculation when inclusion of
such shares would be anti-dilutive, such as in a period in which a net loss is recorded.
F-36
Table of Contents
(af)
Share-based compensation
Share-based payment transactions with employees, such as stock options and restricted stocks, are measured based on the grant date fair value
of the awards, with the resulting expense generally recognized on a straight-line basis in the consolidated statements of income over the period during
which the employee is required to perform service in exchange for the award.
(ag)
Certain risks and concentrations
Financial instruments that potentially expose the Group to concentrations of credit risk consist principally of cash, restricted cash, financial
investments, accounts receivable and contract assets, deposits to institutional cooperators, loans receivables and loans at fair value.
The Group’s investment policy requires cash and restricted cash to be placed with high-quality financial institutions and to limit the amount of
credit risk from any one issuer. The Group regularly evaluates the credit standing of the counterparties or financial institutions.
Financial investments that potentially subject the Group to credit risk mainly consist of investments in VC funds. The Group limits its
exposure to credit risks associated with financial instruments by regularly conducting a credit review of the funds and their underlying investments.
Accounts receivable and contract assets are typically unsecured and are derived from revenue earned from customers in the PRC. The risk
with respect to accounts receivable and contract assets is mitigated through the Group’s consistent credit risk management framework to the entire
portfolio of loans in accordance with ASC 450-20. The Group also constantly monitor the financial condition and evaluates the credit quality of certain
institutional funding partners and external financing guarantee companies from which the Group’s service fees are collected.
Deposits to institutional cooperators are placed with financial institutional cooperators. The Group regularly monitors the financial condition
and evaluates the credit quality of each institutional cooperator.
Credit of loans receivables and loans at fair value is controlled by the application of credit approval, limit and monitoring procedures.
No investor represented greater than 10% or more of the total net revenues for the years ended December 31, 2019, 2020 and 2021.
There were no and two contract assets due from institutional funding partner and financing guarantee company that individually accounted for
greater than 10% of the Group's carrying amount of accounts receivable and contract assets as of December 31, 2020 and 2021, respectively.
Financing guarantee company A
Institutional funding partner B
As of December 31,
2020
As of December 31,
2021
Nil
Nil
15.5 %
11.0 %
As of December 31, 2020 and 2021, three and two institutional cooperators accounted for more than 10% of the Group's deposits to
institutional cooperators, respectively.
Institutional cooperator A
Institutional cooperator B
Institutional cooperator C
Institutional cooperator D
* Less than 10%.
F-37
As of December 31,
2020
As of December 31,
2021
43.9 %
*
17.5 %
14.6 %
30.7 %
23.1 %
*
*
Table of Contents
The Company manages current payment risk of guarantee liabilities / financial guarantee derivative through a 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. As of December 31, 2021, substantially all of the
loans facilitated by the Group were insured/guaranteed by external insurance company or financing guarantee companies.
(ah)
Credit losses
In June 2016, the Financial Accounting Standards Board (FASB) issued ASU No. 2016-13, Financial Instruments—Credit Losses (Topic
326). The ASU introduced a new credit loss methodology, the current expected credit losses (CECL) methodology, which requires earlier recognition
of credit losses while also providing additional disclosure about credit risk. The Group adopted the ASU as of January 1, 2020, which resulted in an
increase in the Group’s Allowance for credit losses (ACL) and a decrease to opening Retained earnings, net of deferred income taxes, at January 1,
2020.
The CECL methodology utilizes a lifetime “expected credit loss” measurement objective for the recognition of credit losses for loans,
receivables and other financial assets measured at amortized cost at the time the financial asset is originated or acquired. The ACL is adjusted each
period for changes in expected lifetime credit losses. The CECL methodology represents a significant change from prior U.S. GAAP and replaced the
prior multiple existing impairment methods, which generally required that a loss be incurred before it was recognized. Within the life cycle of a loan or
other financial asset, the methodology generally results in the earlier recognition of the provision for credit losses and the related ACL than prior U.S.
GAAP.
The CECL methodology’s impact on expected credit losses, among other things, reflects the Group’s view of the current state of the economy,
forecasted macroeconomic conditions and the Group’s portfolios. The CECL methodology also applies to certain off-balance sheet credit exposures,
such as financial guarantees not accounted for as derivatives. The financial guarantees provided for the Group’s off-balance sheet loans accounted for
under ASC 460 are in the scope of ASC 326 and subject to the CECL methodology.
At the January 1, 2020 date of adoption, based on forecasts of macroeconomic conditions and exposures at that time, the aggregate impact to
the Group was an approximate RMB22.99 million, or an approximate 8.03%, pre tax increase in the Allowance for credit losses, along with a
RMB17.24 million after-tax decrease in Retained earnings and a deferred tax asset increase of RMB5.75 million. This transition impact reflects (i) a
RMB11.64 million build to the Allowance for credit losses for the Group’s accounts receivable and contract assets; (ii) an increase of RMB3.15
million of Allowance for credit losses for the Group’s loans receivable from Xiaoying Credit Loans and Xiaoying Revolving Loans; (iii) an increase of
RMB2.10 million of Allowance for credit losses for the Group’s earnings rights associated with loan assets; (iv) an increase of RMB0.12 million of
cash and equivalents; and (v) an increase of RMB0.22 million of guarantee liabilities.
Under the CECL methodology, the Allowance for credit losses is model based and utilizes a forward-looking macroeconomic forecast in
estimating expected credit losses. The model of the Allowance for credit losses would be considers (i) the uncertainty of forward-looking scenarios
based on the likelihood and severity of a possible recession as another possible scenario; (ii) certain portfolio characteristics, such as portfolio
concentration and collateral coverage; and (iii) model limitations as well as idiosyncratic events.
(ai)
Impact of COVID-19
The Company’s results of operations have been adversely affected by the COVID-19 which harms the Chinese and global economy in general
in 2020. In the early onset of the third quarter of 2020, the Group’s business was already on track for a steady recovery. In July 2020, the Group’s total
loan facilitation amount was back to the level in January 2020 before COVID-19, and so were the delinquency rates for outstanding loans. In 2021, the
Group’s operational and financial results continued to show progress against the Group’s strategic objectives. The Company has also provided
additional credit losses for accounts receivable and contract assets, other current assets and loans receivables in 2020 and 2021, due to the impact of
COVID-19, other economic conditions and other factors. 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, possibility of a second wave in China, the development and progress
of distribution of COVID-19 vaccine and other medical treatment, the potential change in user behavior, especially on internet usage due to the
prolonged impact of COVID-19, the actions taken by government authorities, 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, certain of the Company’s estimates and assumptions, including
the allowance for credit losses, 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.
F-38
Table of Contents
(aj)
Revisions of prior year
In 2020, the Company identified certain amount should have been excluded from both origination and collection of loan principals related to
Consolidated Trusts for the year ended December 31, 2019. As a result, the additional information about Level 3 loans and payable to investors
measured at fair value, and “Principal payment of loans at fair value” and “Principal collection of loans at fair value” in the cash flows from investing
activities of consolidated statement of cash flows for 2019 have been revised accordingly to reflect the immaterial error, which did not affect loans at
fair value, payable to investors at fair value, cash and cash equivalent, cash flows from investing activities, or any other subtotal on the accompanying
consolidated statement of cash flows.
(ak)
Recent accounting pronouncements
In May 2021, the FASB issued Accounting Standards Update 2021-04—Earnings Per Share (Topic 260), Debt—Modifications and
Extinguishments (Subtopic 470-50), Compensation—Stock Compensation (Topic 718), and Derivatives and Hedging—Contracts in Entity’s Own
Equity (Subtopic 815-40): Issuer’s Accounting for Certain Modifications or Exchanges of Freestanding Equity-Classified Written Call Options (a
consensus of the FASB Emerging Issues Task Force). The FASB is issuing this Update to clarify and reduce diversity in an issuer’s accounting for
modifications or exchanges of freestanding equity-classified written call options that remain equity classified after modification or exchange. The
amendments in this Update are effective for all entities for fiscal years beginning July 1, 2022, including interim periods within those fiscal years. The
Group is currently evaluating the impact of this new guidance on the consolidated financial statements but does not expect this guidance will have a
material impact on its consolidated financial statements.
(al)
Translation into United States Dollars
The financial statements of the Group are stated in RMB. Translations of amounts from RMB into United States dollars are solely for the
convenience of the reader and were calculated at the rate of US$1.00 = RMB6.3726, on December 31, 2021, as set forth in H.10 statistical release of
the Federal Reserve Board. The translation is not intended to imply that the RMB amounts could have been, or could be, converted, realized or settled
into United States dollars at that rate on December 31, 2021, or at any other rate.
F-39
Table of Contents
3. Fair value of assets and liabilities
For a description of the fair value hierarchy and the Group’s fair value methodologies, see “ Note 2—Summary of Significant Accounting
Policies”.
Financial Instruments Recorded at Fair Value on a Recurring Basis
The following tables present the fair value hierarchy for assets and liabilities measured at fair value on a recurring basis:
December 31, 2020
Assets
Loans at fair value
Financial guarantee derivative
Financial investments
Total assets
Liabilities
Payable to investors at fair value
Financial guarantee derivative
Total liabilities
December 31, 2021
Assets
Loans at fair value
Financial guarantee derivative
Total assets
Liabilities
Payable to investors at fair value
Financial guarantee derivative
Total liabilities
December 31, 2021
Assets
Loans at fair value
Financial guarantee derivative
Total assets
Liabilities
Payable to investors at fair value
Financial guarantee derivative
Total liabilities
Level 1
(RMB)
Level 2
(RMB)
Level 3
(RMB)
—
—
6,000,000
6,000,000
Level 1
(RMB)
Level 1
(US$)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
Level 2
(RMB)
Level 2
(US$)
1,585,731,888
297,928,066
—
1,883,659,954
1,914,183,650
130,442,090
2,044,625,740
Level 3
(RMB)
389,679,352
11,816,799
401,496,151
462,714,400
565,953,269
1,028,667,669
Level 3
(US$)
61,149,194
1,854,314
63,003,508
72,609,987
88,810,418
161,420,405
Balance at Fair
Value
(RMB)
1,585,731,888
297,928,066
6,000,000
1,889,659,954
1,914,183,650
130,442,090
2,044,625,740
Balance at Fair
Value
(RMB)
389,679,352
11,816,799
401,496,151
462,714,400
565,953,269
1,028,667,669
Balance at Fair
Value
(US$)
61,149,194
1,854,314
63,003,508
72,609,987
88,810,418
161,420,405
Financial guarantee derivative
The Group uses the discounted cash flow model to value the financial guarantee derivatives. Net cumulative expected loss rates represent
expected default rate, prepayment rate and collection rate at inception, as significant unobservable inputs applied in the discounted cash flow model,
which ranged from 4.79% to 17.87% and from 3.43% to 13.29% for the year ended December 31, 2020 and 2021, respectively.
F-40
Table of Contents
The following table sets forth the asset side of Group’s financial guarantee derivative movement activities for the years ended December 31,
2020 and 2021.
Year ended December 31, 2020
Balance at December 31, 2019
Estimated payment to financial institutional cooperators based on the pre-agreed
Cap(1)
Less: Initially estimated net guarantee service fee to be collected(2)
Add : Subsequent changes in estimated net guarantee service fee to be collected
for outstanding loans(3)
Change in fair value of financial guarantee derivative
Add: Guarantee service fee received from borrowers
Less: Compensation paid to financial institutional cooperators
Balance at December 31, 2020
Potential maximum undiscounted amount payable (Remaining estimated payment
to financial institutional cooperators based on the pre-agreed Cap at
December 31, 2020)
Changes in fair value related to balance outstanding at December 31, 2020
For loans facilitated in
2019
RMB
(719,962,262)
For loans facilitated in
2020
RMB
Total
RMB
—
(719,962,262)
—
—
1,268,778,377
1,151,250,106
1,268,778,377
1,151,250,106
57,152,814
57,152,814
818,427,767
155,618,319
—
(41,440,640)
76,087,631
622,533,675
996,549,372
(297,928,066)
15,712,174
133,240,445
1,440,961,442
1,152,167,691
(297,928,066)
—
—
272,229,005
39,915,887
272,229,005
39,915,887
Year ended December 31, 2021
Balance at December 31, 2020
Estimated payment to financial institutional cooperators based on the
pre-agreed Cap (1)
Less: Initially estimated net guarantee service fee to be collected (2)
Add : Subsequent changes in estimated net guarantee service fee to
be collected for outstanding loans (3)
Change in fair value of financial guarantee derivative
Add: Guarantee service fee received from borrowers
Less: Compensation paid to financial institutional cooperators
Balance at December 31, 2021
Potential maximum undiscounted amount payable (Remaining
estimated payment to financial institutional cooperators based on
the pre-agreed Cap at December 31, 2021)
Changes in fair value related to balance outstanding at December 31,
2021
Note:
For loans facilitated in For loans facilitated in
2020
RMB
2021
RMB
3,842,853
—
Total
RMB
3,842,853
Total
USD
603,027
—
—
212,641,902
201,562,969
212,641,902
201,562,969
33,368,155
31,629,628
1,044,741
1,044,741
52,087,120
56,974,714
—
—
—
1,731,660
12,810,593
94,897,894
119,525,286
(11,816,799)
2,776,401
13,855,334
146,985,014
176,500,000
(11,816,799)
435,678
2,174,204
23,065,156
27,696,702
(1,854,314)
93,116,616
93,116,616
14,612,029
11,388,942
11,388,942
1,787,174
(1)
Amount represents estimated payment to financial institutional cooperators which is the aggregated amount of guarantee fees, which
would be the amount of loan principle multiplied by annualized guarantee fee ratio. The obligation is not influenced by default and early repayment of
borrowers.
(2)
Amount represents estimated guarantee service fees to be collected for loans newly facilitated during each vintage period according
to the guarantee service agreement with the borrowers, net of estimated defaults and prepayments.
(3)
Amount represents the subsequent adjustment to update the estimated net guarantee service fees to be collected for all outstanding
loans as a result of changes in estimated default or prepayment rates.
F-41
Table of Contents
The following table sets forth the liability side of Group’s financial guarantee derivative movement activities for the years ended December
31, 2020 and 2021.
Year ended December 31, 2020
Balance at December 31, 2019
Estimated payment to financial institutional cooperators based on the pre-agreed Cap (1)
Less: Initially estimated net guarantee service fee to be collected (2)
Add : Subsequent changes in estimated net guarantee service fee to be collected for
outstanding loans (3)
Change in fair value of financial guarantee derivative
Add: Guarantee service fee received from borrowers
Less: Compensation paid to financial institutional cooperators
Balance at December 31, 2020
Potential maximum undiscounted amount payable (Remaining estimated payment to
financial institutional cooperators based on the pre-agreed Cap at December 31, 2020)
Changes in fair value related to balance outstanding at December 31, 2020
For loans facilitated in
2020
RMB
—
527,660,148
484,555,120
(12,675,358)
30,429,670
173,018,461
73,006,041
130,442,090
454,654,107
21,496,996
For loans facilitated in For loans facilitated in
Year ended December 31, 2021
Balance at December 31, 2020
Estimated payment to financial institutional cooperators based on
the pre-agreed Cap (1)
Less: Initially estimated net guarantee service fee to be collected
(2)
Add : Subsequent changes in estimated net guarantee service fee
to be collected for outstanding loans (3)
Change in fair value of financial guarantee derivative
Add: Guarantee service fee received from borrowers
Less: Compensation paid to financial institutional cooperators
Balance at December 31, 2021
Potential maximum undiscounted amount payable (Remaining
estimated payment to financial institutional cooperators based
on the pre-agreed Cap at December 31, 2021)
Changes in fair value related to balance outstanding at December
31, 2021
Note:
2020
RMB
(171,328,829)
2021
RMB
Total
RMB
Total
USD
—
(171,328,829)
(26,885,232)
—
—
1,927,017,013
1,927,017,013
302,391,020
1,827,304,009
1,827,304,009
286,743,874
3,790,670
3,790,670
837,446,557
669,908,398
—
52,979,985
152,692,989
1,147,827,202
734,566,922
565,953,269
56,770,655
156,483,659
1,985,273,759
1,404,475,320
565,953,269
8,908,555
24,555,701
311,532,775
220,392,826
88,810,418
—
—
1,192,450,091
1,192,450,091
187,121,440
110,763,906
110,763,906
17,381,274
(1)
Amount represents estimated payment to financial institutional cooperators which is the aggregated amount of guarantee fees, which
would be the amount of loan principle multiplied by annualized guarantee fee ratio. The obligation is not influenced by default and early repayment of
borrowers.
(2)
Amount represents estimated guarantee service fees to be collected for loans newly facilitated during each vintage period according
to the guarantee service agreement with the borrowers, net of estimated defaults and prepayments.
(3)
Amount represents the subsequent adjustment to update the estimated net guarantee service fees to be collected for all outstanding
loans as a result of changes in estimated default or prepayment rates.
F-42
Table of Contents
The change in fair value of financial guarantee derivative primarily relates the Group’s estimated exposure in relation to the loans newly
facilitated during the corresponding period, as the Group is obligated to compensate financial institutional cooperators under the guarantee
arrangement based on the contractual guarantee fees charged to borrowers across the entire portfolio subject to a pre-agreed Cap rather than the actual
guarantee fees collected from the borrowers. The change in fair value amount equals to the portion of amounts obligated to pay to financial
institutional cooperators that are not expected to be collected from the borrowers due to the estimated default or prepayment. The derivative is
increased by the guarantee fees collected from the borrowers upon receipt as the Group expects all the fees to be ultimately paid to financial
institutional cooperators. When the payments are made to financial institutional cooperators, the derivative is reduced by the corresponding amount.
The total loan products related to guarantee derivatives facilitated during the years ended December 31, 2020 and 2021 were RMB22,050,765,318 and
RMB25,229,094,745 (US$ 3,958,995,503), respectively.
As of December 31, 2020 and 2021, financial guarantee derivatives related to certain financial institutional cooperators has an asset position
of RMB297,928,066 and RMB11,816,799 (US$1,854,314) respectively, primarily due to the time lag between the payments to those financial
institutional cooperators and the collection of monthly guarantee service fees from borrowers. As of December 31, 2020 and 2021, the cumulative
amount paid to those financial institutional cooperators was less than the cumulative monthly guarantee service fees collected from borrowers.
However, the total amount paid to those financial institutional cooperators was still within the pre-agreed Cap. The excess is expected to be fully
collected from the borrowers during the remaining term of the underlying loans. As of December 31, 2020 and 2021, financial guarantee derivatives
related to certain financial institutional cooperators has a liability position of RMB130,442,090 and RMB565,953,269 (US$88,810,418). As of
December 31, 2020 and 2021, the maximum potential undiscounted future payment the Group would be required to make is RMB726,883,112 and
RMB1,285,566,707 (US$201,733,469) which also reflects the maximum potential payment to financial institutional cooperators based on the pre-
agreed Cap.
The following table represents the outstanding loan balance, remaining weighted average contractual term and estimated default rate of the
outstanding loans as of December 31, 2020 and 2021, respectively.
Outstanding loan balance
Remaining weighted average contractual term (Month)
Net cumulative expected loss rates (1)
(1) Represent the net of default rate, prepayment rate and collection rate.
Loans at fair value and Payable to investors at fair value
As of
December 31,
2020
RMB
11,349,182,478
8.16
5.75 %
As of
December 31,
2021
RMB
9,877,178,724
6.76
7.74 %
As of
December 31,
2021
US$
1,549,944,877
6.76
7.74 %
The Group has elected the fair value option for the loan assets and liabilities of the Consolidated Trusts that otherwise would not have been
carried at fair value. Such election is irrevocable and is applied to financial instruments on an individual basis at initial recognition.
As the Group’s loans and payable to investors in the Consolidated Trusts do not trade in an active market with readily observable prices, the
Group uses significant unobservable inputs to measure the fair value of these assets and liabilities. Financial instruments are categorized in the Level 3
valuation hierarchy based on the significance of unobservable factors in the overall fair value measurement. At December 31, 2020 and 2021, the
discounted cash flow methodology is used to estimate the fair value of loans and payables to investors and institutional funding partners.
F-43
Table of Contents
As of December 31, 2020 and 2021, the significant unobservable inputs used in the fair value measurement of the loans and payables to
investors and institutional funding partners of the Consolidated Trusts include the discount rate, net accumulative expected loss. These inputs in
isolation can cause significant increases or decreases in fair value. Increases or decrease in the discount rate can significantly impact the fair value
results. The discount rate is determined based on the market rates.
Significant Unobservable Inputs
Financial Instrument
Loans and payable to investors at fair value
Unobservable Input
Weighted-Average
Weighted-Average
Discount rates
Net cumulative expected loss rates (1)
7.77 %
5.88 %
6.46 %
5.92 %
December 31, 2020
December 31, 2021
Range of Inputs
Range of Inputs
(1) Represents the net of default rate, prepayment rate and collection rate, expressed as a percentage of the loan volume.
The following table presents additional information about Level 3 loans and payable to investors measured at fair value on a recurring basis
for the years ended December 31, 2020 and 2021. Changes in fair value of loans and payable to investors are reported net as “Fair value adjustments
related to Consolidated Trusts” in the consolidated statements of comprehensive income(loss).
RMB
Xiaoying Credit Loan
RMB
Xiaoying Credit Loan
USD
Xiaoying Credit Loan
Balance at
December 31,
2019
2,782,332,885
Origination
of loan
principal
1,521,546,428
Collection of
principal
(5,155,380,196)
Reinvestment
of principal
2,494,613,045
Change in
fair value
(57,380,274)
Changes in fair
value related to
balance
outstanding at
December 31,
2020
5,031,830
Balance at
December
31, 2020
1,585,731,888
Balance at
December 31,
2020
1,585,731,888
Origination
of loan
principal
422,081,700
Collection of
principal
(3,427,158,051)
Reinvestment
of principal
1,816,290,599
Change in
fair value
(7,266,784)
Balance at
December
31, 2021
389,679,352
Changes in fair
value related to
balance
outstanding at
December 31,
2021
(2,234,954)
Balance at
December 31,
2020
248,835,936
Origination
of loan
principal
66,233,829
Collection of
principal
(537,795,884)
Reinvestment
of principal
285,015,629
Change in
fair value
(1,140,317)
Changes in fair
value related to
balance
outstanding at
December 31,
2021
(350,713)
Balance at
December
31, 2021
61,149,194
Balance at December 31, 2019
Initial contribution
Principal payment
Changes in fair value
Balance at December 31, 2020
Changes in fair value related to balance outstanding at December 31, 2020
F-44
Payable to investors at
fair value of the
Consolidated Trusts
RMB
3,006,349,475
1,537,760,000
(2,629,925,825)
—
1,914,183,650
—
Table of Contents
Balance at December 31, 2020
Initial contribution
Principal payment
Changes in fair value
Balance at December 31, 2021
Changes in fair value related to balance outstanding at December 31, 2021
Payable to investors at fair value of the
Consolidated Trusts
RMB
1,914,183,650
454,490,000
(1,905,959,250)
—
462,714,400
—
US$
300,377,185
71,319,399
(299,086,597)
—
72,609,987
—
The unpaid balance of loans at fair value as of December 31, 2020 and 2021 were RMB1,580,700,058 and RMB391,914,306
(US$61,499,907). The difference between the aggregate fair value and unpaid principal balance for loans at fair value is primarily attributable to the
credit risk associated with the loan collections and time value of money, amounted to RMB5,031,830 and RMB2,234,954 (US$350,713) as of
December 31, 2020 and 2021, respectively.
The unpaid balance of payable to investors as of December 31, 2020 and 2021 were RMB1,914,183,650 and RMB462,714,400
(US$72,609,987). The difference between the aggregate fair value and unpaid principal balance for payable to investors at fair value is primarily due
to the time value of money, amounted nil and nil respectively as of December 31, 2020 and 2021.
The difference between the aggregate fair value and unpaid principal balance for both loans at fair value and payable to investors at fair value
was recorded in Fair value adjustments related to Consolidated Trusts in the consolidated statements of comprehensive income(loss).
Financial Instruments Recorded at Fair Value on a non-recurring basis
The Group records its loans held for sale at fair value on a non-recurring basis when the fair value is less than the carrying amount. Given
most of loans held for sale are traded with unrelated third party investors or institutional funding partners in a short period of time at face value, the
Group determines that the face value of loans approximate its fair value upon origination and are classified as level 2 fair value measurement.
Financial Instruments Not Recorded at Fair Value
Financial instruments, including cash and cash equivalents, accounts receivable and contract assets, other payable and short-term bank
borrowings. The carrying values of cash and cash equivalents, accounts receivable and contract assets, other payable and short-term bank borrowings
approximate their fair value reported in the consolidated balance sheets due to the short term nature of these assets and liabilities.
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4. Prepaid expenses and other current assets
Prepaid expenses and other current assets consist of the following:
Earnings rights associated with loan assets(1)
Prepaid expenses(2)
Input VAT to be deducted
Interest receivable of Consolidated Trusts
Dividend receivable(3)
Advance to employee
Others
Total prepaid expenses and other current assets
As of
December 31,
2020
RMB
258,012,040
57,084,166
64,367,796
11,359,212
—
1,510,410
11,442,695
403,776,319
As of December 31,
2021
RMB
99,235,400
19,325,954
63,867,418
7,889,836
15,000,000
1,205,085
6,603,785
213,127,478
2021
US$
15,572,200
3,032,664
10,022,192
1,238,087
2,353,827
189,104
1,036,278
33,444,352
(1)
In 2019, the Group purchased earnings rights of two loan assets from a related party without recourse (Note 13). The principal of the
two underlying loans amounted to RMB100 million (Loan#1) and RMB280 million (Loan#2), respectively. Based on the earnings right transfer
agreement, the Group obtains the contractual right to receive principal and interest payments of the underlying loans through the transfer of earnings
rights from Jiangxi Ruijing and is obligated legally to absorb the credit risk. Therefore, the Group recognized the earning rights as other receivable
under ‘Prepaid expenses and other current assets’.
Loan#1 had been fully repaid in 2020.
Loan#2 was advanced on May 9, 2019 and was due on November 9, 2019, and the interest rate applied is 8%. In 2019 and 2020, the maturity
date of the entire Loan#2 had been extended to November 9, 2020 and November 9, 2021, respectively. As of the date of this report, Loan#2 had been
fully repaid.
The Group assesses the allowance for credit losses for the earnings rights of loan assets in accordance with ASC 326, taking reference with
the credit ratings of the corresponding loan borrowers and applying the probability of default rates, based on the mapping of probability of default rates
and external credit ratings.
The following table presents the movement of the allowances for the credit losses for earnings rights associated with the loan assets:
Total
Total
As of
December 31,
2020
RMB
1,987,960
Reversal of provision of
credit losses for
earnings rights
associated with the loan
assets
RMB
(1,223,360)
As of
December 31,
2021
RMB
764,600
As of
December 31,
2020
US$
311,954
Reversal of provision of
credit losses for
earnings rights
associated with the loan
assets
US$
(191,972)
As of
December 31,
2021
US$
119,982
(2) Prepaid expenses mainly relate to prepaid service fee to the Group’s service providers.
(3) The amount represents dividend receivable from Jiangxi Ruijing, one of the Group’s associates.
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5. Deposits to institutional cooperators, net
The following table presents the deposits to cooperators as of December 31, 2020 and 2021, respectively:
Deposits to cooperators
Provision for credit losses on deposits to institutional cooperators
Deposits to cooperators, net
As of
December 31,
2020
RMB
918,241,497
(10,318,117)
907,923,380
As of December 31,
2021
RMB
1,502,433,446
(2,026,696)
1,500,406,750
2021
US$
235,764,593
(318,033)
235,446,560
Deposits to cooperators relate to the pledged cash to the Group’s financial institutional cooperators and the amount of deposit is separately
agreed with each institutional cooperator.In 2020, to maintain the collaborative relationship with one of its institutional cooperator and to avoid any
material adverse impact on the Group’s current business model and future transaction cost, the Group used deposits amounting to RMB970,000,000 to
compensate for such institutional cooperator’s loss for the amount it had paid under investors’ or institutional funding partners’ claims arising from
borrowers’ default to repay loans. The Group also assumed the right of subrogation and related rights against the defaulting borrowers, which were
sold to a third party with the consideration of RMB10,000,000. The Group has recognized above loss of RMB960,000,000 as impairment of the
deposits and has also provided an allowance for the potential losses of the remaining deposits, taking into account the underlying assets’ credit quality.
As of 31 December, 2020 and 2021, the allowance of deposits to cooperators was RMB10,318,117 and RMB2,026,696(US$318,033),
respectively.
The following table presents the movement of the provision for deposits to institutional cooperators:
Deposits to institutional cooperators
Deposits to institutional cooperators
6. Property and equipment, net
Property and equipment, net consists of the following:
Computer and transmission equipment
Furniture and office equipment
Leasehold improvements
Motor vehicles
Total property and equipment
Accumulated depreciation
Property and equipment, net
As of
December 31,
2020
RMB
Reversal of provision for
credit losses on
deposits to
institutional cooperators
RMB
10,318,117
(8,291,421)
Charge-off for
deposits to
institutional cooperators
RMB
—
As of
December 31,
2021
RMB
2,026,696
As of
December 31,
2020
US$
Reversal of provision for
credit losses on
deposits to
institutional cooperators
US$
1,619,138
(1,301,105)
Charge-off for
deposits to
institutional cooperators
US$
—
As of
December 31,
2021
US$
318,033
As of
December 31,
2020
RMB
22,107,077
3,663,257
21,682,197
816,103
48,268,634
(37,132,035)
11,136,599
As of December 31,
2021
RMB
19,521,668
2,781,360
22,803,702
816,103
45,922,833
(39,734,571)
6,188,262
2021
US$
3,063,376
436,456
3,578,398
128,064
7,206,294
(6,235,221)
971,073
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Table of Contents
Depreciation expense was RMB10,544,813, RMB10,114,779 and RMB6,215,253 (US$975,309) for the years ended December 31, 2019,
2020 and 2021, respectively. Disposal of property and equipment resulted in a gain of RMB2,389 during the year ended December 31, 2019, but a loss
of RMB59,213 for the year ended December 31, 2020, and a gain of RMB180,537(US$28,330) in the year ended December 31, 2021.
7. Intangible assets, net
Intangible assets, net consists of the following:
Licenses (1)
Software and others
Accumulated amortization
Intangible assets, net
As of
December 31,
2020
RMB
26,600,000
15,438,530
(4,598,123)
37,440,407
Weighted Average
Remaining
Amortization
Period in Years
As of December 31,
2021
US$
2021
RMB
26,600,000
16,735,406
(6,518,422)
36,816,984
4,174,120
2,626,150
(1,022,883)
5,777,388
NA
3.03
(1)
During 2018, the Group acquired an insurance broker license at a cost of RMB26,000,000. During 2019, the Group further acquired
an insurance sale on line license at a cost of RMB600,000.
Amortization expenses were RMB834,884, RMB1,800,749 and RMB1,920,299 (US$301,337) for the years ended December 31, 2019, 2020
and 2021 respectively. The Group expects to record amortization expenses of RMB1,910,149 (US$299,744), RMB1,531,321 (US$240,298),
RMB1,316,290 (US$206,555), RMB1,316,290 (US$206,565) and RMB1,312,187 (US$205,911) for the years ending December 31, 2022, 2023, 2024,
2025 and 2026 respectively.
8. Short-term bank borrowings
In January 2020, the Group set up a six-month loan amounting to RMB161,000,000 and repaid with interest amounting to RMB3,215,081 in
July 2020.
As of December 31, 2020, out of the secured one-year borrowings, RMB350,545,000 were secured by restricted cash of US$55,950,000. The
weighted average interest rate of all short-term borrowings is 4.04% per annum as of December 31, 2020. The loan had been fully repaid during the
year of 2021.
In March 2021, the Group set up a six-month loan amounting to RMB100,000,000 and repaid with interest amounting to RMB1,715,417 in
August 2021.
As of December 31, 2021, out of the secured one-year borrowings, RMB166,500,000 were secured by restricted cash of US$29,050,000. The
weighted average interest rate of all short-term borrowings is 3.17% per annum as of December 31, 2021.
9. Financial investments
During the years ended December 31, 2020 and 2021, the Group invested financial products issued by banks of RMB6,000,000 and
RMB30,000,000, respectively and these financial products have been fully collected in 2021. During the years ended December 31, 2020 and 2021,
the Company recorded interest income from its financial investments of nil and RMB302,460(US$47,463) in the consolidated statements of
comprehensive income (loss), respectively.
During the year ended December 31, 2021, the Group invested in an aggregate amount of US$13,000,000 in two VC funds, which were
elected to be measured at the cost minus impairment. During the year ended December 31, 2021, no gain or loss from investments in VC funds was
recognized in the consolidated financial statements. There was no any upward adjustment, downward adjustment including impairment, nor disposal of
investment during the year ended December 31, 2021.
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The following table presents the carrying amount of investments in VC funds as of December 31, 2021:
Opening balance
Contribution
Upward adjustment
Downward adjustments including impairment
Ending Balance
10. Long-term investments
As of December 31,
2021
RMB
—
82,843,800
—
—
82,843,800
2021
US$
—
13,000,000
—
—
13,000,000
During the year ended December 31, 2017, the Group invested RMB15,000,000 in cash for 10% of the equity interest in a private company
which mainly operates computer services, advisory and car leasing & financing. The significant influence can be given by the Group as the Group has
its representation on the board and thus equity method was applied. As the investee was unable to sustain an earnings capacity that would justify the
carrying amount of the investment, the Group fully impaired the investment amounting to RMB12,538,280 and considered that such impairment is
other than temporary in 2019.
In 2017, the Group also invested RMB40,000,000 in cash of equity interests through nominee arrangement where the Group obtained all
shareholder rights associated with the 40% equity holdings through contractual agreements with the nominal shareholder as the Group currently does
not meet certain regulatory requirements to directly invest in such investee company. As the Group has significant influence over the private entity
through its representation on the board, the investment was accounted for using the equity method. As of the date of this report, the investee company
is in the winding up process and the Group has collected its capital contribution of RMB40,000,000 from the investee company.
During the year ended December 31, 2018, the Group invested RMB225,000,000 in cash for 15% equity interest of a Jiangxi Ruijing
Financial Asset Management Co., Ltd. (‘‘Jiangxi Ruijing’’), a PRC based asset management company through a nominee arrangement where the
Group obtained all shareholder rights associated with the 15% equity holdings through contractual agreements with the nominal shareholder. Given
that the Group has the ability to significantly influence Jiangxi Ruijing, the equity method of accounting was used.
During the year ended December 31, 2020, the Group invested RMB3,500,000 in cash for 20% equity interest of a PRC based digital system
service company, whereas the Group obtained less than 17% of the voting power of the investee. Given that the Group does not have the ability to
exercise significant influence over investments, the cost method of accounting was used.
During the year ended December 31, 2021, the Group invested RMB315,000,000 in cash for 45% equity interest of Shenyang Tianxinhao
Technology Limited, a PRC based software and information technology services company. The significant influence can be given by the Group as the
Group has its representation on the board and thus equity method was applied.
There are no differences between the amount at which these long-term investments were carried and the amount of the underlying equities in
net assets.
F-49
Table of Contents
The following table presents the summary combined financial information for the investee companies as of and for the years ended December
31, 2020 and 2021.
Assets:
Cash and cash equivalents
Financial investments
Prepaid expenses and other current assets, net
Long-term investments
Other non-current assets
Total assets
Liabilities:
Short-term borrowings
Accrued expenses and other current liabilities
Long-term borrowings
Other non-current liabilities
Total liabilities
Net revenues
Net income
11. Accrued expenses and other current liabilities
Accrued expenses and other current liabilities consist of the following:
Fund attributable to institutional funding partners (1)
Accrued interest payable of Consolidated Trusts
Professional fee payable
Commission fee payable(2)
Insurance fee payable(3)
Lease liabilities
Other accrued expenses
Total accrued expenses and other current liabilities
As of December 31,
2020
RMB
As of December 31,
2021
RMB
2021
US$
1,090,349,265
3,361,800,611
90,141,356
—
18,428,513
4,560,719,745
118,754,431
742,087,584
1,937,000,000
86,280
2,797,928,295
327,483,767
4,291,549,384
1,331,030,237
538,864,786
29,069,461
6,517,997,635
136,611,562
742,552,522
2,611,819,014
5,738,967
3,496,722,065
51,389,349
673,437,747
208,867,690
84,559,644
4,561,633
1,022,816,063
21,437,335
116,522,694
409,851,397
900,569
548,711,995
Year ended
December 31,
2020
RMB
115,828,103
72,275,985
Year ended December 31,
2021
2021
US$
RMB
49,496,340
315,420,375
19,386,938
123,545,201
As of
December 31,
2020
RMB
16,485,383
25,320,873
27,648,350
101,285,353
65,906,706
16,871,785
70,229,980
323,748,430
As of December 31,
2021
RMB
68,931,284
1,219,993
25,874,860
81,862,576
14,360,705
12,331,166
64,385,966
268,966,550
2021
US$
10,816,823
191,443
4,060,330
12,846,025
2,253,508
1,935,029
10,103,563
42,206,721
(1)
Fund attributable to institutional funding partners relate to the principal and interest collected on behalf of the institutional funding
partners but have not yet been passed onto them as of December 31, 2020 and 2021.
(2)
Commission fee payable relates to the commission fees payable to channel partners who introduce borrowers to the platform of the
Group. The commission is typically determined based on the volume of traffic introduced, regardless of whether the introduced traffic becomes a
borrower or investor on the Group’s platform.
(3)
Insurance fee payable relates to the insurance fees payable to ZhongAn who provides credit insurance to institutional funding
partners.
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Table of Contents
12. Guarantee liabilities
The movement of guarantee liabilities during the years ended December 31, 2019, 2020 and 2021 are as follows:
RMB
Xiaoying Credit Loan
Xiaoying Housing Loan
Internet Channel
Total
RMB
Xiaoying Credit Loan
Xiaoying Housing Loan
Internet Channel
Total
RMB
Xiaoying Credit Loan
Internet Channel
Total
USD
Xiaoying Credit Loan
Internet Channel
Total
As of
January 1,
2019
19,297,719
1,600,482
—
20,898,201
Provision at
the inception
of new loans Net payout(1)
—
184,036
—
184,036
(6,333,472)
97,593
—
(6,235,879)
Released on
expiration
Contingent
liability(2)
(3,366,501)
(1,752,115)
—
(5,118,616)
289,211
—
7,458,350
7,747,561
As of
December 31,
2019
9,886,957
129,996
7,458,350
17,475,303
As of
January 1,
2020
9,886,957
129,996
7,458,350
17,475,303
Provision at
the inception
ASU 2016-13 of new loans
Adoption of
168,385
2,214
127,023
297,622
—
—
—
—
Net payout(1)
9,192,069
42,660
(3,761,403)
5,473,326
Released on
expiration
(14,162,703)
(174,870)
—
(14,337,573)
Contingent
liability
55,034
—
825,914
880,948
As of
December 31,
2020
5,139,742
—
4,649,884
9,789,626
As of
January 1,
2021
5,139,742
4,649,884
9,789,626
Provision at
the inception
of new loans Net payout(1)
7,821,975
(4,625,600)
3,196,375
—
—
—
Released on
expiration
(12,961,717)
—
(12,961,717)
Reversal of
provision for
contingent
liability
—
(24,284)
(24,284)
As of
December 31,
2021
—
—
—
As of
January 1,
2021
806,538
729,668
1,536,206
Provision at
the inception
of new loans
—
—
—
Net payout (1)
1,227,439
(725,858)
501,581
Released on
expiration
(2,033,976)
—
(2,033,976)
Reversal of
provision for
contingent
liability
—
(3,811)
(3,811)
As of
December 31,
2021
—
—
—
(1)
Net payouts represent the amount paid to investors and institutional funding partners or ZhongAn upon borrowers’ default net of the
amount subsequently collected from the borrower if they paid back the loan.
(2)
The Group continued to recognize a contingent liability of RMB7,458,350 in 2019 relating to expected default loans referred by a
cooperated Fintech channel partner who experiences business difficulties. In order to maintain the reputation among investors and institutional funding
partners, the Group decided at its sole discretion to reimburse investors and institutional funding partners if the channel partner fails to fulfill its
obligation to make the reimbursement.
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Table of Contents
The maximum potential undiscounted future payment was nil as of December 31, 2021. The following table presents the maximum potential
undiscounted future payments by product, remaining weighted average contractual loan term, and estimated net default rates as of December 31, 2020:
As of December 31, 2020
Xiaoying Credit Loan
Internet Channel (1)
Total
Maximum potential
undiscounted future
payment
(RMB)
10,560,672
4,649,885
15,210,557
Maximum potential
undiscounted future
payment
(USD)
1,618,494
712,626
2,331,120
Remaining
weighted
average
contractual
Estimated net
term (Month) default rate
26.06 %
100 %
3.04
2.21
(1)
Relates to loans referred from third party channel cooperators that has back to back guarantee arrangements with the Group. The
Group co-operates with selected Fintech and other financial companies by connecting the borrowers referred by those companies to investors or
institutional funding partners on the Group’s platform. Though it is the selected companies who provide credit enhancements on the loans facilitated to
the borrowers, since 2019, the Group voluntarily provides guarantee service to the investors or institutional funding partners from its platform for
reputational maintenance, if any indication of operational deterioration is found among these selected companies. The Group recognizes a contingent
liability in 2019 relating to expected default loans referred by a cooperated Fintech channel partner who experiences business difficulties, which was
minimal comparing with the cooperating scale. In 2020, the Group continues to voluntarily provide guarantee services to its institutional funding
partners and estimates that its potential reimbursement would be maximized as no indication of operational improvement is found from the cooperated
Fintech channel partner. As such, estimated net default rate is 100% as of December 31, 2020.
As of December 31, 2020, the maximum potential undiscounted future payment that had been secured through use of collateral was nil.
From 2018, the Group entered into a series of arrangements with various external asset management companies to provide guarantee service
for an identified portfolio of loans facilitated on the Company’s platform and engages directly with the borrowers and investors on the platform.
Throughout the loan term, borrowers pay the guarantee fee directly to the asset management companies. Upon the default of the borrower, the asset
management companies directly compensate the investors and obtains the creditor’s rights of the loans. As a result, no guarantee liabilities have been
recorded by the Group for the loan portfolio that are guaranteed by the asset management companies.
13. Related party balances and transactions
In 2019, the Group transferred loan portfolios with an aggregate amount of RMB108.7 million to Zijinzhonghao(Zhejiang) Investment Co.,
Ltd. The considerations received by the Group were determined based on the outstanding loan balances on the transaction dates.
In 2019, the Group purchased earnings rights of two loans from Jiangxi Ruijing. The considerations paid amounted to RMB100,000,000 and
RMB280,000,000, respectively, which equal to the principal amounts of the underlying loans. In 2020, earnings right of the former loan (Loan#1) had
been fully repaid. Earnings right of the latter loan (Loan#2) had been partially repaid by RMB20,000,000 and RMB160,000,000 in 2020 and 2021,
respectively, and the remaining RMB100,000,000 had been fully repaid in January 2022. (Note 4(1)). The associated interest income amounted to
RMB27,111,557, RMB28,774,549 and RMB17,269,246(US$2,709,921) in 2019, 2020 and 2021, respectively.
In 2021, the Company entered into agreements with a financing guarantee company, which is a wholly-owned subsidiary of the Company's
equity investee obtained in 2020. This financing guarantee company provides guarantee service for an identified portfolio of loans the Company
facilitated and charges borrowers a guarantee fee, a portion of which will be subsequently paid to the Company as the service fee for the intermediary
service the Company provide. During the year of 2021, this financing guarantee company provided guarantee service for 5.9% of the total loans the
Company facilitated. The Company recognized total net revenue of RMB78,801,582(US$12,365,688) during the year of 2021 in connection with the
service fees of facilitation service for loans that covered by this financing guarantee company. As of December 31, 2021, contract assets of
RMB66,761,250(US$10,476,297) will be subsequently collected from this financing guarantee company.
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In 2021, the Group provided a loan of RMB150,000,000(US$23,538,273) to an associate of the Group, Shenyang Tianxinhao Technology
Limited, and the monthly interest rate applied is 0.5%. The loan had been fully repaid during the year of 2021. The associated interest income
amounted to RMB750,000(US$117,691) in 2021.
14. Income taxes
Cayman Islands
X Financial is a company incorporated in the Cayman Islands. Under the current laws of the Cayman Islands, the Company is not subject to
tax on either income or capital gain.
Hong Kong
Under the current Hong Kong Inland Revenue Ordinance, YZT (HK) Limited, a subsidiary of the Group located in Hong Kong, is subject to
16.5% income tax on its taxable income generated from operations in Hong Kong. No income tax expense for this entity has been recognized in the
consolidated financial statements as it has no assessable income for the years ended December 31, 2019, 2020 and 2021.
PRC
The Company’s subsidiaries and consolidated VIEs established in the PRC are subject to an income tax rate of 25% for the years presented.
As stipulated by the Taxation Law of the PRC, entities founded in certain industrial cooperation zones can be subject to a reduced enterprise income
tax rate of 15%. One subsidiary became a qualified enterprise eligible to enjoy the preferential income tax rate of 15% in 2019, and it was not qualified
to enjoy the preferential income tax rate of 15% from 2020. One VIE in Shenzhen was a qualified enterprise eligible to enjoy the preferential income
tax rate of 15% from 2019 to 2021. Moreover, a qualified software enterprise is entitled to a tax holiday consisting of a two-year exemption starting
from the first profit-making year and 50% reduction for the subsequent three years. One subsidiary was a qualified software enterprise and was subject
to the preferential tax rate of 12.5% from 2019 to 2021.
Uncertainties exist with respect to how the current income tax law in the PRC applies to the Group’s overall operations, and more specifically,
with regard to tax residency status. The EIT Law includes a provision specifying that legal entities organized outside of the PRC will be considered
residents for Chinese Income Tax purposes if the place of effective management or control is within the PRC. The implementation rules to the EIT
Law provide that non-resident legal entities will be considered PRC residents if substantial and overall management and control over the
manufacturing and business operations, personnel, accounting and properties, occurs within the PRC. Despite the present uncertainties resulting from
the limited PRC tax guidance on the issue, the Group does not believe that the legal entities organized outside of the PRC within the Group should be
treated as residents for EIT law purposes. If the PRC tax authorities subsequently determine that the Company and its subsidiaries registered outside
the PRC should be deemed resident enterprises, the Company and its subsidiaries registered outside the PRC will be subject to PRC income taxes, at a
statutory income tax rate of 25%.
According to PRC Tax Administration and Collection Law, the statute of limitations is three years if an underpayment of taxes is due to
computational errors made by the taxpayer or withholding agent. The statute of limitations will be extended five years under special circumstances,
which are not clearly defined (but an underpayment of tax liability exceeding RMB0.1 million is specifically listed as a special circumstance). In the
case of a related party transaction, the statute of limitations is ten years. There is no statute of limitations in the case of tax evasion. Tax yeas from
2015 to the current years for the Group’s PRC subsidiaries are subject to examination of the PRC tax authorities.
Current tax expense (benefit) and deferred tax expense (benefit), which are substantially all attributable to the Company’s PRC subsidiaries,
VIEs and subsidiaries of the VIEs, are as follows:
Current tax expense (benefit)
Deferred tax expense (benefit)
Total income tax expense (benefit)
Year ended
December 31,
2019
RMB
71,809,290
(164,911,933)
(93,102,643)
Year ended
December 31,
2020
RMB
(157,326,719)
(142,551,916)
(299,878,635)
Year ended December 31,
2021
2021
US$
RMB
35,315,597
333,420,104
368,735,701
5,541,788
52,320,890
57,862,678
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Income (loss) before income taxes and gain (loss) from equity affiliates for different jurisdictions is shown as follows:
Cayman Islands
Hong Kong entities
PRC entities
Total
Year ended
December 31,
2019
RMB
(9,978,594)
(140,208)
674,034,252
663,915,450
Year ended
December 31,
2020
RMB
(15,160,941)
911,529
(1,587,284,724)
(1,601,534,136)
2021
US$
Year ended December 31,
2021
RMB
(6,463,771)
948,973
1,196,315,182
1,190,800,384
(1,014,307)
148,915
187,727,958
186,862,566
A reconciliation between income tax expense computed by applying the PRC tax rate of 25% to income (loss) before income taxes and gain
(loss) from equity in affiliates and the reported amount of income tax expense (benefit) is as follows:
Expected tax at PRC rate
Other expenses not deductible for income tax purposes
Share based compensation expense not deductible for income tax purposes
Effect of tax holiday and preferential tax rate(1)
Effect of different tax rate of subsidiary operation in other jurisdictions
Effect of change in tax rate
Research and development tax deduction
Unrecognized tax benefits for prior years' transfer pricing arrangement
Tax on undistributed loss of VIEs
Valuation allowance movement
Others
Total
Year ended
December 31,
2019
RMB
165,978,862
27,243,710
39,101,140
(279,823,276)
2,853,547
—
(12,657,389)
—
(46,419,145)
4,451,281
6,168,627
(93,102,643)
Year ended
December 31,
2020
RMB
(400,383,534)
26,628,325
20,035,035
2,160,562
3,712,755
(1,547,465)
—
32,092,388
—
9,155,075
8,268,224
(299,878,635)
Year ended December 31,
2021
2021
US$
RMB
46,715,642
297,700,096
3,817,136
24,325,078
3,469,336
22,108,693
(4,035,464)
(25,716,398)
240,919
1,535,280
—
—
(2,203,187)
(14,040,027)
(3,489,855)
(22,239,451)
—
—
15,595,550
99,384,200
(2,247,399)
(14,321,770)
57,862,678
368,735,701
(1) The aggregate amount and per share effect of the tax holiday and preferential tax rate are as follows:
The aggregate amount tax benefit(expense) of the tax holiday and preferential
tax rate
The aggregate effect on basic and diluted net income per share:
—Basic
—Diluted
Year ended
December 31,
2019
RMB
Year ended
December 31,
2020
RMB
Year ended December 31,
2021
2021
US$
RMB
279,823,276
(2,160,562)
25,716,398
4,035,464
0.89
0.88
(0.01)
(0.01)
0.08
0.08
0.01
0.01
F-54
Table of Contents
The tax effects of temporary differences and carry forwards that give rise to the deferred tax balances at December 31, 2020 and 2021 are as
follows:
Deferred tax assets:
Long-term investments
Accrued expenses
Accounts receivable and contract assets
Guarantee liabilities
Financial guarantee derivatives
Loan receivable from Xiaoying Housing Loans
Loans receivable from Xiaoying Credit Loans and Xiaoying Revolving Loans
Operating loss carryforwards
Earnings rights associated with loan assets
Deposits to institutional cooperators
Investment in Consolidated Trusts
Lease liabilities
Total deferred tax assets
Valuation allowance
Total deferred tax assets, net of valuation allowance
Deferred tax liabilities:
Property and equipment
Long-term investments
Right-of-use assets
Investment in Consolidated Partnerships
Total deferred tax liabilities
As of December 31,
2020
RMB
As of December 31,
2021
RMB
2021
US$
5,325,000
27,280,677
79,593,687
62,048,651
157,281,000
16,551,270
60,479,731
214,313,889
496,990
2,579,529
808,113
9,479,662
636,238,199
(14,010,030)
622,228,169
581,854
6,778,801
9,214,921
—
16,575,576
5,325,000
36,045,445
28,982,373
1,017,108
199,865,748
16,456,881
79,578,524
43,644,917
191,150
506,674
11,509,170
6,599,483
429,722,473
(113,394,230)
316,328,243
488,150
4,142,756
6,299,837
30,528,966
41,459,709
835,609
5,656,317
4,547,967
159,606
31,363,297
2,582,444
12,487,607
6,848,840
29,996
79,508
1,806,040
1,035,602
67,432,833
(17,794,029)
49,638,804
76,601
650,088
988,583
4,790,661
6,505,933
On January 1, 2020, the Group adopted the ASC 326. The transition adjustment included a tax benefit of RMB5.75 million in retained
earnings, which increased deferred tax assets by a corresponding amount.
Movement of the valuation allowance is as follows:
Balance as of January 1
Addition
Balance as of December 31
As of
December 31,
2020
RMB
(4,854,955)
(9,155,075)
(14,010,030)
As of December 31,
2021
RMB
2021
US$
(14,010,030)
(99,384,200)
(113,394,230)
(2,198,479)
(15,595,550)
(17,794,029)
The Company operates through its subsidiaries, VIEs and subsidiaries of the VIEs. The valuation allowance is considered on an individual
entity basis. As of December 31, 2020 and 2021, the Company had operating loss carryforwards of RMB921,429,605 and RMB207,062,455
(US$32,492,618) respectively from its subsidiaries, VIEs and subsidiaries of the VIEs registered in the PRC. The net operating loss will expire in
years 2022 to 2026, if not utilized.
The tax benefit, net of valuation allowance, recognized during the year due to the generation of net operating losses that can be carried
forward to future years amounted to RMB200,303,859 and RMB25,408,164 (US$3,987,095), respectively. The tax benefit utilised during the year
ended December 31, 2020 and 2021 amounted to nil and RMB196,077,136 (US$30,768,781) respectively. During the year ended December 31, 2021,
the Company recognized a deferred tax expense of RMB103,563,700 (US$16,251,404) for an increase in a valuation allowance as a result of a change
in judgment about the ability of a subsidiary to utilize a beginning-of-the-year deferred tax asset in future years.
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Table of Contents
The Group assesses the available positive and negative evidence to estimate if sufficient future taxable income will be generated to use the
existing deferred tax assets. The ultimate realization of deferred tax assets is dependent upon its ability to generate sufficient future taxable income
within the carryforward periods provided for in the tax law and during the periods in which the temporary differences become deductible. When
assessing the realization of deferred tax assets, the Group has considered possible sources of taxable income including (i) future reversals of existing
taxable temporary differences, (ii) future taxable income exclusive of reversing temporary differences and carryforwards, including consideration of
specific known trend of profits expected to be reflected within the industry, (iii) taxable income in prior carryback years and (iv) tax-planning
strategies. On the basis of this evaluation, as of December 31, 2020 and 2021 a valuation allowance of RMB14,010,030 and RMB113,394,230
(US$17,794,029) was recorded respectively to reduce the deferred tax assets to the amount that is not more likely than not to be realized. The amount
of the deferred tax assets considered realizable, however, could be adjusted if estimates of future taxable income during the carryforward period are
reduced or increased or if objective negative evidence in the form of cumulative losses is no longer present and additional weight is given to subjective
evidence such as the Group’s projections for growth.
In accordance with the EIT Law, dividends, which arise from profits of foreign invested enterprises (“FIEs”) earned after January 1, 2008, are
subject to a 10% withholding income tax. In addition, under tax treaty between the PRC and Hong Kong, if the foreign investor is incorporated in
Hong Kong and qualifies as the beneficial owner, the applicable withholding tax rate is reduced to 5%, if the investor holds at least 25% in the FIE, or
10%, if the investor holds less than 25% in the FIE. A deferred tax liability should be recognized for the undistributed profits of PRC subsidiaries
unless the Company has sufficient evidence to demonstrate that the undistributed dividends will be reinvested and the remittance of the dividends will
be postponed indefinitely. Management has asserted it intends to indefinitely reinvest the undistributed earnings of the subsidiaries located in the PRC.
As of December 31, 2021, the FIE of the Group had cumulative profits of RMB2,265,192,430 (US$355,458,122). The related unrecognized deferred
tax liabilities were RMB226,519,243(US$35,545,812) as of December 31, 2021.
A deferred tax liability should be recorded for taxable temporary differences attributable to the excess of financial reporting amounts over tax
basis amounts, including those differences attributable to a more than 50% interest in a domestic subsidiary. However, recognition is not required in
situations where the tax law provides a means by which the reported amount of that investment can be recovered tax-free and the enterprise expects
that it will ultimately use that means. The Group accrued deferred tax liabilities on the earnings of the VIEs of nil and nil as of December 31, 2020 and
2021.
Unrecognized tax benefits
A roll-forward of unrecognized tax benefits is as follows:
Balance at beginning of the year
Additions for tax positions taken in prior years
Additions for tax positions taken in current year
Reductions for tax positions taken in prior years
Balance at end of the year
Year ended December 31,
2020
RMB
246,394,607
32,092,388
34,252,413
(153,256,232)
159,483,176
Year ended December 31,
2021
RMB
159,483,176
—
19,087,010
(139,959,819)
38,610,367
2021
US$
25,026,390
—
2,995,168
(21,962,750)
6,058,808
The accrued interest and penalties related to income taxes at December 31, 2020 and 2021 is set forth below:
Accrued interest and penalties
Year ended December 31,
2020
RMB
11,885,624
Year ended December 31,
2021
RMB
1,154,145
2021
US$
181,111
As of December 31, 2020 and 2021, the Group’s unrecognized tax benefits consisted of: 1) RMB79,593,688 and
RMB28,757,431(US$4,512,668) arising from impairment losses and charge-offs of accounts receivable and contract assets; 2) RMB47,797,100 and nil
related to the provision for contingent guarantee liabilities; and 3) RMB32,092,388 and RMB9,852,936(US$1,546,140) arising from prior years’
transfer pricing arrangement.
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Table of Contents
As of December 31, 2020 and 2021, RMB34,252,413 and nil of the unrecognized tax benefits was presented in the consolidated financial
statements as a reduction to a deferred tax asset for a net operating loss carryforward.
As at December 31, 2020 and 2021, the unrecognized tax benefit balance of RMB32,092,388 and nil, if recognized upon examination
settlement or statute expiration, would affect the effective tax rate.
For the year ended December 31, 2020, interest expense related to unrecognized tax benefits was RMB8,079,661, which was recorded as part
of the income tax expense in the consolidated financial statements. For the year ended December 31, 2021, interest income related to unrecognized tax
benefits was RMB10,731,479(US$1,684,003), which was recorded as part of the income tax expense in the consolidated financial statements.
15. Net income (loss) per share and net income (loss) attributable to common stockholders
The following table details the computation of the basic and diluted net income (loss) per share:
Net income (loss) attributable to X Financial
Shares (denominator):
Weighted average number of ordinary shares used in computing basic EPS
Basic net income (loss) per share
Diluted effects of stock options and RSUs
Weighted average number of ordinary shares used in computing diluted
EPS
Diluted net income (loss) per share
Year ended
December 31,
2019
RMB
774,276,129
313,757,887
2.47
5,989,505
319,747,392
2.42
Year ended
December 31,
2020
RMB
(1,308,502,575)
Year ended December 31,
2021
2021
US$
RMB
129,524,374
825,407,023
321,236,089
(4.07)
—
329,230,273
2.51
7,650,808
329,230,273
0.39
7,650,808
321,236,089
(4.07)
336,881,082
2.45
336,881,082
0.38
Diluted income (loss) per share do not include the following instruments as their inclusion would have been anti-dilutive:
Stock options
Restricted stocks units
16. Share-based compensation
Share options
Year ended
Year ended
Year ended
December 31,
December 31,
December 31,
2019
52,405,826
3,689,400
2020
52,198,603
6,285,294
2021
32,139,614
27,100,812
On January 25, 2015, the Board of Directors of X Financial approved the Share Incentive Plan for the purpose of providing incentives and
rewards to employees and executives who contribute to the success of the Company’s operations, and granted 13,843,645 of stock options. On June 29,
2015, May 3, 2016, October 11, 2017, April 30, 2018, October 31, 2018 and April 30, 2019, the Board of Directors of X Financial granted 630,000,
7,425,000, 16,616,000, 841,054, 475,000 and 155,000 stock options respectively to certain employees, directors and officers. The stock options shall
expire 10 years from the date of grant and vest over a period from three to four years.
On May 9, 2018, the Board of Directors of X Financial granted 40,000,000 share options to certain senior management. The exercise price
was the offering price per share of the Group’s IPO which was US$4.75, and were eligible to vest, in whole or in part, when both the market
capitalization milestone as well as the targeted adjusted net earnings were achieved subsequent to the IPO. The Company determined the service
inception date to be May 9, 2018 and the grant date to be the date of the IPO.
On November 10, 2021, the board of directors of X Financial decided to cancel 9,429,984 of unvested share options granted to certain senior
management.
F-57
Table of Contents
The Company used the Binomial model to estimate the fair value of the options granted on the respective grant dates with assistance from
independent valuation firms. The fair value per option was estimated at the date of grant using the assumptions. The weighted-average grant date fair
value of the options for the years ended December 31,2019, 2020 and 2021 were RMB10.33, RMB9.99 and RMB9.58 per share respectively
Fair value of underlying ordinary
shares
Exercise Price
Expected Volatility per annum
(“p.a.”)
Risk-Free Rate (p.a.)
Exercise Multiple
Dividend Yield (p.a.)
Time to Maturity (Years)
January 25,
2015
RMB
June 29,
2015
RMB
May 3,
2016
RMB
October 11,
2017
RMB
April 30,
2018
RMB
May 9,
2018
RMB
4.91
0.27
9.66
0.27
16.98
0.27 - 10.71
30.29
0.27 - 27.02
41.33
25.42
38.14
30.27
October 31, April 30,
2018
RMB
26.74
27.93
2019
RMB
16.65
31.96
43.00 % 38.00 %
2.33 %
2.5
NIL
10
1.81 %
2.5
NIL
10
42.00 %
1.81 %
2.5
NIL
10
38.60 % 45.47 %
2.35 % 2.96 %
2.5
NIL
10
2.5
NIL
10
39.3 %
2.94 %
5.58-38.33
NIL
5
43.90 % 30.15 %
3.15 % 2.97 %
2.5
NIL
10
NIL
NIL
10
The risk-free rate of interest is based on the yield curve of government bonds in the PRC as of valuation date. The expected volatility is
estimated based on annualized standard deviation of daily stock price return of comparable companies for the period before valuation date and with
similar span as the expected expiration term. Prior to the IPO, the fair value of the ordinary shares was through a retrospective valuation as at each
grant date, which used management’s best estimate for projected cash flows as of the valuation date with the assistance of an independent third-party
appraiser. Subsequent to the IPO, the fair value of ordinary shares was determined by observable market price.
A summary of option activity during the year ended December 31, 2021 is presented below:
Outstanding, as of January 1, 2021
Granted
Exercised
Forfeited/Cancelled
Outstanding, as of December 31, 2021
Vested and expected to vest as of December 31, 2021
Exercisable as of December 31, 2021
Number of
Options
52,198,603
—
3,490,378
9,959,692
38,748,533
38,748,533
6,154,008
Exercise Price
RMB
0.27-31.96
—
0.27
0.27-30.27
0.27-31.96
0.27-31.96
0.27-31.96
Remaining
Contractual
4.07-8.33
—
—
—
3.07-7.33
3.07-7.33
3.07-7.33
Intrinsic
value of
options
RMB
19,538,815
—
—
—
20,378,161
20,378,161
14,821,392
The Group recognized the compensation cost for the stock options on a straight line basis.
For the years ended December 31, 2019, 2020 and 2021 the Group recorded compensation expenses of RMB150,943,580, RMB70,588,710
and RMB71,849,299 (US$11,274,723) respectively for the stock options granted to the Group’s employees. The Group allocated share-based
compensation expense for share option as follows:
Origination and servicing
General and administrative
Sales and marketing
Year ended
December 31,
2019
RMB
88,671,136
60,445,030
1,827,414
Year ended
December 31,
2020
RMB
35,885,086
32,794,113
1,909,511
Year ended December 31,
2021
US$
3,349,639
7,635,108
289,976
2021
RMB
21,345,909
48,655,490
1,847,900
As of December 31, 2019, 2020 and 2021, there were RMB232,061,272, RMB85,785,176 and RMB11,094,017 (US$1,718,377) respectively
of total unrecognized compensation expense related to unvested stock options granted. As of December 31, 2021 that cost is expected to be recognized
over a weighted-average period of 1.27 years.
There were no income tax benefits recognized for the year ended December 31, 2019, 2020 and 2021 for share options.
F-58
Table of Contents
Restricted stocks unit
On April 15, 2019, the Board of Directors of X Financial granted 150,000 of restricted stock units to certain directors. The restricted stock
units shall vest over a period from two to three years. The restricted stock unites have no expiration period. On November 20, 2019, the Board of
Directors of X Financial granted 1,789,400 of restricted stock units to certain employees. On January 21, April 30, October 31, 2020, the Board of
Directors of X Financial granted 4,600,000, 673,300 and 550,000 of restricted stock units to certain employees, respectively. The restricted stocks shall
expire 10 years from the date of grant and vest over a period from three to four years. On November 10, 2021, the board of directors of X Financial
granted 26,657,998 of restricted stock unites to certain senior managements and employees. The restricted stock unites shall expire 10 years from the
date of grant and vest over a period from three to four years.
On August 13, 2019 and November 20, 2019, the Board of Directors decided to cancel 1,500,000 and 250,000 of unvested options of certain
senior managements and concurrently granted 1,500,000 and 250,000 of restricted stock units as replacement awards to the senior managements. The
incremental compensation expenses of RMB360,592 (US$51,796) was equal to the excess of the fair value of the modified award immediately after
the modification over the fair value of the original award immediately before the modification.
A summary of restricted share units activity during the year ended December 31, 2021 is presented below:
Outstanding, as of January 1, 2021
Granted
Vested
Forfeited
Outstanding, as of December 31, 2021
Number of
Restricted Shares
Weighted-Average Grant-Date
Fair Value
RMB
7,535,294
26,657,998
1,469,751
307,926
32,415,615
6.49
4.97
6.19
5.65
5.18
For the year ended December 31,2019, 2020 and 2021, the Group recorded compensation expenses of RMB6,172,515, RMB9,551,428 and
RMB16,585,473 (US$2,602,623) respectively for the restricted shares granted to the Group’s directors and employees. The Group allocated share-
based compensation expense for restricted share as follows:
Origination and servicing
General and administrative
Sales and marketing
Year ended
December 31,
2019
RMB
446,808
5,717,025
8,682
Year ended
December 31,
2020
RMB
6,173,735
3,064,908
312,785
Year ended December 31,
2021
2021
US$
RMB
1,697,839
835,078
69,706
10,819,642
5,321,620
444,211
As of December 31,2019, 2020 and 2021, there was RMB34,246,159, RMB33,499,672 and RMB141,127,667(US$21,859,585) respectively
of total unrecognized compensation expense related to unvested restricted shares granted. As of December 31, 2021, the cost is expected to be
recognized over a weighted-average period of 3.66 years.
There were no income tax benefits recognized for the year ended December 31, 2019, 2020 and 2021 for restricted stocks unit.
17. Statutory reserves and 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 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.
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Table of Contents
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.
Amounts restricted that include paid-in capital, additional paid-in capital and statutory reserve funds, as determined pursuant to PRC GAAP,
are RMB3,565,880,640 and RMB4,531,337,021 (US$711,065,659) as of December 31, 2020 and 2021 respectively
18. Commitments and contingencies
Operating lease as lessee
As disclosed in note 2, the Group has adopted ASC Topic 842 on 1 January, 2019. These lease payments have been recognized as “Other non-
current assets” and the current and non-current portions of lease liabilities have been recorded as “Accrued expenses and other current liabilities” and
“Other non-current liabilities” in the balance sheet as at December 31, 2020 and 2021, except for short-term leases.
Contingencies
On November 26, 2019, a putative class action complaint captioned Shivakumar Ningappa v. X Financial, et al., No. 657033/2019, was filed
in the Supreme Court of the State of New York, New York County against the Group, certain of officers and directors, and the underwriters of initial
public offering, asserting violations of the Securities Act of 1933 based on the Group’s September 2018 initial public offering. Two additional lawsuits
were subsequently filed in the same court, containing substantially identical allegations. On February 5, 2020, all three lawsuits were consolidated
under the caption “In re X Financial Securities Litigation,” No. 657033/2019, and a consolidated amended complaint (the “CAC”) was filed on
February 14, 2020. On May 11, 2020, the Group filed a motion to dismiss the CAC in its entirety. On February 8, 2022, the matter was reassigned to a
new judge. Following such reassignment, oral argument on Defendants’ motion to dismiss was scheduled for July 12, 2022.
On December 9, 2019 a putative class action complaint captioned Xiangdong Chen v. X Financial, et al., No. 19-cv-06908-KAM-SJB, was
filed in the Eastern District of New York against the Group and certain officers and directors, asserting violations of the Securities Act of 1933 based
on the Group’s September 2018 initial public offering. The lead plaintiff filed an amended complaint (the “AC”) on July 13, 2020. The Group filed a
motion to dismiss the AC on December 7, 2020. The court has referred the motion to the magistrate judge for a report and recommendation. On
December 9, 2021, the magistrate judge issued a report and recommendation (the “R&R”) concluding that Defendants’ motion to dismiss the Federal
Action should be granted in full. The magistrate judge determined that all claims under the Securities Act of 1933 were time-barred by the applicable
one-year statute of limitations and should be dismissed with prejudice, while the claims under the Securities Exchange Act of 1934 failed for deficient
allegations of fraudulent scienter and should be dismissed with leave to replead. The lead plaintiff in the Federal Action timely filed objections to the
R&R on December 23, 2021, and Defendants submitted a response to plaintiff’s objections on January 6, 2022. On March 13, 2022, presiding District
Judge issued a memorandum and order overruling plaintiffs’ objections, adopting the R&R in full, dismissing the Securities Act claims without leave
to replead, and dismissing the Exchange Act claims with leave to file a further amended complaint within 30 days. On April 12, 2022, plaintiffs
voluntarily dismiss the above-captioned action, with prejudice, as to all defendants.
The Group is subject to periodic legal or administrative proceedings in the ordinary course of business. The Group does not have any pending
legal or administrative proceeding to which the Group is a party that will have a material effect on its business or financial condition.
19. Subsequent events
In January 2022 and February 2022, the Group committed to invest US$10 million and US$3 million in two VC funds, respectively. As of the
date of this annual report, the Group had made the capital contribution of US$2.5 million and US$3 million to those two funds, respectively.
On March 3, 2022, the board of directors of X Financial granted 810,000 restricted stock unites to certain directors. The restricted stock unites
shall vest over a period of three years. The restricted stock unites have no expiration period.
F-60
Table of Contents
SCHEDULE I
CONDENSED FINANCIAL INFORMATION OF PARENT COMPANY
BALANCE SHEETS
(in Renminbi “RMB”, except share and per share data)
Assets:
Cash and cash equivalents
Prepaid expenses and other current assets
Amount due from subsidiaries and VIEs
Investments in subsidiaries and VIEs
Total assets
Liabilities:
Accrued expenses and other current liabilities
Total liabilities
Equity:
Common shares
Additional paid-in capital
Retained earnings (accumulated deficit)
Accumulated other comprehensive income
Total equity
Total liabilities and equity
As of
December 31,
2020
RMB
6,041,648
1,862,127
1,008,811,092
2,067,921,292
3,084,636,159
As of December 31,
2021
RMB
2021
US$
4,771,477
371,460
1,077,449,147
2,899,792,086
3,982,384,170
748,749
58,290
169,075,283
455,040,656
624,922,978
9,880,123
9,880,123
5,489,209
5,489,209
861,377
861,377
202,870
3,068,045,239
(14,551,146)
21,059,073
3,074,756,036
3,084,636,159
206,793
3,159,522,737
810,855,877
6,309,554
3,976,894,961
3,982,384,170
32,450
495,798,063
127,240,981
990,107
624,061,601
624,922,978
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Table of Contents
CONDENSED FINANCIAL INFORMATION OF PARENT COMPANY
STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in Renminbi “RMB”, except share and per share data)
General and administrative expenses
Interest income
Equity in profit (loss) of subsidiaries and VIEs
Other income, net
Net income (loss)
Other comprehensive income (loss)
Comprehensive income (loss)
Year ended
December 31,
2019
RMB
(14,451,949)
77,030
785,350,473
3,300,575
774,276,129
14,606,045
788,882,174
Year ended
December 31,
2020
RMB
(18,494,095)
4,416
(1,293,341,634)
3,328,738
(1,308,502,575)
(46,041,729)
(1,354,544,304)
Year ended December 31,
2021
2021
US$
RMB
(9,577,576)
590
831,870,794
3,113,215
825,407,023
(14,749,519)
810,657,504
(1,502,931)
93
130,538,680
488,531
129,524,373
(2,314,521)
127,209,852
F-62
Table of Contents
CONDENSED FINANCIAL INFORMATION OF PARENT COMPANY
STATEMENT OF CASH FLOWS
(in Renminbi “RMB”, except share and per share data)
Net cash by used in operating activities
(Loan to) Received from subsidiaries and VIEs
Net cash provided (used in) investing activities
Contribution from shareholders
Dividend paid
Net cash provided by (used in) financing activities
Effect of foreign exchange rate changes
Net decrease in cash and cash equivalents
Cash and cash equivalents, beginning of year
Cash and cash equivalents, end of year
Year ended
December 31,
2019
RMB
(10,004,797)
(199,179,173)
(199,179,173)
6,035,665
(103,196,981)
(97,161,316)
10,892,988
(295,452,298)
309,504,088
14,051,790
Year ended
December 31,
2020
RMB
(14,708,389)
6,818,106
6,818,106
543,594
—
543,594
(663,453)
(8,010,142)
14,051,790
6,041,648
Year ended December 31,
2021
2021
RMB
US$
(8,630,238)
4,545,040
4,545,040
2,959,511
—
2,959,511
(144,484)
(1,270,171)
6,041,648
4,771,477
(1,354,273)
713,216
713,216
464,412
—
464,412
(22,672)
(199,317)
948,066
748,749
F-63
Table of Contents
SCHEDULE I—NOTES TO CONDENSED FINANCIAL INFORMATION OF PARENT COMPANY
1.
Schedule I has been provided pursuant to the requirements of Rule 12-04(a) and 5-04(c) of Regulation S-X, which require condensed
financial information as to the financial position, changes in financial position and results of operations of a parent company as of the same date and
for the same period for which audited consolidated financial statements have been presented when the restricted net assets of consolidated subsidiaries
exceed 25 percent of consolidated net assets as of the end of the most recently completed fiscal year.
2.
The condensed financial information has been prepared using the same accounting policies as set out in the consolidated financial
statements except that the equity method has been used to account for investments in its subsidiaries and VIEs. For the parent company, the Company
records its investments in 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 Sheet as “Investments in subsidiaries and VIEs” and the subsidiaries and
VIEs’ profit or loss as “Equity in profit (loss) of subsidiaries and VIEs” on the Condensed Statements of Comprehensive Income (loss). Ordinarily
under the equity, an investor in an equity method investee would cease to recognize its share of the losses of an investee once the carrying value of the
investment has been reduced to nil absent an undertaking by the investor to provide continuing support and fund losses. For the purpose of this
Schedule I, the parent company has continued to reflect its share, based on its proportionate interest, of the losses of subsidiaries and VIE regardless of
the carrying value of the investment even though the parent company is not obligated to provide continuing support or fund losses.
3.
For the years ended December 31, 2019, 2020 and 2021, except as disclosed in Note 18, there were no material contingencies,
significant provisions of long-term obligations, guarantees of the Company.
4.
Translations of balances in the additional financial information of Parent Company—Financial Statements Schedule I from RMB
into US$ as of and for the year ended December 31, 2021 are solely for the convenience of the readers and were calculated at the rate of US$1.00=
RMB6.3726, as set forth in H.10 statistical release of the Federal Reserve Board on December 31, 2021. The translation is not intended to imply that
the RMB amounts could have been, or could be, converted, realized or settled into United States dollars at that rate on December 31, 2021, or at any
other rate.
F-64
Exhibit 8.1
List of subsidiaries, VIEs and significant subsidiaries of VIEs of the Registrant
Significant Subsidiaries
YZT (HK) Limited
Xiaoying (Beijing) Information Technology Co., Ltd.
Shenzhen Xiaoying Puhui Technology Co., Ltd.
Shenzhen Xiaoying Information Technology Co., Ltd.
VIEs
Shenzhen Xiaoying Technology Co., Ltd.
Shenzhen Tangren Financing Guarantee Co., Ltd.
Beijing Ying Zhong Tong Rongxun Technology Service Co., Ltd.
Shenzhen Beier Assets Management Co., Ltd.
Significant Subsidiaries of VIEs
Shenzhen Ying Zhong Tong Financial Information Service Co., Ltd.
Shenzhen Ying Ai Gou Trading Co., Ltd.
Shenzhen Xiaoying Microcredit Co., Ltd.
Hong Kong
PRC
PRC
PRC
PRC
PRC
PRC
PRC
PRC
PRC
PRC
Place of Incorporation
Place of Incorporation
Place of Incorporation
*
considered in the aggregate as a single entity, they would not constitute a significant subsidiary.
The subsidiaries of the Registrant’s subsidiaries incorporated in PRC and other subsidiaries of the VIEs have been omitted from this list since,
(Confidential) Contract No.:
Exhibit 10.1
Share Purchase Agreement
On
Shenyang Tianxinhao Technology Co., Ltd.
November 1, 2021
Contents
Article
Article 1 Definitions
Article 2 Share Transfer
Article 3 Transfer Price and Payment
Article 4 Conditions Precedent to Closing
Article 5 Closing Date and Post-Closing Obligations
Article 6 Representations and Warranties of the Seller
Article 7 Representations and Warranties of the Purchaser
Article 8 Undertakings of the Seller
Article 9 Further Undertakings of Target Company and the Seller
Article 10 Liabilities for Breach of Contract
Article 11 Confidentiality
Article 12 Costs and Taxes
Article 13 Governing Laws and Dispute Resolution
Article 14 Effectiveness and Miscellaneous
Schedule I: Representations and Warranties of the Seller
Schedule II: Designated Bank Account for Receipt of Purchase Price for the Shares
Page
3
5
5
6
7
8
8
8
10
11
11
12
12
12
18
21
This Share Purchase Agreement (hereinafter referred to as the “Agreement”) is made and entered into on November 1, 2021 in Futian District,
Shenzhen by and among:
(1) Shenzhen Yingaigou Trade Co., Ltd. (深圳市赢爱购贸易有限公司), a limited liability company incorporated under the PRC laws, having its
registered address at *********************, Shenzhen (hereinafter referred to as the “Purchaser” or “Shenzhen Yingaigou”);
(2) Shenzhen SUNHOPE Investment Development Co., Ltd. (深圳市新浩投资发展有限公司), a limited liability company incorporated under the
PRC laws, having its registered address at *********************, Shenzhen (hereinafter referred to as the “Seller” or “Shenzhen
SUNHOPE”);
(3) Shenyang Tianxinhao Technology Co., Ltd. (沈阳天新浩科技有限公司), a company limited by shares incorporated under the PRC laws, having
its registered address at *********************, Shenyang, Liaoning Province (hereinafter referred to as the “Target Company” or “Shenyang
Tianxinhao”).
The Purchaser, the Seller and the Target Company are hereinafter referred to collectively as the “Parties” and individually as a “Party”.
WHEREAS,
A. The Seller is the sole shareholder of the Target Company and holds 100% equity in the Target Company;
B. The Parties agree that, the Purchaser purchases 45% equity in the Target Company from the Seller subject to the terms and conditions of this
Agreement (hereinafter referred to as the “Acquisition”).
NOW, THEREFORE, it is agreed that:
Article 1 Definitions
1.1 Unless otherwise expressly provided herein or the context otherwise requires, the following terms in bold shall have the meanings ascribed to
them below:
“Affiliate”
“Approval”
“Shares”
“Representations and
Warranties of the
Purchaser”
Refers to any enterprise or other entity directly or indirectly controlling, controlled by or under common control with any
Party hereto, and if a Party hereto is an individual, any direct relatives of such individual; “control”, with respect to any
Party, refers to the power to directly or indirectly direct or cause the direction of the management and policies of such
Party, whether by way of ownership of securities, contract or otherwise, and “controlling” and “controlled” shall have
meanings in connection therewith; “direct relatives” refer to spouse, children, grandchildren, parents, grandparents, and
siblings.
Refers to any consent, approval, authorization, clearance, order, registration, filing, certification, grant of qualification,
issuance of license, permit, or statement containing approval of, by and with any public, regulatory or governmental agency
or department.
Shall have the meaning set forth in Article 2.1.
Refer to all the representations, warranties and undertakings made by the Purchaser hereunder.
“NewUp Bank”
“Group Companies”
“Closing”
“Closing Date”
“Confidential
Information”
“Day”
“Security Interest”
“Material Adverse
Effect”
“RMB”
“Administration for
Market Regulation”
“Tax”
Refers to the NewUp Bank of Liaoning.
Refer to the Target Company, subsidiaries and branches of the Target Company, and subsidiaries and branches as the Target
Company may establish and/or control from time to time; “Group Company” refers to any of them.
Refers to this transfer of shares in accordance with the provisions hereof.
Shall have the meaning set forth in Article 3.2.
Refers to the technical, engineering, operational, commercial, financial, economic or legal technologies, analysis data,
process, procedures, manuals, designs, sketches, pictures, plans, drawings, specifications, reports, researches, discoveries,
non-patented inventions and ideas and other information and know-how, that are in connection with the Target Company or
its business operation, regarded as secret or confidential by any Party or any of its Affiliates, and provided by any Party or
any of its Affiliates for the purposes of discussion and implementation of this Agreement and its relevant transaction.
refers to calendar day.
Refers to any mortgage, claim, lien, option, pledge, security interest, priority, call option, hypothecation, retention of
ownership, right of offset, counterclaim, trust arrangement or other type of similar restrictions (including restrictions on
use, voting, transfer, generation of income, or other exercise of owner’s equity).
With respect to the Target Company or any Group Company, refers to any circumstance, change or effect which
individually or jointly has the material adverse effect on the business, financial condition, assets or operating results of the
Target Company or any Group Company, including but not limited to any circumstance, change or effect affecting the
Target Company or any Group Company or the business of the foregoing, which: (i) will or could be expected, with
abundant evidence, to cause any material adverse effect on the existence, business, assets, intellectual property rights,
liabilities, key employees, operating results or financial conditions of the Target Company or any Group Company, or (ii)
will or could be expected, with abundant evidence, to cause any material adverse effect on the qualifications, licenses or
capabilities of the Target Company or any Group Company to conduct current business; or (iii) will or could be expected,
with abundant evidence, to cause any material adverse effect on the performance of major obligations under the Transaction
Documents by the Target Company or any Group Company or the Seller or on the validity or enforceability of any
Transaction Document.
refers to Renminbi, the legal currency of the PRC.
Refers to the State Administration for Market Regulation and its branches.
Refers to any form of tax levied by central or local finance, taxation, customs
“Transfer Price”
“Transaction
Documents”
“Subsequent
Supplementary
Transaction
Documents”
“Costs”
“Delinquent Taxes”
or other authorities in the PRC, including any surcharge, fine or charge in connection therewith.
Shall have the meaning set forth in Article 3.1.
Refer to this Agreement, the Shareholder Agreement, the restated articles of association, and other legal documents
required for the Acquisition; ”Transaction Document” refers to any of them.
Shall have the meaning set forth in Article 2.3.
Shall have the meaning set forth in Article 10.4.
Shall have the meaning set forth in Article 10.4.
1.2 Unless otherwise expressly agreed herein or the context otherwise requires:
(1) Any contract, agreement or document mentioned shall refer to such contract, agreement or document as may be amended, supplemented or
replaced from time to time;
(2) Any person mentioned in this Agreement or other contracts, agreements or documents shall include the successor and permitted assign of such
person; and
(3) Any reference to terms or schedules shall mean the terms of or schedules to this Agreement.
Article 2 Share Transfer
2.1 The Purchaser agrees to purchase and the Seller agrees to sell and transfer the 45% shares held by the Seller in the Target Company (“Shares”) at
the Transfer Price subject to the terms and conditions hereof.
2.2 The Parties agree and acknowledge that, upon completion of the Acquisition, the shareholding percentage of the Parties in the Target Company is
as follows:
Name of
Shareholder
Shenzhen Yingaigou
Shenzhen SUNHOPE
Total
Shareholding
Percentage
45%
55%
100%
2.3 The Parties agree that, notwithstanding any provision herein to the contrary, the Purchaser may designate any other third-party entity to accept the
transfer of all of its rights and obligations hereunder before the Closing Date. Where the Purchaser designates any other third-party entity to accept
the transfer of all of its rights and obligations hereunder, the Purchaser shall give a notice to the Seller within 3 business days after making such
decision. Upon receipt of notice from the Purchaser, the Seller shall complete the signing of a share transfer agreement or supplementary
agreement substantially consistent with this Agreement, and other Transaction Documents relating to the Acquisition (“Subsequent
Supplementary Transaction Documents”) with the third-party entity designated by the Purchaser as soon as possible, and this Agreement and
other corresponding Transaction Documents signed by the Purchaser shall become invalid immediately after such agreement and Subsequent
Supplementary Transaction
Documents are signed.
Article 3 Transfer Price and Payment
3.1 The Parties agree that, the share purchase price hereunder shall be denominated in RMB. The share purchase price payable by the Purchaser shall
be RMB315,000,000 (“Transfer Price”).
3.2 The Parties agree that, within 5 business days after all conditions precedent set forth in Article 4.1 hereof are satisfied (or waived in writing by the
Purchaser at its sole discretion) or on other date unanimously agreed in writing by the Parties (“Closing Date”), the Purchaser shall pay the first
tranche of the Transfer Price of RMB165,000,000 (“First Tranche of Transfer Price”), and the Seller shall, within 1 business day upon receipt of
the First Tranche of the Transfer Price, transfer and pay RMB150,000,000 therein to the Target Company, and the Target Company shall, within 1
business day upon receipt of RMB150,000,000 paid by the Seller to it, apply such amount in full to repay the borrowing under the loan contract
(Contract No.: (Jie) 20210928) (“Loan Contract”) between the Target Company and Shenzhen Yingaigou.
3.3 The Parties agree that, within 5 business days after full repayment of the borrowing under the Loan Contract, the Purchaser shall pay the second
tranche of the Transfer Price of RMB150,000,000 (“Second Tranche of Transfer Price”) to the Seller, and for the avoidance of doubt, the
condition precedent to the Purchaser’s payment of the Second Tranche of Transfer Price is that the borrowing under the Loan Contract has been
fully repaid, and if such condition precedent is not satisfied, then the Purchaser shall have no obligation to pay the Second Tranche of Transfer
Price, and the Seller and the Target Company shall assume joint and several liability for compensation to the Purchaser with respect to the failure
to apply the First Tranche of the Transfer Price for the agreed purpose.
3.4 The Parties agree that, the Purchaser shall pay the Transfer Price to the designated bank account set forth in Schedule II attached hereto in
accordance with the provisions of Articles 3.2 and 3.3 hereof. The Purchaser shall be deemed to have completed the payment obligation of the
Transfer Price when it pays the Transfer Price to such designated bank account.
Article 4 Conditions Precedent to Closing
4.1 The Purchaser shall be obligated to conduct the Closing of the Acquisition only after confirming the satisfaction of all of the following conditions
precedent (or waiver by the Purchaser at its own discretion). The Purchaser’s payment of the Transfer Price to the Seller shall be conditional upon
the completion of the following obligations by the Seller and the Target Company:
(1) The Purchaser has completed financial, legal and business due diligence against the Group Companies and the NewUp Bank, and satisfies with
the results thereof;
(2) The Transaction Documents have been signed and take effect;
(3) The Seller and the Group Companies have completed all necessary pre-communication, governmental approval, registration and filing formalities
(if required) for the completion of the Acquisition under the PRC Laws and Regulations, and have obtained the consents of any third party (if
required);
(4) The board of directors and/or the meeting of shareholders of each Party have approved the transaction;
(5) The representations and warranties made by the Seller and the Target Company to the Purchaser in accordance with Article 6 hereof and Schedule
I are true, accurate and not misleading;
(6) The change registration with the administration for industry and commerce (“AIC”) for the
Acquisition has been completed, and such AIC change registration has clearly reflected that: (i) the Purchaser holds a total of 45% equity in the
Target Company; and (ii) the Target Company has set up a board of directors and the Purchaser has appointed a director to the Target Company,
and the Target Company has provided the Purchaser with relevant supporting AIC documents, including but not limited to the scanned copies of
the following originals: articles of association filed with the Administration for Market Regulation, updated register of shareholders and list of
members of board of directors of the company (signed by legal representative and affixed with common seal), relevant decisions of
shareholder/executive director or resolutions of the meeting of shareholders/board of directors, and other relevant documents;
(7) As of the Closing Date, it is confirmed by the auditor appointed by the Purchaser that the balance of capital of the NewUp Bank is no less than
RMB1,700,000,000;
(8) As of the Closing Date, the Group Companies and the NewUp Bank carry out business in the normal course of business, and have no event or
circumstance which has or is reasonably expected to have Material Adverse Effect on the business, financial condition, operation, operating
results or future prospect of the Group Companies and the NewUp Bank;
(9) There is no legal proceeding, contract, agreement or other arrangement arising out of the fault of the Seller, which has caused or may cause the
Acquisition to be prohibited, restricted or otherwise impaired in all or material aspects, and no third party who otherwise objects, claims, or seeks
other remedies against the Acquisition or who may impose restrictions or conditions or otherwise disturb the Acquisition.
4.2 The Seller and the Target Company shall make best efforts to ensure the conditions set forth under Article 4.1 relating to them to be satisfied as
soon as possible. If any condition cannot be satisfied or waived (as the case may be) within 30 business days upon execution of this Agreement,
the Purchaser shall have the right to postpone to a specific later date by written notice to the Seller. If any condition set forth in Article 4.1 still
cannot be satisfied or waived (as the case may be) as provided in Article 4.1 after such postponement, the Purchaser shall have no obligation to
conduct the Closing, and this Agreement shall automatically terminate and become invalid (except that Article 11 (Confidentiality), Article 12
(Costs and Taxes), Article 13 (Governing Laws and Dispute Resolution) and Article 14 (Effectiveness and Miscellaneous) shall survive).
Article 5 Closing Date and Post-Closing Obligations
5.1 Subject to full satisfaction of all conditions precedent set forth in Article 4.1 hereof (or waiver of such conditions by the Purchaser in writing at its
sole discretion), the Closing will be conducted in Futian District, Shenzhen or other place agreed by the Parties hereto in writing, on the Closing
Date. From the Closing Date, based on the Shares acquired in the Acquisition, the Purchaser shall have all the rights granted to the Purchaser
under the Laws and Regulations and the Transaction Documents.
5.2 On and after the Closing Date, the Purchaser shall pay the Transfer Price to the Seller in accordance with Articles 3.2 and 3.3 hereof.
5.3 If the Purchaser has not completed the financial, legal and business due diligence against the Group Companies and the NewUp Bank prior to the
Closing Date, the Seller shall compensate the Purchaser for any potential losses suffered or any Costs incurred due to any material financial, legal
and business issue (if any) discovered after the Closing, per the actual amount
thereof. If it is reasonably estimated that such issue may affect the Purchaser’s decision to purchase the Shares, the Purchaser may demand
termination of transaction and reinstatement, in which case, the Seller shall refund the Transfer Price to the Purchaser, and the Purchaser shall
transfer the Shares back to the Seller.
5.4 The Purchaser agrees that if the Parties fail to complete the Closing finally, the Purchaser agrees to cooperate with the Seller in transferring back
the Shares which have already been through the AIC change registration for transfer.
Article 6 Representations and Warranties of the Seller
6.1 The Seller has the powers and authorizations to execute, deliver and perform the Transaction Documents to which it is a party. All actions required
for the Seller to authorize, execute and deliver the Transaction Documents, perform all of its obligations under the Transaction Documents, and
conduct filing of and obtain Approval for this Agreement (if necessary) have been or will be taken and completed before the Closing Date.
6.2 Except as disclosed herein, the Shares acquired by the Purchaser under this Agreement are legally and validly issued by the Target Company, fully
paid-in, and non-assessable. The Shares are free from any encumbrance, including but not limited to any pledge or other Security Interest, warrant
or other right of any person to obtain all or any part of the Shares, any restriction over the exercise of voting power, receipt of dividends or transfer
of shares, and are not involved in or subject to any lawsuit, dispute or controversy.
6.3 All consents, Approvals, orders, authorizations, registrations, qualifications, instructions, declarations or filings required for the Seller to execute,
deliver and perform this Agreement and all other Transaction Documents to which it is a party, and complete the transactions contemplated
hereunder or under the Transaction Documents, will be obtained and acquired from the governmental authority or any other competent authority.
6.4 The Seller as a shareholder of the Target Company irrevocably agrees on the date hereof to waive all preferences (including, without limitation,
preemptive right, right of first refusal, co-sale right, right of prior notice, anti-dilution right, drag-along, liquidation preference, redemption right,
etc. (if any)) as it may have towards the Target Company. If the Closing hereunder is not completed ultimately, such preferences of the Seller shall
automatically revert.
6.5 The Seller shall make all the representations and warranties in Schedule II attached hereto to the Purchaser.
Article 7 Representations and Warranties of the Purchaser
7.1 The Purchaser has the right to execute this Agreement, exercise its rights hereunder and perform its obligations hereunder. Once signed by the
Purchaser, this Agreement will become a valid agreement binding upon and enforceable against the Purchaser (except that this Agreement needs
to take effect after Approval by the approval authority).
7.2 The execution, delivery and performance of this Agreement by the Purchaser has not violated and will not violate in any material aspect the
applicable laws or regulations in force on the date hereof and the Closing Date.
7.3 The Purchaser acknowledges that its execution of this Agreement relies on the Seller’s representations and warranties and other provisions
hereunder.
8.1 The Seller undertakes to the Purchaser that all representations and warranties set forth in Article 6 and Schedule I of this Agreement are true,
accurate and not misleading from the date hereof
Article 8 Undertakings of the Seller
to the Closing Date (inclusive), and acknowledges that the Purchaser enters into this Agreement on basis of such representations and warranties.
8.2 The Seller undertakes that it will timely inform the Purchaser in writing of any circumstance known to it and incurred prior to the Closing Date,
which is or can be reasonably presumed to be in material breach of or inconsistent with the Seller’s representations and warranties. The Seller
hereby undertakes to provide all information and documents relating to the Group Companies and the NewUp Bank as the Purchaser may
reasonably require in order to understand the accuracy of and compliance with all representations and warranties of the Seller, prior to the Closing
Date.
8.3 No rights and amounts claimed by the Purchaser against the Seller will be affected by whether the Purchaser has known about or investigated any
information relating to the Seller, the Group Companies and the NewUp Bank (other than information contained herein or already disclosed by the
Seller in the course of transaction or due diligence).
8.4 The Seller undertakes that, for any liability or loss suffered by the Purchaser after the Closing Date due to any matter prior to the Closing Date,
regardless of whether such matter has been disclosed to the Purchaser or not, the Purchaser shall have the right to demand the Seller to fully
compensate for any losses, damages, costs or fees (including, without limitation, reasonable legal or other Costs paid for enforcement or
realization of compensation) suffered or incurred by the Group Companies and the Purchaser.
8.5 Where the Seller breaches its representations and warranties or materially breaches other provisions hereof, the Seller shall fully compensate for
any losses, damages, costs or fees (including, without limitation, reasonable legal or other Costs paid for enforcement or realization of
compensation) suffered or incurred by the Purchaser.
8.6 If, prior to the Closing Date, the Seller breaches the undertakings set forth in this Article 8 and/or has any material breach such as breach or non-
performance of any other provision hereof (“Seller’s Breach”), the Purchaser may opt to continue Closing, or without prejudice to any other
possible rights or compensation available, notify the Seller in writing to terminate this Agreement and claim for compensation, and the Purchaser
shall not assume any liability or obligation (including, without limitation, specific performance of the obligations hereunder) to the Seller for such
termination.
8.7 If the Purchaser continues to complete the Closing in accordance with Article 8.6, then the Purchaser may deduct from the corresponding Transfer
Price for the Shares payable to the Seller, an amount equivalent to the losses suffered or Costs incurred by the Purchaser due to the Seller’s
Breach. Where the Purchaser cannot receive full compensation from such deduction, the Seller shall compensate the Purchaser for the losses
suffered or Costs incurred by the Purchaser due to the Seller’s Breach per the actual amount.
8.8 If the Purchaser continues to complete the Closing and it is determined after the Closing that there is any Seller’s Breach, then the Seller shall
compensate the Purchaser for the losses suffered or Costs incurred by the Purchaser due to the Seller’s Breach per the actual amount.
8.9 In case of termination of this Agreement in accordance with Article 8.6, the Seller shall be liable for any costs and expenses (including, without
limitation, reasonable legal, accounting or other Costs paid for enforcement or realization of compensation) incurred by the Purchaser
due to Seller’s Breach or directly paid by the Purchaser due thereto. The further rights and obligations of the Parties shall immediately cease upon
termination, without prejudice to the
rights and obligations of the Parties accrued as of the termination date.
Article 9 Further Undertakings of Target Company and the Seller
9.1 The Target Company and the Seller severally and jointly undertake to the Purchaser that it will procure that, prior to the Closing Date:
(1) The Group Companies operate their daily business as usual;
(2) The Target Company and the Seller shall timely notify the Purchaser in writing about any material potential or actual event which may affect the
operation of the Group Companies and the NewUp Bank;
(3) The Target Company and the Seller will make best efforts to provide any necessary assistance or documents for any legal, financial or business
due diligence made by the Purchaser against the Group Companies and the NewUp Bank at any time before the Closing;
9.2 From the date when the Seller signs the decision of shareholder on consent to sale of the Shares of the Target Company to the Closing Date, the
Target Company and the Seller undertake and procure the Group Companies will continuously operate as normal and usual in good faith, and
make best efforts to maintain the business and the relationship with business partners. Without prior written consent of the Purchaser, the Target
Company and the Seller shall procure the Group Companies not to carry out or cause to:
(1) Amend the articles of association, unless such amendment is compulsorily required by laws or administrative regulations;
(2) Sell, transfer, create encumbrance over, or otherwise dispose of the equity of the Group Companies, or permit any third party to have the right to
purchase the equity of the Group Companies or become a legal or commercial right holder of the equity of the Group Companies;
(3) Sell, transfer, create encumbrance over, or otherwise dispose of the equity held by the Target Company in the NewUp Bank, or permit any third
party to have the right to purchase the equity held by the Target Company in the NewUp Bank or become a legal or commercial right holder of the
equity held by the Target Company in the NewUp Bank;
(4) Acquire, merge, purchase or create encumbrance over any assets owned by the Group Companies;
(5) Sell, transfer, create encumbrance over or otherwise dispose of any intellectual property rights owned by the Group Companies;
(6) Give up the directorship of the Target Company in the NewUp Bank or change the candidate of director appointed to the NewUp Bank by the
Target Company;
(7) Not to make any external payment of any amount or transfer funds or approve reimbursement without permission, except for scheduled external
payment under existing contracts of the Group Companies and payment of current wages and rent of the Group Companies;
(8) Enter into new business contract or make external investment;
(9) Except under compulsory requirements of the legal or governmental department, (1) pay any severance pay or contract termination fee to any
employee of the Group Companies, (ii) amend any employment agreement with any employee of the Group Companies, (iii) increase the
compensation, bonus or other payable benefits (including severance pay or contract termination fee) of any employee of the Group Companies,
and (iv) enter into employment agreement with any new employee;
(10) Declare, pay or distribute any dividend or other bonus, or agree orally or in writing to declare, pay or distribute any dividend or other bonus;
(11) Provide any borrowing to the shareholder of the Target Company, and the shareholder of the Target Company shall repay any existing borrowing
(if any) provided by the Target Company to it before the Closing Date;
(12) Waive or exempt any claim or right of the Group Companies, incur any new debt or financial indebtedness, loan or contingent liabilities;
(13) Make or agree orally or in writing to make any material payment of tax, except that non-payment thereof will cause loss to the Group Companies;
(14) Bring or resolve, or agree orally or in writing to bring or resolve, any lawsuit, arbitration or other proceedings which have material effect on its
business; or
(15) Enter into or agree to enter into any agreement or undertaking which may impede, restrict or delay the Acquisition, or affect relevant contractual
terms or undertakings of the Acquisition.
Article 10 Liabilities for Breach of Contract
10.1Where any representation or warranty made herein by any Party (“Breaching Party”) is false or wrong, or such representation or warranty is not
timely or properly performed, such Party shall be deemed to have breached this Agreement. Where any Party fails to perform any of its
undertakings or obligations hereunder, it shall be deemed to have constituted a breach of this Agreement by such Party. In addition to fulfillment
of other obligations agreed herein, the Breaching Party shall compensate for and assume all losses, damages and costs (including, without
limitation, reasonable attorney’s fee, audit fee, fee of financial advisor) and liabilities incurred or suffered by the non-breaching Party due to such
breach.
10.2Without prejudice to any other provisions in this Article 10, if any Party fails to perform any of its obligations hereunder, the other Parties shall be
entitled to demand the Breaching Party for specific performance of such obligations in addition to exercise of any other rights and remedies
hereunder.
10.3Without prejudice to any other provisions in this Article 10, if the Seller fails to transfer the shares to the Purchaser completely subject to the
terms and conditions hereof, the Purchaser may unilaterally terminate this Agreement based on such substantial breach, and demand the Seller to
compensate for the losses, damages and costs (including, without limitation, reasonable attorney’s fee, audit fee, fee of financial advisor) suffered
by the Purchaser in connection with the Acquisition prior to such termination.
10.4Without prejudice to any other provisions herein, upon completion of the Acquisition, if the Group Companies are required to pay any damages,
compensation, arrears, fines (including penalty interest) or costs (“Costs”) incurred prior to the Closing Date to relevant governmental authority
and/or third party, and/or if the Group Companies has paid any surcharge relating to taxes prior to the Closing Date, undisclosed unpaid taxes,
fines or penalties prior to the Closing Date (“Delinquent Taxes”), then the Seller shall be liable for such Costs and/or Delinquent Taxes, and
compensate the Group Companies per the actual amount thereof within 7 days upon occurrence of such Costs and/or Delinquent Taxes.
11.1The Parties shall keep confidential the Confidential Information, and not use such Confidential Information for any purpose other than this
Agreement, and not disclose the Confidential Information to any third party. Notwithstanding the foregoing restrictions, such confidentiality
Article 11 Confidentiality
obligation shall not apply to the information which:
(1) is in or becomes a part of the public domain other than due to the fault of the Parties or their
representatives, agents, suppliers or subcontractors;
(2) is duly and legally received by the Parties from a third party, without confidentiality obligation or restriction of use when receiving from such
third party; or
(3) has been possessed by the Parties in writing without any restriction of use or disclosure, was not obtained from the other Party hereto for the
anticipation of this Agreement.
11.2Notwithstanding, the Parties may disclose the Confidential Information to their employees, directors and professional consultants to the extent
reasonably necessary to fulfill the purpose of this Agreement. The Parties shall ensure such employees, directors and professional consultants be
aware of and abide by the confidentiality obligation hereunder. If the disclosure of any Confidential Information is required by the laws, or by any
competent court or regulatory authority, the Parties may disclose such Confidential Information; provided however, all measures to the extent
permitted by applicable Laws and Regulations shall be taken by the Parties to ensure the confidential treatment of such information.
11.3No Party may reproduce any Confidential Information it receives in any tangible, written or electronic form.
Article 12 Costs and Taxes
12.1Except as otherwise provided herein, the Parties shall bear their own negotiation and implementation costs (including, without limitation, legal,
accounting, financial, consulting, advisory and other relevant fees) in connection with this Agreement (including Schedules) and other definitive
agreements and the Acquisition.
12.2The Parties shall be responsible for any taxes as may be payable by them due to completion of the Acquisition in accordance with this Agreement,
provided that, if the Purchaser is obligated to withhold and pay Taxes under the Laws and Regulations, the Seller agrees that the Purchaser may
conduct such withholding and payment.
13.1This Agreement shall be governed by and interpreted in accordance with the PRC laws.
Article 13 Governing Laws and Dispute Resolution
13.2It is agreed by the Parties hereto that any dispute arising out of or in connection with the execution of this Agreement shall be resolved by the
Parties through negotiation. If such dispute cannot be resolved within 30 days after a Party issues a notice to demand negotiation, either Party may
submit such dispute to the People’s Court of Futian District, Shenzhen for litigation. The Parties further agree that the defeated Party shall bear the
costs and expenses (including but not limited to attorney’s fee) of the Parties arising from the litigation.
13.3Pending dispute resolution in accordance with this Article 13, except for the disputed matters, the Parties shall continue performing their
corresponding obligations hereunder.
14.1Effectiveness
Article 14 Effectiveness and Miscellaneous
This Agreement shall take effect and be legally binding upon and enforceable against the Parties upon execution (“Effective Date”). This
Agreement may be amended, changed or terminated after negotiation and consensus of the Parties hereto. Any amendment, change or termination
must be made in writing and become effective upon execution by the Parties hereto.
14.2Termination
(1) A Party may terminate this Agreement by notifying the other Party in writing at least 10
business days in advance, stating the effective date of termination, if:
a)
there is any material untruthfulness or gross omission in the representations or warranties
of the other Party;
b)
the other Party fails to perform the covenants, undertakings or obligations hereunder in accordance with the provisions hereof, and fails to
take valid remedies within 15 business days after written demand from such Party; or
c)
other circumstances agreed herein occur.
(2) Unless otherwise agreed herein, upon termination of Agreement, the Parties hereto shall resume to the state at the execution of this Agreement as
much as possible on the principles of equity, reasonableness and good faith.
14.3No Waiver
Where any Party fails to exercise or delays in exercising any right, power or privilege agreed herein, it shall not constitute its waiver of such right,
power or privilege. The single or partial exercise of any right, power or privilege shall not exclude any future exercise of such right, power or
privilege.
14.4Transfer
This Agreement shall be binding upon and inure to the benefits of the Parties. Without prior written consent of the Purchaser, the Seller and the
Target Company may not transfer any of their rights or obligations hereunder to any third party, or otherwise dispose of such rights or obligations.
Without prior written consent of the Seller and the Target Company, the Purchaser may not transfer any of its rights or obligations hereunder to
any third party, or otherwise dispose of such rights or obligations.
14.5Amendment
This Agreement may not be amended orally. Any amendment to this Agreement may only be made by the written document signed by the duly
authorized representatives of the Parties and subject to Approval by the PRC approval authority.
14.6Entire Agreement
(1) Matters not covered herein, if any, shall be agreed by the Parties in a supplementary agreement upon negotiation. Such supplementary agreement
shall become a schedule to this Agreement, with the same legal effect as this Agreement.
(2) This Agreement constitutes the entire agreement between the Parties with respect to the subject matter of the Agreement, and prevails over all
previous discussions, negotiations, expressions of intent or understandings in connection therewith between the Parties. All previous documents,
undertakings and agreements, whether orally, in writing or otherwise, with respect to the subject matter hereof, are hereby canceled without
prejudice to any provision hereof.
14.7Notice
All notices or other communications required or permitted to be given hereunder shall be written in Chinese. Such notices or communications
shall be deemed served (i) on the date of delivery if sent by personal delivery, courier service or other means of delivery by hand, (ii) on the date
of fax if faxed, (iii) on the date of delivery if sent by registered mail or certified mail, with postage prepaid, or (iv) on the date when the email
enters the server of the other Party if sent by email, to the following address.
If to the Purchaser:
Attn.: ***************
Address: ***************, Shenzhen
Email: ***************
Tel: ***************
If to the Seller:
Attn.: ***************
Address: ***************, Shenzhen
Email: ***************
Tel: ***************
If to the Target Company:
Attn.: ***************
Address: ***************
Email: ***************
Tel: ***************
14.8Severability
The invalidity of any provision hereof shall not affect the validity of any other provision, unless such invalidity will cause material negative
consequence on the interests of the other Party hereunder, in which case, the Party whose interests are impaired may make adjustment in
accordance with relevant provisions hereof.
14.9Miscellaneous
The Parties agree that, if any standard share purchase contract signed as required by the Administration for Market Regulation for the purpose of
registration is inconsistent with this Agreement, this Agreement shall prevail.
[REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK]
(Signature Page of the Share Purchase Agreement on Shenyang Tianxinhao Technology Co., Ltd.)
In Witness Whereof, the Parties have caused this Agreement to be signed on the date first written above.
Shenzhen Yingaigou Trade Co., Ltd.
Legal Representative or Authorized Representative (Signature):
Date:
(Signature Page of the Share Purchase Agreement on Shenyang Tianxinhao Technology Co., Ltd.)
In Witness Whereof, the Parties have caused this Agreement to be signed on the date first written above.
Shenzhen SUNHOPE Investment Development Co., Ltd.
Legal Representative or Authorized Representative (Signature):
Date:
(Signature Page of the Share Purchase Agreement on Shenyang Tianxinhao Technology Co., Ltd.)
In Witness Whereof, the Parties have caused this Agreement to be signed on the date first written above.
Shenyang Tianxinhao Technology Co., Ltd.
Legal Representative or Authorized Representative (Signature):
The Seller hereby represents and warrants to the Purchaser that, except as those disclosed in writing, the following representations and warranties are
true, accurate and not misleading from the date hereof to the Closing Date.
Schedule I: Representations and Warranties of the Seller
1. Corporate Matters
a) Organization, Legal Existence and Qualifications
The Group Companies have been duly incorporated and established, and validly existing and comply with all registration and Approval
requirements. The Group Companies have the corporate rights and authorization to own and operate their assets and properties and conduct their
business in the current manner.
b) Constitutional Documents
The constitutional documents of the Group Companies delivered to the Purchaser are true and complete, and valid and not replaced by other
documents as of the date hereof. All legal and procedural requirements and other formalities relating to such constitutional documents have been
legally and properly followed in all material aspects.
c) Options and Warrants
Except as disclosed to the Purchaser, there are no outstanding options, warrants, rights (including conversion right or preemptive right) or
agreements which can subscribe for or purchase from the Target Company any equity interest in the Target Company or any securities which may
be converted into or finally exchanged into or exercised to obtain any equity interest in the Target Company. None of the shares of the Target
Company or shares of the Target Company issuable upon the exercise of any outstanding options, warrants or rights is subject to restriction by the
preemptive right, right of first refusal or other right which can subscribe for or purchase such shares due to any agreement or undertaking of the
Target Company (whether in favor of the Target Company or any other person), or encumbrance in other aspects.
d) Subsidiaries and Branches
The full details of the Group Companies have been disclosed to the Purchaser. Except for those disclosed to the Purchaser, the Group Companies
have no direct or indirect equity interest or interest of any other type in any other person.
2. Authorization and Validity of Transaction
a) Authorization
The Target Company has the powers and authorizations to execute, deliver and perform the Transaction Documents to which it is a party. All
required actions for the Target Company to authorize, execute and deliver the Transaction Documents, perform all of its obligations under the
Transaction Documents, and conduct filing of and obtain Approval for this Agreement (if necessary) have been or will be taken before the Closing
Date.
b) Shares
The shares to be acquired by the Purchaser under this Agreement are legally and validly issued, fully paid-up, and non-assessable. The Shares are
free from any encumbrance, including but not limited to any pledge or other Security Interest, warrant or other right of any person to obtain all or
any part of the Shares, any restriction over the exercise of voting power, receipt of dividends or transfer of shares, and are not involved in or
subject to any lawsuit, dispute or controversy.
c) Consents and Approvals
All consents, Approvals, orders, authorizations, registrations, qualifications, instructions, declarations or filings required for the Target Company
to execute, deliver and perform this Agreement and all other Transaction Documents to which it is a party, and complete the transactions
contemplated hereunder or under the Transaction Documents, will be obtained and acquired from the governmental authority or any other
competent authority.
d) No Breach of Contract
The execution and delivery of this Agreement and other Transaction Documents to which it is a Party by the Target Company or the Seller does
not and will not:
(i) Cause breach of, or constitute non-performance of, any contract to which it is a party or which binds upon its properties or assets, or cause the
acceleration of any obligation under any Loan Agreement; or
(ii) Cause contravention, violation or non-compliance with any applicable laws.
3. Compliance with Laws
a) No Violation of Laws
None of the Group Companies and the Seller is violating or has violated any applicable laws, which may give rise to any criminal or
administrative penalty having Material Adverse Effect on the capacity of the Group Companies to operate business, or otherwise have Material
Adverse Effect on the capacity of the Group Companies to conduct their current business.
b) License
The Group Companies have all permits, Approvals, authorizations, franchises and licenses necessary for them to operate the current business. The
Group Companies have not breached or failed to perform any of such permits, Approvals, authorizations, franchises or licenses.
c) Compliance with All Laws
The Group Companies have been complying with all applicable laws in all material aspects when operating their business. The Group Companies
have obtained all necessary registrations, permits and consents for them to own their assets and operate their business, and all such registrations,
permits and consents are valid and existing, and there is no ground to suspend, cancel or revoke any registration, permit or consent.
d) Operation of Business
With respect to the main business of the Group Companies, the Group Companies have obtained and completed all Approvals, registrations,
consents, authorizations, filings and procedures, etc. which are sufficient to affect such business, from and with relevant governmental authorities.
e)
Interference of Transaction
No governmental authority or other third party:
(i)
Initiates or may initiate any legal proceedings, arbitration or administrative procedure against the Group Companies or the Seller; or
(ii) Threatens to initiate any legal proceedings, arbitration or administrative procedure against the Group Companies or the Seller.
f) Books, Records and Internal Control
(i) The Group Companies have prepared and kept books, records and accounts with reasonable details to reflect the transactions and disposals of their
assets accurately and fairly.
(ii) The Group Companies have formulated and maintained internal accounting control system sufficient to reasonably ensure: (A) that only person
with general or special power of attorney
from the management may transact and acquire assets; (B) that the transaction records meet the needs for regular preparation of financial
statements and traceability of assets; and (C) to compare the recorded assets and existing assets at a reasonable interval, and take appropriate
actions against any difference.
4. Disclosure
a) No Misrepresentation
No representation, warranty or statement made by the Target Company or the Seller in this Agreement, any other agreement concluded with the
Purchaser, or any appendix, schedule, declaration or certificate provided to the Purchaser under this Agreement has contained any
misrepresentation of or omitted any material matter, which is necessary to ensure such representation not in any way misleading in the context
from which it was made.
b) Accuracy of Information Provided
All the information provided to the Purchaser and/or its professional advisors by the officers and employees or professional advisors of the Target
Company or the Seller are true, accurate and not misleading at the time of provision and as of the date hereof.
c) Full Disclosure
There is no undisclosed fact or circumstance about affairs of the Group Companies, the Seller or the NewUp Bank (including external liabilities
and guarantee), which, if disclosed, may be reasonably expected to affect the Purchaser’s decision to purchase the Shares.
Schedule II: Designated Bank Account for Receipt of Purchase Price for the Shares
Shenzhen SUNHOPE Investment
Development Co., Ltd.
Account Holder
Shenzhen SUNHOPE Investment
Development Co., Ltd.
Bank
Bank Name: ***************
Account Number
***************
(Confidential) Contract No.:
Exhibit 10.2
Shareholder Agreement
On
Shenyang Tianxinhao Technology Co., Ltd.
AMONG
SHENZHEN YINGAIGOU TRADE CO., LTD. (深圳市赢爱购贸易有限公司)
SHENZHEN SUNHOPE INVESTMENT DEVELOPMENT CO., LTD. (深圳市新浩投资发展有限公司)
AND
SHENYANG TIANXINHAO TECHNOLOGY CO., LTD. (沈阳天新浩科技有限公司)
November 1, 2021
Contents
Recital
Section 1 Definitions
Section 2 Basic Information of Company
Section 3 Registered Capital
Section 4 Representations, Warranties and Undertakings
Section 5 Restrictions and Rights on Transfer of Equity
Section 6 Preemptive Right
Section 7 Meeting of Shareholders
Section 8 Board of Directors, Supervisor and General Manager
Section 9 Profit Distribution
Section 10 Financial Systems
Section 11 Right to Information
Section 12 Labor Management
Section 13 Effectiveness and Term
Section 14 Dissolution and Liquidation
Section 15 Breach of Contract and Liabilities for Breach of Contract
Section 16 Termination
Section 17 Confidentiality
Section 18 Governing Laws and Dispute Resolution
Section 19 General Provisions
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This Shareholder Agreement (hereinafter referred to as the “Agreement”) is made and entered into on November 1, 2021 (hereinafter referred to as the
“Signing Date”) in Futian District, Shenzhen, by and among:
A. Shenyang Tianxinhao Technology Co., Ltd., a limited liability company incorporated under the PRC laws, having its domicile at
****************, Shenyang, Liaoning (hereinafter referred to as the “Target Company” or “Shenyang Tianxinhao”);
B. Shenzhen SUNHOPE Investment Development Co., Ltd., a limited liability company incorporated under the PRC laws, having its domicile at
****************, Shenzhen (hereinafter referred to as the “Original Shareholder” or “Shenzhen SUNHOPE”);
C. Shenzhen Yingaigou Trade Co., Ltd., a limited liability company incorporated under the PRC laws, having its domicile at ****************,
Shenzhen (hereinafter referred to as the “New Shareholder” or “Shenzhen Yingaigou”);
The Target Company, the Original Shareholder and the New Shareholder shall be hereinafter collectively referred to as the “Parties” and individually
as a “Party”.
WHEREAS, the Target Company, the New Shareholder, and the Original Shareholder entered into the Share Purchase Agreement on Shenyang
Tianxinhao Technology Co., Ltd. (hereinafter referred to as the “SPA”), whereby the New Shareholder will acquire 45% equity in the Target Company
held by the Original Shareholder (hereinafter referred to as the “Acquisition”).
According to the SPA, upon completion of the Acquisition, the shareholding structure of the Target Company will be as follows:
Recital
Name of Shareholder
Shenzhen Yingaigou
Shenzhen SUNHOPE
Total
Shareholding
Percentage
45%
55%
100%
NOW, THEREFORE, pursuant to the Company Law of the People’s Republic of China and other applicable Laws and Regulations of the People’s
Republic of China, and on the principles of equality and mutual benefits, and upon friendly negotiation, the Target Company, the New Shareholder and
the Original Shareholder hereby enter into this Agreement with respect to the joint investment in and operation of the Target Company by the New
Shareholder and the Original Shareholder.
1.1 Definitions
Section 1 Definitions
In this Agreement, unless otherwise defined in the body, the following terms shall have the meanings ascribed to them below. Except as expressly
defined herein, other terms shall have same meanings as those used in the SPA.
“Affiliate” shall include affiliated company and connected person. An entity shall be deemed as the affiliated company of a Person if: (i) it directly or
indirectly controls, is controlled by or under common control with such Person; or (ii) more than fifty percent (50%) of its registered capital, voting
power, equity or decision-making power is directly or indirectly owned by such Person (or vice versa); or (iii) such Person can direct, exert influence
over or determine the direction of its decision-making, development, management and policies by contract, directorship or otherwise (or vice versa); or
(iv) any connected person of such Person acts as its director, partner, shareholder or
officer. “Connected person” refers to immediate relatives of a natural person, including his/her parents, spouse, siblings and their spouses, adult
children and their spouses.
“Control”, with respect to the relationship between two or more Persons, refers to the right or power to direct or cause the direction of the business,
management or decision-making of a Person directly or indirectly, whether by means of ownership of equity, voting rights or voting securities, or by
contract, contractual arrangement, trust arrangement or otherwise. Ownership of more than fifty percent (50%) of shares with voting power at the
meeting of shareholders of such Person or the power to control the majority of the board of directors of such Person shall be presumed to constitute
such right or power.
“Business Day” refers to any business day on which banks in the PRC are open for business to the public (other than Saturday, Sunday and legal
holidays).
“Laws and Regulations” refer to the laws, regulations, ordinances, codes, bylaws, orders, rules, normative documents of the PRC or other applicable
jurisdiction.
“Person” refers to any individual, partnership, firm, limited liability company, corporation, association, trust, cooperation organization, unincorporated
organization or other legal entity.
“NewUp Bank” refers to the NewUp Bank of Liaoning.
“Group Companies” refer to the Target Company, subsidiaries and branches of the Target Company, and subsidiaries and branches as the Target
Company may establish and/or control from time to time; “Group Company” refers to any of them.
“Material Adverse Effect” refers to any circumstance, change or effect affecting the Target Company or any Group Company or the business of the
foregoing, which: (a) will or could be expected, with abundant evidence, to cause any material adverse effect on the existence, business, assets,
intellectual property rights, liabilities, key employees, operating results or financial conditions of the Target Company or any Group Company, or (b)
will or could be expected, with abundant evidence, to cause any material adverse effect on the qualifications, licenses or capabilities of the Target
Company or any Group Company to conduct current business; or (c) will or could be expected, with abundant evidence, to cause any material adverse
effect on the performance of major obligations under the Transaction Documents by the Target Company or the Original Shareholder or on the validity
or enforceability of any Transaction Document.
“Transaction Documents” refer to this Agreement, the SPA, the restated articles of association, and other legal documents required for the
Acquisition; “Transaction Document” refers to any of them.
“Closing Date” refers to the closing date under the SPA.
“Required Actions”, with respect to any particular consequence, refer to all actions (if permitted by applicable Laws and Regulations) which are
necessary or reasonably required to complete to ensure such consequence, including but not limited to: (i) voting for or providing a written consent or
authorization in connection with the equity in the Target Company; (ii) causing the adoption of resolutions of shareholders and the board of directors,
and making corresponding amendment to the Organizational Documents; (iii) signing all necessary agreements, forms and instruments; and (iv)
obtaining or completing or causing the obtaining or completion of all approvals, registrations, filings or similar actions from and with any
governmental authority in order to achieve such consequence.
“Financial Report” refers to the (audited or unaudited, annual, quarterly or monthly) balance sheet, income statement, cash flow statement and other
financial documents of the Target Company, together with all relevant notes and schedules.
“Shareholder” refers to any shareholder that holds or controls the equity in the Target Company.
“Board of Directors” refers to the board of directors or, in the absence of board of directors, executive director of the Target Company.
“Senior Executives” refer to the general manager, CFO and other persons who are determined by the Board of Directors as senior executives, of the
Target Company.
“Operation Plan” refers to the operation plan (containing budget, investment policies and restrictions) prepared by the Target Company for the
current fiscal year and each subsequent fiscal year and approved or updated by the Board of Directors on an annual basis.
“Encumbrance” refers to any security interest, pledge, mortgage, lien (including but not limited to the right of revocation and subrogation right),
lease, license, debt burden, preferential arrangement, third-party claim, restrictive undertaking, condition or any kind of restriction, including but not
limited to any restriction on the use, voting, transfer, yields or on any other right or interest to exercise the ownership.
“Organizational Documents” refers to the articles of association, bylaws, partnership agreement, limited liability company agreement, trust
agreement or other incorporation documents of any Person.
“PRC” refers to the People’s Republic of China, and shall, only for the purpose of this Agreement, exclude Hong Kong, Macau Special Administrative
Region and Taiwan.
“RMB” refers to Renminbi, the legal tender of the PRC.
1.2 Other Provisions Concerning Definitions
(a) Unless otherwise stated, references to article, section, schedule, appendix, recital or preamble herein shall mean the article, section, schedule,
appendix, recital or preamble of this Agreement, and such article, section, schedule, appendix, recital or preamble shall be deemed an integral part
of this Agreement;
(b) The headings and titles herein are inserted for convenience only and shall not affect the meaning or interpretation of this Agreement in any way;
(c) When used herein, the word “including” shall be deemed to be followed by “but not limited to”;
(d) Laws and Regulations defined or mentioned in this Agreement or any agreement or document mentioned herein refer to such Laws and
Regulations as may be amended, revised or supplemented from time to time, including subsequent Laws and Regulations replacing the original
ones;
(e) When used herein, “hereof”, “herein”, “hereunder” and other words of similar meaning shall refer to the entire Agreement, instead of any
provision of this Agreement;
(f) Any equity of the Target Company acquired by any Shareholder after the Signing Date hereof shall be deemed as “equity in the Target Company”;
(g) Any reference to any Person shall also include its permitted assigns and successors.
Section 2 Basic Information of Company
2.1 Company Name
Shenyang Tianxinhao Technology Co., Ltd.
2.2 Domicile
**************** , Liaoning Province
2.3 Scope of Business
Computer network technology, communication engineering
technology, network engineering technology, technology development, technology transfer and technology consulting services for biological products,
mechanical and electrical products; interior and exterior fitting-out and decoration engineering, building insulation engineering design and
construction. (Items which must be approved under laws, may only be engaged in upon obtaining the approval from relevant departments.)
2.4 Compliance with Laws
All activities of the Target Company and the acts of the Parties under this Agreement shall be bound and protected by the PRC Laws and Regulations,
this Agreement, and the articles of association of the Target Company.
3.1 Registered Capital
Section 3 Registered Capital
The registered capital of the Target Company shall be RMB One Billion and Five Hundred Million Yuan (RMB1,500,000,000).
3.2 Contribution by the Parties
Upon completion of the Acquisition, the contribution amount subscribed for by the Parties and their shareholding percentages will be as follows:
Name of Shareholder
Shenzhen Yingaigou
Shenzhen SUNHOPE
Total
Shareholding
Percentage
45%
55%
100%
Each Party hereby represents and warrants to each of the other Parties that, as of the date when it signs this Agreement:
Section 4 Representations, Warranties and Undertakings
4.1 Existence, Authority and Enforceability
Such Party is a limited liability company or limited partnership registered or incorporated and validly existing under the PRC laws (only with respect
to legal person), or such Party is a PRC citizen with capacity for civil rights and full capacity for civil conduct (only with respect to natural person).
Such Party has absolute right and capacity to execute and perform this Agreement and consummate the transactions contemplated hereunder. Such
Party has obtained all authorities and completed all procedures to execute, deliver and perform this Agreement and consummate the transactions
contemplated hereunder. This Agreement will, upon execution by such Party, constitute legal, valid, and binding obligations upon such Party, and may
be enforced against such Party in accordance with the provisions of this Agreement (subject to restrictions set forth in bankruptcy laws or similar laws
that generally affect the rights of creditor, and subject to the general principles of equity).
4.2 No Conflict
The execution of this Agreement and performance of obligations hereunder by such Party will not: (a) cause breach of any provision of the
Organizational Documents of such Party (only with respect to legal person); (b) cause breach of any agreement, contract, license, permit, approval,
undertaking or other binding document or arrangement to which such Party is a party or which binds upon any of its/his business, assets or properties,
or constitute a default under such document or arrangement, or require any consent or authority under such document or arrangement, or empower
others to
terminate, amend, accelerate, suspend, revoke or cancel such document or arrangement, or cause the creation of any Encumbrance over the equity or
assets of the Target Company under such document or arrangement; or (c) cause violation of any Laws and Regulations or governmental instructions
applicable to such Party.
4.3 Consent
Except for any consent and authorization already obtained and for future registration with the administration for industry and commerce as required for
the equity transfer, capital increase or liquidation carried out in accordance with this Agreement, the execution of this Agreement or consummation of
any transaction contemplated hereunder by such Party does not require such Party to make or obtain any consent, waiver, approval, authority,
exemption, registration, permit or announcement to and from any governmental authority or third party.
The Original Shareholder hereby represents and warrants to the New Shareholder that, as of the date when the Original Shareholder signs this
Agreement:
4.4 Waiver of Preference
Before December 31, 2022, the Original Shareholder waives all preferences (including, without limitation, preemptive right, right of first refusal, co-
sale right, right of prior notice, anti-dilution right, drag-along, liquidation preference, redemption right, etc. (if any)) as it may have towards the Target
Company.
The Original Shareholder hereby undertakes to the New Shareholder that:
4.5 Historical Assets, Claims and Debts
The historical assets (which refer to other assets other than equity of NewUp Bank, same below), historical claims and debts (including, without
limitation, claims and debts regarding the unsettled business (including but not limited to the trust investment advising business), claims over the non-
performing assets transferred from NewUp Bank, debts arising from historical borrowings, etc.) and other actual or potential profits or losses, which
are generated before the Closing Date or after the Closing Date but attributable to reasons before the Closing Date, shall be enjoyed and borne by the
Original Shareholder, and none of the Target Company and the New Shareholder shall enjoy and bear any historical assets, claims or debts. Where the
Target Company and/or the New Shareholder assume any liability externally with respect to the historical claims and debts, the Original Shareholder
shall compensate the Target Company and/or the New Shareholder for the actual amount thereof. Besides, the current office building (Housing
Property Ownership Certificate No.: Liao (2019) Shenyang Real Estate Ownership No.0161658) of the Target Company is one of the historical assets
of the Target Company and excluded from this Acquisition. Upon completion of this Acquisition, if the New Shareholder proposes to continue to
acquire all remaining equity of the Target Company, it shall pay to the Original Shareholder in a lump sum the aggregate of the purchase price, fitting-
out costs and maintenance costs of such office building (and shall not exceed RMB4,400,000) as consideration.
5.1 Restrictions on Equity Transfer
Section 5 Restrictions and Rights on Transfer of Equity
(a) As of December 31, 2022 or until other date agreed in writing between the Original Shareholder and the New Shareholder (referred to as the
“Long Stop Date” in this Article 5.1), without prior written consent of the New Shareholder, the Original Shareholder may not transfer or dispose
of the equity in the Target Company held by it in any way, including but not limited to direct or indirect transfer of any part of the equity in the
Target Company held by it, or creation
of any pledge or Encumbrance over such equity. Any equity transfer in breach of this Article shall be invalid, and the transferee shall not enjoy the
rights as shareholder of the Company, nor be deemed as a Shareholder by the Target Company.
(b) For the avoidance of doubt, before the Long Stop Date, the provisions of Article 5.1(a) shall not be restricted by Article 71 of the Company Law,
that is, where the Original Shareholder proposes to transfer the equity in the Target Company held by it and notifies the New Shareholder in
writing to seek consent for its equity transfer, but the New Shareholder fails to reply within 30 days upon receipt of such written notice, it shall not
be deemed that the New Shareholder has consented to such transfer; and if the New Shareholder does not consent to the transfer, it has no
obligation to purchase such equity proposed to transfer, and the refusal of the New Shareholder to purchase such equity proposed to transfer shall
not be deemed as its consent to such transfer. The Original Shareholder agrees that it shall not invoke the provision of Article 71 of the Company
Law to defend against the right of the New Shareholder under this Article. Provisions of Article 5.1 (a) shall not apply after the Long Stop Date.
5.2 Right of First Refusal
(a) Subject to Article 5.1, where any Shareholder transfers the equity in the Target Company held by it directly or indirectly, other Shareholders shall
have the right of first refusal under the same conditions.
(b) Where a Shareholder (hereinafter referred to as the “Transferring Shareholder”) intends to transfer or sell all or part of the equity in the Target
Company held by it directly or indirectly to any Person (hereinafter referred to as the “Transferee”), the Transferring Shareholder shall
immediately notify the other Shareholder (hereinafter referred to as the “Non-Transferring Shareholder”) in writing to truthfully inform the
quantity of equity proposed to transfer and the price and main terms thereof. The Non-Transferring Shareholder shall have the right but not the
obligation to purchase the equity in the Target Company proposed to transfer by the Transferring Shareholder in precedence to any third party
under the terms and conditions offered by the Transferee to the Transferring Shareholder or proposed by the Transferring Shareholder to the
Transferee, provided that the Non-Transferring Shareholder shall reply in writing to the Transferring Shareholder whether it will exercise such
right, within twenty (20) Business Days upon receipt of the written notice from the Transferring Shareholder. Should the Non-Transferring
Shareholder fail to reply the Transferring Shareholder in writing within twenty (20) Business Days upon receipt of the written notice from the
Transferring Shareholder, it shall be deemed to waive the right of first refusal granted by this Article.
(c)
If the Non-Transferring Shareholder waives the right of first refusal granted by this Article 5.2, the Non-Transferring Shareholder undertakes that
it shall be unconditionally obliged to provide all kinds of cooperation (including, without limitation, signing relevant documents, requiring the
director(s) appointed by it to grant consent and make resolutions, etc.) to realize the Transferring Shareholder’s equity transfer arrangement.
Where the Non-Transferring Shareholder fails to fully fulfill the cooperation obligation, giving rise to any restriction on the
Transferring Shareholder’s equity transfer, the Non-Transferring Shareholder undertakes to accept the transfer of the equity proposed to transfer
by the Transferring Shareholder at the price set forth in the notice given under Article 5.2 (b) by the Transferring Shareholder plus a simple
annualized interest of 8% (and for the avoidance of doubt, a year shall be 365 days).
5.3 Assumption of Rights and Obligations by Transferee
When transferring the equity in the Target Company held by it in accordance with the conditions and procedures provided herein, the Transferring
Shareholder shall be responsible for ensuring:
(a)
the Person accepting the transfer of such equity will sign all necessary documents so that such Transferee will enjoy and assume the rights and
obligations originally enjoyed and assumed by the Transferring Shareholder under this Agreement and the articles of association (or other
Organizational Documents), and be bound by the provisions of this Agreement and the articles of association (or other Organizational
Documents), as may be amended by the Parties from time to time;
(b) The production and operation activities of the Target Company will not suffer any Material Adverse Effect due to the equity transfer.
6.1 Preemptive Right of Shareholders
Section 6 Preemptive Right
(a)
If the Target Company increases registered capital, issues new shares, or makes subsequent financing in the future, the Shareholders shall have the
priority to subscribe for the newly increased registered capital or new shares of the Target Company in proportion to their shareholdings in the
Target Company (hereinafter referred to as the “Preemptive Right”). The price, terms and conditions for the Shareholders to subscribe for the
newly increased registered capital or new shares of the Target Company shall be substantially same as the subscription or investment price, terms
and conditions of other potential investors or subscribers.
(b) The Preemptive Right of the Shareholders shall not apply to: (a) equity or shares issued by the Target Company under the employee stock
incentive plan approved by the meeting of shareholders; (b) shares issued by the Target Company at listing; or (c) equity or shares issued by the
Target Company for the stock split, dividend payment or similar transaction approved in accordance with this Agreement.
6.2 Notice of Preemptive Right
Where the Target Company decides to increase the registered capital, issues new shares or makes subsequent financing, it shall give a written notice
thereof to the Shareholders at least ten (10) Business Days in advance, which shall contain the terms and conditions for the increase of registered
capital, issuance of new shares or subsequent financing (including, without limitation, corporate valuation, number of shares issued, total investment
amount, issue price, investment percentage, and relevant preferences), and shall also give offer to the Shareholders for purchase of the increased
registered capital, new shares issued or participation in subsequent financing on such conditions and at such price. The Shareholders shall notify the
Target Company on whether they will exercise the Preemptive Right or not within twenty (20) Business Days upon receipt of such offer. If a
Shareholder fails to notify the Target Company on whether it will exercise the Preemptive Right or not within twenty (20) Business Days upon receipt
of such offer, it shall be deemed to waive the Preemptive Right granted in this Article.
6.3 Over-subscription
Where a Shareholder waives its Preemptive Right to subscribe for the registered capital newly increased or new shares issued by the Target Company,
other Shareholders shall have the pre-emptive right to subscribe for all or part of the newly increased registered capital or new shares so waived in
proportion to their then relative shareholding percentages.
The following rules shall apply to the meeting of shareholders of the Target Company:
Section 7 Meeting of Shareholders
7.1 Meeting of Shareholders
(a) The meeting of shareholders shall be convened by the Board of Directors. The meeting of shareholders shall include regular meeting and
extraordinary meeting, and regular meeting will be convened once a year. When a regular meeting is convened, the time and place of and business
to be transacted on the meeting shall be notified to the Parties twenty (20) days prior to the convention of such meeting. Where the Shareholder(s)
representing more than one tenth (10%) of voting power, more than one third of directors, or the supervisor proposes to convene an extraordinary
meeting, the extraordinary meeting of shareholders shall be convened and notified to all Shareholders fifteen (15) days prior to the convention of
such meeting, provided that a decision may be directly made without convening a meeting of shareholders if the Shareholders reach unanimous
agreement in writing and sign and seal on such decision.
(b) The Parties may participate in the meeting of shareholders by phone, video conference or any other means of synchronous communication,
provided that each Shareholder present at the meeting can hear the opinion of every other Shareholder. Besides, each Shareholder must have its
identity confirmed, including but not limited to providing a written power of attorney to the Target Company when attending on site, and
providing the power of attorney in writing or by email to the Target Company in advance when attending by phone, video conference or any other
means of synchronous communication. No Shareholder without identity confirmation shall have the right to speak or vote at the meeting.
(c) Other rules regarding the meeting of shareholders shall be further specified in the articles of association of the Target Company.
7.2 Voting at the Meeting of Shareholders
The Shareholders of the Target Company shall exercise the voting power at the meeting of shareholders in proportion to their respective contributions.
The following matters regarding the Group Company must be approved by the Shareholders representing two thirds or more voting power (and a
resolution of Shareholders adopted without convening the meeting of shareholders will be valid if it has been sent to all the Shareholders by post,
email or fax and approved in writing by the Shareholders representing two thirds or more voting power):
(a) Amendment to the articles of associations;
(b) Increase or decrease of registered capital;
(c) Consolidation, split, merger, reorganization, or any transaction which leads to the change of control of the Group Company, whether via a single
transaction or a series of transactions;
(d) Liquidation, dissolution, termination; approval of liquidation report; resolution on any event which may lead to the dissolution, shutdown,
bankruptcy or liquidation of the Group Company;
(e) Change in the corporate form;
(f) Any material change to the scope of business of the Group Company; any substantial change or termination of the main business of the Group
Company; any engagement in business field which is completely different from the main business; or any substantial change to the Operation Plan
of the Group Company;
(g) Issue of bonds or other financing instruments;
(h) Approval or substantial amendment of and to the annual budget or final accounts, annual Operation Plan (the annual financial budget and the
annual Operation Plan are collectively referred to as the “Budget and Operation Plan”); approval of audited statements;
(i) Approval or substantial change of the profit allocation plan and the loss make-up plan;
(j) Sale, transfer, lease, license or disposal of, or creation of any mortgage, pledge, lien or other Encumbrance over, all or substantially all of the
business, assets (including intellectual property rights, technologies, intangible assets, real estate, tangible assets, etc.) of the Group Company,
whether via a single transaction or a series of transactions;
(k) Establishment of any controlled subsidiary, partnership or joint venture; incorporation, dissolution or sale of any subsidiary, partnership, joint
venture, or branch;
(l) Approval of the qualified listing plan, including important terms and conditions of listing, such as place and time of listing, valuation, issue price,
appointment of intermediary agencies (such as undertakers, investment banks or financial advisors), etc.;
(m) Any change to the number of members or appointment and removal rules of the Board of Directors of the Group Company; increase or decrease
of the decision-making power of the Board of Directors; election and replacement of directors of the Group Company, or determination of matters
relating to remuneration of directors;
(n) Approval of bonus or any profit distribution.
For the avoidance of doubt, with respect to resolutions made by the meeting of shareholders of the Target Company regarding any matter concerning
NewUp Bank, the Parties agree to procure the Target Company to cast votes consistent with the resolution of the meeting of shareholders of the Target
Company at the level of NewUp Bank, in its capacity of shareholder of the NewUp Bank or via the directors appointed by it. Notwithstanding any
other provision herein, if the New Shareholder makes any resolution with respect to the appointment of directors by the Target Company to the NewUp
Bank (including but not limited to the nomination, removal, replacement, etc.), the Original Shareholder undertakes to fulfill all cooperation
obligations (including but not limited to adopting resolution, etc.) to approve such resolution.
The following rules shall apply to the operation of Board of Directors, supervisor, and general manager of the Target Company:
Section 8 Board of Directors, Supervisor and General Manager
8.1 Composition of Board of Directors
(a) The Target Company shall establish a Board of Directors. The Board of Directors of the Target Company shall consist of 3 directors, one
appointed by the New Shareholder and two appointed by the Original Shareholder. The appointor may notify the Target Company in writing to
appoint or remove the director(s) it appoints, who may not be appointed or removed by any other Party, and the tenure of any successor shall be
the remaining tenure of the replaced director. The tenure of a director shall be three (3) years, and a director may continue to hold office if he is re-
appointed by the original appointer.
(b) The chairman of the Target Company shall be a director appointed by the Original Shareholder. The chairman shall be the legal representative of
the Target Company. Where the chairman cannot perform his duties for cause, a director jointly selected by a majority of the directors shall
perform such duties.
8.2 Meeting of the Board of Directors
(a) The meeting of the Board of Directors shall be convened at least once a year and called and presided over by the chairman. The Target Company
shall give notice of all regular meetings and extraordinary meetings of the Board of Directors to each director, and the convener of the meeting of
the Board of Directors shall give a written notice to each director ten (10) Business Days in advance, stating the date, time, place and specific
agenda of the meeting together with
relevant documents and materials, provided that the notice of meeting of the Board of Directors may be exempted with unanimous consent of the
Board of Directors. The Board of Directors may use written voting, instead of convening the meeting of the Board of Directors, for any resolution
which will be deemed as adopted if sent to all directors by post or fax and signed by all directors in favor.
(b) All directors who attend in person or by proxy shall constitute the quorum of the meeting of the Board of Directors. If a director is unable to
attend the meeting, he may issue a written proxy to appoint another director or other person to attend on his behalf. Such proxy shall vote on
behalf of such director. Where a director fails to attend any meeting of the Board of Directors in person or by proxy, he shall be deemed to waive
the voting right on such meeting.
(c) After each meeting of the Board of Directors, the meeting minutes shall be delivered to all directors as soon as possible for review. If any director
would like to amend or supplement such minutes, he shall submit a written report indicating his opinion to the Target Company as soon as
possible after receipt of such meeting minutes. The finalized and adopted meeting minutes shall be signed by all present directors and archived by
the Target Company, the complete copies of which shall be promptly sent to the Parties and all directors. All meeting minutes and records of
resolutions in lieu of the meeting of the Board of Directors shall be archived to the meeting minutes book of the Target Company, and kept at the
legal address of the Target Company.
(d) The Target Company shall bear all reasonable costs incurred by directors arising from attending the activities of the Board of Directors, including
but not limited to costs for attending the meeting of the Board of Directors, and reimburse all reasonable miscellaneous expenses incurred by
directors in connection with attending the meetings of the Board of Directors, including but not limited to the travel expenses and accommodation
fee.
(e) Other rules regarding the meeting of Board of Directors shall be further specified in the articles of association of the Target Company.
(f) Each director shall have one vote during the voting on resolutions of the Board of Directors. The following matters regarding the Group Company
(including the NewUp Bank) may only be approved with the affirmative votes of more than two thirds of the directors (which must include the
affirmative vote of the director appointed by the New Shareholder). Except for the following matters, other matters requiring approval of the
Board of Directors will be approved through resolution adopted by a majority of directors of the Board of Directors. A resolution of directors will
be valid if it has been sent to all directors by post, email or fax and approved by all directors in writing, without convening the meeting of the
Board of Directors.
1) Sale, transfer, lease, license or disposal of, or creation of any mortgage, pledge, lien or other Encumbrance over, the business, assets
(including intellectual property rights, technologies, intangible assets, real estate, tangible assets, etc.), shares or interests of the Group
Company (other than transactions requiring approval by the meeting of shareholders), if (i) the single amount exceeds RMB100,000, or (ii) it
is beyond the Budget and Operation Plan deliberated and approved by the meeting of shareholders;
2) Merger with or acquisition of all or substantially all business, assets (including intellectual property rights, technologies, intangible assets,
real estate, tangible assets, etc.), shares or interests of any third party, whether via a single transaction or a series of transactions, with a single
amount of more than RMB100,000;
3) Establishment of any controlled subsidiary, partnership, or joint venture; incorporation, dissolution or sale of any subsidiary, partnership, joint
venture, or branch; purchase or subscription for any shares, equity, voting power, claims, debts, securities or trust or other interest of any
Person, with a single amount of more than RMB100,000;
4) Borrowing from any financial institution or third party by the Group Company, with an amount of more than RMB100,000 in a single loan or
in 12 consecutive months on a cumulative basis;
5) Provision of any loan, advancement, or other financial support to any entity or individual (including, without limitation, shareholders,
directors, employees, and Senior Executives), with an amount of more than RMB100,000 in a single transaction or in 12 consecutive months
on a cumulative basis; or provision of any guarantee for the debts of any entity or individual (including, without limitation, shareholders,
directors, employees, and Senior Executives);
6) Entry into any speculative swap, futures, or option transaction;
7) Except for the disclosed existing litigations of the Target Company arising from acquisition of the non-performing assets of the NewUp Bank,
any legal action or arbitration initiated or settled by the Group Company, with an amount of more than RMB100,000 in a single case or in 12
consecutive months on a cumulative basis;
8) Any material change to the financial and accounting systems, engagement or change of auditor;
9) Approval of any employee stock incentive plan of the Target Company and any substantial amendment to such employee stock incentive plan
(including, without limitation, any increase or decrease of the reserved equity under such employee stock incentive plan), or implementation
or management of the employee stock incentive plan;
10) Any related party transaction between the Group Companies or between a Group Company and its shareholders, directors, or Senior
Executives, with a single amount of more than RMB100,000 (except for remuneration under labor contract);
11) Adoption of any new financing plan;
12) Employment or dismissal of Senior Executives, or termination or change of major terms of or compensation package set forth in the labor
contract of the foregoing person;
13) Entry into any transaction involving grant of exclusive right to any third party or restriction over the business development of the Group
Company, or any contract or undertaking with an amount of payment of more than RMB100,000; or any change to any material contract
which is materially adverse to the Group Company;
14) Expenses exceeding 10% of the annual Budget and Operation Plan (except for those duly authorized);
15) Waiver or exemption of any debt or material right, with an amount of more than RMB100,000 in a single waiver or exemption or in 12
consecutive months on a cumulative basis; and
16) Any matter which can be reasonably expected to have Material Adverse Effect on the Group Company.
For the avoidance of doubt, with respect to resolutions made by the meeting of Board of Directors of the Target Company regarding any matter
concerning NewUp Bank, the Parties agree to procure the Target Company to cast votes consistent with the resolution of the meeting of Board of
Directors
of the Target Company at the level of NewUp Bank, in its capacity of shareholder of the NewUp Bank or via the directors appointed by it.
8.3 General Manager
(a) The Target Company shall practice the accountability system of general manager under the leadership of the Board of Directors, and shall have
one (1) general manager who will be appointed by the Board of Directors. The general manager shall be directly responsible to the Board of
Directors, implement the resolutions of the Board of Directors, and direct the daily business management work of the Target Company.
(b) The general manager shall be appointed by the Board of Directors, with a tenure of three (3) years, and may be re-appointed. The general manager
shall have the duties and responsibilities provided under the PRC Laws and Regulations and the articles of association and delegated by the Board
of Directors.
(c) Except with approval by the Board of Directors in accordance with this Agreement, the management of the Target Company shall not enter into
any contract, agreement or letter of intent or any transaction with the Group Companies (including the NewUp Bank) or their affiliated companies.
(d) The Board of Directors may remove the general manager at any time if he commits any malpractice or serious breach or dereliction of duty. The
general manager may remove any other managers or their subordinates if they commit any malpractice or serious breach or dereliction of duty.
8.4 Supervisor
(a) The Company will have no board of supervisors, but one (1) supervisor instead, who shall be appointed by the Original Shareholder. The
appointor may notify the Target Company in writing to appoint or remove the supervisor it appoints, and the tenure of any successor shall be the
remaining tenure of the replaced supervisor. The tenure of the supervisor shall be three (3) years, and such supervisor may be re-appointed by the
original appointer. No director or Senior Executive may concurrently act as supervisor.
(b) The supervisor shall exercise the following powers and duties:
1) To inspect the finance of the Group Company;
2) To supervise compliance of the directors and Senior Executive with their respective duties and propose the removal of any director or Senior
Executive who violates any law, administrative regulation, or the articles of association;
3) To require any director or Senior Executive to take corrective action where he acts in a way that damages the interests of the Group Company;
4) To bring a lawsuit against any director or Senior Executive in accordance with the provisions of the Company Law of the People's Republic
of China; and
5) Other powers as provided in the articles of association of the Target Company.
(c) The supervisor may be present at the meeting of the Board of Directors without voting power, and make inquiries or suggestions on matters to be
resolved by the Board of Directors.
9.1 Funds
Section 9 Profit Distribution
The Target Company shall appropriate 10% of the profit after payment of income tax as legal reserve and discretionary reserve in accordance with
provisions of the PRC Laws and Regulations.
9.2 Dividends
(a) Where the meeting of shareholders approves distribution of dividends out of the profits of the Target Company, then all after-tax distributable
profits shall be distributed among all the Shareholders in proportion to their respective paid-in contributions. Where the meeting of shareholders
decides not to distribute any profit, the after-tax profits shall be retained by the Target Company.
(b) No profit distribution shall be made by the Target Company until making up any loss of previous fiscal year, and any undistributed profits of the
previous fiscal year may be included into the profits of current fiscal year for distribution.
10.1 Chief Financial Officer
Section 10 Financial Systems
The chief financial officer shall report his work to the general manager and the Board of Directors. The financial accounting systems and procedures
adopted by the Target Company shall be formulated by the chief financial officer under the supervision of the general manager, and submitted to the
Board of Directors for approval.
10.2 Basic Financial Systems
(a) The fiscal year of the Target Company shall be a calendar year from January 1 to December 31.
(b) The Target Company shall use RMB as the recording currency in its financial and accounting work. Where the currency used for recording of
cash, bank’s deposits, foreign loans and claims, debts, income and payment is different from the recording currency, such cash, bank’s deposits,
foreign loans and claims, debts, income and payment shall be recorded in the actual receipt and payment currency. The exchange gains and losses
arising out of exchange rate margin shall be handled in accordance with the foreign exchange transaction accounting processing methods issued
by the Ministry of Finance, the Administration for Foreign Exchange and other governmental authority of the PRC.
(c) All vouchers, books and statements of the Target Company shall be properly kept by dedicated person, and may not be altered or destroyed by
anyone at will.
(d) The Board of Directors shall engage an accounting firm registered in the PRC to be responsible for auditing and examining the financial and
accounting documents of the Target Company. The audit results of the auditor shall be reported to the Board of Directors and the general manager.
10.3 Taxation
The Target Company shall ensure all Group Companies will prepare and submit on time national and local tax returns in accordance with the
applicable Laws and Regulations and requirements of competent governmental authorities, and pay the due taxes on time and in full in accordance
with the applicable Laws and Regulations and the tax returns. The Target Company shall ensure all Group Companies to make their best efforts to
obtain the most favorable tax treatment permitted under applicable Laws and Regulations.
11.1 Information Right
(a) The Target Company shall submit the information and materials to all the Shareholders as required below:
Section 11 Information Right
1) Within ninety (90) days after the end of each year, submit the annual financial statements and auditor’s report of the Group Companies
audited by an audit firm acceptable to the
Shareholders in accordance with the PRC accounting principles (which shall include their major equity investment, that is, financial
statements and relevant materials of the NewUp Bank);
2) Within ten (10) Business Days after the end of each quarter, submit the unaudited quarterly financial report of the Group Companies prepared
in accordance with the PRC accounting principles (which shall include their major equity investment, that is, financial statements and
relevant materials of the NewUp Bank), and any quarterly budget, capital expenditure plan, loan limit and business plan (if any);
3) At least thirty (30) days prior to the start of a new fiscal year, the annual budget plan, capital expenditure plan, loan limit and annual business
plan for the Group Companies approved by the Board of Directors of the Target Company (including approval by the director appointed by
the New Shareholder);
4) Other information associated with the operation and finance of the Group Companies (including the NewUp Bank) as the Shareholders may
reasonably require. The Target Company shall provide the Shareholders with any information which may have Material Adverse Effect on the
business, operation, finance or development prospect of the Group Companies (including the NewUp Bank), within two (2) days upon its
knowledge of such information.
(b) The Shareholders may consult the monthly, quarterly and annual operation records, accounting records, books and Financial Report at any time.
The Shareholders may independently engage a third party to conduct financial audit over the Group Companies annually, and the Group
Companies shall actively cooperate therewith and provide necessary conditions and materials so that the Shareholders of the Target Company can
complete such audit and investigation work.
11.2 Suggestion Right
Without prejudice to other provisions hereof, with respect to the operation, management and any other matter of the Group Companies (including the
NewUp Bank), the Shareholders may propose suggestions to and discuss with the Target Company and the management, and the Target Company and
the management shall seriously consider and accept reasonable suggestions from the Shareholders.
12.1 Labor Contract
Section 12 Labor Management
The Target Company shall ensure all Group Companies enter into formal labor contract with each employee in accordance with the provisions of the
PRC Laws and Regulations.
12.2 Labor Systems
(a) The Target Company shall ensure all Group Companies comply with the PRC Laws and Regulations on labor and welfare in all aspects.
(b) All plans on the recruitment, employment, dismissal, resignation, salary, welfare, and discipline of and concerning employees of the Target
Company shall be formulated by the general manager in accordance with the applicable PRC Laws and Regulations and deliberated and adopted
by the Board of Directors.
(c) The Group Companies shall recruit staff in accordance with the Laws and Regulations, and staff must be subject to a probation period after entry
into the Target Company and all Group Companies. During the probation period, a labor contract must be concluded. Upon expiry of the
probation period, such staff shall become formal regular employees. The labor contract
shall include compensation package, matters to be followed, signature of the employer and the employee, etc.
Section 13 Effectiveness and Term
13.1 Effectiveness
This Agreement shall take effect and be legally binding upon the signing Parties immediately from the date of be duly executed. For the convenience
of completing relevant governmental procedures, the Parties shall enter into separate contract, agreement or document in connection with matters
hereunder as required by relevant governmental authorities, provided that in case of any conflict or inconsistency between such contract, agreement or
document and this Agreement, this Agreement shall prevail.
13.2 Term
The term of this Agreement shall commence from the time of signature and end on the expiry of duration of the Target Company or dissolution of the
Target Company (unless early terminated in accordance with this Agreement).
14.1 Reason for Dissolution of the Company
Section 14 Dissolution and Liquidation
Any Shareholder may request to convene a meeting of shareholders to discuss early dissolution of the Target Company if:
(a) A Party fails to perform its substantial obligations hereunder due to force majeure event, which lasts for six (6) months or longer, giving rise to the
termination of this Agreement;
(b) The Target Company is revoked off its business license, ordered to close or canceled according to the laws;
(c) Any circumstance for dissolution or early termination of the Target Company provided under the applicable PRC Laws and Regulations or the
articles of association of the Target Company or resolved by the meeting of shareholders of the Target Company takes place.
In case of any event listed above, the meeting of shareholders shall convene a meeting to discuss the dissolution of the Target Company within thirty
(30) days upon receipt of the request for convening such meeting from either Party. The Parties shall discuss on such meeting and make best efforts to
reach a solution acceptable to the Parties, and if the Parties cannot reach consensus on the solution, the Parties shall liquidate the Target Company in
accordance with the Laws and Regulations.
14.2 Liquidation
(a) Where any cause which requires the liquidation of the Target Company under the Laws and Regulations or as agreed by the Parties takes place,
the Target Company shall carry out liquidation in accordance with applicable PRC Laws and Regulations.
(b) After adopting resolution on liquidation of the Company, the meeting of shareholders shall formulate the liquidation procedures and principles,
and establish a liquidation committee (hereinafter referred to as the “Liquidation Committee”) according to applicable PRC Laws and
Regulations on liquidation, to liquidate the Target Company in accordance with the Company Law of the People’s Republic of China, the articles
and association and other applicable PRC Laws and Regulations on liquidation. The Liquidation Committee shall conduct comprehensive
inventory of the properties, claims and debts of the Target Company, prepare the balance sheet and list of properties, propose the valuation and
calculation basis of properties, prepare a liquidation plan of the Target Company, and fulfill other duties as may be
required under applicable Laws and Regulations.
(c) The Liquidation Committee shall pay the liquidation fee and repay debts of the Target Company out of the assets of the Target Company in
accordance with the order of precedence stipulated in the applicable Laws and Regulations. After payment of the liquidation fee, wages of the
employees, social insurance contribution and statutory compensation as well as the delinquent taxes and discharge of the debts of the Target
Company by the Target Company according to the laws, the remaining property of the Target Company shall be allocated to the Shareholders in
proportion to their respective contributions.
(d) Upon completion of the liquidation of the Target Company, the Liquidation Committee shall immediately submit a liquidation report to the
meeting of shareholders, which shall be approved by the Shareholder(s) representing two thirds or more of the voting powers. After approval by
the meeting of shareholders, the Liquidation Committee shall submit such report and the application documents for dissolution to relevant
governmental authorities within the scope stipulated by Laws and Regulations, and after obtaining approval from such authorities, complete the
surrender of business license to and de-registration procedures with the registration authority of the Company.
15.1 Breach of Contract and Early Termination
Section 15 Breach of Contract and Liabilities for Breach of Contract
Where a Party fails to perform its obligations hereunder or under any other Transaction Document, or any of its representations or warranties
hereunder or under any other Transaction Document is untrue or inaccurate, it shall constitute a breach of this Agreement (and such Party shall be
referred to as the “Breaching Party”), in which case, the non-breaching Party shall notify the Breaching Party in writing of its breach of this
Agreement, and the Breaching Party shall cure its breach within fifteen (15) days after the date when such notice is sent. Should the Breaching Party
fail to cure such breach upon expiry of such fifteen (15) days, the non-breaching Party may terminate this Agreement. Either Party expressly indicates
(orally, in writing or by its acts) prior to the expiry of the performance period that it will not perform the major obligations hereunder, or any breach by
the Breaching Party (including those caused by force majeure) has caused the frustration of the fundamental purpose for the Parties to enter into this
Agreement, the non-breaching Party may terminate this Agreement.
15.2 Compensation for Breach of Contract
In case of breach of this Agreement or any other Transaction Document, the Breaching Party shall compensate the non-breaching Party for the loss
suffered arising from its breach. The right to early terminate this Agreement available to the non-breaching Party hereunder shall be in addition to any
other remedies available to it, and such termination shall neither exempt the Breaching Party from the liabilities for breach of contract, nor exempt the
Breaching Party’s liability for compensating for the losses of the non-breaching Party suffered due to its breach of this Agreement or any other
Transaction Document.
16.1 Termination
Unless otherwise provided herein, this Agreement may be terminated at the time prior to the Closing if:
Section 16 Termination
(a) Any circumstance set forth in Article 15.1 takes place and the non-breaching Party terminates this Agreement after giving a written notice to that
effect to the Breaching Party;
(b) (i) Any representation or warranty of the Target Company or the Original Shareholder contained in any Transaction Document is untrue or
inaccurate in any material aspect; (ii) the Target Company or the Original Shareholder breaches any of its obligations, undertakings or covenants
under any Transaction Document and fails to cure within seven (7) days after written demand by the New Shareholder, or such breach has caused
it impossible for the Parties to realize the fundamental purpose of this Agreement; (iii) the Group Companies (including the NewUp Bank) suffer
material losses or the value of the Group Companies (including the NewUp Bank) is materially impaired due to any penalty, indemnity claim or
other claim imposed or made against the Group Companies (including the NewUp Bank) by the governmental authority or any third party arising
from the violation of the PRC Laws and Regulations or infringement upon the rights of such third party by the Group Companies (including the
NewUp Bank); or (iv) the Group Companies (including the NewUp Bank) make general transfer for the benefits of creditors, or the Group
Companies (including the NewUp Bank) initiate or are initiated by any Person any legal proceedings to declare the bankruptcy or insolvency of
the Group Companies (including the NewUp Bank), or carry out dissolution, liquidation, winding-up, restructuring, or reorganization of debts
under any laws with respect to bankruptcy, insolvency or reorganization, then the New Shareholder may terminate this Agreement after giving a
written notice to the Target Company and the Original Shareholder;
(c) Any governmental authority issues any Laws and Regulations or any order, decree or ruling or takes any other legal actions to restrict, stop or
otherwise prohibit the transaction hereunder, or render it illegal or impossible to consummate the transaction hereunder, and such order, decree or
ruling or other legal actions are final, unactionable, unappealable and not eligible for application for reconsideration, then either Party may
terminate this Agreement after giving a written notice to the other Party;
(d) Any Transaction Document (including but not limited to the SPA) other than this Agreement is terminated in accordance with its terms;
(e) The Parties unanimously agree in writing upon negotiation to terminate this Agreement.
16.2 Effect of Termination
If this Agreement is terminated in accordance with Article 16.1, then this Agreement shall terminate with immediate effect and no longer be binding
upon either Party, provided that (i) Sections 16 and 17 hereof shall remain in full force and effect, and (ii) nothing herein relieves any Party from the
liabilities for breach of contract hereunder.
17.1 Confidential Information
Section 17 Confidentiality
The Parties acknowledge that this Agreement, the content of this Agreement and the transaction under this Agreement or any oral or written business,
financial, legal, marketing, customer, technical, property and other information mutually exchanged for the preparation or performance of this
Agreement shall be deemed as confidential information.
17.2 Confidentiality Duty
The Parties agree that they shall, and shall procure their Affiliates and their respective officers, directors, employees, agents, representatives,
accountants and legal counsels will, treat any confidential information received or obtained by it/them as confidential materials and keep the same
confidential, and without prior written permission of the other Parties or except as required by judicial or administrative procedures or other Laws and
Regulations, may not disclose to any third
party or use the same.
17.3 Excluded Disclosure
(a) The confidentiality obligation under this Section shall not apply to any information which is: (i) permitted to disclose hereunder; (ii) publicly
available at the time of disclosure due to reasons other than breach of this Agreement by any Party or its Affiliates or their respective officers,
directors, employees, agents, representatives, accountants and legal counsels; (iii) obtained by a Party from a good faith third party without
confidentiality obligations; or (iv) disclosed within the scope mutually agreed by the Parties. And either Party may disclose such information to its
Affiliates and their respective investors, officers, directors, employees, agents, representatives, accountants and legal counsels to the extent
necessary for the purpose of performance of this Agreement, provided that such persons shall undertake the same confidentiality obligation.
(b) Besides, for the sake of clarity, the Parties agree that either Party and its Affiliates (including their respective officers, directors, employees,
agents, representatives, accountants and legal counsels) may disclose the confidential information to any governmental authority, judicial authority
or securities regulator in accordance with the provisions of applicable Laws and Regulations or requirements of such governmental authority,
judicial authority or securities regulator, provided that the Party required to make disclosure shall make disclosure only to the extent so required,
and issue a written notice to the other Parties prior to such disclosure.
17.4 Confidentiality Term
From the execution of this Agreement to five (5) years upon termination of this Agreement.
Section 18 Governing Laws and Dispute Resolution
18.1 Governing Laws
The conclusion, validity, interpretation and performance of this Agreement and the resolution of any dispute arising hereunder shall be governed by the
PRC Laws.
18.2 Dispute Resolution
(a) It is agreed by the Parties hereto that any dispute arising out of or in connection with the execution of this Agreement shall be resolved by the
Parties through negotiation. If such dispute cannot be resolved within 30 days after a Party issues a notice to demand for negotiation, either Party may
submit such dispute to the People’s Court of Futian District, Shenzhen for litigation. The Parties further agree that the defeated Party shall bear the
costs and expenses (including but not limited to attorney’s fee) of the Parties arising from the litigation.
(b) Pending dispute resolution in accordance with this Article, except for the disputed matters, the Parties shall continue performing their
corresponding obligations hereunder.
19.1 Compliance with the SPA
Section 19 General Provisions
Each Party hereby represents and warrants to other Parties that the representations and warranties made by it under the SPA are true, accurate and
complete. Each Party hereby undertakes to other Parties that it will fully comply with all its obligations under the SPA.
19.2 Notice
Any notice or other correspondence given by any Party to the other Parties in connection with this Agreement (“Notice”) shall be made in writing
(including, without limitation, letter, fax, and email) and addressed to the following address of such other Parties by personal delivery, registered mail,
postage prepaid, commercial courier service, email, or fax. For the purpose of Notice, the contacts
of the Parties are as follows:
If to Shenzhen Yingaigou Trade Co., Ltd.:
(a)
Address: ********************, Shenzhen
Tel.: ****************
Email: ****************
Attn.: ****************
If to Shenzhen SUNHOPE Investment Development Co., Ltd.:
(b)
Address: ****************, Shenzhen
Tel.: ****************
Email: ****************
Attn.: ****************
(c)
If to Shenyang Tianxinhao Technology Co., Ltd.:
Address: ****************, Shenyang, Liaoning Province
Tel.: ****************
Email: ****************
Attn.: ****************
Any written notice given as aforesaid shall be deemed served: (1) if sent by personal delivery, on the date when the notified party signs for receipt or it
is placed at the address for service as agreed by the notified party; (2) if sent by post (including registered mail, postage prepaid, commercial courier
service), when it is shown properly delivered; (3) if sent by fax, on the date of successful transmission (subject to the transmission confirmation
information automatically generated); and (4) if sent by email, upon completion of sending of email if the sending party receives no feedback that the
email has been returned. In case of any change to the correspondence address or number of any Party (“Changing Party”), the Changing Party shall
notify the other Parties within seven (7) days prior to such change. Any written notice given by other Parties to the address, email or fax number before
change shall be deemed validly served if the Changing Party fails to give timely notice of change as agreed.
19.3 Assignment and Succession
Unless otherwise expressly provided herein or agreed by the Parties in writing, no Party may assign this Agreement or any of its rights and obligations
hereunder for whatever reason. Notwithstanding the foregoing, the New Shareholder may assign the rights and obligations hereunder to its Affiliates
without consent of the Parties, provided that the New Shareholder shall give a prior notice of such assignment and the information on the Affiliate
accepting such assignment of rights and obligations, to the Target Company. This Agreement shall be binding upon and inure to the benefits of the
Parties hereto and their successors and assigns.
19.4 Severability
If, under any Laws and Regulations or public policy, any term or other provision hereof is held
invalid, illegal, or unenforceable, then as long as the economic or legal substance of the transaction contemplated hereunder is not subject to Material
Adverse Effect of any form on any Party, all other terms and provisions hereof shall remain in full force and effect. Where any term or other provision
is held invalid, illegal, or unenforceable, the Parties hereto shall negotiate in good faith to amend this Agreement in an acceptable manner as close as
possible to the original intent of the Parties, so as to complete the transaction contemplated hereunder as originally planned to the maximum extent.
19.5 Entire Agreement
This Agreement sets forth the entire understanding and agreement of the Parties with respect to the transaction contemplated hereunder and supersedes
all written and oral agreements and undertakings entered into by the Parties with respect to the transaction contemplated hereunder prior to the Signing
Date.
19.6 Waiver
Either Party hereto may: (a) extend the time for any other Party to perform any obligation or take any action, (b) waive to hold any other Party liable
for any inaccuracy of any representation or warranty made herein or in any other Transaction Document, or (c) waive to demand any other Party to
comply with any agreement or required condition contained herein. No such extension or waiver shall be effective unless the Party bound thereby
signs a written document to state such extension or waiver. The waiver of any Party of any breach of any provision of this Agreement shall not operate
as or be construed as a further waiver of such breach or a continuing waiver, or a waiver of any other breach or subsequent breach. Unless otherwise
provided herein, failure or delay of any Party to exercise any right, power or remedy hereunder or otherwise available under the Laws and Regulations
shall not operate as waiver of such right, power or remedy. And single or partial exercise of such right, power or remedy by such Party shall not
preclude any other or further exercise of such right, power or remedy, or the exercise of any other right, power or remedy.
19.7 Amendment
No revision or amendment to this Agreement shall be valid unless made in writing and signed by the Parties.
19.8 Language
The Agreement shall be signed in Chinese.
19.9 Counterpart
This Agreement may be signed and delivered (including by fax) in one or more counterparts separately by the Parties hereto. Each counterpart shall,
once signed, be deemed as an original.
19.10 Further Assurance
At the reasonable request of any Party and without further consideration, every other Party shall execute and deliver such additional instruments and
take such further legal actions as necessary or required to consummate and effect all transactions contemplated hereunder in the fastest way possible.
For all documents submitted by each Party to any governmental authority with respect to this Agreement and all transactions contemplated hereunder,
such Party shall timely negotiate with the other Parties and provide any necessary information and materials, specifically, without limitation, the
Parties shall make best reasonable efforts and cooperate with each other to obtain all consents required for the implementation of all transactions
contemplated hereunder.
19.11 Conflict
In case of any conflict or inconsistency between this Agreement and the articles of association of the Target Company, this Agreement shall prevail,
and the Parties shall be obligated to approve (and procure the directors appointed by them to approve) any amendment to the articles of association of
the Target Company, so that the provisions of the articles of association shall be consistent with this Agreement. For the convenience of completing
relevant governmental procedures, the Original Shareholder shall enter into separate contract, agreement or document in connection with matters
hereunder as required by the New Shareholder, provided that in case of any conflict or inconsistency between such contract, agreement or document
and this Agreement, this Agreement shall prevail.
(Remainder of this Page Intentionally Left Blank. Followed by Signature Page of the Agreement.)
(Signature Page of the Shareholder Agreement on Shenyang Tianxinhao Technology Co., Ltd.)
In Witness Whereof, the Parties hereto or their duly authorized representatives have signed this Agreement on the date first written above.
Shenzhen Yingaigou Trade Co., Ltd. (Seal)
By:
Name:
Title:
(Signature Page of the Shareholder Agreement on Shenyang Tianxinhao Technology Co., Ltd.)
In Witness Whereof, the Parties hereto or their duly authorized representatives have signed this Agreement on the date first written above.
Shenzhen SUNHOPE Investment Development Co., Ltd. (Seal)
By:
Name:
Title:
(Signature Page of the Shareholder Agreement on Shenyang Tianxinhao Technology Co., Ltd.)
In Witness Whereof, the Parties hereto or their duly authorized representatives have signed this Agreement on the date first written above.
Shenyang Tianxinhao Technology Co., Ltd. (Seal)
By:
Name:
Title:
Certification by the Principal Executive Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, Yue (Justin) Tang, certify that:
Exhibit 12.1
1.
2.
3.
4.
I have reviewed this annual report on Form 20-F of X Financial (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 28, 2022
/s/ Yue (Justin) Tang
By:
Name: Yue (Justin) Tang
Title:
Chief Executive Officer and Chairman
Certification by the Principal Financial Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, Frank Fuya Zheng, certify that:
Exhibit 12.2
1.
2.
3.
4.
I have reviewed this annual report on Form 20-F of X Financial (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 28, 2022
/s/ Frank Fuya Zheng
By:
Name: Frank Fuya Zheng
Title:
Chief Financial Officer
Certification by the Principal Executive Officer
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Exhibit 13.1
In connection with the annual report of X Financial (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, Yue (Justin) Tang, Chief Executive Officer and Chairman of the Company, certify,
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Date: April 28, 2022
/s/ Yue (Justin) Tang
By:
Name: Yue (Justin) Tang
Title:
Chief Executive Officer and Chairman
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 X Financial (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, Frank Fuya Zheng, Chief Financial Officer of the Company, certify, pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Date: April 28, 2022
/s/ Frank Fuya Zheng
By:
Name: Frank Fuya Zheng
Title:
Chief Financial Officer
Consent of Independent Registered Public Accounting Firm
We consent to the incorporation by reference in the registration statement (No. 333–227938) on Form S-8 of our report dated April 28, 2022, with
respect to the consolidated financial statements and financial statement schedule I of X Financial.
Exhibit 15.1
/s/ KPMG Huazhen LLP
Shenzhen, China
April 28, 2022
Table of Contents
Exhibit 99.1
SHENYANG TIANXINHAO TECHNOLOGY LIMITED
FINANCIAL STATEMENTS
FOR THE PERIOD FROM NOVEMBER 2 TO DECEMBER 31 2021
Table of Contents
SHENYANG TIANXINHAO TECHNOLOGY LIMITED
INDEX TO FINANCIAL STATEMENTS
Financial Statements
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
BALANCE SHEETS AS OF DECEMBER 31, 2021
STATEMENTS OF COMPREHENSIVE LOSS FOR THE PERIOD FROM NOVEMBER 2 TO DECEMBER 31, 2021
STATEMETNS OF CHANGES IN SHAREHOLDERS’ EQUITY FOR THE PERIOD FROM NOVEMBER 2 TO
DECEMBER 31, 2021
STATEMENTS OF CASH FLOWS FOR THE PERIOD FROM NOVEMBER 2 TO DECEMBER 31, 2021
PAGE(S)
F-2
F-3
F-4
F-5
F-6
NOTES TO FINANCIAL STATEMENTS FOR THE PERIOD FROM NOVEMBER 2 TO DECEMBER 31, 2021
F-7 – F-13
F-1
Table of Contents
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors of Shenyang Tianxinhao Technology Limited:
Opinion on the Financial Statements
We have audited the accompanying balance sheet of Shenyang Tianxinhao Technology Limited (the “Company”) as of December 31, 2021, the related
statements of comprehensive loss, changes in shareholders’ equity and cash flows for the period from November 2 to December 31, 2021, and the
related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the
financial position of the Company at December 31, 2021, and the results of its operations and its cash flows for the period from November 2 to
December 31, 2021, in conformity with U.S. generally accepted accounting principles.
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 audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United
States) (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 the financial statements are free of material misstatement, whether due to error or fraud. The Company is not
required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audit we are required to
obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the
Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audit 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 audit 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 audit provides a reasonable basis for our
opinion.
Basis of Preparation and Restriction of use of the Audit Report
Without qualifying our opinion above, we draw attention to Note 2 of the financial statements. This report has been prepared for X Financial for the
purpose of the preparation of X Financial’s financial statements and reports. It should not be relied upon by any other party for any other purpose and
we expressly disclaim any liability or duty to any other party in this report. It should not be disclosed, referred to or quoted in whole or in part without
our prior written consent.
/s/ Shanghai Perfect C.P.A Partnership
Shanghai Perfect C.P.A Partnership
Shanghai, the People’s Republic of China
April 22, 2022
We have served as the Company’s auditor since 2022.
F-2
Table of Contents
SHENYANG TIANXINHAO TECHNOLOGY LIMITED
BALANCE SHEETS
(Amounts in Renminbi (“RMB”))
As of December 31,
Note
2021
ASSETS:
Current assets:
Cash and cash equivalents
Other receivables, net
Amounts due from the immediate holding company
Total current assets
Non-current assets:
Property and equipment, net
Long-term investment
Total non-current assets
TOTAL ASSETS
LIABILITIES AND SHAREHOLDER’S EQUITY :
Current liabilities:
Accrued expenses and other current liabilities
Total current liabilities
TOTAL LIABILITIES
Commitments and contingencies
Shareholders’ equity:
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
4
8
5
6
9
1,691,806
67,983,349
939,500,000
1,009,175,155
3,642,050
538,864,786
542,506,836
1,551,681,991
363,587,643
363,587,643
363,587,643
1,188,094,348
1,551,681,991
The accompanying notes are an integral part of these financial statements.
F-3
Table of Contents
SHENYANG TIANXINHAO TECHNOLOGY LIMITED
STATEMENTS OF COMPREHENSIVE LOSS
(Amounts in Renminbi (“RMB”))
Note
For the period from
November 2 to December 31,
2021
Operating expenses:
General and administrative
Provision for account and other receivables
Total operating expenses
Loss from operations
Interest income
Share of profit of an associate
Finance cost
Loss before provision for income taxes
Income tax expenses
Net loss
Other comprehensive income:
Share of other comprehensive income of an associate
Comprehensive loss
58,597
867,560
926,157
(926,157)
3,426
3,467,702
(5,475,943)
(2,930,972)
—
(2,930,972)
1,931,115
(999,857)
7
The accompanying notes are an integral part of these financial statements.
F-4
Table of Contents
SHENYANG TIANXINHAO TECHNOLOGY LIMITED
STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
(Amounts in Renminbi (“RMB”))
For the period from November 2 to December 31,2021
Registered
capital
Retained
earnings
Accumulated other
comprehensive
income
Total
shareholders’
equity
Balance as of November 2, 2021
1,500,000,000
(310,230,167)
(675,628)
1,189,094,205
Net loss
Other comprehensive income
—
—
(2,930,972)
—
1,931,115
(2,930,972)
1,931,115
Balance as of December 31, 2021
1,500,000,000
(313,161,139)
1,255,487
1,188,094,348
The accompanying notes are an integral part of these financial statements.
F-5
Table of Contents
SHENYANG TIANXINHAO TECHNOLOGY LIMITED
STATEMENTS OF CASH FLOWS
(Amounts in thousands of Renminbi (“RMB”))
For the period from
November 2 to December 31,
2021
Note
Cash flows from operating activities:
Net loss
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation
Provision for account and other receivables
Share of profit of an associate
Finance cost
Changes in operating assets and liabilities:
Other receivables
Accrued expenses and other current liabilities
Net cash used in operating activities
Net cash provided by investing activities
Repayment of loan from a shareholder
Net cash used in provided by financing activities
Decrease in cash and cash equivalents
Cash and cash equivalents, beginning of the period
Cash and cash equivalents, end of the period
The accompanying notes are an integral part of these financial statements.
F-6
(2,930,972)
39,305
867,560
(3,467,702)
5,475,943
29,096,429
121,658,027
150,738,590
—
(150,750,000)
(150,750,000)
(11,410)
1,703,216
1,691,806
Table of Contents
SHENYANG TIANXINHAO TECHNOLOGY LIMITED
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
FOR THE PERIOD FROM NOVEMBER 2 TO DECEMBER 31, 2021
1. ORGANIZATION AND PRINCIPAL ACTIVITIES
Shenyang Tianxinhao Technology Limited (the “Company”), was incorporated in the People’s Republic of China (“PRC”) on
October 12, 2015. The Company is primarily engaged in computer network technology, communication engineering technology,
network engineering technology, biological products, mechanical and electrical product technology development, technology
transfer, technology consulting services; interior and exterior decoration engineering, building insulation engineering design and
construction in PRC.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of presentation
The financial statements of the Company have been prepared in accordance with the U.S. generally accepted accounting principles
(‘‘US GAAP’’).
The financial statements have been prepared on a historical cost basis. The financial statements are presented in Renminbi
(“RMB”), except when otherwise indicated.
The financial statements have been prepared for X Financial for the purpose of the preparation of X Financial’s financial
statements and reports. It should not be relied upon by any other party for any other purpose.
Use of estimates
The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during the period. Areas where management uses
subjective judgment include, but are not limited to, provision for account and other receivables, estimating useful lives for long-
lived assets, impairment of long-lived assets and long-term investments. Changes in facts and circumstances may result in revised
estimates. Actual results could differ from those estimates, and as such, differences may be material to the financial statements.
Cash and cash equivalents
Cash and cash equivalents consists of demand deposits placed with banks or other financial institutions which are unrestricted as
to withdrawal and use and have original maturities less than three months.
Accounts receivable, net of allowance
Accounts receivable represents those receivables derived in the ordinary course of business, carried at net realizable value.
The Company maintains an allowance for doubtful accounts for estimated losses on uncollected accounts receivable. Management
considers the following factors when determining the collectability of specific accounts: creditworthiness of customers, aging of
the receivables, past transaction history with customers and their current condition, changes in customer payment terms, specific
facts and circumstances, and the overall economic climate in the industries the Company serves. The provision for doubtful
accounts receivable of RMB836,433 was recognized for the period from November 2 to December 31, 2021.
F-7
Table of Contents
SHENYANG TIANXINHAO TECHNOLOGY LIMITED
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
FOR THE PERIOD FROM NOVEMBER 2 TO DECEMBER 31, 2021
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Property and equipment
Property and equipment are stated at cost and are depreciated using the straight-line method over the estimated useful lives of the
assets, as follows:
Buildings
Computer equipment
Office equipment
Leasehold improvement
20 years
3 years
3 years
Over the shorter of lease term or the estimated useful lives of the assets
Repair and maintenance costs are charged to expense when incurred, whereas the cost of betterments that extend the useful life of
property and equipment are capitalized as additions to the related assets. Retirement, sale and disposals of assets are recorded by
removing the cost and related accumulated depreciation with any resulting gain or loss reflected in the statements of operations.
Impairment of long-lived assets
The Company evaluates the recoverability of its long-lived assets, whenever events or changes in circumstances indicate that the
carrying amount of an asset may no longer be recoverable. When these events occur, the Company measures impairment by
comparing the carrying value of the assets to the estimated undiscounted future cash flows expected to result from the use of the
assets and their eventual disposition. If the sum of the expected undiscounted cash flow is less than the carrying amount of the
assets, the Company would recognize an impairment loss based on the excess of carrying amount over the fair value of the assets.
No impairment loss was recognized for the period from November 2 to December 31, 2021.
Long-term investments
Equity Method Investment
The Company uses the equity method of accounting for the long-term investments when the Company has the ability to
significantly influence the operations or financial activities of the investee. The Company record the equity method long-term
investments at historical cost and subsequently adjusts the carrying amount each period for share of the earnings or losses of the
investee and other adjustments required by the equity method of accounting. Dividends received from the equity method
investments are recorded as reductions in the cost of such investments.
Long-term investments are evaluated for impairment when facts or circumstances indicate that the fair value of the long-term
investments is less than its carrying value. An impairment is recognized when a decline in fair value is determined to be other-than-
temporary. The Company reviews several factors to determine whether a loss is other-than-temporary. These factors include, but
are not limited to, the: (i) nature of the investment; (ii) cause and duration of the impairment; (iii) extent to which fair value is less
than cost; (iv) financial condition and near term prospects of the investments; and (v) ability to hold the security for a period of
time sufficient to allow for any anticipated recovery in fair value.
F-8
Table of Contents
SHENYANG TIANXINHAO TECHNOLOGY LIMITED
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
FOR THE PERIOD FROM NOVEMBER 2 TO DECEMBER 31, 2021
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Long-term investment of the Company is an equity investment of a PRC private company, Newup Bank of Liaoning (“Newup
Bank”). Newup Bank is a private bank incorporated on September 28, 2017 in Liaoning, PRC and it is the first private bank in
Liaoning, PRC. On May 24, 2017, the Company invested RMB560,000,000 for 28% equity interest of Newup Bank. The
significant influence can be given by the company as the company has its representation on the board and thus equity method was
applied. The Company recognized share of profit of an associate of RMB3,467,702 and share of other comprehensive income of an
associate of RMB1,931,115 during the period from November 2 to December 31, 2021.
Income taxes
The Company accounts for current income taxes in accordance with the laws of the relevant tax authorities. The Company follows
the liability method in accounting for income taxes in accordance to ASC topic 740 (“ASC 740”), Income Taxes. Under this
method, deferred tax assets and liabilities are determined based on the difference between the financial reporting and tax bases of
assets and liabilities using enacted tax rates that will be in effect in the period in which the differences are expected to reverse. A
valuation allowance would be recorded against deferred tax assets if, based on the weight of available evidence, it is more-likely-
than-not that some portion, or all, of the deferred tax assets will not be realized.
The guidance on accounting for uncertainties in income taxes prescribes a more likely than not threshold for financial statement
recognition and measurement of a tax position taken or expected to be taken in a tax return. Guidance was also provided on
recognition of income tax assets and liabilities, classification of current and deferred income tax assets and liabilities, accounting
for interest and penalties associated with tax positions, accounting for income taxes in interim periods, and income tax disclosures.
Significant judgment is required in evaluating the Company’s uncertain tax positions and determining its provision for income
taxes. The Company recognizes interests and penalties, if any, under accrued expenses and other current liabilities on its balance
sheet and under other expenses in its statement of comprehensive loss. The Company did not recognize any interest and penalties
associated with uncertain tax positions for the period from November 2 to December 31, 2021. As of December 31, 2021, the
Company did not have any significant unrecognized uncertain tax positions.
Comprehensive income
Comprehensive income is defined as the increase in equity of the Company during a period from transactions and other events and
circumstances excluding transactions resulting from investments by owners and distributions to owners. Comprehensive income is
reported in the statements of comprehensive income, including net profit, presented net of tax.
Segment reporting
The Company follows ASC 280, “Segment Reporting.” The Company’s chief operating decision-maker reviews the financial
results when making decisions about allocating resources and assessing the performance of the Company as a whole and hence, the
Company has only one reportable segment. The Company operates and manages its business major in PRC as a single segment. As
the Company’s long-lived assets are substantially all located in the PRC, no geographical segments are presented.
F-9
Table of Contents
SHENYANG TIANXINHAO TECHNOLOGY LIMITED
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
FOR THE PERIOD FROM NOVEMBER 2 TO DECEMBER 31, 2021
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Fair value
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 it considers assumptions that market participants would use when pricing the asset or liability.
Authoritative literature provides a fair value hierarchy, which prioritizes the inputs to valuation techniques used to measure fair
value into three broad levels. The level in the hierarchy within which the fair value measurement in its entirety falls is based upon
the lowest level of input that is significant to the fair value measurement as follows:
Level 1-inputs are based upon quoted prices for instruments traded in active markets.
Level 2-inputs are based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar
instruments in markets that are not active, and model-based calculation techniques for which all significant assumptions
are observable in the market or can be corroborated by observable market data for substantially the full term of the assets
or liabilities.
Level 3-inputs are generally unobservable and typically reflect management’s estimates of assumptions that market participants
would use in pricing the asset or liability. The fair values are therefore determined using model-based techniques that
include option pricing models, cash flow models, and similar techniques.
Fair value of financial instruments
Financial instruments include cash and cash equivalents, amounts due from the immediate holding company and other receivable.
The carrying values of cash, amounts due from the immediate holding company and other receivable approximate their fair values
reported in the balance sheets due to the short-term maturities.
Recent accounting pronouncements
In August 2020, the FASB issued a new standard (ASU 2020-06) to reduce the complexity of accounting for convertible debt and
other equity-linked instruments. For certain convertible debt instruments with a cash conversion feature, the changes are a trade-off
between simplifications in the accounting model (no separation of an “equity” component to impute a market interest rate, and
simpler analysis of embedded equity features) and a potentially adverse impact to diluted EPS by requiring the use of the if-
converted method. The new standard will also impact other financial instruments commonly issued by both public and private
companies. For example, the separation model for beneficial conversion features is eliminated simplifying the analysis for issuers
of convertible debt and convertible preferred shares. Also, certain specific requirements to achieve equity classification and/or
qualify for the derivative scope exception for contracts indexed to an entity’s own equity are removed, enabling more freestanding
instruments and embedded features to avoid mark-to-market accounting. The new standard is effective for companies that are SEC
filers (except for Smaller Reporting Companies) for fiscal years beginning after December 15, 2021 and interim periods within
that year, and two years later for other companies. Companies can early adopt the standard at the start of a fiscal year beginning
after December 15, 2020. The standard can either be adopted on a modified retrospective or a full retrospective basis. The
Company is currently reviewing the newly issued standard and does not believe it will materially impact the Company.
F-10
Table of Contents
SHENYANG TIANXINHAO TECHNOLOGY LIMITED
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
FOR THE PERIOD FROM NOVEMBER 2 TO DECEMBER 31, 2021
3. CONCENTRATION OF RISK
Credit risk
Financial instruments that potentially expose the Company to concentrations of credit risk consist primarily of cash and cash
equivalents. The Company places its cash and cash equivalents with financial institutions with high-credit ratings and quality.
4. OTHER RECEIVABLES, NET
As of December 31,
2021
RMB
Other receivables, net of allowance for doubtful accounts of RMB328,765,966 at December 31, 2021(i)
67,983,349
(i)
A provision for loss is recognized in operating expenses when the loss on such assets is determined to be probable and amount can be
reasonably estimated. The Company provided provision of RMB31,127 for other receivables and wrote off the doubtful other
receivables of RMB31,127 during the period from November 2 to December 31, 2021.
5. PROPERTY AND EQUIPMENT, NET
Property and equipment consist of the following:
Buildings
Computer equipment
Office equipment
Leasehold improvement
Total
Less: accumulated depreciation
Property and equipment, net
6. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities consist of the following:
Accrued payroll and welfare
Other tax payable
Other payables
As of December 31,
2021
RMB
4,103,122
4,988
6,989
112,260
4,227,359
585,309
3,642,050
As of December 31,
2021
RMB
5,000
4,455
363,578,188
363,587,643
(i)
(i)
The amount represents the loans borrowed from a third party of RMB338,765,966 with no fixed repayment terms, interest expense
incurred on loan was RMB5,475,943 during the period from November 2 to December 31,2021 and interest free loan from another
third party of RMB750,000 with no fixed repayment terms.
F-11
Table of Contents
SHENYANG TIANXINHAO TECHNOLOGY LIMITED
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
FOR THE PERIOD FROM NOVEMBER 2 TO DECEMBER 31, 2021
7. INCOME TAXES
The enterprise income tax (‘‘EIT’’) law applies a uniform 25% EIT rate to domestic enterprises. No taxable income was generated
for the Company. No income tax was credited to the Company.
Reconciliation between the income taxes benefits computed by applying the PRC tax rate to loss before income taxes and the
actual credit for income taxes is as follows:
Net loss before provision for income taxes
Statutory tax rates in the PRC
Income tax at statutory tax rate
Non-taxable income
Changes in valuation allowance
Income tax expenses
Unrecognized Tax Benefits
For the year ended
December 31,
2021
RMB
(2,930,972)
25 %
(732,743)
(866,926)
1,599,669
—
The Company evaluates the level of authority for each uncertain tax position (including the potential application of interest and
penalties) based on the technical merits, and measures the unrecognized benefits associated with the tax positions. As of
December 31, 2021, the Company did not have any significant unrecognized uncertain tax positions.
8. RELATED PARTY BALANCES AND TRANSACTIONS
Nature of the relationships with related parties:
Name
Shenzhen SUNHOPE Investment Development Co., Ltd.
Shenzhen Yingaigo Trading Co., Ltd.
Relationship with the Company
The immediate holding company
Shareholder
(a) As of December 31, 2021, the following balances were due from the related parties:
Current assets
Amount due from related parties
Shenzhen SUNHOPE Investment Development Co., Ltd.
As of December 31,
2021
RMB
939,500,000
F-12
Table of Contents
SHENYANG TIANXINHAO TECHNOLOGY LIMITED
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
FOR THE PERIOD FROM NOVEMBER 2 TO DECEMBER 31, 2021
8. RELATED PARTY BALANCES AND TRANSACTIONS (CONTIUNED)
(b) Details of related party transactions occurred during the period from November 2 to December 31, 2021 were as follows:
Repayment of loan from a shareholder
Shenzhen Yingaigo Trading Co., Ltd.
9. COMMITMENTS AND CONTINGENCIES
For the period from
November 2 to
December 31,
2021
RMB
150,750,000
The Company did not have significant capital and other commitments as of December 31, 2021.
10. SUBSEQUENT EVENTS
The Company evaluated subsequent events and transactions that occurred after the balance sheet date up through the date that the
financial statement was issued. Based upon this review, the Company did not identify any subsequent events that would have
required adjustment or disclosure in the financial statement.
F-13