SEC Filing | Qudian Inc.

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FORM 20-F

Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM

20-F

(Mark One)

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

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

For the fiscal year ended December 31, 2019

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

☐	SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Date of event requiring this shell company report

For the transition period from

Commission file number

001-38230

Qudian Inc.

(Exact name of Registrant as specified in its charter)

Cayman Islands

(Jurisdiction of incorporation or organization)

Tower A, AVIC Zijin Plaza

Siming District, Xiamen

Fujian Province 361000,

People’s Republic of China

(Address of principal executive offices)

Min Luo, Chairman and Chief Executive Officer

Telephone: telephone:

+86-592-5911580

Email: ir@qudian.com

At the address of the Company set forth above

(Name, Telephone,

E-mail

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

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


Title of each class	Trading Symbol(s)	Name of each exchange on which registered
American depositary shares, each representing one Class A ordinary share	QD	New York Stock Exchange
Class A ordinary shares, par value nominal or US$0.0001 per share*	N/A	New York Stock Exchange

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

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

None

(Title of Class)

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

None

(Title of Class)


Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report.			190,238,854 Class A ordinary shares 63,491,172 Class B ordinary shares

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.			☐ Yes ☒ No

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

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

Indicate by check mark whether the registrant has submitted 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, a non-accelerated filer, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.


Large accelerated filer ☒		Accelerated filer ☐		Non-accelerated filer ☐		Emerging growth company ☐

If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying 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 which basis of accounting the registration has used to prepare the financial statements included in this filing:

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.

☒


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


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

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

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

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

*	Not for trading, but only in connection with the listing on the New York Stock Exchange of the American Depositary Shares

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

FORWARD-LOOKING INFORMATION			iv

PART I.			1

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

ITEM 2.	OFFER STATISTICS AND EXPECTED TIMETABLE		1

ITEM 3.	KEY INFORMATION		1

ITEM 4.	INFORMATION ON THE COMPANY		69

ITEM 4A.	UNRESOLVED STAFF COMMENTS		121

ITEM 5.	OPERATING AND FINANCIAL REVIEW AND PROSPECTS		121

ITEM 6.	DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES		152

ITEM 7.	MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS		163

ITEM 8.	FINANCIAL INFORMATION		165

ITEM 9.	THE OFFER AND LISTING		167

ITEM 10.	ADDITIONAL INFORMATION		168

ITEM 11.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK		175

ITEM 12.	DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES		177

PART II.			179

ITEM 13.	DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES		179

ITEM 14.	MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS		179

ITEM 15.	CONTROLS AND PROCEDURES		179

ITEM 16A.	AUDIT COMMITTEE FINANCIAL EXPERT		180

ITEM 16B.	CODE OF ETHICS		180

ITEM 16C.	PRINCIPAL ACCOUNTANT FEES AND SERVICES		180

ITEM 16D.	EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES		181

ITEM 16E.	PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS		181

ITEM 16F.	CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT		181

ITEM 16G.	CORPORATE GOVERNANCE		181

ITEM 16H.	MINE SAFETY DISCLOSURE		182

PART III.			183

ITEM 17.	FINANCIAL STATEMENTS		183

ITEM 18.	FINANCIAL STATEMENTS		183

ITEM 19.	EXHIBITS		183

SIGNATURES			188

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS			F-1

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CONVENTIONS THAT APPLY TO THIS ANNUAL REPORT ON FORM

20-F

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

•

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

•

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

•

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

•

“Ant Financial” are to Ant Small and Micro Financial Services Group Co., Ltd., a company organized under the laws of the PRC, and its affiliates; API (Hong Kong) Investment Limited, which is wholly owned by Ant Financial, is one of our principal shareholders;

•

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

•

“D1 delinquency rate” are to the balance of the total amount of principal and financing service fees that became overdue as of a specified date, divided by the total amount of principal and financing services fees that was due for repayment as of such date, in each case with respect to our loan book business and transaction services business;

•

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

•

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

on-balance

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

•

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

•

“new borrowers” are to borrowers who drew down credit for the first time from our platform; new borrowers who have made at least two drawdowns in the relevant period are also counted as repeat borrowers;

•

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

•

“off-balance

sheet transactions” are to credit drawdowns under our loan book business that are not recorded on our balance sheets; we bear credit risk for such transactions;

•

“on-balance

sheet transactions” are to credit drawdowns under our loan book business that are recorded on our balance sheets;

•

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

•

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

on-balance

sheet transactions facilitated during such period;

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•

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

•

“Qudian marketplace” are to our online marketplace where consumers purchase merchandise offered by third-party merchandise suppliers with our merchandise credit products.

•

“registered users” are to individuals who have registered with us;

•

“repeat borrowers” are to active borrowers in the specified period who have made at least two drawdowns since such borrowers’ registration with us until the end of the specified period;

•

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

•

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

•

“transaction services business” are to our business of offering loan recommendation and referral services to third-party financial service providers; we assume no credit risk for the transactions facilitated under the transaction services business;

•

“transactions” are to borrowers’ credit drawdowns from our platform;

•

“Wanlimu” are to our online luxury fashion products platform;

•

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

•

“vintage” are to the on-balance sheet transactions and off-balance sheet transactions facilitated under the loan book business during a specified time period; and

•

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

The translations from Renminbi to U.S. dollars and from U.S. dollars to Renminbi in this annual report were made at a rate of RMB6.9618 to US$1.00, the exchange rates set forth in the H.10 statistical release of the Federal Reserve Board on December 31, 2019. We make no representation that the Renminbi or U.S. dollar amounts referred to in this annual report could have been or could be converted into U.S. dollars or Renminbi, as the case may be, at any particular rate or at all. On March 31, 2020, the noon buying rate for Renminbi was RMB7.0808 to US$1.00.

iii

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FORWARD-LOOKING INFORMATION

This annual report on Form

20-F

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

•

our goal and strategies;

•

our expansion plans;

•

our future business development, financial condition and results of operations;

•

our expectations regarding demand for, and market acceptance of, our credit products and services;

•

our expectations regarding keeping and strengthening our relationships with borrowers, institutional funding partners, merchandise suppliers and other parties we collaborate with; and

•

general economic and business conditions.

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

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

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PART I.

ITEM 1.

IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS

Not Applicable.

ITEM 2.

OFFER STATISTICS AND EXPECTED TIMETABLE

Not Applicable.

ITEM 3.

KEY INFORMATION

A.	Selected Financial Data

The following selected consolidated statements of operations for the years ended December 31, 2017, 2018 and 2019 and selected consolidated balance sheets as of December 31, 2018 and 2019 have been derived from our audited consolidated financial statements included elsewhere in this annual report. The following selected consolidated statements of operations for the years ended December 31, 2015 and 2016 and selected consolidated balance sheets as of December 31, 2016 and 2017 have been derived from our audited consolidated financial statements not included in this annual report.

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


	Year Ended December 31
	2015			2016			2017			2018			2019
	RMB			RMB			RMB			RMB			RMB			US$
	(in thousands, except for share and per share data)
Condensed Consolidated Statement of Operations Data:
Revenues
Financing income		153,554			1,271,456			3,642,184			3,535,276			3,510,055			504,188
Sales commission fee		62,182			126,693			797,167			307,492			356,812			51,253
Sales income		—			—			26,083			2,174,789			431,946			62,045
Penalty fees		19,271			22,943			7,922			28,013			44,354			6,371
Loan facilitation income and other related income		—			21,754			302,010			1,646,773			2,297,413			330,003
Transaction services fee and other related income		—			—			—			—			2,199,464			315,933
Total revenues		235,007			1,442,846			4,775,366			7,692,343			8,840,044			1,269,793
Cost of revenues
Cost of goods sold		—			—			(23,895	)		(2,003,642	)		(366,015	)		(52,575	)
Cost of other revenues		(148,417	)		(267,862	)		(856,951	)		(731,786	)		(535,773	)		(76,959	)

Total cost of revenues		(148,417	)		(267,862	)		(880,846	)		(2,735,428	)		(901,788	)		(129,534	)

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	Year Ended December 31
	2015			2016			2017			2018			2019
	RMB			RMB			RMB			RMB			RMB			US$
	(in thousands, except for share and per share data)
Operating expenses(1)
Sales and marketing		(192,603	)		(182,458	)		(431,749	)		(540,551	)		(280,616	)		(40,308	)
General and administrative		(42,426	)		(108,786	)		(183,674	)		(255,867	)		(286,059	)		(41,090	)
Research and development		(37,530	)		(52,275	)		(153,258	)		(199,560	)		(204,781	)		(29,415	)
Changes in guarantee liabilities and risk assurance liabilities		—			(861	)		(150,152	)		(116,593	)		(1,143,427	)		(164,242	)
Provision for receivables and other assets		(45,111	)		(132,176	)		(605,164	)		(1,178,723	)		(2,283,126	)		(327,951	)

Total operating expenses		(317,670	)		(476,556	)		(1,523,997	)		(2,291,294	)		(4,198,009	)		(603,006	)
Other operating income		—			14,646			50,703			23,748			108,508			15,586

Income/ (loss) from operations		(231,078	)		713,074			2,421,226			2,689,369			3,848,755			552,839
Interest and investment income, net		2,889			1,857			4,211			35,740			20,872			2,998
Foreign exchange gain/(loss), net		752			(9,651	)		(7,177	)		(90,771	)		6,635			953
Other income		779			47			2,108			15,231			24,583			3,531
Other expenses		(6,505	)		(1,834	)		(363	)		(522	)		(10,323	)		(1,483	)

Net income/ (loss) before income taxes		(233,164	)		703,493			2,420,005			2,649,047			3,890,522			558,838
Income tax expenses		—			(126,840	)		(255,546	)		(157,731	)		(626,234	)		(89,953	)

Net income /(loss)		(233,164	)		576,653			2,164,459			2,491,316			3,264,288			468,886

Net Income/(loss) attributable to Qudian Inc.’s shareholders		(233,164	)		576,653			2,164,459			2,491,316			3,264,288			468,886

Earnings/(loss) per share for Class A and Class B ordinary shares
— Basic		(2.94	)		7.27			17.13			7.82			11.72			1.68
Earnings/(loss) per share for Class A and Class B ordinary shares
— Diluted		(2.94	)		1.90			7.09			7.74			10.94			1.57
Earnings per ADS (1 Class A ordinary share equals 1 ADSs)
— Basic								17.13			7.82			11.72			1.68
Earnings per ADS (1 Class A ordinary share equals 1 ADSs)
— Diluted								7.09			7.74			10.94			1.57

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	Year Ended December 31
	2015			2016		2017			2018		2019
	RMB			RMB		RMB			RMB		RMB		US$
	(in thousands, except for share and per share data)
Weighted average number of Class A and Class B ordinary shares outstanding
— Basic		79,305,191			79,305,191		126,390,196			318,685,836		278,531,382		278,531,382
Weighted average number of Class A and Class B ordinary shares outstanding
— Diluted		79,305,191			303,778,745		305,221,444			321,955,142		300,457,711		300,457,711

Other comprehensive loss:
Foreign currency translation adjustment		—			—		(77,947	)		33,089		31,893		4,581

Total comprehensive income/(loss)		(233,164	)		576,653		2,086,512			2,524,405		3,296,181		473,467

Total comprehensive income/(loss) attributable to Qudian Inc.’s shareholders		(233,164	)		576,653		2,086,512			2,524,405		3,296,181		473,467

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


	For the year ended December 31,
	2015		2016		2017		2018		2019
	RMB		RMB		RMB		RMB		RMB		US$
	(in thousands)
Sales and marketing		23,691		690		1,891		5,641		4,482		644
General and administrative		11,425		18,986		42,849		38,587		74,312		10,674
Research and development		20,492		2,457		19,316		13,753		8,505		1,222

Total share-based compensation expenses		55,607		22,134		64,056		57,981		87,299		12,540

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	As of December 31,
	2015			2016			2017		2018		2019
	RMB			RMB			RMB		RMB		RMB		US$
				(in thousands)
Summary Consolidated Balance Sheets:
Cash and cash equivalents		210,114			785,770			6,832,306		2,501,188		2,860,938		410,948
Restricted cash		—			—			2,252,646		339,827		1,257,649		180,650
Time deposits		—			—			—		—		231,132		33,200
Short-term amounts due from related parties (1)		34,930			585,906			551,215		2		—		—
Short-term loan principal and financing service fee receivables, net		2,060,768			4,826,791			8,758,545		8,417,821		7,894,697		1,134,002
Short-term finance lease receivables, net		—			—			8,508		508,647		398,256		57,206
Short-term contract assets		—			—			—		903,436		2,741,914		393,851
Long-term loan principal and financing service fee receivables		177,582			87,822			—		665,653		424		61
Long-term finance lease receivables, net		—			—			17,900		649,243		239,697		34,430
Long-term contract assets		—			—			—		15,597		273,597		39,300
Total assets		2,675,596			7,117,599			19,380,416		16,253,375		18,361,604		2,637,479
Short-term borrowings and interest payables		1,562,883			4,183,231			7,979,415		3,860,441		1,049,570		150,761
Long-term borrowings and interest payables		89,358			76,052			510,024		413,400		—		—
Total liabilities		3,306,965			4,604,010			9,840,049		5,432,762		6,437,552		924,696
Total mezzanine equity		5,943,978			5,943,978			—		—		—		—
Total shareholders’ equity / (deficit)		(6,575,347	)		(3,430,389	)		9,540,367		10,820,613		11,924,052		1,712,783

(1)	Includes RMB33.8 million, RMB404.6 million and RMB549.8 million deposited in our Alipay accounts as of December 31, 2015 and 2016, 2017. Such amount is unrestricted as to withdrawal and use and readily available to us on demand.

Non-GAAP

Measure

Adjusted Net Income/(Loss)

We use adjusted net income/(loss), a

non-GAAP

financial measure, in evaluating our operating results and for financial and operational decision-making purposes. We believe that adjusted net income/(loss) help identify underlying trends in our business by excluding the impact of share-based compensation expenses, which are

non-cash

charges. We believe that adjusted net income/(loss) provide useful information about our operating results, enhance the overall understanding of our past performance and future prospects and allow for greater visibility with respect to key metrics used by our management in its financial and operational decision-making.


	For the year ended December 31,
	2015			2016		2017		2018		2019
	RMB			RMB		RMB		RMB		RMB		US$
	(in thousands)
Adjusted net income/(loss) (1)		(177,557	)		598,787		2,228,515		2,549,297		3,351,587		481,426

(1)	Adjusted net income/(loss) is defined as net income/(loss) excluding share-based compensation expenses.

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Adjusted net income/(loss) is not defined under U.S. GAAP and are not presented in accordance with U.S. GAAP. This

non-GAAP

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

We mitigate these limitations by reconciling the

non-GAAP

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

The following table reconciles our adjusted net income/(loss) in the years presented to the most directly comparable financial measure calculated and presented in accordance with U.S. GAAP, which is net income/(loss):


	For the year ended December 31,
	2015			2016		2017		2018		2019
	RMB			RMB		RMB		RMB		RMB		US$
	(in thousands)
Net income/(loss)		(233,164	)		576,653		2,164,459		2,491,316		3,264,288		468,886
Add: share-based compensation expenses		55,607			22,134		64,056		57,981		87,299		12,540
Adjusted net income/(loss)		(177,557	)		598,787		2,228,515		2,549,297		3,351,587		481,426

Exchange Rate Information

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 RMB6.9618 to US$1.00, the exchange rate set forth in the H.10 statistical release of the Federal Reserve Board on December 31, 2019. We make no representation that the Renminbi or U.S. dollar amounts referred to in this annual report could have been or could be converted into U.S. dollars or Renminbi, as the case may be, at any particular rate or at all. The PRC government imposes control over its foreign currency reserves in part through direct regulation of the conversion of Renminbi into foreign exchange and through restrictions on foreign trade.

B.	Capitalization and Indebtedness

Not Applicable.

C.	Reasons for the Offer and Use of Proceeds

Not Applicable.

D.	Risk Factors

Risks Related to Our Business and Industry

We have a limited operating history in a new and evolving market, which makes it difficult to evaluate our future prospects.

The online consumer finance market in the PRC is new and may not develop as expected. The regulatory framework for this market is also evolving and may remain uncertain for the foreseeable future. See “— The laws and regulations governing the online consumer finance industry in the PRC are still at a nascent stage and subject to further change and interpretation. If our business practices or the business practices of our institutional

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funding partners are deemed to violate any PRC laws or regulations, our business, financial condition, results of operations and prospects would be materially and adversely affected.” Prospective borrowers may not be familiar with this market and may have difficulty distinguishing our platform from those of our competitors, both online and offline. Convincing prospective borrowers of the value of our platform is critical to increasing the amount of transactions to borrowers and to the success of our business.

We launched our business in 2014 and have a limited operating history. We have limited experience in most aspects of our business operation, such as credit product offerings, data-driven credit assessment and the development of long-term relationships with borrowers, institutional funding partners and merchandise suppliers.

In addition, we have limited experience in serving our current target borrower base. In November 2015, we shifted our focus from college students to young consumers in general, a more diverse customer base for whom traditional credit data is often unavailable. Through our technology platform, we operate (i) a loan book business, whereby we offer small credit products to consumers and undertake the related credit risk, and (ii) a transaction services business, whereby we offer loan recommendation and referral services to third-party financial service providers and assume no credit risk. We evaluate and approve prospective borrowers’ credit applications submitted online, and we currently rely on institutional funding partners and trusts established in collaboration with trust companies to fund such credit drawdowns. In the second half of 2018, we launched an open platform for transaction services business. As our business develops or in response to competition, we may continue to introduce new credit products and services, make adjustments to our existing credit products and services, make adjustments to our business operation in general, or look for other business opportunities in the market. For example, we may implement more stringent borrower qualifications to reduce the delinquency rates of transactions facilitated by us, which may negatively affect the growth of our business. We will also seek to expand the base of prospective borrowers that we serve, which may result in higher delinquency rates of transactions facilitated by us. In addition, we rely on our institutional funding partners to fund the credit that we facilitate. Our ability to continuously attract

low-cost

funding sources is also critical to our business. Any significant change to our business model not achieving expected results may have a material and adverse impact on our financial condition and results of operations. It is therefore difficult to effectively assess our future prospects.

You should consider our business and prospects in light of the risks and challenges we encounter or may encounter given the rapidly-evolving market in which we operate and our limited operating history. These risks and challenges include our ability to, among other things:

•

offer personalized and competitive credit products;

•

increase the utilization of our credit products by existing borrowers as well as new borrowers;

•

offer attractive financing service fees while driving the growth and profitability of our business;

•

maintain low delinquency rates of transactions facilitated by us;

•

develop sufficient, diversified, cost-efficient and reputable institutional funding sources;

•

maintain and enhance our relationships with our other business partners, including merchandise suppliers and financial service providers that participate on our open platform;

•

continue to 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;

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•

navigate economic condition and fluctuation; and

•

defend ourselves against legal and regulatory actions, such as actions involving intellectual property or privacy claims.

We launched Wanlimu, an online luxury fashion products platform, in March 2020. While we expect our new

e-commerce

business will enable us to capitalize on sizable market opportunities, it also presents new challenges. The success of the Wanlimu platform will depend on, among other things, our abilities to understand consumer preferences and behavior, price merchandise competitively, acquire users cost-effectively and manage inventory risk. We need to partner with qualified suppliers and source high quality products from them on favorable terms. We also need to timely deliver products to customers at the fulfillment stage and effectively address customer complaints at the after-sales stage. Given our limited experience in

e-commerce

industry, we may not be able to successfully address the relevant challenges, which could significantly harm our business, results of operations and financial condition.

We have faced significant challenges recently, and our business, results of operations and financial condition have been adversely affected by these challenges.

China’s online consumer finance industry was affected by several regulatory developments in the fourth quarter of 2019, including further restrictions on loan collection practices, more stringent user data privacy rules and the requirements for P2P lending platforms to orderly exit their P2P businesses. These regulatory developments have reduced the availability of funding for consumer credit and driven up delinquency rates across the online consumer finance industry, including our loan portfolio. Our D1 delinquency rate, a more real-time representation of our portfolio asset quality, rose to around 13% as of the end of the fourth quarter of 2019, from around 10% as of the end of the previous quarter. To better protect our company and our institutional funding partners from these industry headwinds, we implemented significantly stricter standards for credit approvals and decreased reliance on certain third-party data providers who previously provided information we used in evaluating prospective borrowers. Accordingly, the amounts of transactions we facilitated under our loan book business and transaction services business decreased by 36.2% and 19.7%, respectively, in the fourth quarter of 2019 as compared with the amounts in the preceding quarter. As a result of our revenue recognition policy under ASC606, the decrease in transaction volumes in the fourth quarter of 2019 had a more pronounced impact on our revenue for such quarter. According to ASC606, the major portion of revenue from the loan facilitation process is recognized at the time we successfully match borrowers and institutional funding partners. As such, our loan facilitation income and other related income decreased by 21.1% to RMB460.0 million (US$66.1 million) in the fourth quarter of 2019 as compared to that in the third quarter in 2019. Furthermore, we recognized significant amounts of changes in guarantee liabilities and risk assurance liabilities and provision for receivables and other assets for the fourth quarter of 2019 due to the rise in delinquency rates, which adversely affected net income for such quarter. In the fourth quarter of 2019, we recognized changes in guarantee liabilities and risk assurance liabilities of RMB735.7 million (US$105.7 million) and provision for receivables and other assets of RMB707.2 million (US$101.6 million), as compared to changes in guarantee liabilities and risk assurance liabilities of RMB328.6 million and provision for receivables and other assets of RMB691.1 million in the third quarter of 2019.

Starting in January 2020, the outbreak of

COVID-19

coronavirus has significantly impacted the Chinese economy. The government measures designed to control the spread of the virus have also resulted in a decline in economic activities in China. We expect the pandemic to exacerbate the already existing challenges in the consumer credit sector. The decrease in consumer spending and the rise in unemployment rates have contributed to a further decrease in the amount of transactions we facilitate and a rise in delinquency rates in the outstanding transactions. The amounts of transactions we facilitated under our loan book business and transaction services business decreased by approximately 53% and 68%, respectively, in the first quarter of 2020 as compared with the amounts in the preceding quarter. Our D1 delinquency rate was approximately 21% as of the end of the first quarter of 2020, and we expect to record higher provision for receivables and other assets and changes in

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guarantee liabilities and risk assurance liabilities for such quarter. The reduced transaction volumes combined with higher provisions for receivables and changes in guarantee liabilities and risk assurance liabilities are expected to result in a material loss in the first quarter of 2020.

The

COVID-19

coronavirus outbreak may continue to adversely affect our business, results of operations and financial condition after the first quarter of 2020. The extent of such impact will depend largely on future developments, which are highly uncertain, including the severity of the outbreak and future government measures in response to the outbreak, among other things. We plan to continue mitigating our risk exposure to the consumer credit market by reducing loan book aggressively in the first half of 2020. Until the credit cycle terminates the current downtrend, we intend to maintain a leverage ratio, which is calculated by dividing (i) outstanding balance of our loan book business by (ii) total net assets, of lower than 1.9x and remain committed to protecting our net assets.

In addition, we launched Wanlimu, an online luxury fashion products platform, in March 2020. A significant portion of merchandise offered on Wanlimu platform is sourced from Europe and other parts of the world. To the extent the

COVID-19

outbreak disrupts the production of luxury products in Europe or other parts of the world, we would not be able to ramp up the Wanlimu platform in accordance with our plan, and our business, results of operations and financial condition would be adversely affected.

If we are unable to retain existing borrowers or attract new borrowers, or if we are unable to monetize our large user base, our business and results of operations may be adversely affected.

We seek to retain existing borrowers and attract additional creditworthy borrowers, which may be affected by several factors, including our brand recognition and reputation, the financing terms offered to borrowers, our efficiency in engaging prospective borrowers, our ability to convert registered users to borrowers, utilization of the credit we approve, the effectiveness of our credit assessment model and risk management system, our ability to secure sufficient and cost-efficient funding, borrower experience, the PRC regulatory environment governing our industry and the macroeconomic environment. In the past few years, the number of outstanding borrowers has fluctuated and our outstanding borrowers only represented a small percentage of our total registered users. The number of outstanding borrowers, including both loan book business and transaction services business, was 5.8 million, 5.3 million and 6.1 million as of December 31, 2017, 2018 and 2019, respectively. Outstanding borrowers represented 9%, 7% and 8% of total registered users as of December 31, 2017, 2018 and 2019, respectively. We cannot assure you that the numbers of outstanding borrowers will not decrease in the future.

In connection with the introduction of new products or in response to general economic conditions, we may also impose more stringent borrower qualifications to ensure the quality of the transactions we facilitate, which may result in a decrease in the amount of transactions facilitated to borrowers. We engage a majority of active borrowers through our own mobile applications. If we are unable to attract borrowers through our own mobile applications or other third-party channels that we may collaborate with, or develop or launch new products that may be attractive to registered users on our mobile applications, we may not be able to engage new borrowers in an efficient manner to convert prospective borrowers into active borrowers, and may even lose existing borrowers to our competitors. In particular, we rely on application marketplaces to drive downloads of our mobile applications. If the operators of application marketplaces make changes to their marketplaces which hinder or impede access to our mobile applications, our ability to engage new borrowers will be adversely affected. If we are unable to attract creditworthy borrowers or if borrowers do not continue to utilize our platform, our business and results of operations would be materially and adversely affected.

We rely on our proprietary credit assessment model and risk management system in the determination of credit approval and credit limit assignment. If our proprietary credit assessment model and risk management system fail to perform effectively, such failure may materially and adversely impact our operating results.

Credit limits for our borrowers are determined and approved based on risk assessment conducted by our proprietary credit assessment model and risk management system. Such model and system use big data-enabled

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technologies, such as artificial intelligence and machine learning, that take into account transactions that we have processed. While we rely on big data analytics to refine our model and system, there can be no assurance that our application of such technology will continue to deliver the expected benefits. As we have a limited operating history, we may not have accumulated sufficient credit analysis and data to optimize our model and system. Furthermore, our existing data and credit assessment model and risk management system might not be effective, as we seek to expand the borrower base and broaden our borrower engagement efforts through different channels in the future. If our system contains programming or other errors, if our model and system are ineffective or if the credit analysis and data we obtained are incorrect or outdated, our credit assessment abilities could be negatively affected, resulting in incorrect approvals or denials of credit applications or mispriced credit products. If we are unable to effectively and accurately assess the credit profiles of borrowers or price credit products appropriately, we may either be unable to offer attractive financing service fee and credit limits to borrowers, or be unable to maintain low delinquency rates of transactions facilitated by us. Our risk and credit assessment may not be able to provide more predictive assessments of future borrower behavior and result in better evaluation of our borrower base when compared to our competitors. If our proprietary credit assessment model and risk management system fail to perform effectively, our business and results of operations may be materially and adversely affected.

If we are unable to effectively manage 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.

We may not be able to maintain low delinquency rates for transactions facilitated by us, or such delinquency rates may be significantly affected by economic downturns or general economic conditions beyond our control and beyond the control of individual borrowers. For example, certain regulatory developments have reduced the availability of funding for consumer credit and driven up delinquency rates across the online consumer finance industry, including our loan portfolio. For further information, see “—We have faced significant challenges recently, and our business, results of operations and financial condition have been adversely affected by these challenges.” To better protect our company and our institutional funding partners from these industry headwinds, we implemented significantly stricter standards for credit approvals. However, there can be no assurance that we will be able to effectively manage delinquency rates with such measures.

Introduction of new credit products may result in higher delinquency rates for transactions facilitated by us. Increase in credit utilization by borrowers from existing levels may also potentially have a material adverse effect as to the delinquency rates for transactions facilitated by us. Furthermore, we broaden our prospective borrower base from time to time as we enhance our credit assessment model to include those with different credit profiles than borrowers that we currently provide credit to as well as prospective borrowers that we have not reached out to previously. In addition, we have offered, and will continue to offer, borrowers with stronger credit profiles higher credit limits and longer repayment durations to drive higher engagement with such borrowers. In the three months ended December 31, 2017 and 2018 and 2019, our cash credit products had an average size of approximately RMB960, RMB1,491 and RMB2,027 (US$291), respectively. Our weighted average loan tenure increased from 2.5 months in the fourth quarter of 2017 to 10.4 months in the fourth quarter of 2018, and slightly increased to 10.9 months in the fourth quarter of 2019. As a result of such changes, we may experience higher delinquency rates for transactions facilitated by us in the future.

Although certain credit facilitated by us under the loan book business are funded directly or indirectly by institutional funding partners, if borrowers default on their payment obligations, we are generally obligated to repay our institutional funding partners all or a percentage of loan principals and fees payable in respect of such credit drawdowns. As of December 31, 2019, the total outstanding loan principal of our loan book business was RMB22,541.2 million (US$3,237.8 million), of which RMB379.7 million (US$54.5 million) represented credit drawdowns that were transferred to or indirectly funded by institutional funding partners, which were recorded as short-term and long-term borrowings and interest payables on our balance sheets. As of December 31, 2019, outstanding principal of

off-balance

sheet transactions, which represent credit drawdowns directly funded by

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institutional funding partners, was RMB13,254.8 million (US$1,903.9 million). As such, if we were to experience a significant increase in delinquency rate, we may not have sufficient capital resources to pay defaulted principals and fees to our institutional funding partners, and if this were to occur, our results of operations, financial position and liquidity will be materially and adversely affected. We experienced increases in M1+ delinquency rate by vintage over time. M1+ delinquency rate by vintage for transactions in the four quarters of 2018 was less than 3.3% through March 31, 2019. M1+ delinquency rate by vintage for transactions in the four quarters of 2019 reached 5.6% through March 31, 2020. Such increase was primarily due to longer loan tenures and higher risks in the credit market. We cannot assure you that M1+ delinquency rate by vintage will not increase in the future.

Increase in the amount of

off-balance

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

Under our loan book business, we have entered into

off-balance

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

off-balance

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

off-balance

sheet transaction, we record the fair value of (i) guarantee liabilities, which represent the present value of our expected payout based on the estimated delinquency rate and the applicable discount rate for time value; or (ii) risk assurance liabilities, which considers the premium required by a third-party market participant to issue the same risk assurance in a standalone transaction, as applicable. The contingent loss rising from risk assurance liabilities is recognized when borrower default is probable, and the amount of loss is estimable.

Accordingly, an increase in the expected delinquency rates of

off-balance

sheet transactions would result in an increase in the amount of guarantee liabilities and risk assurance liabilities, which are recognized as changes in guarantee liabilities and risk assurance liabilities. In 2017, 2018 and 2019,

off-balance

sheet transactions represented 11.8%, 36.1% and 62.6% of the total amount of transactions under our loan book business, respectively, and we recognized RMB150.2 million, RMB116.6 million and RMB1,143.4 million (US$164.2 million) of changes in guarantee liabilities and risk assurance liabilities during such periods, respectively. Furthermore, if the actual delinquency rates for

off-balance

sheet transactions were higher than expected, our guarantee liabilities and risk assurance liabilities may not be able to cover the actual losses as expected, which could have a material adverse impact on our working capital, financial condition, results of operations and business operations. Our guarantee liabilities and risk assurance liabilities were RMB47.0 million, RMB302.6 million and RMB1,517.8 million (US$218.0 million) as of December 31, 2017, 2018 and 2019, respectively, and we paid the relevant institutional funding partners RMB124.8 million, RMB387.2 million and RMB2,084.1 million (US$299.4 million) as a result of borrowers’ default for

off-balance

sheet transactions in 2017, 2018 and 2019, respectively.

Increase in the delinquency rate of

on-balance

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

We reserve any estimated loss for

on-balance

sheet transactions due to the borrowers’ default as allowance for loan principal and financing service fee receivables. When evaluating the loan principal receivables on a pooled basis, we apply a roll rate model based on historical loss rates, while also taking into consideration macroeconomic conditions in order to calculate the pooled allowance. Accordingly, any increase in the delinquency rates of

on-balance

sheet transactions would increase our allowance for loan principal and financing

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service fee receivables, and we recognize any increase in allowance for loan principal and financing service fee receivables as provision for loan principal and financing service fee receivables for the relevant period. Such increase could have a material adverse effect on our business, results of operations and financial positions. Furthermore, if the actual delinquency rates for

on-balance

sheet transactions were higher than predicted, our cash flow would be reduced and our allowance for loan principal and financing service fee receivables may not be able to cover the actual losses as expected, which could have a material adverse effect on our working capital, financial condition, results of operations and business operations. In 2017, 2018 and 2019,

on-balance

sheet transactions represented 88.2%, 63.9% and 37.4% of the total amount of transactions under our loan book business. In 2017, 2018 and 2019, provision for loan principal and financing service fee receivables and other assets was RMB605.2 million, RMB1,178.7 million, RMB2,283.1 million (US$328.0 million), respectively; and our provision ratio during the same periods was 0.8%, 3.1% and 9.5%, as a result of increase in delinquency rate. Our

charge-off

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

on-balance

sheet transactions during such period, in 2017, 2018 and 2019 was 0.2%, 2.9% and 5.3%, respectively.

As of December 31, 2017, 2018 and 2019, our M1+ delinquency coverage ratio, defined as the balance of allowance for loan principal and financing service fee receivables at the end of a period, divided by the total balance of outstanding principal for

on-balance

sheet transactions for which any installment payment was more than 30 calendar days past due as of the end of such period, was 1.3x, 1.1x and 1.5x respectively. With respect to

on-balance

sheet transactions, principal for which any installment payment was more than 30 calendar days past due accounted for 4.4%, 5.4% and 11.1% of total

on-balance

sheet outstanding principal as of December 31, 2017, 2018 and 2019, respectively. As of December 31, 2017, 2018 and 2019, our loan principal and financing service fee receivables for

on-balance

sheet transactions for which any installment payment was more than 90 calendar days past due were approximately RMB181.2 million, RMB298.1 million and RMB630.0 million (US$90.5 million), respectively. As of December 31, 2017, 2018 and 2019, our allowance for loan principal and financing service fee receivables were approximately RMB519.3 million, RMB585.3 million and RMB1,528.9 million (US$219.6 million), respectively.

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

on-balance

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

Our business depends on our ability to collect payment on and service the transactions we facilitate under the loan book business.

We have implemented payment and collection policies and practices designed to optimize regulatory compliant repayment, while also providing superior borrower experience. Our collection process is divided into distinct stages based on the severity of delinquency, which dictates the level of collection steps taken. For example, automatic reminders through text, voice and instant messages are sent to a delinquent borrower as soon as the collections process commences. Our collection team will also make phone calls to borrowers following the first missed payment and periodically thereafter. For amounts more than 90 calendar days past due, we may continue to contact the relevant borrowers by phone. During 2017, 2018 and 2019, we recovered RMB22.4 million, RMB156.6 million and RMB197.3 million (US$28.3 million), respectively, of principal and financing service fees of

on-balance

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

Despite our servicing and collection efforts, we cannot assure you that we will be able to collect payments on the transactions we facilitate under the loan book business as expected. If borrowers default on their payment obligations relating to such transactions under the loan book business, we are generally obligated to repay our institutional funding partners all or a percentage of loan principals and fees payable in respect of credit funded by

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

Moreover, the current regulatory regime for debt collection in the PRC remains unclear. Although we aim to ensure our collection efforts comply with the relevant laws and regulations in the PRC and we have established strict internal policies that our collections personnel do not engage in aggressive practices, we cannot assure you that such personnel will not engage in any misconduct as part of their collection efforts. Any such misconduct by 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 a decrease in the willingness of prospective borrowers to apply for and utilize our credit or fines and penalties imposed by the relevant regulatory authorities, any of which may have a material adverse effect on our results of operations.

Our business may be adversely affected if we are unable to secure funding on terms acceptable to us, or at all.

We collaborate with institutional funding partners to fund certain credit drawdowns we facilitate. Our current institutional funding partners include banks, trust companies, consumer finance companies, asset management companies and other institutions. For credit drawdowns currently funded by institutional funding partners, such credit drawdowns are typically either facilitated to borrowers directly from institutional funding partners or indirectly from institutional funding partners through trusts we established in collaboration with trust companies. Our total amount of transactions has increased from approximately RMB578.2 million in 2014 to RMB84,524.3 million (US$12,141.2 million) in 2019. 81.1% of our amount of transactions in 2019 under the loan book business and the transaction services business was funded by our institutional funding partners. As the demand for credit facilitated by us have significantly increased since inception, our funding arrangements have also changed significantly. For example, we historically transferred a significant amount of credit drawdowns to P2P platforms, and we have subsequently ceased transferring credit drawdowns to P2P platforms in April 2017. In the fourth quarter of 2018, we launched the transaction services business, whereby we offer loan recommendation and referral services to third-party financial service providers and assume no credit risk. We expect that our funding arrangements will continue to evolve as we explore additional or new sources of funding as well as new risk sharing or transfer mechanisms. There can be no assurance that our cooperation with new institutional funding partners will meet our expectations or the expectations of borrowers.

The availability of funding from institutional funding partners depends on many factors, some of which are out of our control. Some of our institutional funding partners have limited operating history, and there can be no assurance that we will be able to rely on their funding in the future. Our ability to cooperate with new institutional funding partners may be subject to regulatory or other limitations. In addition, regardless of our risk management efforts, credit facilitated by us may nevertheless be considered riskier and have a higher delinquency rate than loans provided by traditional financial institutions. In the event there is a sudden or unexpected shortage of funds from our institutional funding partners or if our institutional funding partners have determined not to continue to collaborate with us, we may not be able to maintain necessary levels of funding without incurring high costs of capital, or at all. Furthermore, we had historically relied on one institutional funding partner to fund a substantial portion of credit facilitated by us. While we have since managed to diversify our funding sources, there can be no assurance that our funding sources will remain or become increasingly diversified in the future. If we become dependent on a small number of institutional funding partners and any such institutional funding partner determines not to collaborate with us or limits the funding that is available, our

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business, financial condition, results of operations and cash flow may be materially and adversely affected. Since inception, we have from time to time experienced, and may continue to experience, constraints as to the availability of funds from our institutional funding partners. Such constraints have affected and may continue to affect user experience, including by limiting our ability to approve new credit applications or resulting in us having to curtail the amount that can be drawn down by borrowers under their existing credit limits. Such limitations have in turn restrained, and may continue to restrain, the growth of our business. Any prolonged constraint as to the availability of funds from our institutional funding partners may also harm our reputation or result in negative perception of the credit products we offer, thereby decreasing the willingness of prospective or existing borrowers to seek credit products from us or to draw down on their existing credit.

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

We commenced our business in early 2014. We have established trusts in collaboration with trust companies starting in December 2016. Such trusts are funded by funds from institutional funding partners and our own capital. Since the trust companies administering such trusts have been licensed by financial regulatory authorities to lend, credit drawdowns funded under this arrangement are not private lending transactions within the meaning of the Private Lending Judicial Interpretation issued by the Supreme People’s Court of the PRC in August 2015. In 2019, the amount of transactions facilitated through trusts was RMB12,843.7 million (US$1,844.9 million), representing approximately 21.1% of the total amount of transactions facilitated under the loan book business during such period. We currently fund a majority of credit drawdowns initially disbursed by us through banks or trusts. We historically funded credit drawdowns through online small credit companies established by us.

We disbursed funds to borrowers without utilizing online small credit companies or trusts in the past, which may be considered to involve the use of our own capital in lending, as a result of which we may be deemed as a lender or a provider of financial services by the PRC regulatory authorities, and we may become subject to supervision and restrictions on lending under applicable laws and regulations. For example, the Measures for the Banning of Illegal Financial Institutions and Illegal Financial Business Operations, promulgated by the PRC State Council, or the State Council, in July 1998 and revised in 2011, prohibits financial business activity, including fund raising and facilitating loans to the public, to be conducted without the approval of the People’s Bank of China, or the PBOC. The General Rules on Loans issued by the PBOC in June 1996 provides that a financial institution shall conduct the business with the approval of the PBOC. Otherwise, it will be subject to a fine from one time to five times of the illegal revenues, and the PBOC has the authority to order such business to suspend its operations. Such existing PRC laws and regulations with respect to the supervision and restrictions on lending to the public were primarily aimed to regulate traditional banking and financial institutions at the time of their respective promulgations, and the regulatory environment in the PRC has evolved since then. With the rapid development and evolving nature of the consumer finance industry and other new forms of Internet finance business in China, there are uncertainties as to the interpretation of the laws and regulations mentioned above as well as whether such laws and regulations are applicable to our business. In the event that we are considered by the relevant authorities to be subject to such PRC laws and regulations, and our past business operations are deemed to be in violation of such laws and regulations, we may be exposed to certain administrative penalties, including the confiscation of illegal revenue and fines up to five times the amount of the illegal revenue as mentioned above. Furthermore, our financing service fees received from borrowers might be fully or partially deemed as interest, such fees may be subject to the restrictions on interest rate as specified in applicable rules on private lending. For example, in accordance with the Provisions on Several Issues Concerning Laws Applicable to Trials of Private Lending Cases issued by the Supreme People’s Court of the PRC on August 6, 2015, or the Private Lending Judicial Interpretations, which came into effect on September 1, 2015, if the annual interest rate of a private loan is higher than 24%, the excess will not be enforced by the courts; if the annual interest rate is higher than 36%, the excess will be void and will not be enforced by the courts. See “Item 4. Information on the Company — B. Business Overview — Regulations — Regulations related to Loans and Intermediation.”

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

Non-Deposit-Taking

Lending Organizations (Draft for

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Comment), or the Draft Regulations on

Non-Deposit-Taking

Lending, with a Note on the Draft Regulations on

Non-Deposit-Taking

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

Non-Deposit-Taking

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

Non-Deposit-Taking

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

non-deposit-taking

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

Non-Deposit-Taking

Lending seeks to regulate small credit companies and other

non-deposit-taking

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

It is uncertain when or whether the Draft Regulations on

Non-Deposit

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

Non-Deposit

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

Non-Deposit

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

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

The PRC government has not adopted a clear regulatory framework governing the new and rapidly-evolving online consumer finance industry in which we operate, and our business may be subject to a variety of laws and regulations in the PRC that involve financial services, including consumer finance, small credit, and private lending. The application and interpretation of these laws and regulations are ambiguous, particularly in the new and rapidly-evolving online consumer finance industry in which we operate, and may be interpreted and applied inconsistently between the different government authorities. As of December 31, 2019, we had not been subject to any material fines or other penalties under any PRC laws or regulations as to our business operations. However, if the PRC government adopts a stringent regulatory framework for the online consumer finance industry in the future, and subject market participants such as our company to specific requirements (including without limitation, capital requirements, reserve requirements and licensing requirements), our business, financial condition and prospects would be materially and adversely affected. The existing and future rules, laws and regulations can be costly to comply with and if our practice is deemed to violate any existing or future rules, laws and regulations, we may face injunctions, including orders to cease illegal activities, and may be exposed to other penalties as determined by the relevant government authorities as well.

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

non-banking

financial institutions as approved by the CBRC that do not engage in taking public deposits from individual lenders and provide individual borrowers with consumer loans pursuant to the principles that such loans be small amount in nature and widely dispersed to various borrowers. However, the Internet Finance Guidelines and the Pilot Consumer Finance Measures do not explicitly provide guidance or requirements on other forms of online consumer finance business conducted by participants other

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than the CBRC-approved consumer finance companies as defined in the Pilot Consumer Finance Measures, including, for example, our business. Therefore, it is currently uncertain whether our business practice is subject to the relevant rules regarding online consumer finance companies provided under the Internet Finance Guidelines and consumer finance companies provided under the Pilot Consumer Finance Measures. Given the evolving regulatory environment of the consumer finance industry, we cannot rule out the possibility that the CBRC or other government authorities will issue new regulatory requirements to institute a new licensing regime covering our industry. If such a license regime is introduced or new regulatory rules are promulgated, we cannot assure you that we would be able to obtain any new licenses or other regulatory approvals in a timely manner, or at all, which would materially and adversely affect our business and impede our ability to continue our operations.

According to two circulars promulgated in April 2016, namely the Circular of the General Office of the PRC State Council on Issuing the Implementing Proposals for the Special Rectification of Internet Financial Risks and the Circular on Issuing the Implementing Proposals for the Special Rectification of P2P online Financial Risks, two special task forces at the central-government level, namely the Office of the Leading Group for Specific Rectification against Online Finance Risks, or the Online Finance Risks Rectification Office, and the Office of the Leading Group for Specific Rectification against P2P Online Lending Risks, or the P2P Online Lending Rectification Office, were established to align the regulatory measures of the PBOC, the CBRC, and other relevant PRC government authorities that regulate the business operations of online finance companies and P2P platforms.

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

peer-to-peer

lending relationships. The Interim Online Lending Information Intermediary Measures are only applicable to private lending transactions according to relevant interpretations by the China Banking Regulatory Commission. Loans funded by financial institutions which are licensed by financial regulatory authorities are not private lending transactions within the meaning of the Private Lending Judicial Interpretation issued by the Supreme People’s Court of the PRC in August 2015. Therefore, facilitation of loans funded directly by such licensed financial institutions is not subject to the regulation set forth in the Interim Online Lending Information Intermediary Measures.