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, 2020

☐	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 US$0.0001 per share*

*	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.			189,514,026 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 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 whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒

Indicate by check mark which basis of accounting the registration has used to prepare the financial statements included in this filing:


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

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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	123

ITEM 5.	OPERATING AND FINANCIAL REVIEW AND PROSPECTS	123

ITEM 6.	DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES	151

ITEM 7.	MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS	163

ITEM 8.	FINANCIAL INFORMATION	164

ITEM 9.	THE OFFER AND LISTING	167

ITEM 10.	ADDITIONAL INFORMATION	167

ITEM 11.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	175

ITEM 12.	DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES	176

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	182

ITEM 16G.	CORPORATE GOVERNANCE	182

ITEM 16H.	MINE SAFETY DISCLOSURE	182

Part III.		183

ITEM 17.	FINANCIAL STATEMENTS	183

ITEM 18.	FINANCIAL STATEMENTS	183

ITEM 19.	EXHIBITS	183

SIGNATURES		189

AUDITED 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;

•

“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;

•

“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 RMB6.525 to US$1.00, the exchange rates set forth in the H. 10 statistical release of the Federal Reserve Board on December 31, 2020. 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, 2021, the noon buying rate for Renminbi was RMB 6.5518 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, 2018, 2019 and 2020 and selected consolidated balance sheets as of December 31, 2019 and 2020 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, 2016 and 2017 and selected consolidated balance sheets as of December 31, 2016, 2017 and 2018 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,
	2016			2017			2018			2019			2020
	RMB			RMB			RMB			RMB			RMB			US$
	(in thousands, except for share and per share data)
Condensed Consolidated Statement of Operations Data:
Revenues
Financing income		1,271,456			3,642,184			3,535,276			3,510,055			2,102,665			322,248
Sales commission fee		126,693			797,167			307,492			356,812			80,992			12,413
Sales income		—			26,083			2,174,789			431,946			610,793			93,608
Penalty fees		22,943			7,922			28,013			44,354			72,235			11,070
Guarantee income		—			—			—			—			826,198			126,620
Loan facilitation income and other related income		21,754			302,010			1,646,773			2,297,413			131,633			20,174
Transaction services fee and other related income		—			—			—			2,199,464			(136,542	)		(20,926	)
Total revenues		1,442,846			4,775,366			7,692,343			8,840,044			3,687,974			565,207

Cost of revenues
Cost of goods sold		—			(23,895	)		(2,003,642	)		(366,015	)		(645,083	)		(98,864	)
Cost of other revenues		(267,862	)		(856,951	)		(731,786	)		(535,773	)		(217,271	)		(33,298	)

Total cost of revenues		(267,862	)		(880,846	)		(2,735,428	)		(901,788	)		(862,354	)		(132,162	)

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	Year Ended December 31,
	2016			2017			2018			2019			2020
	RMB			RMB			RMB			RMB			RMB			US$
	(in thousands, except for share and per share data)
Operating expenses(1)
Sales and marketing		(182,458	)		(431,749	)		(540,551	)		(280,616	)		(293,282	)		(44,947	)
General and administrative		(108,786	)		(183,674	)		(255,867	)		(286,059	)		(285,905	)		(43,817	)
Research and development		(52,275	)		(153,258	)		(199,560	)		(204,781	)		(170,691	)		(26,160	)
Changes in guarantee liabilities and risk assurance liabilities		(861	)		(150,152	)		(116,593	)		(1,143,427	)		87,894			13,470
Provision for receivables and other assets		(132,176	)		(605,164	)		(1,178,723	)		(2,283,126	)		(1,641,362	)		(251,550	)

Total operating expenses		(476,556	)		(1,523,997	)		(2,291,294	)		(4,198,009	)		(2,303,346	)		(353,004	)

Other operating income		14,646			50,703			23,748			108,508			343,324			52,617

Income from operations		713,074			2,421,226			2,689,369			3,848,755			865,598			132,659

Interest and investment income, net		6,663			24,887			47,060			24,292			708,251			108,544
Loss from equity method investments		(4,805	)		(20,676	)		(11,319	)		(3,420	)		(370,039	)		(56,711	)
Foreign exchange gain/(loss), net		(9,651	)		(7,177	)		(90,771	)		6,635			(107	)		(16	)
Other income		47			2,108			15,231			24,583			26,358			4,040
Other expenses		(1,834	)		(363	)		(522	)		(10,323	)		(9,263	)		(1,420	)

Net income before income taxes		703,493			2,420,005			2,649,047			3,890,522			1,220,798			187,095
Income tax expenses		(126,840	)		(255,546	)		(157,731	)		(626,234	)		(261,979	)		(40,150	)

Net income		576,653			2,164,459			2,491,316			3,264,288			958,819			146,945

Net Income attributable to Qudian Inc.’s shareholders		576,653			2,164,459			2,491,316			3,264,288			958,819			146,945

Earnings per share for Class A and Cass B ordinary shares
— Basic		7.27			17.13			7.82			11.72			3.78			0.58
Earnings per share for Class A and Class B ordinary shares
— Diluted		1.90			7.09			7.74			10.94			3.59			0.55
Earnings per ADS (1 Class A ordinary shares equals 1 ADSs)
— Basic					17.13			7.82			11.72			3.78			0.58
Earnings per ADS (1 Class A ordinary shares equals 1 ADSs)
— Diluted					7.09			7.74			10.94			3.59			0.55
Weighted average number of Class A and Class B ordinary shares outstanding
— Basic		79,305,191			126,390,196			318,685,836			278,531,382			253,658,448			253,658,448

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	Year Ended December 31,
	2016		2017			2018		2019		2020
	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
— Diluted		303,778,745		305,221,444			321,955,142		300,457,711		274,333,161			274,333,161

Other comprehensive (loss)/income:
Foreign currency translation adjustment		—		(77,947	)		33,089		31,893		(38,455	)		(5,893	)

Total comprehensive income		576,653		2,086,512			2,524,405		3,296,181		920,364			141,052

Total comprehensive income attributable to Qudian Inc.’s shareholders		576,653		2,086,512			2,524,405		3,296,181		920,364			141,052

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


	Year Ended December 31,
	2016		2017		2018		2019		2020
	RMB		RMB		RMB		RMB		RMB		US$
	(in thousands)
Sales and marketing		690		1,891		5,641		4,482		1,912		293
General and administrative		18,986		42,849		38,587		74,312		40,895		6,267
Research and development		2,457		19,316		13,753		8,505		2,827		433

Total share-based compensation expenses		22,134		64,056		57,981		87,299		45,634		6,994

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	As of December 31,
	2016			2017		2018		2019		2020
	RMB			RMB		RMB		RMB		RMB		US$
	(in thousands)
Summary Consolidated Balance Sheets:
Cash and cash equivalents		785,770			6,832,306		2,501,188		2,860,938		1,537,558		235,641
Restricted cash and cash equivalent		—			2,252,646		339,827		1,257,649		135,404		20,752
Time deposits		—			—		—		231,132		—		—
Short-term amounts due from related parties(1)		585,906			551,215		2		—		—		—
Short-term investments		—			—		—		—		5,042,314		772,768
Short-term loan principal and financing service fee receivables, net		4,826,791			8,758,545		8,417,821		7,894,697		3,940,461		603,902
Short-term finance lease receivables, net		—			8,508		508,647		398,256		179,613		27,527
Short-term contract assets		—			—		903,436		2,741,914		92,813		14,224
Long-term loan principal and financing service fee receivables		87,822			—		665,653		424		—		—
Long-term finance lease receivables, net		—			17,900		649,243		239,697		28,771		4,409
Long-term contract assets		—			—		15,597		273,597		23,094		3,539
Total assets		7,117,599			19,380,416		16,253,375		18,361,604		13,398,032		2,053,338

Short-term borrowings and interest payables		4,183,231			7,979,415		3,860,441		1,049,570		—		—
Long-term borrowings and interest payables		76,052			510,024		413,400		—		102,415		15,696
Convertible senior notes		—			—		—		2,339,552		822,005		125,978

Total liabilities		4,604,010			9,840,049		5,432,762		6,437,552		1,488,188		228,075

Total mezzanine equity		5,943,978			—		—		—		—		—

Non-controlling interest		—			—		—		—		10,000		1,533

Total Qudian Inc. shareholders’ equity / (deficit)		(3,430,389	)		9,540,367		10,820,613		11,924,052		11,899,844		1,823,730

Total shareholders’ equity / (deficit)		(3,430,389	)		9,540,367		10,820,613		11,924,052		11,909,844		1,825,263

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

Non-GAAP

Measure

Adjusted Net Income

We use adjusted net income, a

non-GAAP

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

non-cash

charges, and (ii) convertible senior notes buyback income, which is

non-cash

and

non-recurring.

We believe that adjusted net income 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,
	2016		2017		2018		2019		2020
	RMB		RMB		RMB		RMB		RMB		US$
	(in thousands)
Adjusted net income(1)		598,787		2,228,515		2,549,297		3,351,587		382,344		58,597

(1)	Adjusted net income is defined as net income excluding share-based compensation expenses and convertible senior notes buyback income.

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Adjusted net income 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, 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 in the years presented to the most directly comparable financial measure calculated and presented in accordance with U.S. GAAP, which is net income:


	For the year ended December 31,
	2016		2017		2018		2019		2020
	RMB		RMB		RMB		RMB		RMB		US$
	(in thousands)
Net income		576,653		2,164,459		2,491,316		3,264,288		958,819		146,945
Add: share-based compensation expenses		22,134		64,056		57,981		87,299		45,634		6,994
Less: Convertible senior notes buyback income		—		—		—		—		622,109		95,342
Adjusted net income		598,787		2,228,515		2,549,297		3,351,587		382,344		58,597

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 RMB6.525 to US$1.00, the exchange rate set forth in the H.10 statistical release of the Federal Reserve Board on December 31, 2020. 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.

A.	Capitalization and Indebtedness

Not Applicable.

B.	Reasons for the Offer and Use of Proceeds

Not Applicable.

C.	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 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

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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 credit approval standards 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;

•

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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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 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 and provision for receivables and other assets of RMB707.2 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. The pandemic has exacerbate the already existing challenges in the consumer credit sector. The decrease in consumer spending and the rise in unemployment rates 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 52.8% and 68.0%, 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.

In response to the challenging market for our credit business, we have implemented more stringent credit approval standards to protect our net assets. The amount of transactions we facilitated under our loan book business decreased by 69.8% in 2020, as compared with the amount in 2019. Meanwhile, as some of our institutional funding partners have also tightened their credit approval standards, the amount of transactions we facilitated under our transaction services business decreased by 83.0% in 2020, as compared with the amount in 2019. As a result of the decreases in transaction activities on our platform, our total revenues decreased by 58.3%

year-on-year

to RMB3,688.0 million (US$565.2 million) in 2020, and our net income decreased by 70.6%

year-on-year

to RMB958.8 million (US$146.9 million) in 2020.

The

COVID-19

coronavirus outbreak and regulatory developments in the online consumer finance industry may continue to adversely affect our business, results of operations and financial condition in 2021. The extent of such impact will depend largely on future developments, which are highly uncertain. We will continue to mitigate our risk exposure to the consumer credit market by implementing stringent credit approval standards.

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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 5.3 million, 6.1 million and 3.5 million as of December 31, 2018, 2019 and 2020, respectively. Outstanding borrowers represented 7%, 8% and 4% of total registered users as of December 31, 2018, 2019 and 2020, respectively. We cannot assure you that the numbers of outstanding borrowers will not decrease in the future.

In response to general economic conditions, we have imposed more stringent credit approval standards to ensure the quality of the transactions we facilitate, which have resulted in decreases in the amount of transactions facilitated to borrowers and our revenues. If we continue to maintain such stringent credit approval standards, we may experience further decreases in the amount of transactions and revenues. On the other hand, if we start to expand our borrower base, we may experience increases in user acquisition costs and delinquency rates, which could have a material and adverse impact on our results of operations and financial condition.

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 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.

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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 may 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, 2018 and 2019 and 2020, our cash credit products had an average size of approximately RMB1,491, RMB2,027 and RMB2,713 (US$416), respectively. Our weighted average loan tenure increased from 10.4 months in the fourth quarter of 2018 to 10.9 months in the fourth quarter of 2019, and substantially decreased to 4.5 months in the fourth quarter of 2020 primarily due to our efforts to manage our risk exposure. However, as we continue to adjust our credit approval strategy based on market conditions, 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, 2020, the total outstanding loan principal of our loan book business was RMB4,801.8 million (US$735.9 million), subtstantially all of which represented credit drawdowns that were funded by our own capital. As of December 31, 2020, outstanding principal of

off-balance

sheet transactions, which represent credit drawdowns directly funded by institutional funding partners, was RMB83.7 million (US$12.8 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 2020 reached 13.0% through March 31, 2021. Such increase was primarily due to 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 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

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macroeconomic conditions in order to calculate the pooled allowance. Subsequent to January 1, 2020, the Company adjusts the allowance that is determined by the roll rate-based model for various qualitative factors that reflect current conditions and reasonable and supportable forecasts of future economic conditions, in accordance with Accounting Standards Update (“ASU”) No. 2016-13, Financial instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASC 326”). Accordingly, any increase in the delinquency rates of

on-balance

sheet transactions would increase our allowance for loan principal and financing 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 2018, 2019 and 2020,

on-balance

sheet transactions represented 63.9%, 37.4% and 99.5% of the total amount of transactions under our loan book business. In 2018, 2019 and 2020, provision for loan principal and financing service fee receivables and other assets was RMB1,178.7 million, RMB2,283.1 million and RMB1,641.4 million (US$251.5 million), respectively; and our provision ratio during the same periods was 3.1%, 9.5% and 7.8%, as a result of the decrease in

past-due

on-balance

sheet outstanding principal receivables compared to 2019. 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 2018, 2019 and 2020 was 2.9%, 5.3% and 11.6%, respectively.

As of December 31, 2018, 2019 and 2020, 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 1.1x, 1.5x and 2.4x respectively. With respect to

on-balance

sheet transactions, principal for which any installment payment was more than 30 calendar days past due accounted for 5.4%, 11.1% and 7.5% of total

on-balance

sheet outstanding principal as of December 31, 2018, 2019 and 2020, respectively. As of December 31, 2018, 2019 and 2020, 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 RMB298.1 million, RMB630.0 million and RMB254.9 million (US$39.1 million), respectively. As of December 31, 2018, 2019 and 2020, our allowance for loan principal and financing service fee receivables were approximately RMB585.3 million, RMB1,528.9 million and RMB849.2 million (US$130.2 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.

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

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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. Subsequent to January 1, 2020, the contingent liability relating to the expected credit losses arising from the contingent aspect of the risk assurance liability is initially measured under current expected credit loss model, or CECL model, in accordance with ASC 326.

Accordingly, an increase in the expected delinquency rates of

off-balance

sheet transactions would result in an increase in the amount of guarantee liabilities and risk assurance liabilities, which are recognized as changes in guarantee liabilities and risk assurance liabilities. In 2018, 2019 and 2020,

off-balance

sheet transactions represented 36.1%, 62.6% and 0.5% of the total amount of transactions under our loan book business, respectively, and we recognized RMB116.6 million, RMB1,143.4 million and a reverse of RMB87.9 million (US$13.5 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 RMB302.6 million, RMB1,517.8 million and RMB31.4 million (US$4.8 million) as of December 31, 2018, 2019 and 2020, respectively, and we paid the relevant institutional funding partners RMB387.2 million, RMB2,084.1 million and RMB1,684.4 million (US$258.2 million) as a result of borrowers’ default for

off-balance

sheet transactions in 2018, 2019 and 2020, respectively. Although the relevant amount under our

off-balance

sheet transactions decreased significantly as we primarily funded our loan book business with our own capital in 2020, we cannot assure you that

off-balance

sheet transactions will not increase in the future.

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 2018, 2019 and 2020, we recovered RMB156.6 million, RMB197.3 million and RMB310.7 million (US$47.6 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 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.

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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. Currently, we primarily fund our loan book business with our own capital. The total amount of transactions facilitated by us under the loan book business and the transaction services business in 2020 was RMB22,413.6 million (US$3,435.0 million), and RMB4,730.4 million (US$725.0 million) of such transactions was funded by our institutional funding partners. Our funding arrangements has changed significantly since inception. 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 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. In addition, we may not be able to obtain timely payment of the relevant fees from the institutional funding partners and our

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relationship with them may suffer as a result. See “— We may not be able to successfully operate our open platform for transaction services business” for further details.

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 Provisions of the Supreme People’s Court the Provisions on Several Issues Concerning the Application of Law in the Trial of Private Lending Cases, or the Private Lending Judicial Interpretation, issued by the Supreme People’s Court of the PRC in 2015. The second revised version of the Private Lending Judicial Interpretation, or the Second Revised Private Lending Judicial Interpretation, has been issued in December 2020. In 2020, the amount of transactions facilitated through trusts was RMB17,879.2 million (US$2,740.1 million), representing approximately 97.2 % 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, under the Second Revised Private Lending Judicial Interpretation issued by the the Supreme People’s Court in December 2020, such total annual percentage rates (inclusive of any default rate, default penalty and any other fee) exceeding four times that of China’s benchmark

one-year

loan prime rate, or LPR, as published on the 20th of each month will not be legally protected. Based on the LPR of 3.85% as published on April 20, 2021, such cap would be 15.4%. See “Item 4. Information on the Company—B. Business Overview—Regulations—Regulations related to Loans and Intermediation.”

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

Non-Deposit-Taking

Lending Organizations (Draft for Comment), or the Draft Regulations on

Non-Deposit-Taking

Lending, with a Note on the Draft Regulations on

Non-Deposit-Taking

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

Non-Deposit-Taking

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

Non-Deposit-Taking

Lending, rather than generally categorizing activities like lending to public without the approval of PBOC as

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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, 2020, 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 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

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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 Second Revised Private Lending Judicial Interpretation issued by the Supreme People’s Court of the PRC in December 2020. Therefore, facilitation of loans funded directly by such licensed financial institutions is not subject to the regulation set forth in the Interim Online Lending Information Intermediary Measures.

On December 8, 2017, the P2P Online Lending Rectification Office issued the Notice on the Rectification and Inspection Acceptance of Risk of Online Lending Intermediaries, or Circular 57, which provides further clarification on several matters in connection with the rectification of online lending information intermediaries. The Circular 57 requires that online lending intermediaries set up custody accounts with qualified banks that have passed certain testing and evaluation procedures run by the P2P Online Lending Rectification Office to hold customer funds. Pursuant to the Circular 57, online lending information intermediaries that have already established risk reserve funds shall not continue to set aside any of their funds as additional risk reserve and shall gradually reduce the balance of their existing risk reserve funds. Other than risk reserve funds, online lending information intermediaries shall actively seek alternative means of investor protection, such as third-party guarantee arrangements.

In particular, starting from the issuance of the Circular on the Classification and Disposal of Risks of Online Lending Institutions and Risk Prevention on December 19, 2018, or Circular 175, by the Online Finance Risks Rectification Office and the P2P Online Lending Rectification Office, a storm of regulatory measures have been taken by the PRC government centered on the enhancement of rectification of existing P2P platforms, with the goal of guiding such platforms to wind down and exit P2P business. The overarching objective of Circular 175 is for the PRC government agencies to effect orderly exits of

peer-to-peer

direct lending marketplaces without

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inducing systematic risks in the financial system or causing significant social turbulence. In accordance with Circular 175, P2P lending platforms which have demonstrated risk characteristics should exit the business or cease operation, and even the normal platforms must limit the scale of outstanding business and number of investors, which is sometimes referred as the “Business Dual Decrease,” and eventually seek to become licensed small credit companies, loan facilitation companies servicing banking institutions or companies channeling information for banking institutions. The regulatory actions under such stringent regulation on P2P lending platforms have decimated P2P lending platforms, including many well-known or listed companies such as Yidai, LuFax, and China Rapid Finance (NYSE: XRF). It is reported that in November 2019, the Online Finance Risks Rectification Office and the P2P Online Lending Rectification Office jointly issued the Guidance of Transformation of Online Lending Information Intermediaries to Small Credit Companies, or Guidance 83, which further signals the fundamental goal of the PRC government to end of P2P business. As of December 31, 2020, all P2P lending platforms have been exited or have completed their business transformation.

We do not engage in direct loan facilitation between peers. While we facilitate transactions that are directly funded by certain institutional funding partners, such companies are financial institutions licensed by financial regulatory authorities to lend. As such, we do not consider ourselves as an “online information intermediary institution” regulated under the Interim Online Lending Information Intermediary Measures. However, we cannot assure you that the CBRC, the P2P Online Lending Rectification Office or other PRC governmental agencies would not expand the applicability of the Interim Online Lending Information Intermediary Measures and/or otherwise regard us as an online lending information intermediary institution. As a provider of online credit products, our business share certain similarities with those of P2P platforms. In March 2017, Beijing Happy Time received a rectification notice from the Beijing Branch of the Office of Leading Group for Special Rectification against Online Finance Risks, which was also the Office of the Leading Group for Special Rectification against P2P Online Lending Risks of Beijing or the Beijing Rectification Office, the regulator of the Internet finance and online lending industry in Beijing. The rectification notice required Beijing Happy Time to conduct certain improvements and corrections to its business operation to be in compliance with the Interim Online Lending Information Intermediary Measures and the Implementing Scheme of Special Rectification of Risks in the Internet Finance Sector. We do not believe we are subject to the Interim Online Lending Information Intermediary Measures, Circular 57 and Circular 157 and have discussed with the Beijing Rectification Office about the difference between our business and those of “online information intermediary institution” as defined in the Interim Online Lending Information Intermediary Measures and that certain correction requirements in the notice were not actually related to our business. Nevertheless, the Beijing Rectification Office still required us to comply with certain requirements under the Interim Online Lending Information Intermediary Measures regardless of whether we are a P2P platform due to the fact that some of our institutional funding partners are P2P platforms, which are identified as online lending information intermediary institutions in accordance with the Interim Online Lending Information Intermediary Measures and other PRC laws and regulations. As such, we were deemed to be participating in a certain part of the “online lending” process as defined in the Interim Online Lending Information Intermediary Measures. We have since carried out certain improvements and corrections as required by the Beijing Rectification Office and are maintaining an ongoing dialogue with the Beijing Rectification Office. As of the date of this annual report, we have not received final clearance from the Beijing Rectification Office that our rectification efforts were sufficient, and there can be no assurance that we will be able to receive such final clearance. We also cannot assure you that the Beijing Rectification Office will agree with our position that we are not an “online information intermediary institution.” In the event that we are deemed as an online lending information intermediary institution by the PRC regulatory authorities in the future, we may have to register with local financial regulatory authorities and apply for telecommunication business operation licenses if required by the competent authorities, and our current business practices may be considered to be in violation of the Interim Online Lending Information Intermediary Measures. Accordingly, we may face administrative orders to make rectification, receive administrative warnings or criticism notice, monetary penalties up to RMB30,000 and other penalties, and our business, results of operations and financial position could be materially and adversely affected.

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We have cooperated with our institutional funding partners, whose compliance with PRC laws and regulations may affect our business. Our collaboration with institutional funding partners have exposed us to and may continue to expose us to additional regulatory uncertainties faced by such institutional funding partners. In addition, we have ceased transferring credit drawdowns to P2P platforms in April 2017. Nonetheless, we cannot assure you that the business operations of our institutional funding partners currently are or will be in compliance with the relevant laws and regulations, and in the event that our institutional funding partners do not operate their businesses in accordance with the relevant laws and regulations or are engaged in illegal activities, they will be exposed to various regulatory risks and accordingly, our business, financial condition and prospects would be materially and adversely affected.

In April 2017, the P2P Online Lending Rectification Office, the regulator for administration and supervision on the nationwide Internet finance and online lending, issued the Notice on the Conduction of Check and Rectification of Cash Loan Business Activities and a supplementary notice, or the Notice on Cash Loan. The Notice on Cash Loan requires the local counterparts of the P2P Online Lending Rectification Office to conduct a full-scale and comprehensive inspection of cash loan business conducted by online platforms and require such platforms to conduct necessary improvements and corrections within a designated period to comply with the relevant requirements under the Second Revised Private Lending Judicial Interpretation in December, 2020, the Measures for the Banning of Illegal Financial Institutions and Illegal Financial Business Operations, the Guiding Opinions on Small Credit Companies, the Interim Online Lending Information Intermediary Measures and the Implementing Scheme of Special Rectification of Risks in the Internet Finance Sector. The Notice on Cash Loan focuses on preventing malicious fraudulent activities, loans that are offered at extortionate interest rates and violence in the loan collection processes in the cash loan business operation of online platforms. The P2P Online Lending Rectification Office issued a list of cash loan business that are to be examined, which includes Laifenqi, one of the brands in which we use to market our credit products. In light of the Notice on Cash Loan, we have taken measures, including

re-evaluating

and adjusting the amount of financing service fees we charge on all credit drawdowns in an effort to comply with applicable regulations. Due to the uncertainties with respect to the interpretation and application of the laws and regulations as stated in the Notice on Cash Loan, we cannot assure you our business practice will be deemed to be in full compliance with all such laws and regulations, and we may face injunctions, including orders to change our current business activities, and may be exposed to other penalties as determined by the relevant government authorities after such examination according to the Notice on Cash Loan. Furthermore, we may be required to conduct certain other improvements or corrections which could be costly, and our business, financial condition, results of operations and prospects would be materially and adversely affected.

The Online Finance Risks Rectification Office and P2P Online Lending Rectification Office jointly issued the Circular on Regulating and Rectifying Cash Loan Business on December 1, 2017, or Circular 141. Circular 141 sets out the principles and new requirements for the conduct of “cash loan” businesses by small loan companies, P2P platforms and banking financial institutions. Circular 141 does not clearly define “cash loans,” but it indicates that cash loans that are subject to regulation and rectification have certain features, such as the lack of (i) specific user cases (which, as we understand the term, refers to scenarios in which users purchase specific products or services on credit), (ii) specified uses of loan proceeds, (iii) defined customer base, or (iv) collateral.

The Circular 141 sets forth several general requirements with respect to “cash loan” business, including, among others: (i) no organizations or individuals may conduct the lending business without obtaining approvals for the lending business; (ii) the aggregate borrowing costs of borrowers charged by institutions in the forms of interest and various fees should be annualized and subject to the limit on interest rate of private lending set forth in the Private Lending Judicial Interpretations issued by the Supreme People’s Court; (iii) all relevant institutions shall follow the “know-your-customer” principle and prudently assess and determine the borrower’s eligibility, credit limit,

cooling-off

period and other relevant features; (iv) loans to any borrower without income sources are prohibited; (v) all relevant institutions shall enhance the internal risk control and prudently use “data-driven” risk management models; (vi) no lending institution or any third party entrusted thereby may collect debts by means

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of violence, intimidation, insult, defamation or harassment; and (vii) lending institutions shall strengthen the protection of customers’ information, and shall not steal or misuse customers’ private information in the name of “Big Data”, or illegally trade or disclose customers’ private information.

The Circular 141 also sets forth several requirements on banking financial institutions participating in “cash loan” business, including, among others,(i) such banking financial institutions shall not extend loans jointly with any third-party institution which has not obtained approvals for the lending business, or fund such institution for the purpose of extending loans in any form; (ii) with respect to the loan business conducted in cooperation with third-party institutions, such banking financial institutions shall not outsource the core business (including the credit assessment and risk control), and shall not accept any credit enhancement service whether or not in a disguised form (including the commitment to taking default risks) provided by any third-party institutions with no guarantee qualification and (iii) such banking financial institutions must require and ensure that the third-party institutions shall not collect any interests or fees from the borrowers. It remains uncertain how the regulatory authorities will interpret and enforce the requirements of Circular 141 under various circumstances. We have entered into arrangements with several banks which directly fund credit drawdowns to borrowers. We refer to such banks qualified credit applications from borrowers, including our assessment of their credit profiles and our suggested credit limits. They will then review the credit applications and approve credit for drawdown. Borrowers directly repay principal and financing service fees to the relevant institutional funding partners, who will in turn deduct the principal and fees due to them from the repayments and remit the remainder to us as our loan facilitation fees.

On October 9, 2019, the Supplementary Provisions on the Supervision and Administration of Financing Guarantee, or Financing Guarantee Provisions, is jointly issued by the China Banking and Insurance Regulatory Commission, the National Development and Reform Commission and other seven central governmental departments. Although financing guarantee, which means guarantor providing security for the secured party’s debt financing such as borrowings and issuance of bonds, has always been a licensed activity, the Financing Guarantee Provisions further tightens the supervision of such business. Specifically, it provides that institutions providing customer referral, credit rating or other services for loan lenders are barred from offering financing guarantee services in any manner unless after obtaining necessary approvals. Our

off-balance

sheet transactions may be deemed to involve both customer referral and financing guarantee services. However, we do not directly or indirectly provide any financing guarantee to lenders without approvals. Our outstanding loans, if involving guarantees, are either guaranteed by one of our wholly owned subsidiaries, Xiamen Xincheng Youda Financing Guarantee Ltd., or Xiamen Xincheng or covered by alternative arrangements with third-party companies with financing guarantee licenses. Xiamen Xincheng has obtained a license to provide financing guarantee service. We plan to provide guarantees for credit drawdowns through Xiamen Xincheng, which has a registered capital of RMB900 million. As of December 31, 2020, the net assets of Xiamen Xincheng was RMB1,003.0 million (US$153.7 million), and it was therefore permitted to incur guarantee liabilities and risk assurance liabilities up to RMB10,030.2 million (US$1,537.2 million). Nonetheless, if our arrangement to provide guarantees through the alternative arrangements are deemed to be in violation of Circular 141 or Financing Guarantee Provisions, we could be subject to penalties and/or be required to change our business model. As a result, our business, financial condition, results of operations and prospects could be materially and adversely affected.

On July 23, 2019, the Supreme People’s Court of the PRC, the Supreme People’s Procuratorate of the PRC, the Ministry of Public Security and Ministry of Justice of the PRC jointly issued the Opinions on Several Issues Concerning Handling Illegal Lending Criminal Cases, or the Illegal Lending Opinions. According to the Illegal Lending Opinions, providing loans to unspecified public regularly (meaning more than ten borrowers in any given two years) without necessary governmental approvals will constitute illegal lending practices, of which the provision of loans of annual interest rate (including nominal interest and fees charged to borrowers in combination) higher than 36%, under serious or very serious circumstances, is criminally punishable (“Illegal High-interest Lending”). The Illegal Lending Opinions also provides specific definition of “serious” and “very serious” Illegal High-Lending. In comparison to previous administrative and judicial practices, the Illegal Lending Opinions criminalizes Illegal High-interest Lending practices at the first time. In addition, under the

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Illegal Lending Opinions, the collection of debts by means of violence is forbidden. Whoever gathers, instigates or hires others to forcibly collect debts by disturbing, pestering, beguiling, gathering a crowd to create momentum or otherwise, which does not constitute a crime independently, but the illegal lending has constituted the crime of illegal operation, shall be imposed a heavier punishment as the case may be in accordance with the provisions on the crime of illegal operation. In an effort to comply with potentially applicable laws and regulations, the Company adjusted the pricing of its credit products in April 2017 to ensure that the annualized fee charged on all credit drawdowns rates (including interest and fees combined) do not exceed 36%. The Company does not believe the regulatory change represented by the Illegal Lending Opinions will materially affect its business.

We focus on complying with relevant laws, regulations and government policies applicable to our business practice in the PRC and have implemented various measures. We have established trusts in collaboration with trust companies starting in December 2016. In addition, we continuously seek to work with additional institutional funding partners, including more traditional banking institutions, in light of the regulatory uncertainties faced by certain of our institutional funding partners, such as P2P platforms. In April 2017, we ceased transferring credit drawdowns to P2P platforms and certain other institutional funding partners. However, due to the lack of clarity in the potential interpretation of the relevant rules and the fact that the rules, laws and regulations are expected to continue to evolve in this newly emerging industry in which we operate, we cannot assure you that our measures would effectively prevent us from violating any existing or future rules, laws and regulations. In addition, although the relevant regulations on P2P platforms do not directly apply to us, any regulatory restrictions may cause borrowers with lower credit qualities to seek for our service, which may have negative effect on our delinquency rates. Furthermore, such changes in regulations may also affect market sentiment and have a negative impact on our partnership with institutional funding partners.

As part of our efforts to obtain funding at competitive costs, we may from time to time explore alternative funding initiatives to support our rapid business growth, including through standardized capital instruments such as the issuance of asset-backed securities and other debt and equity offerings. The current PRC regulatory framework does not impose many restrictions and obligations on us as the credit originator of any potential asset-backed securities offering. Pursuant to the relevant PRC laws and regulations, an institution, such as our online small credit companies, is entitled to establish an asset-backed securities scheme as a credit originator for such scheme on the condition that it has legitimate ownership to the underlying transferred assets that are able to generate independent and predictable cash flow in compliance with relevant laws and regulations. However, the initiators of any potential asset-backed securities scheme with whom we work with are required to be financial institutions and they are subject to a variety of laws and regulations in the PRC, such as Administrative Provisions on the Asset Securitization Business of Securities Companies and the Subsidiaries of Fund Management Companies and Measures for the Supervision and Administration of Pilot Projects of Credit Asset Securitization of Financial Institutions. Since we will not operate as an initiator of any asset-backed securities scheme, we will not be subject to these laws and regulations governing financial institutions as initiators. However, as the laws and regulations applicable to asset-backed securities are still developing, it remains uncertain as to the application and interpretation of such laws and regulations, particularly relating to the new and rapidly evolving online consumer finance industry in which we operate.

To the extent we issue asset-backed securities in the future, we do not plan to issue such securities to investors located in the United States or otherwise meeting the definition of “U.S. persons” as defined under Rule 902 under the Securities Act. As such, we do not believe that any such potential issuances will be subject to the requirements in Regulation AB under the Securities Act and the related rules. Nonetheless, if we issue asset-backed securities in the future that are required to be registered under the Securities Act, we may need to comply with Regulation AB and related rules, which may make the issuance of such asset-backed securities impracticable.

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Our financing service fees may decline in the future and any material decrease in such financing service fees could harm our business, financial condition and results of operations.

We generate a material portion of our total revenues from financing service fees. In 2020, financing income, which we recognize for our

on-balance

sheet transactions, comprised 57.0% of our total revenues. In addition, we recognize revenues from loan facilitation services when we match borrowers with funding partners and the funds are transferred to the borrowers. Additionally, revenues from post-origination services are recognized evenly over the term of the loans as the services are performed. As such, the amount of financing service fees charged under such arrangements may affect the amount of loan facilitation fees that we collect. Any material decrease in our financing service fees would have a substantial impact on our margin. In the event that the amount of financing service fees we charge for credit drawdowns we facilitated decrease significantly in the future and we are not able to reduce our cost of capital for funds from institutional funding partners or to adopt any cost control initiatives, our business, financial condition and results of operations will be harmed. To compete effectively, the financing service fees we charge could be affected by a variety of factors, including the creditworthiness and ability to repay of the borrowers, the competitive landscape of our industry, our access to capital and regulatory requirements. Our financing service fees may also be affected by a change over time in the mix of the types of products we offer and a change to our borrower engagement initiatives. Our competitors may also offer more attractive fees, which may require us to reduce our financing service fees to compete effectively. Certain consumer financing solutions offered by traditional financial institutions may provide lower fees than our financing service fees. Although we do not believe such consumer financing solutions currently compete with our products or target the same unserved or underserved consumers in China, such traditional financial institutions may decide to do so in the future, which may have a material adverse effect as to the financing service fees that we will be able to charge. Furthermore, as our borrowers establish their credit profile over time, they may qualify for and seek out other consumer financing solutions with lower fees, including those offered by traditional financial institutions offline, and we may need to adjust our financing service fees to retain such borrowers. In addition, our financing service fees may be affected by many macroeconomic factors beyond our control, such as inflation, recession, the state of the credit markets, changes in market interest rates, global economic disruptions, unemployment and fiscal and monetary policies.

Our financing service fees, to the extent they are fully or partially deemed as interest, may also be subject to the restrictions on interest rate as specified in applicable rules on private lending. Circular 141 provides that overall capital cost charged on a borrower, comprised of interests and fees, should be in compliance with the judicial interpretations by the Supreme People’s Court of the PRC regarding interest rates in private lending. According to the Private Lending Judicial Interpretations, if the annual interest rate of a private loan is higher than 36%, the excess will be void and will not be enforced by the courts. The annualized fee rates charged by us on a significant number of transactions facilitated were in excess of 36% historically. Among the number of transactions we facilitated in 2016, 59.5% of their annualized fee rates exceeded 36%. Had all such credit drawdowns reduced their annualized fee rates to 36%, our revenue would have been reduced by approximately RMB307 million, representing 21% of our total revenues in 2016.

In an effort to comply with potentially applicable laws and regulations, we adjusted the pricing of our credit products in April 2017 to ensure that the annualized fee rates charged on all credit drawdowns do not exceed 36%. See “The laws and regulations governing the online consumer finance industry in the PRC are still at a nascent stage and subject to further change and interpretation. If 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.” In addition, as some of our institutional funding partners are prohibited from charging fees at annualized rates in excess of 24%, we cooperate with various insurance and asset management companies to charge additional fees from the relevant borrowers so that the overall fee rates applicable to such borrowers would still be within the limit of 36% on an annualized basis. If such arrangements were found by the regulatory authorities to be in violation of the applicable laws and regulations, our business, results of operations and financial condition could be materially and adversely affected.

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Under the Second Revised Private Lending Judicial Interpretation issued by the Supreme People’s Court in December 2020, total annual percentage rates (inclusive of any default rate, default penalty and any other fee) for private lending exceeding four times that of China’s benchmark

one-year

loan prime rate, or LPR, as published on the 20th of each month will not be legally protected. Based on the LPR of 3.85% as published on April 20, 2021, such cap would be 15.4%. According to the Second Revised Private Lending Judicial Interpretation and Reply by Supreme People’s Court to Issues Concerning the Scope of Application of the New Judicial Interpretation on Private Lending, the interest rate cap is not applicable to the lending business of financial institutions and their branches that have been established with the approval of financial regulatory authorities. Rather, this new policy is generally interpreted as only being applicable to private lending, while our business almost entirely involves financial institutions. However, it is important to note that the Second Revised Private Lending Judicial Interpretation is newly promulgated, and the policy is subject to further clarifications by courts and regulatory authorities. If the same interest rate cap were applied to our business as required by relevant courts or regulatory authorities, our profitability may suffer a material adverse impact, and we could incur net losses.

In addition, the Circular 141 requires financial institutions to ensure that the loan facilitation operators they cooperate with do not collect interests or fees from borrowers. Although we no longer charge borrowers directly of any financing service fees, we do receive service fees from our institutional funding partners and third-party guarantee companies, which in turn charge fees from borrowers. We do not believe such practice is in violation of Circular 141. However, as the Circular 141 and other relevant regulations lack detailed guidance, the relevant authorities has broad discretion in the interpretation and implementation of such rules. We cannot rule out the possibility that the government authorities would still consider our business practices described above to be in violation of Circular 141. These regulations may be interpreted or enforced in ways that are different from our understanding and expectations. Moreover, the PRC government may seek to enhance the regulatory scrutiny of our industry and promulgate new laws and regulations in response to the growth of consumer finance. To the extent that any new laws and regulations or any interpretations of existing laws and regulations restrict our ability to continue and expand our current operations, cause any aspects of our current operations to become

non-compliant,

or impose material compliance costs on us, our business and results of operations may be materially and adversely affected.

We may be deemed to operate financing guarantee business by the PRC regulatory authorities.

The State Council promulgated the Regulations on the Administration of Financing Guarantee Companies, or the Financing Guarantee Rules, on August 2, 2017 which became effective on October 1, 2017. Pursuant to the Financing Guarantee Rules, “financing guarantee” refers to the activities in which guarantors provide guarantee to the guaranteed parties as to loans, bonds or other types of debt financing, and “financing guarantee companies” refer to companies legally established and operating financing guarantee business. According to the Financing Guarantee Rules, the establishment of financing guarantee companies shall be subject to the approval by the competent government department, and unless otherwise stipulated by the state, no entity may operate financing guarantee business without such approval. If any entity violates these regulations and operates financing guarantee business without approval, the entity may be subject to penalties including ban or suspension of business, fines of RMB500,000 to RMB1,000,000, confiscation of illegal gains if any, and if the violation constitutes a criminal offense, criminal liability shall be imposed in accordance with the law.

On October 9, 2019, the Supplementary Provisions on the Supervision and Administration of Financing Guarantee Companies, or Financing Guarantee Provisions, is jointly issued by the China Banking and Insurance Regulatory Commission, the National Development and Reform Commission and other seven central governmental departments. Although financing guarantee has always been a licensed activity, the Financing Guarantee Provisions further tightens the supervision of such business. Specifically, it provides that institutions providing customer referral, credit rating or other services for loan lenders are barred from offering financing guarantee services in any manner unless after obtaining necessary approvals.

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Under our loan bank business, we have entered into cooperative arrangements with certain banks in which they are identified as the lender under the agreements with borrowers and the borrowers are required to repay the principal and financing service fees directly to them. However, when borrowers under arrangements with banks fail to repay, we are obligated to repay the relevant bank the full overdue amount. In addition, pursuant to our agreement with a consumer finance company, we will make cash payments to the consumer finance company based on the overdue amount of loans that we have facilitated in which the consumer finance company originates. For 2020, such transactions, which are

off-balance

sheet transactions, represented 0.5% of the total amount of transactions under our loan book business. We have also entered into arrangements with various institutional funding partners to fund

on-balance

sheet transactions, and we are also obligated to compensate such institutional funding partners for borrower default. For 2020, such

on-balance

sheet transactions represented 3.3% of the total amount of transactions under our loan book business. As such, transactions funded by institutional funding partners represented 3.8% of the total amount of transactions under our loan book business for year 2020.

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 current arrangements with institutional funding partners. However, institutions providing customer referral, credit rating or other services for loan lenders are barred from offering financing guarantee services in any manner unless after obtaining necessary approvals in accordance with Financing Guarantee Provisions. Furthermore, pursuant to Circular 141, a bank participating in loan facilitation transactions may not accept credit enhancement service from a third party which has not obtained any license or approval to provide guarantees, including credit enhancement service in the form of a commitment to assume default risks. One of our wholly-owned subsidiaries, Xiamen Xincheng, obtained a license to provide financing guarantee service in March 2019. We provide guarantees for certain credit drawdowns through Xiamen Xincheng. Under the Financing Guarantee Rules, the outstanding guarantee liabilities and risk assurance liabilities of a financing guarantee company shall not exceed ten times of its net assets. Nonetheless, we may also provide guarantees through alternative arrangements, such as cooperation with third parties with financing guarantee licenses. If such alternative arrangements are deemed to be in violation of Circular 141, we could be subject to penalties and/or be required to change our business model. As a result, our business, financial condition, results of operations and prospects could be materially and adversely affected.

We may not be able to successfully operate our open platform for transaction services business.

In the second half of 2018, we launched an open platform for transaction services business. The open platform helps financial service providers grow, while simultaneously bringing value to consumers. The transaction services business also allows us to further monetize our user base and mitigate our credit risk exposure. We perform credit assessment on users applying for credit on our platform, following which we primarily refer users that meet our credit requirements to licensed institutional funding partners that participate on the platform. We receive commissions from the institutional funding partners for such referrals. According to the contracts between us and our institutional funding partners, the calculation of the commission will be decided by the monthly paid interest. As such, our monthly paid interest will decrease when the users repay multiple periods or pay off in advance, which will in turn result in decrease in our commission. The financial service providers perform independent credit assessment for the transactions facilitated under our transaction services business, and we do not bear credit risk for the transactions. Although we do not bear principal credit risk, our commission depends on the monthly paid interest and is affected by actual repayment and delinquency behavior of users.

The success of the open platform depends on our ability to attract more users and financial service providers. However, both users and financial service providers may become dissatisfied with our platform and users may consequently be reluctant to continue to use our platform and utilize our credit products and financial service providers may be hesitant to continue to partner with us. As a result, our business, reputation, results of operations and financial condition will be materially and adversely affected.

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Furthermore, we have limited control over the products of financial service providers. The regulatory framework for online consumer finance market in China is both complex and constantly evolving. If any product we recommended on our platform is found to violate the relevant laws and regulations, we may suffer significant reputational damage, and our business, results of operations and financial condition would be materially and adversely affected.

In addition, our institutional funding partners may delay their payment of commissions to us and we may need to initiate litigations against such institutional funding partners in order to receive the relevant fees we are entitled to receive. Furthermore, we may charge our institutional funding partners with lower commission rates in the future. Any of the above may materially and adversely affect our results of operations and financial condition.

We intend to continue to explore new business opportunities, and such new businesses may not deliver the expected benefits.

To grow our business, we intend to continue to explore new business opportunities in addition to our core consumer finance business. For example, we launched an open platform for transaction services business in the second half of 2018 to leverage our user base. We also launched Wanlimu Kids Clubs, an early childhood education business, in January 2021. Prior to launching Wanlimu Kids Clubs, we had no experience or track record of operating an early childhood education business. If we experience initial success with the new business, we may decide to invest significant amounts of capital to grow the business. We cannot assure you that our new business initiatives will be successful. For example, we are in the process of winding down our budget auto financing business and the Wanlimu

e-commerce

platform. We may make significant capital expenditures to develop new businesses, and our management’s attention may be diverted. We may also incur significant cost to comply with the laws and regulations that apply to such new businesses. Any failure of our efforts to pursue new business opportunities could have a material adverse effect on our business, prospects, financial condition and results of operations.

You should consider our business and prospects in light of the risks and challenges we face as a new entrant into the early childhood education industry, including, among other things, with respect to our ability to:

•

enhance the reputation and recognition of the “Wanlimu Kids Clubs” brand;

•

increase student enrollment;

•

obtain all necessary approvals, licenses and permits or to make all necessary registrations and filings for our educational services in China;

•

offer educational programs that are appealing to children and their parents;

•

properly price our educational programs; and

•

operate our education centers in a safe and cost-efficient manner.

If we fail to address any or all of these risks and challenges, our business may be materially and adversely affected.

Our early childhood education business relies on our ability to recruit, train and retain dedicated and qualified teachers and management personnel.

Our teachers and management personnel are critical to the quality of our services and our reputation. We seek to recruit, train and retain qualified and dedicated teachers with necessary licenses and permits required by law, as well as principals who manage our education centers. There is, however, a limited pool of teachers with the attributes we require. In addition, any foreign teachers we hire must hold valid working permits, which may not be obtained in a timely manner, or at all. Despite our various initiatives, investments to secure qualified

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personnel and competitive compensation we offer, we may still not be able to recruit, train and retain sufficient qualified teachers and principals to keep pace with our growth while maintaining consistent teaching quality in the different markets we serve. A shortage of qualified teachers or a deterioration in the quality of our teachers’ services, whether actual or perceived, or a significant increase in the average compensation of teachers, would have a material adverse effect on our business, financial condition and results of operations.

In addition, our teachers are the ones who interact directly with our students and their families. Despite our constant emphasis on service quality, our continuous training of our teachers as well as our close supervision on a daily basis, we cannot assure that our teachers will completely follow our service manual and standards all the time. Any misbehavior or unsatisfactory performance of our teachers will hurt our reputation and potentially our operation results and financial performance. Any improper behavior of our teachers, whether actual or perceived, would result in negative publicity and adversely affect our business and brand.

Injuries, accidents, food safety incidents or other harm suffered by students or employees of our education centers that we operate may subject us to liabilities and damage our reputation.

Operating early childhood education centers involves inherent risks associated with the safety and wellbeing of our students and other people visiting or working at our education centers. We could face negligence claims for inadequate maintenance of our education centers or lack of supervision of our teachers and other employees. In addition, any defects playground equipment in our education centers or educational tools we use in classrooms may cause harm to students. We therefore could be liable for accidents, injuries, food safety incidents or other harm to students or other people at our education centers. Even if we are found not legally liable for such accidents or injuries, disputes on liabilities or general complaints by parents regarding food quality, students wellbeing or, from time to time, air quality and renovation fumes within our education centers may create unfavorable publicity and our reputation may be damaged on such occasions. Additionally, although we maintain certain liability insurance, the insurance coverage may not be adequate to fully protect us from claims and liabilities, and reoccurrence of similar accidents may make it difficult for us to obtain liability insurance at reasonable prices in the future. Defending such claims may also cause us to incur substantial expenses and divert the time and attention of our management.

As we are winding down the Wanlimu

e-commerce

platform, we may incur significant inventory write-downs or write-offs, and our results of operations, financial condition and liquidity may be materially and adversely affected.

We launched the Wanlimu

e-commerce

platform, which offers online luxury fashion products, in March 2020. We are in the process of winding down this business to focus on our other service offerings. We operated the Wanlimu e-commerce platform primarily on the basis of

just-in-time

ordering, whereby we purchased the relevant products from suppliers upon receiving customer orders. As of December 31, 2020, inventory relating to the platform amounted to RMB62.2 million (US$9.5 million). As we are winding down the Wanlimu

e-commerce

platform, we may be subject to a heightened risk of inventory obsolescence, a decline in inventory values, and significant inventory write-downs or write-offs. In addition, we may be required to lower sale prices in order to reduce inventory level, which may lead to lower gross margins. Any of the above may materially and adversely affect our results of operations and financial condition.

We have limited experience managing our allowance for loan principal and financing service fee receivables. In addition, our allowance for loan principal and financing service fee receivables is determined based on both objective and subjective factors and may not be adequate to absorb loan losses if we fail to accurately forecast the expected loss.

We face the risk that borrowers fail to repay their principals and financing service fees in full. Estimated credit loss relating to

on-balance

sheet transactions is recorded as allowance for loan principal and financing service fee receivables. If we experience higher delinquency rates, such allowance would also increase. See

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“Item 5. Operating and Financial Review and Prospects — B. Liquidity and Capital Resources.” We have established an evaluation process designed to determine the adequacy of our allowance for loan principal and financing service fee receivables. While this evaluation process uses historical and other objective information, it is also dependent on our subjective assessment based upon our experience and judgment. In addition, since January 1, 2020 and our adoption of ASC 326, our evaluation process also take into account certain

forward-looking

factors that reflect current conditions and reasonable and supportable forecasts of future economic conditions. Actual losses are difficult to forecast, especially if such losses stem from factors beyond our historical experience. We have limited experience managing our allowance for loan principal and financing service fee receivables, especially given the fact that we only commenced our business in early 2014. Furthermore, we shifted our focus of target borrower base from college students to young consumers in general starting from November 2015, and we may not be able to accurately forecast delinquencies of our current target borrower base. Given these challenges, it is possible that we will underestimate or overestimate the allowance for loan principal and financing service fee receivables. In addition, we are not subject to periodic review by bank regulatory agencies of our allowance for loan principal and financing service fee receivables. As a result, if we underestimate the allowance for loan principal and financing service fee receivables, there can be no assurance that our allowance for loan principal and financing service fee receivables will be sufficient to absorb losses or prevent a material adverse effect on our business, financial condition and results of operations. Conversely, if we overestimate the allowance for loan principal and financing service fee receivables, we will record higher provision for loan principal and financing service fee receivables, which will adversely affect our results of operations.

We face intense 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 consumer finance service providers, including online consumer finance service providers, such as JD Finance, 360 Finance, WeBank, Huabei and Jiebei, as well as traditional financial institutions, such as banks and consumer finance companies. Our competitors may operate different business models, have different cost structures or participate selectively in different market segments. They may ultimately prove more successful or more adaptable to consumer demand and new regulatory, technological and other developments. Some of our current and potential competitors have significantly more financial, technical, marketing and other resources than we do and may be able to devote greater resources to the development, promotion, sale and support of their offerings. Our competitors may also have longer operating history, more extensive borrower bases or funding sources, greater brand recognition and brand loyalty and broader relationships with funding partners or merchandise suppliers than us. Additionally, a current or potential competitor may acquire, or form a strategic alliance with, one or more of our competitors. Our competitors may be better at developing new products, offering more attractive fees, responding more quickly to new technologies and undertaking more extensive and effective marketing campaigns. Furthermore, in light of the low barriers to entry in the online consumer finance industry, more players may enter this market and increase the level of competition. We anticipate that more established Internet, technology and financial services companies that possess large, existing user bases, substantial financial resources and established distribution channels may also enter the market in the future. In response to competition and in order to grow or maintain the amount of transactions facilitated to borrowers, we may have to offer lower amount of financing 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 credit products could stagnate or substantially decline, which could harm our business and results of operations.

With respect to institutional funding partners, we compete with other investment products and asset classes, such as equities, bonds, investment trust products, insurance products, bank savings accounts and real estate. If a substantial number of our institutional funding partners choose other investment alternatives, our business, financial condition and results of operations could be materially and adversely affected.

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We may be required to obtain additional value-added telecommunication business licenses.

PRC regulations impose sanctions for engaging in Internet information services of a commercial nature without having obtained an Internet content provider license, or the ICP license, and sanctions for engaging in the operation of online data processing and transaction processing without having obtained a VATS license for online data processing and transaction processing, or ODPTP license (ICP and ODPTP are both

sub-sets

of value-added telecommunication business). These sanctions include corrective orders and warnings from the PRC communication administration authority, fines and confiscation of illegal gains and, in the case of significant infringements, the websites and mobile apps may be ordered to cease operation. Nevertheless, the interpretation of such regulations and PRC regulatory authorities’ enforcement of such regulations in the context of online consumer finance industry remains uncertain, it is unclear whether online consumer finance service provider like us are required to obtain ICP license or ODPTP license, or any other kind of value-added telecommunication business licenses. As of December 31, 2020, Qufenqi Beijing, Xiamen Qudian Culture and Technology Co., Ltd., or Xiamen Qudian Culture and Technology, Xiamen Qudian Technology Co., Ltd., or Xiamen Qudian and Xiamen Qu Plus Plus Technology Development Co., Ltd., or Xiamen Qu Plus Plus, Xiamen Wanlimu Technology Co., Ltd., had obtained ICP licenses. We have not obtained any ODPTP license to date. Given the evolving regulatory environment of the consumer finance industry and value-added telecommunication business, we cannot rule out the possibility that the PRC communication administration authority or other government authorities will explicitly require any of our consolidated VIEs or subsidiaries of our consolidated VIEs to obtain ICP licenses, ODPTP licenses or other value-added telecommunication business licenses, or issue new regulatory requirements to institute a new licensing regime for our industry. If such value-added telecommunication business licenses are clearly required in the future, or a new license regime is introduced or new regulatory rules are promulgated, we cannot assure you that 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.

PRC regulation of loans to, and direct investment in, PRC entities by offshore holding companies and governmental control of currency conversion may restrict or prevent us from using the proceeds of our initial public offering to make loans to our PRC subsidiaries and our consolidated VIEs, or to make additional capital contributions to our PRC subsidiaries.

In utilizing the proceeds of our initial public offering, we, as an offshore holding company, are permitted under PRC laws and regulations to provide funding to our PRC subsidiaries, which are treated as foreign-invested enterprises under PRC laws, through loans or capital contributions. However, loans by us to our PRC subsidiaries to finance their activities cannot exceed statutory limits and must be registered with the local counterpart of SAFE and capital contributions to our PRC subsidiaries are subject to the requirement of making necessary filings in the Foreign Investment Comprehensive Management Information System, and registration with other governmental authorities in China.

SAFE promulgated the Notice of the State Administration of Foreign Exchange on Reforming the Administration of Foreign Exchange Settlement of Capital of Foreign-invested Enterprises, or Circular 19, effective on June 1, 2015, in replacement of the Circular on the Relevant Operating Issues Concerning the Improvement of the Administration of the Payment and Settlement of Foreign Currency Capital of Foreign-Invested Enterprises, or SAFE Circular 142, the Notice from the State Administration of Foreign Exchange on Relevant Issues Concerning Strengthening the Administration of Foreign Exchange Businesses, or Circular 59, and the Circular on Further Clarification and Regulation of the Issues Concerning the Administration of Certain Capital Account Foreign Exchange Businesses, or Circular 45. According to Circular 19, the flow and use of the RMB capital converted from foreign currency-denominated registered capital of a foreign-invested company is regulated such that RMB capital may not be used for the issuance of RMB entrusted loans, the repayment of inter-enterprise loans or the repayment of banks loans that have been transferred to a third party. Although Circular 19 allows RMB capital converted from foreign currency-denominated registered capital of a foreign-invested enterprise to be used for equity investments within the PRC, it also reiterates the principle that RMB

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converted from the foreign currency-denominated capital of a foreign-invested company may not be directly or indirectly used for purposes beyond its business scope. Thus, it is unclear whether SAFE will permit such capital to be used for equity investments in the PRC in actual practice. SAFE promulgated the Notice of the State Administration of Foreign Exchange on Reforming and Standardizing the Foreign Exchange Settlement Management Policy of Capital Account, or Circular 16, effective on June 9, 2016, which reiterates some of the rules set forth in Circular 19, but changes the prohibition against using RMB capital converted from foreign currency-denominated registered capital of a foreign-invested company to issue RMB entrusted loans to a prohibition against using such capital to issue loans to

non-associated

enterprises. Violations of SAFE Circular 19 and Circular 16 could result in administrative penalties. Circular 19 and Circular 16 may significantly limit our ability to transfer any foreign currency we hold, including the net proceeds from our initial public offering, to our PRC subsidiaries, which may adversely affect our liquidity and our ability to fund and expand our business in the PRC.

Due to the restrictions imposed on loans in foreign currencies extended to any PRC domestic companies, we are not likely to make such loans to any of 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.

In light of the various requirements imposed by PRC regulations on loans to, and direct investment in, PRC entities by offshore holding companies, we cannot assure you that we will be able to complete the necessary government registrations or obtain the necessary government approvals on a timely basis, if at all, with respect to future loans to our PRC subsidiaries or any consolidated variable interest entity or future capital contributions by us to our PRC subsidiaries. As a result, uncertainties exist as to our ability to provide prompt financial support to our PRC subsidiaries or 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.

We may need additional capital to pursue business objectives and respond to business opportunities, challenges or unforeseen circumstances, and financing may not be available on terms acceptable to us, or at all.

Since inception, we have issued equity securities to support the growth of our business. In addition, we issued US$345 million aggregate principal amount of convertible senior notes in July 2019. As we intend to continue to make investments to support the growth of our business, we may require additional capital to pursue our business objectives and respond to business opportunities, 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 diversify our borrower engagement channels by collaborating with other leading Internet companies, enhancing our operating infrastructure and acquiring complementary businesses and technologies. 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 that are acceptable to us, or at all. Repayment of the debts may divert a substantial portion of cash flow to pay principal and interest on such debt, which would reduce the funds available for expenses, capital expenditures, acquisitions and other general corporate purposes; and we may suffer default and foreclosure on our assets if our operating cash flow is insufficient to repay debt obligations, which could in turn result in acceleration of obligations to repay the indebtedness and limit our sources of financing.

Volatility in the credit markets may also have an adverse effect on our ability to obtain debt financing. If we raise additional funds through further issuances of equity or convertible debt securities, our existing stockholders could suffer significant dilution, and any new equity securities we issue could have rights, preferences and privileges superior to those of holders of our Class A ordinary shares. If we are unable to obtain adequate financing or financing on terms satisfactory to us when we require it, our ability to continue to pursue our business

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objectives and to respond to business opportunities, challenges or unforeseen circumstances could be significantly limited, and our business, operating results, financial condition and prospects could be adversely affected.

Servicing our debt may require a significant amount of cash, and we may not have sufficient cash flow from our business to pay our debt.

In July 2019, we issued US$345 million aggregate principal amount of convertible senior notes due 2026. The convertible notes bear interest at a rate of 1.00% per year, payable on July 1 and January 1 of each year, beginning on January 1, 2020. The convertible notes will mature on July 1, 2026, unless earlier redeemed, repurchased or converted in accordance with their terms. As of December 31, 2020, we have repurchased US$217 million aggregate principal amount of convertible notes, and the outstanding principal amount was US$128 million.

Our ability to make scheduled payments of the principal of, to pay interest on or to refinance our indebtedness, including the notes, depends on our future performance, which is subject to economic, financial, competitive and other factors beyond our control. Our business may not continue to generate cash flow from operations in the future sufficient to service our debt and make necessary capital expenditures. If we are unable to generate such cash flow, we may be required to adopt one or more alternatives, such as selling assets, restructuring debt or obtaining additional equity capital on terms that may be onerous or highly dilutive. Our ability to refinance our indebtedness will depend on the capital markets and our financial condition at such time. We may not be able to engage in any of these activities or engage in these activities on desirable terms, which could result in a default on our debt obligations.

Any harm to our brands or reputation or any damage to the reputation of the online consumer finance industry may materially and adversely affect our business and results of operations.

Enhancing the recognition and reputation of our brands is critical to our business and competitiveness, since this initiative affects our ability to attract and better serve borrowers and institutional funding partners as well as merchandise suppliers. Factors that are vital to this objective include our ability to:

•

maintain the effectiveness, quality and reliability of our systems;

•

provide borrowers with a superior experience;

•

engage a large number of quality borrowers with low delinquency rate;

•

enhance and improve our credit assessment model and risk management system;

•

enhance the quality of our funding sources;

•

effectively manage and resolve borrower complaints; and

•

effectively protect personal information and privacy of borrowers.

Any malicious or otherwise negative allegation made by the media or other parties about the foregoing or other aspects of our company, including our management, business, compliance with law, financial condition, prospects or our historical business operations on campuses, such as the ongoing putative shareholder class action lawsuits that we are involved in, whether with merit or not, could severely hurt our reputation and harm 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 institutional funding partners, financial service providers that participate on our open platform or other business partners, including negative publicity about any failure by them to adequately protect the information of their users, to comply with applicable laws and regulations or to otherwise meet required quality and service standards, could also harm our reputation or result in negative perception of the products we offer. Furthermore, any negative development in the online consumer finance industry, such as bankruptcies or failures of other consumer finance service providers, and especially a large number of such bankruptcies or failures, or negative perception of the industry as a whole, such as that arises from any failure of other consumer finance platforms to detect or prevent money laundering or other illegal activities, even if factually incorrect or based on isolated incidents, could compromise

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our image, undermine the trust and credibility we have established and impose a negative impact on our ability to attract new borrowers and to collaborate with and retain institutional funding partners. Negative developments in our industry, such as widespread borrower default, fraudulent behavior and/or the closure of other online consumer finance service providers, may also lead to tightened regulatory scrutiny of the sector and limit the scope of permissible business activities that may be conducted. If any of the foregoing takes place, our business and results of operations could be materially and adversely affected.

We incurred net losses in the past and may incur net losses in the future.

We had net losses of RMB40.8 million and RMB233.2 million in the period from April 9 to December 31, 2014 and in 2015, respectively. We had accumulated deficits of RMB5,984.8 million and RMB6,633.7 million as of December 31, 2014 and December 31, 2015, respectively. Although we had net income of RMB2,491.3 million in 2018, RMB3,264.3 million in 2019 and RMB958.8 million (US$146.9 million) in 2020, we cannot assure you that we will be able to continue to generate net income in the future. In particular, we have faced recent challenges due to regulatory developments in the online consumer finance industry and the outbreak of

COVID-19

coronavirus, which may materially and adversely affect our business and results of operations. 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.”

In addition, we anticipate that our cost of revenues and operating expenses will increase in the foreseeable future as we continue to grow our business, attract borrowers, institutional funding partners and merchandise suppliers and further enhance and develop our credit products, enhance our risk management capabilities and increase brand recognition. As we develop our Wanlimu Kids Clubs business, we expect to incur significant unfront investment and sales and marketing expenses to acquire customers. These efforts may prove more costly than we currently anticipate, and we may not succeed in increasing our revenue sufficiently to offset these higher expenses. There are other factors that could negatively affect our financial condition. For example, the delinquency rates of the transactions facilitated may be higher than expected, which may lead to lower than expected revenue, additional expenses and higher provision for loan principal and financing service fee receivables. Furthermore, we have adopted share incentive plans in the past and may adopt new share incentive plans in the future, which have caused, and will result in, significant share-based compensation expenses to us. We generate a material portion of our total revenues from service fees we receive from our loan book business. Any material decrease in our service fees would have a substantial impact on our margin. Furthermore, as a result of the outbreak of

COVID-19

coronavirus, our investment in Wanlimu Kids Clubs business and their potential impact on our business and results of operations, we may incur net losses in 2021. As a result of the foregoing and other factors, our net income margins may decline or we may incur additional net losses in the future and may not be able to maintain profitability on a quarterly or annual basis.

If our credit products do not achieve sufficient market acceptance or if we are unable to manage the growth of our credit products, our financial condition, results of operations and competitive position will be materially and adversely affected.

We currently offer cash credit products and merchandise credit products under our loan book business. Historically, we had explored and offered other types of credit products to users in China which were discontinued due to limited demand in the market. For example, we launched our budget auto financing business in November 2017, and we started to wind down this business in the second quarter of 2019 to focus on our core consumer finance business While we intend to broaden the scope of products and services that we offer, there can be no assurance that we will be successful. New credit products must achieve high levels of market acceptance in order for us to balance the default risks associated with such products and to recoup our investment 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 credit products at appropriate pricing and amount that meet this demand in a timely fashion;

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•

borrowers may not like, find useful or agree with any changes made to our platform;

•

our existing credit products may cease to be popular among current borrowers or prove to be less attractive to prospective borrowers;

•

our failure to offer attractive merchandise on the Qudian marketplace that can be purchased by borrowers through merchandise credit products at competitive amount of financing service fees to meet consumer needs and preferences;

•

our failure to assess risk associated with new products and to properly price new and existing products;

•

negative publicity about our credit products, our platform or our mobile apps’ performance or effectiveness;

•

views taken by regulatory authorities that the launch of new credit products and changes to our existing credit products do not comply with PRC laws, rules or regulations applicable to us; and

•

the introduction or anticipated introduction of competing offerings by competitors.

If our existing and new products and services do not achieve adequate acceptance in the market, our competitive position, results of operations and financial condition could be harmed.

Furthermore, the introduction of new credit products or the increased utilization of certain credit products over other products may result in material adverse change to our results of operations. For example, borrowers may increase their preference and utilization of our merchandise credit products, which are typically larger in amount with longer terms, over our cash credit products. As small credit products enjoy favorable risk characteristics compared to larger credit products, an increase in the utilization of merchandise credit products over cash credit products by borrowers may result in an increase in delinquency rate for the transactions facilitated by us. Credit products with longer durations may also lead to reduced frequency of transactions by borrowers, which may have a material adverse effect as to the volume and comprehensiveness of the data we collect and analyze and our risk management capabilities.

As we wind down our Dabai Auto business, revenues generated from such business will decrease, and we may record write-downs in relation to the process of winding down such business.

We have started to wind down our budget auto financing business in the second quarter of 2019 to focus on our core consumer finance business. As a result, revenues generated from our Dabai Auto business will further decrease. Sales income in relation to Dabai Auto business was RMB2,174.8 million, RMB411.4 million and RMB122.8 million (US$18.8 million) in 2018, 2019 and 2020, respectively. As of December 31, 2020, we carried finance lease receivable of RMB208.4 million (US$31.9 million). The decrease in revenues generated from our Dabai Auto business and any further write-down that may be recorded during the process of winding down such business may adversely affect our business, financial condition and results of operations.

Credit analysis and other information that we receive from other parties concerning a prospective borrower may be inaccurate or may not accurately reflect such prospective borrower’s creditworthiness, which may compromise the accuracy of our credit assessment.

For the purpose of credit assessment and pricing, we obtain prospective borrower’s credit analysis and other information from them as well as, with their authorization, from external parties, and assess applicants’ creditworthiness based on such information. Such external party’s credit assessment system may still be at a development stage and therefore have limitations in measuring borrowers’ creditworthiness. We have experienced instances where credit analysis information provided by an external party was not fully predictive of actual delinquency rates. Therefore, we do not rely on inputs from one or only a few external parties. Instead, we use inputs from many external parties for our credit assessment model to enhance our risk management capabilities. As the credit assessment methodologies of external parties are not disclosed to us, we may not have

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adequate knowledge of the assumptions behind their credit analysis, which could cause our model to produce inaccurate results. In addition, if there is an adverse change in the economic condition, credit analysis information provided by external parties may not be a reliable reference to assess an applicant’s creditworthiness, which may compromise our risk management capabilities. As a result, our assessment of a borrower’s credit profile may not reflect that particular borrower’s actual creditworthiness because assessment may be based on outdated, incomplete or inaccurate information. In addition, the completeness and reliability of information on borrower’s credit risk available in the PRC is relatively limited. The PBOC has developed and put into use a credit reference center which remains relatively underdeveloped. The information available to us and external parties from whom we obtain information for our credit assessment model is limited. We also currently do not have a comprehensive way to determine whether prospective borrowers have obtained loans through other consumer finance platforms, creating the risk whereby a borrower may utilize our credit products in order to pay off loans from other sources. There is also a risk that, following our obtaining a borrower’s information, the borrower may have:

•

become delinquent in the payment of an outstanding obligation;

•

defaulted on a

pre-existing

debt obligation;

•

taken on additional debt; or

•

sustained other adverse financial events.

Such inaccurate or incomplete borrower credit analysis and other information could compromise the accuracy of our credit assessment and adversely affect the effectiveness of our control over our delinquency rates. We may not be able to recoup funds underlying transactions made in connection with inaccurate or incomplete borrower credit information, in which case our results of operations will be harmed.

Erroneous reports with respect to certain of our users have been sent to the credit reference center of the PBOC, which may result in reputational damage to us.

Some of our institutional funding partners report delinquencies of our users to the credit reference center of the PBOC, which adversely affect such users’ abilities to obtain loans in the future. Due to errors in our interfaces with certain institutional funding partners, we failed to inform such institutional funding partners about repayments made by certain of our users. As a result, such institutional funding partners believed that the users were delinquent on loan repayments and therefore made erroneous reports to the credit reference center of the PBOC. Neither we nor the institutional funding partners are subject to legal liabilities if the institutional funding partners timely inform the PBOC about the errors after receiving complaints from the borrowers.

As isolated incidents, the erroneous reports have not resulted in any material adverse effect on our business. To avoid future errors, we have started to request our institutional funding partners to compare their records of delinquent borrowers with ours. However, there can be no assurance that our institutional funding partners will agree with the measure we proposed or that such measure will be effective in preventing errors. If additional erroneous reports were made to the PBOC in the future, we may suffer reputational damage due to the negative publicity, which could have a material adverse effect on our business, results of operations and financial condition.

We are subject to risks associated with other parties with which we collaborate. 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 other parties in providing our credit products to borrowers. Such other parties include our institutional funding partners, third-party financial service providers that participate on our open platform, our cloud computing service provider and merchandise suppliers. These parties may not be able sufficiently or timely fund credit that we facilitate or provide satisfactory merchandise and services to us and/or

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borrowers on commercially acceptable terms or at all. Any failure by these parties to continue with good business operations, comply with applicable laws and regulations or any negative publicity on these parties could damage our reputation, expose 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, engage prospective borrowers 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, even if these activities are not related to, attributable to or caused by us.

Fraudulent activity could negatively impact our results of operations, brand and reputation and cause the use of our credit products and services to decrease.

We are subject to the risk of fraudulent activity associated with borrowers and parties handling user information. Our resources, technologies and fraud detection tools may be insufficient to accurately detect and prevent fraud. For example, we currently do not have a comprehensive way to determine whether prospective borrowers have obtained loans through other consumer finance platforms, creating the risk whereby a borrower may borrow money through us in order to pay off loans from other sources. Even if we identify a fraudulent borrower and reject his or her credit application, such borrower may

re-apply

by using fraudulent information. We may fail to identify such behavior, despite our measures to verify personal identification information provided by borrowers. Furthermore, we may not be able to recoup funds underlying transactions made in connection with fraudulent activities. A significant increase in fraudulent activities could negatively impact our brands and reputation, discourage institutional funding partners from collaborating with us, reduce the amount of transactions facilitated to borrowers and lead us to take additional steps to reduce fraud risk, which could increase our costs. High profile fraudulent activity could even lead to regulatory intervention, and may divert our management’s 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 in the past, we cannot rule out the possibility that fraudulent activities may materially and adversely affect our business, financial condition and results of operations in the future.

We rely on institutional funding partners to fund credit drawdowns to borrowers, which may constitute provision of intermediary service, and our agreements with these institutional funding partners and borrowers may be deemed as intermediation contracts under the PRC Civil Code.

Under the PRC Civil Code, if an intermediary conceals any material fact intentionally or provides false information in connection with the conclusion of the proposed contract, which results in harm to the client’s interests, the intermediary may not claim for service fees and is liable for the damages caused. See “Item 4. Information on the Company — B. Business Overview — Regulations — Regulations related to Loans and Intermediation.” Therefore, if we fail to provide material information to institutional funding partners, or if we fail to identify false information received from borrowers or others and in turn provide such information to institutional funding partners, and in either case if we are also found to be at fault, due to failure or deemed failure to exercise proper care, such as to conduct adequate information verification or supervision of our employees, or to accurately detect and prevent fraud due to ineffectiveness of our fraud detection tools, we could be held liable for damages caused to institutional funding partners as an intermediary pursuant to the PRC Civil Code. In addition, if we fail to complete our obligations under the agreements with institutional funding partners and borrowers, we could also be held liable for damages caused to borrowers or institutional funding partners pursuant to the PRC Civil Code. On the other hand, we do not assume any liability solely on the basis of failure to correctly assign a credit limit to a particular borrower in the process of facilitating transactions, as long as we do not conceal any material fact intentionally or provide false information, and are not found to be at fault otherwise. However, due to the lack of detailed regulations and guidance in the area of online consumer finance platforms and the possibility that the PRC government authority may promulgate new laws and regulations

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regulating online consumer finance platforms in the future, there are substantial uncertainties regarding the interpretation and application of current or future PRC laws and regulations for the online consumer finance industry, and there can be no assurance that the PRC government authority will ultimately take a view that is consistent with ours.

Fluctuations in interest rates could negatively affect the amount of transactions facilitated by us and cost of capital for funds provided to borrowers.

All credit facilitated by us have fixed financing service fees. If prevailing market interest rates rise, our cost of capital for funds will increase, which may force us to increase the financing service fees we charge for

on-balance

sheet transactions. If our borrowers decide not to utilize our credit products because of such an increase in financing service fees, our ability to retain existing borrowers, attract or engage prospective borrowers as well as our competitive position may be severely limited. We cannot assure you that we will be able to effectively manage such interest risk at all times or pass on any increase in interest rate to our borrowers. If we are unable to effectively manage such an increase, our business, profitability, results of operations and financial condition could be materially and adversely affected. If prevailing market interest rates decrease and we fail to adjust the amount of financing service fees we charge for

on-balance

sheet transactions accordingly, prospective borrowers may take advantage of the lower funding cost offered by other parties. As a result, any fluctuation in the interest rate environment may discourage borrowers from making credit applications from us or utilize their approved credit, which may adversely affect our business.

If we are unable to provide a high quality borrower experience, our business and reputation may be materially and adversely affected.

The success of our business largely depends on our ability to provide high quality borrower experience, which in turn depends on a variety of factors. These factors include our ability to continue to offer credit products at competitive amount of financing service fees and adequate credit limits, reliable and user-friendly website interface and mobile apps for borrowers to browse, apply for credit, and purchase merchandise, and further improve our online credit approval process, source merchandise sold on the Qudian marketplace to respond to borrower’s demands and preferences, and maintain collection practices that are in strict compliance with applicable laws. If borrowers are not satisfied with our credit products, the merchandise sold on the Qudian marketplace or our services, or our system is severely interrupted or otherwise fail to meet the borrowers’ requests, our reputation and borrower loyalty could be adversely affected.

Our quarterly results may fluctuate significantly and may not fully reflect the underlying performance of our business.

Our quarterly results of operations, including the levels of our total revenues, cost of revenues and operating expenses, net income/(loss) and other key metrics, may vary significantly in the future due to a variety of factors, some of which are outside of our control, and

period-to-period

comparisons of our operating results may not be meaningful, especially given our limited operating history. Accordingly, the results for any one quarter are not necessarily an indication of future performance. Fluctuations in quarterly results may adversely affect the price of our ADSs. Factors that may cause fluctuations in our quarterly financial results include:

•

our ability to attract new borrowers and maintain relationships with existing borrowers;

•

the amount of transactions;

•

the mix of products we offer;

•

delinquency rates of transactions we facilitate;

•

the amount and timing of cost of revenues and operating expenses related to acquiring borrowers and the maintenance and expansion of our business, operations and infrastructure;

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•

our ability to establish relationship with additional institutional funding partners and maintain relationships with existing institutional funding partners;

•

our ability to secure funding for credit we facilitate on reasonable terms;

•

our emphasis on borrower experience instead of near-term growth;

•

the timing of expenses related to the development or acquisition of technologies or businesses;

•

network outages or security breaches;