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ITEM 4. | INFORMATION ON THE COMPANY |
| History and Development of the Company |
We commenced our online consumer finance platform business in June 2007 through Shanghai Daifeng. In January 2011, we relocated to Zhangjiang Hi-Tech Park in Pudong, Shanghai and starting then, our business operations gradually migrated from Shanghai Daifeng to another operating entity located in Zhangjiang Hi-Tech Park, Shanghai Xiazhong Information Technology Co., Ltd., which later changed its name to Shanghai PPDai Financial Information Service Co., Ltd. During the period between June and August 2012, we formed our offshore corporate structure to facilitate offshore financing. In June 2012, we incorporated PPDAI Group Inc. under the laws of the Cayman Islands as our holding company and incorporated PPDAI (HK) LIMITED as its wholly-owned subsidiary, which was renamed as FinVolution (HK) Limited, or FinVolution HK, in November 2019. In August 2012, Beijing Prosper Investment Consulting Co., Ltd., or Beijing Prosper, was incorporated as a wholly-owned PRC subsidiary of FinVolution HK, through which we obtained control over Shanghai PPDai and Beijing Paipairongxin Investment Consulting Co., Ltd., or Beijing Paipairongxin, a company incorporated in June 2012, based on two separate sets of contractual arrangements, including the equity pledge agreements, the business operation agreements, the power of attorneys, the call option agreements, and the exclusive technology consulting and service agreements. In July 2014, following a restructuring, Shanghai PPDai became a wholly-owned subsidiary of Beijing Paipairongxin. We then subsequently terminated our contractual arrangements with Shanghai PPDai and its shareholders, and entered into an amended and restated exclusive technology consulting and service agreement with Shanghai PPDai and Beijing Paipairongxin. In August 2015, we established Wuxi Boxi Information Technology Co., Ltd. (formerly known as Wuxi PPDai Financial Information Service Co., Ltd.), or Wuxi PPDai,Boxi, to provide customer services. In January 2016, we established Shanghai Paifenle Internet Technology Co., Ltd. to operate business related to our consumption loan products. The business operated by Shanghai Paifenle Internet Technology Co., Ltd. was discontinued in early 2018. In December 2016, we established Hefei PPDai Information Technology Co., Ltd., or Hefei PPDai, as another entity to provide customer services with a focus on loan collection. The business previously operated by Wuxi PPDaiBoxi was gradually migrated to Hefei PPDai and other entities. In June 2017, Shanghai Guangjian Information Technology Co., Ltd., or Shanghai Guangjian was incorporated as a wholly-owned PRC subsidiary of FinVolution HK. Shortly after its incorporation, Shanghai Guangjian established a wholly-owned subsidiary, Shanghai Shanghu Information Technology Co., Ltd., or Shanghai Shanghu. In June 2017, Shanghai Guangjian, Shanghai Shanghu, Beijing Prosper, Beijing Paipairongxin, Shanghai PPDai and the shareholders of Beijing Paipairongxin entered into a new set of contractual arrangements, including an equity pledge agreement, a business operation agreement, a power of attorney, ana call option agreement and an exclusive technology consulting and service agreement, replacing the previous contractual arrangements among Beijing Prosper, Beijing Paipairongxin, Shanghai PPDai and the shareholders of Beijing Paipairongxin. Based on the new set of contractual arrangements, we continue to have control over Beijing Paipairongxin and Shanghai PPDai through Shanghai Guangjian. In March 2018, we restated the contractual agreements among Shanghai Guangjian, Shanghai Shanghu, Beijing Prosper, Beijing Paipairongxin, Shanghai PPDai and the shareholders of Beijing Paipairongxin. See “Item 4. Information on the Company—C. Organizational Structure—Contractual Arrangements with Beijing Paipairongxin.” In July 2017, Shanghai Zihe Information Technology Group Co., Ltd., formerly known as Shanghai Zihe Information Technology Co., Ltd., or Shanghai Zihe, was incorporated by Mr. Jun Zhang, Mr. Tiezheng Li, Mr. Honghui Hu and Mr. Shaofeng Gu, our co-founders and shareholders.
On November 10, 2017, our ADSs commenced trading on the NYSE under the symbol “PPDF.” We raised from our initial public offering approximately US$205.0 million in net proceeds after deducting underwriting discounts and the estimated offering expenses payable by us. Concurrently with our initial public offering, we also raised approximately US$49.5 million in net proceeds through issuing 19,230,769 Class A ordinary shares to a wholly-owned subsidiary of Sun Hung Kai & Co. Limited.
In January 2018, we incorporated Bluebottle Limited in Hong Kong. Shortly after its incorporation, Bluebottle Limited established Shanghai Manyin Information Technology Co., Ltd., or Shanghai Manyin, as its wholly-owned PRC subsidiary in China. In March 2018, we entered into a series of contractual arrangements through Shanghai Manyin with Shanghai Zihe and the shareholders of Shanghai Zihe, through which we obtained effective control over the operation of Shanghai Zihe. In April 2018, Shanghai Erxu Information Technology Co., Ltd., or Shanghai Erxu, was incorporated as a wholly-owned PRC subsidiary of Shanghai Zihe to operate business related to loan facilitation services. In August 2018, Shanghai Nianqiao Information Technology Co., Ltd., or Shanghai Nianqiao, was incorporated by Mr. Zhouhao Gu, a family relative of Shaofeng Gu, and Ms. Xiumeng Chen, a family relative of Jun Zhang. In January 2019, Shanghai Ledao Information Technology Co., Ltd., or Shanghai Ledao, was incorporated by Mr. Yejun Jiang, a family relative of Honghui Hu, and Mr. Lizhong Chen, a family relative of Tiezheng Li. We entered into two sets of contractual arrangements through Shanghai Manyin with (i) Shanghai Nianqiao and the shareholders of Shanghai Nianqiao on November 29, 2018, and (ii) Shanghai Ledao and the shareholders of Shanghai Ledao on January 14, 2019, respectively, through which we obtained effective control over the operations of Shanghai Nianqiao and Shanghai Ledao. In February 2022, our contractual arrangements with Shanghai Nianqiao and the shareholders of Shanghai Nianqiao were terminated and all equity interests in Shanghai Nianqiao had been transferred to Shanghai Zihe. In August 2018, Hainan Shanghu Information Technology Co., Ltd. was incorporated as a subsidiary ultimately and wholly owned by Shanghai Manyin to operate technology service business. In November 2019, Fujian Zhiyun Financing Guarantee Co., Ltd., or Fujian Zhiyun, was incorporated as a wholly-owned PRC subsidiary of Shanghai PPDai. Fujian Zhiyun provides financing guarantees services to our institutional funding partners for loans funded by them to the borrowers introduced by us. In November 2019, the name of the Company was changed from “PPDAI Group Inc.” to “FinVolution Group” and that “信“信也科技 ” was adopted as the dual foreign name of the Company. In addition, the Company’s ticker symbol on the New York Stock Exchange was also changed from “PPDF” to “FINV.” In December 2019, Chengdu Yougao Information Technology Co., Ltd., or Chengdu Yougao, was incorporated by Yining Xu, one of our employees. In September 2020, we entered into a series of contractual arrangements through Shanghai Manyin with Chengdu Yougao and the current shareholders of Chengdu Yougao, Yining Xu and Fei Miao, two of our employees, through which we obtained effective control over the operation of Chengdu Yougao. In January 2022, our contractual arrangements with Chengdu Yougao and the shareholders of Chengdu Yougao were terminated and all equity interests in Chengdu Yougao had been transferred to Shanghai Zihe. In January 2020, our Singapore subsidiary received the Capital Markets Services License from the Monetary Authority of Singapore to conduct regulated activities in dealing in capital markets products in Singapore. Our principal executive offices are located at Building G1, No. 999 Dangui Road, Pudong New District, Shanghai 201203, the People’s Republic of China. Our telephone number at this address is +86 21 8030 3200. Our registered office in the Cayman Islands is located at the offices of PO Box 309, Ugland House, Grand Cayman,KY1-1104, Cayman Islands. Our agent for service of process in the United States is Law Debenture Corporate Services Inc., located at 801 2nd Avenue, Suite 403, New York, NY 10017. Investors should contact us for any inquiries through the address and telephone number of our principal executive offices.
The SEC maintains an internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC on. You can also find information on our websitehttps://ir.finvgroup.com/ . The information contained on our website or other information contained on the SEC website is not a part of this annual report. We are a leading online consumer financefintech platform in China with strong brand recognition. Launched in 2007, we are a pioneer in China’s online consumer finance industry connecting borrowers, whose needs are unserved or underserved by traditional financial institutions, with investors and financial institutions.investors. Since 2020, all new loans facilitated on our platform in China were funded by institutional funding partners. As of December 31, 2019,2021, we had over 105.9131.2 million registered users.users in China. We strategically focus on serving borrowers between ages of 20 and 40, the young generation that is typically more receptive to internet financial services and is poised to become the major driving force of China’s consumer finance market. Our borrowers are primarily acquired online and stretch across a large number of cities and counties in China. We primarily offer short-term loans to our borrowers to meet their immediate credit needs while allowing them to gradually establish their credit history through activities on our platform. In 20182019, 2020 and 2019,2021, the average principal amount of loans originated on our platform had an average principal amount of RMB3,281in China was RMB3,267, RMB3,983 and RMB3,267RMB4,982 (US$469.3)782), respectively, andwith an average term of 9.48.7 months, 8.3 months and 8.78.4 months, respectively. Borrowers come to our platform for convenient, simple and fast loan transaction process. We generally have a high level of borrower stickiness. In 20182019, 2020 and 2019, 73.6%2021, 78.1%, 88.2% and 78.1%80.0% of the total loan origination volume originated on our platform in China was generated from repeat borrowers who had at least one drawdown before, respectively.before. We had ceased facilitating new loans funded from individual investors on our platform since October 2019 and improved our business model through acquisition of better quality borrowers and transition of our funding sources from individual investors to institutional funding partners. Since 2020, all new loans facilitated on our platform in China were funded by institutional funding partners. Our platform appeals to individual investors and institutional funding partners by offering a wide spectrum of investment options.loan products. We provide our individual investors and institutional funding partners with an opportunity to invest inconnect with an emerging asset class—consumer loans—and achieve attractive returns. Individual investors may subscribe to loans based on the profiles of approved borrowers listed on our platform, use automated investing tools specifically designed to improve their investment efficiency, or enroll in investment programs that offer greater convenience in making investments. Institutional funding partners may extend loans to borrowers that we introduce to them, relying on the preliminary credit assessment services as well as other services we provide to them. We offer attractive risk-adjusted returns supported by a set of risk management procedures and implement protection mechanisms to control and mitigate investors’ risk exposure. We have built an extensive database that contains firsthand credit data as well as data from various third-party sources. We have established systematic risk management procedures which have proven to be effective in various macro-economic environments. Our proprietary and big-data based credit scoring model, the Magic Mirror Model, has been continually testing and refining its credit decision-making rules as we continue to study the increasing amount of data accumulated through our loan facilitation. We have also made progress in optimizing operational efficiency as we apply big-data analytics and machine learning capabilities to other aspects of our business operations, such as sales and marketing activities and loan collection.
Currently, our business primarily focuses on the PRC market. We arehave also been expanding our business in the overseas markets, including Indonesia.the Philippines, Indonesia and Vietnam. For example, in December 2018 and June 2018,2019, we established two subsidiaries in the Philippines, and one of them is authorized to operate as a lending company and the other is authorized to operate as a financing company. In December 2019, we established a subsidiary in Indonesia, and havewhich has received a license for Technology and Information Based Financial Lending Institution lending license) from the Financial Services Authority of IndonesiaIndonesia. In January 2020, our subsidiary in Singapore received the Capital Markets Services license from the Monetary Authority of Singapore to conduct regulated activities in dealing in capital markets products in Singapore. Our loan origination volume in the overseas markets increased from RMB0.3 billion in 2019 to RMB1.0 billion in 2020 and further to RMB3.7 billion (US$0.6 million) in 2021, and our loan origination volume in China increased from RMB82.2 billion in 2019 to RMB64.1 billion in 2020 and further to RMB133.6 billion (US$21.0 million) in 2021. The number of cumulative registered users in the overseas markets increased from 1.3 million as of December 2019. 31, 2019 to 4.0 million as of December 31, 2020 and further to 9.0 million as of December 31, 2021, and the number of cumulative registered users in China increased from 105.9 million as of December 31, 2019 to 116.1 million as of December 31, 2020 and further to 131.2 million as of December 31, 2021.As of December 31, 2019, we have only generated little revenues from2021, the outstanding loan balance of the overseas markets.markets was RMB330.0 million (US$51.8 million).
We generate revenues primarily by collecting transaction service fees. For loans funded by individual investors, we collect transaction service fees from borrowers for our services in matching them with investors and for other services we provide over the loans’ lifecycle. For loans funded by institutional funding partners, we collect transaction service fees primarily from institutional funding partners for our services provided to them such as borrower introduction and preliminary credit assessment, as well as other services we provide along the lifecycle of loans. Our operating revenues grew from RMB3.9RMB6.0 billion in 20172019 to RMB4.5RMB7.6 billion in 20182020 and further to RMB6.0RMB9.5 billion (US$856.51.5 million) in 2019.2021. A substantial portion of our operating revenues for these periods were attributable to fees collected from borrowers.borrowers, third party guarantee companies and institutional funding partners. Our net profit increased from RMB1.1 billion in 2017 to RMB2.5 billion in 2018, and was RMB2.4 billion in 2019, RMB2.0 billion in 2020 and RMB2.5 billion (US$341.1391.6 million) in 2019. 2021.Since our inception and up to December 31, 2019,2021, we havehad facilitated loans connecting over 17.922.0 million borrowers from 96%100% of the cities and counties in China with investors. In 2018 and 2019,2021, over 80%78.3% of our borrowers arein China were between 20 and 40 years of age. We strategically target the young generation in general and cultivate customer loyalty, aiming to capture the vast growth opportunities as our borrowers enter into different stages of their lives and qualify for higher credit limits. The number of our unique borrowers in China were approximately 8.7 million in 2017, 6.8 million in 2018 and 6.7 million in 2019.2019, 3.5 million in 2020 and 5.6 million in 2021. Our platform features a high proportion of repeat borrowers. We have an active repeat borrower base and our borrowers tend to borrow more on our platform over time. OutIn China, 78.1%, 88.2% and 80.0% of the total loan volume facilitated through our platform in 2017, 20182019, 2020 and 2019, 68.9%, 73.6% and 78.1%, respectively,2021 was generated from repeat borrowers who had successfully borrowed on our platform before. Individual investors andInvestors
Since 2020, all new loans facilitated on our platform in China were funded by institutional funding partners Whenpartners. As of December 31, 2021, we started our business, our investor base only included individual investors. We expanded our investor base to coverhad cumulatively cooperated with 63 institutional funding partners for the first time in August 2014 and have been more actively and systematically expanding such type of investor base since 2018. Accordingly, the proportion ofChina. The loan origination volume funded by institutional funding partners increased more significantly since the second half of 2018. In 2019, we further increased funding for loans on our platform in China increased by 108.4% from institutional funding partners and gradually reduced funding from individual investors. In October 2019, we completely ceased to accept new funding from the individual investors for loans on our platform.
As of December 31, 2017, 2018 and 2019, we had 559,760, 667,738 and 712,750 cumulative individual investors, respectively. The number of individual investors invested through our platform was 307,835 in 2017, 249,635 in 2018 and 160,373 in 2019. Average investment amount per individual investor was RMB149,252 in 2017, RMB163,508 in 2018, and RMB145,562 (US$20,908.7) in 2019.
As of December 31, 2019, we had over 30 institutional funding partners active on our platform. In 2019, the proportion of loans facilitated by institutional funding partners to total loan origination volume increased to 62.0% from 14.5% in 2018. The loan origination volume facilitated by institutional funding partners increased significantly by 473.0% to RMB51.0RMB64.1 billion in 2019 from RMB8.92020 to RMB133.6 billion in 2018.2021. Currently, we primarily cooperate with commercial banks, private banks, consumer finance companies, micro-loan companies and trust management companies to diversify the funding sources on our platform.
In 2019, out of the total loan volume facilitated by us, loans funded by individual investors and institutional funding partners amounted to RMB31.2 billion (US$4.5 billion) and RMB51.0 billion (US$7.3 billion), respectively. As of December 31, 2019, the outstanding balance of loans invested by individual investors on our platform was RMB5.2 billion (US$0.7 billion), and2021, the outstanding balance of loans funded by institutional funding partners on our platform in China was RMB24.0RMB50.0 billion (US$3.47.8 billion).
Our Products and Services Loan services offered to borrowers Our platform primarily offers standard loan products. We do not require security for loan products on our platform and generally provide loan applicants with a credit decision in around 10 minutes of application for first-time applicants and in as little as one minute for repeat borrowers. Approved borrowers typically receive loan disbursements within 24 hours following the loan listing, and in 2019,2021, over 79.8%81.2% of total number of loans facilitated through our platform were funded within two hours. We believe these features are essential to meeting borrowers’ often imminent financing needs. Subject to credit assessment result for each loan application, a borrower is allowed to take out multiple loans on our platform if the aggregate outstanding principal amount does not exceed such borrower’s credit limit for the type of loans the borrower applies for. Standard loan products—basic loan products Borrowers are able to apply for standard loan products using either mobile or PC devices by providing certain basic information, including bank account information, credit card information if any, educational level, marital status, occupation, email address, social media user name if any and mobile phone number of one or two alternative contact persons, in addition to the borrowers’ PRC identity card information and mobile phone numbers which are mandatory for initial user registration.
Depending on the credit assessment result, a borrower may be eligible to apply for a loan within the approved credit limit for a term ranging from one month to 3624 months. The average loan amount for our standard loan products was RMB2,926RMB3,250 in 2017, RMB3,2662019, RMB3,983 and RMB4,982 (US$782) in 2018 and RMB3,250 (US$466.8) in 2019. 2021.Different credit limits and borrowing costs are applicable to different tiers of borrowers based on their respective credit scores. Borrowers’ borrowing cost for taking out a standard loan on our platform include loan interest to be paid to individual investors or institutional funding partners a transaction service fee for our services for loans funded by individual investors, and, under certain circumstances, a quality assurance fund contribution for investor protection purpose or a guarantee service fee for services provided by financing guarantee companies. All of our standard loan products feature fixed monthly repayments, consisting of principal, interest and, where applicable, quality assurance fund contribution or guarantee service fee. Borrowers of our standard loan products may make prepayments without incurring penalties. See “—Our Platform and Transaction Process” for information on payment processing. In 2017, 20182019, 2020 and 2019,2021, the originationtotal amount of our standard loan products totaled RMB54.9originated on our platform in China was RMB81.5 billion, RMB60.4RMB64.1 billion and RMB81.5RMB133.5 billion (US$ 11.720.9 billion), representing 83.7%, 98.3% and 99.1%, respectively,99.9% and 99.9% of the total amount ofloan origination volume on our platform in China in the loans that were made through our platform.same year.ConsumptionStandard loan products—small business loan products
We usedstarted to offer consumptionloans products to small business owners in 2020. Small business owners can apply for small business loan products on our platform through cooperation with retail stores to customersusing either mobile or PC devices by providing basic information, including business license for their purchases of electronic appliances. small business or self-employed license, PRC identity card information and mobile phone number, and certain optional information as applicable, including but not limited to bank account information, credit card information, educational level, marital status, email address and social media username. The principal amount of our consumptionsmall business loan products had variedvaries in the range depending on the price of electronic products. Consumption loan products could havefrom RMB500 to RMB104,000, with a term of 9, 12, 15, 18 orranging from one month to 24 months. We ceased to offer new consumptionIn 2021, we served approximately 826,000 small business owners on our platform in China and the total loan products in December 2017. As of December 31, 2019, the outstanding balanceorigination amount of our existing consumptionsmall business loan products was nil.RMB27.0 billion (US$4.2 billion).In addition, we have offered other products and will continue to develop new products from time to time. For example, we cooperate with several third parties to offer their customers loan products similar to our standard ones but with varied features, such as more preferential interest rates. In implementing our strategy of expanding loan product offerings, we have developed and are developing new loan products. In 2017, 20182019, 2020 and 2019,2021, the total loan origination amounts of our other loan products totaled RMB2.9 billion, RMB1.1 billion andwas RMB0.7 billion, RMB37.0 million and RMB138.6 million (US$0.1 billion)21.7 million), accounting for 4.4%, 1.7% andrepresenting 0.9%, respectively,0.1% and 0.1% of the total amount of the loans facilitatedloan origination volume on our platform.platform in China in the same year. As our business develops, we will continue to expand our loan product offerings to meet demands from different tiers of borrowers.
Investment services offered to individual investors
Our online lending information intermediary business used to provide investment options that cater to the needs of individual investors who prefer to proactively manage their investments as well as individual investors who want to rely on the tools we offer to allocate and manage their investments. We ceased to offer new investment services to individual investors on our platform in October 2019. As of December 31, 2019, the outstanding balance of loans invested by individual investors on our platform was RMB5.2 billion (US$0.7 billion).
Self-discretionary investing tool
Individual investors may directly invest in loans listed on our platform based on loan characteristics and borrower profiles. We provided a set of filters to help self-discretionary individual investors choose among thousands of investment opportunities. By using filters, an individual investor was able to quickly pinpoint specific loans the individual investor desires to invest in based on screening criteria, such as credit rating, interest rate, term, loan amount, profile and the borrowing history of the borrower on our platform. The minimum threshold for a lending commitment made through our self-discretionary investing tool was RMB50 (US$7.2). Upon subscription to a specific loan, an individual investor agreed to commit a certain amount of fund to the subscribed loan until its maturity. Funds would be transferred from the individual investor’s account with us to the borrower once the loan was fully subscribed. Individual investors who wanted to withdraw their funds prior to loan maturity might transfer their rights in loans on our secondary loan market. See “—Secondary Loan Market.” We did not charge fees for the use of our self-discretionary investing tool.
Automated investing tools
Backed by our sophisticated algorithms, we offered multiple automated investing tools in order to make investing easy and efficient. For example, we provided tools that facilitated fast investments in a large number of loans through one click and tools that enabled automated reinvestment according to individual investors’ preset investing criteria. We also offered tools that helped diversify investment risks by allocating funds into a portfolio of thousands of loans. These tools were designed for individual investors who preferred to invest according to their preset criteria, such as loan term and interest rate, instead of screening specific loans one by one. Once investors confirmed the investments selected by our system, the individual investors agreed to commit their funds throughout the life of the loans they invested in unless they transferred their rights in loans on our secondary loan market. See “—Secondary Loan Market.”
The scale and vibrancy of our platform had also attracted some third-party businesses which offered our individual investors additional investing tools to help them manage their investment portfolios. We partnered with some of these companies and shared with them a set of open application programming interfaces to link those investing tools with our platform. This way, individual investors could make investments on our platform through our partners’ websites and mobile applications.
Our investment programs enabled individual investors to enjoy investment returns while minimizing the time needed to manage their investments. Before the launch of ourre-designed
investment programs in March 2018, we used to offer three types of investment programs (namely investment programs with fixed investing periods, investment programs withstep-up
returns, and investment programs with flexible investing periods) with different estimated rates of return and various terms up to 18 months. Investors could freely choose to invest in any investment programs based on their investment preference after committing a minimum amount of RMB100 (US$14.4).
We ceased offering investment programs with flexible investing periods and investment programs withstep-up
returns in July 2017 and March 2018, respectively, and launched new investment programs byre-designing
our previous investment programs with fixed investing periods. Our new investment programs were featured bylock-up
periods of various length and different estimated rates of return. By committing a minimum amount of RMB1,000 (US$143.6), individual investors could freely choose to invest in new investment programs with differentlock-up
periods and estimated rates of return. By opting for our new investment programs, individual investors authorized our platform to make investments in loans on our platform with different sizes, terms and interest rates, and after the expiration of the presetlock-up
periods, to transfer their creditor’s rights to other investors on their behalf or extend the program tenor under certain circumstances at the individual investors’ option. The underlying loans we invested had weighted-average interest rates higher than the lower limit of the estimated rates of return of each investment program. Individual investors were able to exit before maturity of the investment program by transferring their creditor’s right to other investors on our platform after the presetlock-up
period. In the event that the underlying loans invested by an individual investor through our investment programs failed to be transferred after expiration of the presetlock-up
periods, the individual investor would continue to be a creditor of the underlying loans. Thelock-up
periods of our new investment programs typically ranged from 15 days to 540 days. We charged management fees to individual investors who subscribed investment programs and collected such fees when an investment program ended at its maturity.We had established a secondary loan market on our platform to provide liquidity to investors. Loans held by individual investors for no less than 48 hours and with principal balances of no less than RMB10 (US$1.4) might be posted on our platform for transfer once certain other conditions are met. Individual investors might withdraw the offers to transfer at any time before such offers were accepted by transferees. Although a successful transfer was not guaranteed, historical data showed that loans typically changed hands within the same day they were posted. Upon a successful transfer, the transferor would be charged a service fee at a rate ranging from 0.5% to 1% of the transfer price depending on whether the underlying loan had the quality assurance fund protection and the number of outstanding repayments. If the transfer did not happen within 24 hours after a loan was posted, the post would be automatically taken off our platform. In 2018 and 2019, the volume of loans transferred in the secondary loan market was RMB1,416.6 million and RMB1,345.5 million (US$193.3 million), respectively.
Investment servicesServices offered to institutional funding partners
We introduce borrowers to our institutional funding partners and provide preliminary credit assessment services as well as other services to them. Currently, our institutional funding partners primarily include commercial banks, private banks, consumer finance companies, micro-loan companies and trust management companies. The service arrangement between our institutional funding partners and us varies depending on the type of institutional funding partners. Institutional funding partners such as commercial banks and consumer finance companies typically extend loans with their own funds directly to the borrowers introduced by us. With respect to our institutional funding partners that are trust management companies, we usually collaborate with them to set up trusts with different types of investors to invest in loans through trusts on our platform. We typically invest in subordinate tranches in the trusts jointly established and other investors invest in senior tranches. Senior tranche investors in these trusts typically receive a fixed rate of return, whereas we, as the subordinate tranche investor, typically receive residual returns from the trusts. There are also trusts established by other investors without us making investment in such trusts. All trusts are administered by third-party trust management companies we collaborate with and such trust management companies are responsible for making investments in loans on our platform.
Since 2020, all new loans facilitated on our platform in China were funded by institutional funding partners. In 2019, loans2021, the loan origination volume funded by institutional funding partners were RMB51.0on our platform in China was RMB133.6 billion (US$ 7.321.0 billion) , accounting for 62.0% of our total loan origination volume.. Investment services offered to individual investors in the past Our online lending information intermediary business used to provide investment options that cater to the needs of individual investors. Historically, our investment programs enabled individual investors to enjoy investment returns while minimizing the time needed to manage their investments. We ceased to offer new investment services to individual investors on our platform in October 2019. Since 2020, all new loans facilitated on our platform in China were funded by institutional funding partners. Our platform appeals to institutional funding partners by offering a wide spectrum of loan products. On January 14, 2022, the Shanghai Financial Stability Coordinating Joint Conference Office, the Shanghai Online Lending Risk Rectification Office, and other regulatory authorities, jointly announced that Shanghai PPDai, among others, had declared the termination of its business operation as an online lending information intermediary and fully settled all related legacy loan products funded by individual investors. Our Platform and Transaction Process We incorporate advanced technology into every step of the transaction process on our platform to provide a better experience to our borrowers and investors.our institutional funding partners. The entire process appears simple, seamless and efficient but our platform leverages sophisticated, proprietary technology to make it possible. Set forth below is a description of the transaction process of our standard loan products facilitated on our platform between borrowers and investors.institutional funding partners.
Step 1: Initial Application Prospective borrowers are able to initiate applications online anytime, anywhere through our mobile applications and website. Potential borrowers may generally complete the application process for our standard loan products within a few minutes by providing the requested personal details, the type of information readily available to the application, and taking a selfie in real time holding the applicant’s PRC identity card if the loan application is initiated via mobile applications. If the applicant is a small business owner, they are provided with an option to upload the business license of their small business to the platform. Step 2: Fraud Detection and Credit Assessment Following the application for a standard loan product or a small business loan product, our system generally takes around ten minuteshelps to aggregate the data, run our anti-fraud model, conduct credit assessment and decide whether to extend credit, except where manual review process is triggered. Upon submission of a complete application, our system begins to match the application with data from both internal and external sources, including information provided by the prospective borrowers, data gleaned from third-party data partners, and data aggregated from the internet using our proprietary data collection technologies with due authorization from the prospective borrowers. Information aggregated, and later used for fraud detection and creditworthiness evaluation, includes basic background information, such as age, gender and occupation, behavioral data, and if available, borrowers’ credit history, such as personal credit information maintained by the Credit Reference Center under the People’s Bank of China.PBOC. For repeat borrowers, historical loan performance data accumulated on our platform will also be incorporated into the borrowers’ profile. Once aggregated, the data are reviewed by our anti-fraud model to identify fraudulent behaviors. Our anti-fraud model uses a multifaceted detection method that combines sophisticated data integration with a hybrid analytical approach to both identify individual fraud based on existing fraud database and analyze collusive behaviors among multiple individuals to uncover fraudulent schemes. Once the anti-fraud detection process is completed, the prospective borrower’s loan application either proceeds to the next phase or the prospective borrower is notified of the decision if we decline the application.
Following the fraud detection, we initiate a credit review process using our proprietary Magic Mirror Model to generate a Magic Mirror score for the prospective borrower. Each Magic Mirror score corresponds to a credit level in the range of I to VIII, with Level I representing the lowest risk and Level VIII representing the highest risk. See “—Risk Management—Proprietary Credit Scoring and Risk Pricing Models.” Applicants classified as Level VIII will be declined, and applicants falling under other credit levels will be assigned by our risk pricing system the approved credit amounts, maximum loan terms and applicable interest rates and other loan characteristics which are determined based on their respective Magic Mirror scores. In 2019,2021, among all the loan applications approved on our platform, 99.3%99.6% went through the automated process. The remaining 0.7%0.4% in the respective periods often requiring additional information or verification, are forwarded to our credit assessment team for manual review. The manual review process generally takes one to three days. Following this review, our credit assessment team will either approve the loan with one or more approved sets of loan characteristics or decline the loan application. Borrowers who pass our fraud detection and credit assessment procedures will be introduced to our institutional funding partners. See “—Our Platform and Transaction Process—Step 3: Loan Listing and Funding” for details. Borrowers who do not obtain our preliminary credit assessment approval will be introduced to third-party platforms for matching them with investors on such third-party platforms. Once those borrowers pass the relevant fraud detection and credit assessment procedures on such third-party platforms and successfully match with investors on these third-party platforms, we will charge service fees from these third-party platforms. Step 3: Loan Listing and Funding Loan funding process with individual investors
After obtaining credit approval, the borrowers could submit the final loan amount and loan term within the parameters of the credit approval. Our system would then automatically generate a form of loan agreement between the borrower and the individual investors. If the loan had not been matched automatically, the loan was then listed on our platform for individual investors to view and subscribe. Subject to credit assessment for each loan application, a borrower was allowed to take out one or more loans on our platform at a time. Individual investors who were willing to make investment through our platform could deposit their funds with us in custody accounts at China Merchants Bank. We had migrated to a custody account arrangement with China Merchants bank, whereby funds of individual investors had been deposited into and settled by custody accounts under its management. Upon the full subscription of a loan, the loan agreement would become effective, and the full amounts of funds would then be released from investors’ custody accounts to the borrower. Depending on different types of loan application, loans not fully subscribed within10-20
days would be automatically removed. We have ceased facilitating new loans with funding from the individual investors on our platform since October 2019.
Loan funding process with institutional funding partners
Loan funding process with institutional funding partners can be categorized into direct lending model and trust arrangement model. Direct lending model.model Our institutional funding partners that are commercial banks and consumer finance companies or third-party online lending information intermediaries typically invest under the direct lending model. Under this model, our institutional funding partners typically extend loans with their own funds directly to the borrowers introduced by us. After obtaining our preliminary credit assessment and approval, the borrowers may submit the final loan amount and loan term within the parameters of the credit approval. Our proprietary system will then match and refer qualified borrowers to our institutional funding partners based on their specific requirements of borrower profiles, such as credit limits or ticket size. Our institutional funding partners will then review the credit application and our preliminary credit assessment of the borrower introduced by us in accordance with their own credit assessment standards and decide to approve or decline the loan application. Once the borrower’s credit application is approved, our institutional funding partners will then directly disburse the loan amounts to the borrower’s bank account. We cooperate with institutional funding partners through both capital heavy model and capital light model. Under the capital heavy model, wepre-determine a fixed rate of service fees with our institutional funding partners. Under the capital light model, we provide our institutional funding partners with either no credit enhancement service or a limited credit enhancement service. Under the limited credit enhancement service, we negotiate with each institutional funding partner for a fixed upper limit of guarantee amount that we will be liable for. If the accumulated defaulted loan amount exceeds the agreed upper limit, the excess portion will be borne by the institutional funding partners. In 2021, approximately 13.0% of our total loan origination volume was facilitated through the capital light model. Historically, we also collaborated with third-party online lending information under this direct lending model. Third-party online lending information intermediaries generally matchmatched qualified borrowers introduced by us with investors on their platforms. Loans will bewere funded by investors on their platforms upon a successful match. In light of the tightening regulatory environment and due to a lack of clear statutory interpretation and application of the relevant rules, we have been reducing our cooperation withceased offering new loans to third-party online lending information intermediaries since the third quarter ofDecember 2019. For the quality assurance commitments we provide to our institutional funding partners under the direct lending model, see “Item 4. Information on the Company—B. Business Overview—Investor Protection—Quality Assurance Commitments for Our Institutional Funding Partners.”
In addition to the direct lending model, we also collaborate with trust management companies to offer flexibilities to certain of our institutional funding partners and access to a broader range of investors. Under this model, we usually establish trusts jointly with various other investors. We typically invest in subordinate tranches in these trusts while other investors, including certain of our institutional funding partners and investors approached by trust management companies, invest in senior tranches. Under this model, other investors may also collaborate with trust management companies to establish a trust among themselves without us. The trusts established are managed by third-party trust management companies we collaborate with. After we complete our borrower creditworthiness assessments and introduce qualified borrowers to the third-party trust management companies, these trust management companies will then conduct their own credit assessment and decide to approve or decline borrowers’ loan applications. If a borrower’s loan application is approved, the corresponding trust management company will then directly disburse the loan amount from the trust to the borrower’s bank account. For the trusts jointly established by us and other investors, these investors, as senior tranche investors in the trusts, typically receive a fixed rate of return, while we, as the subordinate tranche investor, typically receive the residual returns, if any, from the trusts. In certain very limited cases, we may also receive from the trusts a service fee in addition to possible residual returns. For the trusts jointly established by other investors among themselves, we receive from trusts a service fee. In some cases, we have engaged licensed third-party financing guarantee companies to provide financing guarantees to the third-party trust management companies. If any borrower defaults, third-party guarantee companies engaged by us or our own guarantee company will be obligated to repay the full overdue amount to these trusts. After third-party financing guarantee companies repay the full overdue amount to these trusts, we will be obligated to purchase the loans from these guarantee companies at an amount equal to the repayment they made to those institutional funding partners. In 2019, out of the total loan volume facilitated by us, loans funded by individual investors and institutional funding partners amounted to RMB31.2 billion (US$4.5 billion) and RMB51.0 billion (US$7.3 billion), respectively.
Step 4: Loan Servicing and Collection Loan servicing for individual investors
Upon the origination of a standard loan, we establish a repayment schedule with repayment occurring on a set business day each month and update the loan performance status in real time once a payment has been made or is overdue. Borrowers and investors are able to monitor the loan performance on a real-time basis. On or prior to each scheduled repayment date, borrowers should deposit sufficient funds (consisting of corresponding installment of principal, interest and transaction service fee, as well as quality assurance fund contribution or guarantee service fee to third-party guarantee companies for certain borrowers) in their respective accounts and authorize us to, on such repayment date, (i) transfer corresponding installment of principal and interest to the corresponding investors, (ii) transfer each installment of transaction service fee to our own account, and (iii) transfer quality assurance fund contribution made by certain borrowers to a separate account managed by third-party guarantee company, or transfer each installment of guarantee service fee to the corresponding third-party guarantee company. We used to have a custody account arrangement with China Merchants Bank and funds of borrowers and individual investors were deposited into and settled by the custody accounts under its management. The custody account arrangement expired on March 19, 2020. We will not pursue new custody account arrangements with other commercial banks since we have ceased to accept new investments from individual investors from October 2019 and are winding down investments from individual investors on our platform. The funds in the custody accounts of China Merchants Bank have been migrated to a third-party payment system managed by a third-party payment company. See “Item 3. Key Information—D. Risk Factors—Risks Related to Our Business—We started our business as an online lending information intermediary, and the laws and regulations governing online lending information intermediary industry in China are developing and evolving and subject to changes. If our business practices are deemed to violate any existing and future applicable laws, regulations or requirements of local regulatory authorities, our business, financial condition and results of operations would be materially and adversely affected.”
Loan servicing for institutional funding partners
Borrowers are able to repay loans through our online platform based on the terms and conditions of the loan agreements between borrowers and institutional funding partners. For borrowers who are unable to repay loans online, we accept bank transfer on behalf of our institutional funding partners. Borrowers and institutional funding partners are able to monitor the loan performance on a real-time basis. On or prior to each scheduled repayment date, borrowers should deposit sufficient funds consisting of corresponding installment of principal, interest, late payment penalty (if applicable), guarantee service fee to third-party guarantee companies for certain borrowers in their respective accounts and authorize institutional funding partners and us, including third-party payment companies designated by us or institutional funding partners, to, on such repayment date, (i) transfer corresponding installment of principal, interest and late payment penalty (if applicable) to the corresponding institutional funding partners, and (ii) transfer each installment of guarantee service fee to the corresponding third-party guarantee company. Our institutional funding partners subsequently pay us a transaction service fee for the services we provide to them, such as borrower introduction and preliminary credit assessment as well as other services we provide over the lifecycle of loans. In addition, we also receive a portion of our transaction service fees under certain circumstances from third-party guarantee companies for services we provide to them. We have a collection team of over 1,600700 employees as of December 31, 20192021 and have developed a systematic process to handle collection of delinquent loans. Upon becoming delinquent, a loan enters into our collection process, which is divided into stages based on severity of delinquency. The first 90-day collection period is typically handled by our collection team although we also engage third-party payment collection service providers to assist us from time to time. Primary collection measures, including text message reminders, phone calls, legal letters and legal proceedings, are taken in succession as a loan becomes increasingly overdue. If a loan remains overdue after the 90-day period, we then outsource loan collection to third-party service providers to optimize collection efficiency. Any amount recovered from the borrower will be remitted to first cover third-party collection expenses, if any, then to repay overdue principal and interest. Any remaining amount will be used to pay the late payment penaltyoverdue interests and the collection fee charged to the borrower. Our strong risk management capabilities are one of the key competitive advantages that enable us to make credit available to the large unserved or underserved population in China, whose credit histories have yet been recorded in the country’s developing credit system, while maintaining a sustainable business at a healthy profitability level.
We have invested significant resources in building up a comprehensive credit database since our inception. Today, we own an extensive database with several thousands of variables for our borrowers, covering a wide range of information pertinent to a borrower’s creditworthiness and presenting a user profile from a 360-degree view. Data are aggregated from a number of sources. We have cooperation with a number of organizations, such as industry associations, who grant us the access to their respective data. Our strong data-mining capabilities, which we believe differentiate us from many other players in the online consumer finance industry, also enable us to collect a large amount of data concerning prospective borrowers. We have developed a number of proprietary automated programs that are capable of searching, aggregating and processing massive data from the internet in a short period of time. Another important component of our credit database is the payment histories of our prior and existing borrowers. We take various measures to ensure high level of reliability and accuracy of data. The following are typical data that we seek to collect for each loan application: historical credit data accumulated through our online platform; behavioral data that we glean from an applicant’s behaviors as they apply for loans, such as the location of the applicant or the use of multiple devices to access our platform;loans; personal identity information maintained by an organization operated under the PRC Ministry of Public Security;MPS; background information, such as income level, education level and marital status, collected from prospective borrowers; personal credit information maintainedin a form of credit ranking score provided by the Credit Reference Center underlicensed institution and our own micro-lending company, subject to the People’s Bank of China;authorization by the borrowers; and list and database of fraud cases. Upon the data aggregation, our system converts the originally unstructured data into structured data using machine learning techniques. We have been working closely with multiple partners in a joint effort to identify emerging fraudulent schemes, scams, trends, threats, and criminal organizations and have accumulated massive data as related to fraud. The database we maintain helps us to fine-tune the rules we set and enhance our fraud detection capabilities. We adopt a multifaceted fraud detection method. First, we set up rules based on known fraud cases to filter activities for fraudulent behaviors. Afterwards, we apply advanced network techniques to identify relationships pertinent to fraud and connect the individual fraudulent activities to uncover complex fraud schemes and criminal organizations. In addition, we run anomaly detection to detect individual and aggregated abnormal patterns in order to catch unknown fraud behaviors. If available information is insufficient for our system to draw a conclusion, the relevant loan applications will be forwarded to our anti-fraud team for offline verification, which involves members of our anti-fraud team speaking with applicants to inquire after any inconsistencies in a loan application. Proprietary Credit Scoring and Risk Pricing Models In August 2014, we developed and launched a proprietary credit scoring model, known as Magic Mirror Model, which we believe represents one of our key competitive advantages. Our Magic Mirror Model leverages a huge database that we have built up gradually through our years of operations. Such a vast amount of data lays a strong foundation for our use of machine learning to optimize the Magic Mirror Model on a continuing basis.
Following data aggregation and fraud detection, prospective borrowers enter into credit assessment phase. Different algorithms are applied to prospective borrowers with different features in assessing the potential risks associated with them and based on the assessment results, our credit scoring model generates Magic Mirror scores for each of the prospective borrowers. A new Magic Mirror credit score is generated each time a borrower applies for a loan, which may change the borrower’s credit limit for that type of loan. We apply various machine learning techniques to the data collected. Through monitoring model performance as well as variable consistency, our system is able to evaluate the effectiveness of existing variables while discovering new ones. The Magic Mirror Model then is optimized by adjusting the group of variables used. The following factors are associated with variables that are important for assessing the probability of delinquency: Repayment history
personal identity information Personal identity information
Education
Consumption behavior
third-party supplementary data Social network behavior
Credit reports
Internet behavior, such as visiting history of our website and time spent on completing a loan application
Fraudulent records
For applicants of our standard loan products, the Magic Mirror score derived from our proprietary credit scoring model is used to determine which of the eight segments in our existing credit grid such applicants fall into. Among the eight segments, Level I represents the lowest risks associated with the borrowers, while Level VIII represents the highest risks. Level VIII loan applications will be rejected. Once a credit level is assigned to a specific loan, it will not be changed during the tenor of the loan. The following charts indicate the historical cumulative30-day
plus past due delinquency rates by credit level for loans facilitated in 2017, 2018 and 2019, which demonstrate distinctive credit risks associated with borrowers falling under each credit level:![](https://files.docoh.com/20-F/0001193125-20-128778/g844286page074.jpg) (1) | Vintage delinquency rate for loans facilitated in 2017 is calculated as the volume weighed average of the quarterly vintage delinquency rates at the end of the 12th month following the inception of each loan in an applicable vintage. |
(2) | Vintage delinquency rate for loans facilitated in 2018 is calculated as the volume weighed average of the quarterly vintage delinquency rates at the end of the 12th month following the inception of each loan in an applicable vintage. |
(3) | Vintage delinquency rate for loans facilitated in 2019 is calculated as the volume weighed average of the quarterly vintage delinquency rates as of December 31, 2019. |
For borrowers who were not subject to the quality assurance fund program before December 2017, the borrowing cost included an upfront transaction service fee for most of our loans and the subsequent monthly cost, which equaled to monthly interest payment. Starting from December 2017, we have ceased collecting the transaction service fee upfront. Since then, the transaction service fee is being collected by installments commencing the date one month after the borrower is funded.
For borrowers who were subject to the quality assurance fund program before April 2017, the borrowing cost included an upfront transaction service fee, an upfront portion of quality assurance fund contribution, and the subsequent monthly cost, which was comprised of the monthly quality assurance fund contribution and monthly interest payment. Between April and December 2017, we ceased collecting the upfront portion of quality assurance fund contribution upon the origination of standard loan products. Instead, the entire quality assurance fund contribution was collected through monthly payments. During this period of time, the transaction service fee was still collected upfront. Starting from December 2017, we ceased collecting the transaction service fee upfront, and both the quality assurance fund contribution and the transaction service fee have been collected by installments commencing the date one month after borrowers are funded since then. See “—Investor Protection—Quality Assurance Fund” for more information on the quality assurance fund.
We review and modify our segmented pricing from time to time, taking into consideration not only the borrower credit risk but also other factors, such as market interest rates, adequacy of investor protection mechanism and competition in the market. The following table presents the facilitation amount of our standard loans taken out by borrowers at each credit level in 2017, 2018 and 2019.
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(1) | Include loans facilitated for testing our system or other purposes. |
We provide quality assurance commitments to our institutional funding partners. We also used to employ two types of investor protection mechanisms to help limit individual investors’ risk exposure on our online lending intermediary platform:platform in the past: quality assurance fund and investor reserve fund. We ceased setting aside new investor reserve funds contributions starting from January 1, 2018 and launched a new quality assurance program in February 2018. As we gradually transform our business model, we also started to provide quality assurance commitments to our institutional funding partners. The following is a summary of the latest features of our quality assurance commitments, quality assurance fund and investor reserve funds, andfunds. Quality Assurance Commitments for Our Institutional Funding Partners We make available for our institutional funding partners two major types of quality assurance commitments.commitments: financing guarantee, and insurance policy. We engage licensed third-party financing guarantee companies to provide financing guarantees to our institutional funding partners. For loans guaranteed by third-party financing guarantee companies, if a borrower defaults, the corresponding third-party guarantee company will be obligated to repay the full overdue amount to the institutional funding partner. After the guarantee company repays the full overdue amount, we will be obligated to purchase creditor’s right from the third-party guarantee companies at a price equal to the repayment it made to the institutional funding partner. Under certain circumstances, we also provide security deposits to third-party financing guarantee companies for loans funded by certain institutional funding partners as an additional quality assurance commitment. 71In addition, we also provide quality assurance commitments through cooperation with third-party insurance companies. Under this arrangement, if borrowers introduced by us defaults, our institutional funding partners are able to seek insurance compensations under the insurance policies from third-party insurance companies. In some cases, if the overdue amount exceeds insurance coverage, the remaining overdue amount will be repaid by a third-party guarantee companies engaged by us. See “Item 3. Key Information—D. Risk Factors—Risks Related to Our Business—Limitations on institutional funding partners’ acceptance of credit enhancement may adversely affect our business and access to funding.”
In 2019 and 2020, we incorporated three financing guarantee companies in Fujian, Tianjin and Hainan. In some cases, our own financing guarantee companies provide financing guarantee services directly to our institutional funding partners for loans funded by them. Under our previous quality assurance mechanism, we provideprovided protection for individual investors who invested in the loans taken out by those borrowers who contributed to the quality assurance fund. Certain borrowers of our standard loans and all borrowers of our handy cash loans and consumption loans were required to make contributions to the respective quality assurance fund. In February 2018, we launched a new quality assurance program, or the New QAF Program, by partnering with China United SME Guarantee Corporation, or Sino Guarantee.Guarantee, a Chinese financial services company that provides credit-enhancement services for financial products and risk-sharing services to small and medium enterprises. Beginning from February 9, 2018, investments in new eligible loans facilitated on our platform will bewere protected by the New QAF Program, and relevant borrowers will bewere required to contribute to a quality assurance fund managed by Sino Guarantee under rules that arewere substantially the same as those applicable to our existingthe previous quality assurance fund. Sino Guarantee will makemade payouts based on the relevant rules set out by us. After the launch of the New QAF Program, we will continuecontinued to manage the existing quality assurance fund for eligible loans facilitated before February 9, 2018. Whether under our previous quality assurance fund mechanism or under the New QAF Program, when a borrower isbecame delinquent for one day in repaying an installment of principal and interest of a loan, we will withdrawwithdrew an amount from the dedicated account to repay the delinquent installment of principal and interest to the corresponding individual investors. The repayments will bewere made in succession according to the age of the delinquency—the earliest delinquent installment iswas repaid first. If the quality assurance fund becomes insufficient to pay back all the investors with delinquent loans, these investors will be repaid on a pro rata basis, and the repayment of their outstanding unpaid balances will be deferred to the next time the quality assurance fund is replenished, at which time a distribution will again be made to all investors with delinquent loans having quality assurance fund protection according to the foregoing rules. If the quality assurance fund is continually underfunded, investors may need to wait for extended periods to receive a full distribution from the quality assurance account. Once we recover any amount from the defaulted borrower through our collection efforts, the recovered amount will be remitted first to replenish the portion of the quality assurance fund used to repay the investors. We adjustadjusted our quality assurance fund contribution policy from time to time based on our monitoring of market risks. We determinedetermined the quality assurance fund contributions required from a borrower by taking into consideration delinquency rate of loans taken out by borrowers with similar risk profile. Due to our business model transformation, we have discontinued setting aside quality assurance fund from the individual investors since the third quarter of 2019. We used to operate investor reserve funds, which were self-protection mechanisms for investors of our investment programs. The investment programs that invested in loans that were not covered by the quality assurance fund used to have their own dedicated investor reserve funds that cover potential payouts to investors of the respective type of investment programs. Funds from investors in an amount equal to a certain percentage of the total principal amount of the underlying loans were set aside into the relevant investor reserve funds at the end of each investment program, which were maintained in the custody accounts managed by China Merchants Bank. If the amount of principal and interests collected, net of our management fee and the investor reserve set aside, was insufficient to cover the investment principal plus the expected return, payouts would be made from the relevant investor reserve funds to cover the difference. If the investor reserve funds were insufficient to pay all the relevant investors with their investment principal and expected returns, the investors would be paid on a pro rata basis, and any losses associated with their outstanding unpaid balances would not be deferred until the next time the fund was replenished by another investment program but would be borne by the investors. Upon completion of an investment program, excess returns, if any, net of our management fee and the investor reserve that was set aside, would be distributed to the investors. The investor reserve fund arrangement was not applicable to those investment programs that invest in loans backed by the quality assurance fund, which would not be mixed with those investment programs investing in loans not subject to the quality assurance mechanism. In light of the tightening regulatory environment, we have discontinued setting aside investor reserve funds since January 1, 2018. Quality Assurance Commitments for Our Institutional Funding Partners
We make available for our institutional funding partners two major types of quality assurance commitments: financing guarantee, and insurance policy.84
We engage licensed third-party financing guarantee companies to provide financing guarantees to our institutional funding partners. For loans guaranteed by third-party financing guarantee companies, if a borrower defaults, the corresponding third-party guarantee company will be obligated to repay the full overdue amount to the institutional funding partner. After the guarantee company repays the full overdue amount, we will be obligated to purchase creditor’s right from the third-party guarantee companies at a price equal to the repayment it made to the institutional funding partner. Under certain circumstances, we also provide security deposits to third-party financing guarantee companies for loans funded by certain institutional funding partners as an additional quality assurance commitment. In November 2019, we incorporated Fujian Zhiyun Financing Guarantee Company, or Fujian Zhiyun. The establishment of Fujian Zhiyun has been approved by Fujian Branch of Financial Administrative Bureau on November 11, 2019. In some cases, Fujian Zhiyun provides financing guarantee services directly to our institutional funding partners for loans funded by them.
In addition, we also provide quality assurance commitments through cooperation with third-party insurance companies. Under this arrangement, if borrowers introduced by us defaults, our institutional funding partners are able to seek insurance compensations under the insurance policies from third-party insurance companies. If the overdue amount exceeds insurance coverage, the remaining overdue amount will be repaid by a third-party guarantee companies engaged by us. See “Item 3. Key Information—D. Risk Factors—Risks Related to Our Business—Limitations on institutional funding partners’ acceptance of credit enhancement may adversely affect our business and access to funding.
The success of our business is dependent on our strong technological capabilities that support us in delivering superior user experience, protecting information on our platform, increasing operational efficiency and enabling innovations. Principal components of our technology include: . Data science technology is extensively used in various aspects of our operations. Our data mining and user behavior analytics capabilities allow us to build a comprehensive credit profile for each borrower. Our multi-dimensional real-time analytics capabilities enable fast and accurate credit decisions. Our massive data processing capabilities enable us to provide an array of automated investing tools assisting investors in increasing investment efficiency. In 2018 and 2019,2021, a total of 178.1 million and 251.426.8 million investment transactions were matched on our platform, respectively. Data-based machine learning is also used in numerous applications, such as improving fraud detection, optimizing marketing resource allocation and increasing collection efficiency. . We are committed to maintaining a secure online platform. We have built a firewall that monitors and controls incoming and outgoing traffic on our platform around the clock. Once any abnormal activity is detected, our system will immediately notify our IT team and at the same time automatically take relevant measures, such as activating third-party traffic control service, to prevent any harm to our platform. For any transmission of user information, we use data encryption to ensure confidentiality. Within our organization, we have adopted a series of policies on internal control over information system, including physical security measures, such as entry and equipment control, and network access management, such as identification, authentication and remote access control. We employ data slicing and distribute the storage of a user’s data points across several servers. We also maintain redundancy through a real-time multi-layer data backup system to prevent loss of data resulting from unforeseen circumstances. We conduct periodic reviews of our technology platform, identifying and correcting problems that may undermine our system security. . Our systems infrastructure is hosted in data centers at two separate locations in Shanghai. We maintain redundancy through a real-time multi-layer data backup system to ensure the reliability of our network. Our platform adopts modular architecture that consists of multiple connected components, each of which can be separately upgraded and replaced without compromising the functioning of other components. This makes our platform both highly reliable and scalable. . With modular architecture, our platform can be easily expanded as data storage requirements and user visits increase. In addition, load balancing technology helps us improve distribution of workloads across multiple computing components, optimizing resource utilization and minimizing response time. . In addition to the foregoing technologies we employ to support our highly automated platform, we have taken various measures to ensure uninterrupted operation of our platform. For example, we adopt self-healing technology that enables our system to perceive malfunction and make necessary adjustments to restore itself to normal operation without any human intervention. Also, our system is connected with systems of multiple data providers that serve as backups for each other. If services provided by one data provider are suspended, our system will shift to the backup sources automatically to ensure no interruption to our operation.
We rely on a combination of patent, copyright, trademark and trade secret laws and restrictions on disclosure to protect our intellectual property rights. As of the date of this annual report,March 31, 2022, we have (i) registered five20 patents in China including our proprietary facial recognition technology used for fraud detection and applied for 119150 additional patents with the PRC State Intellectual Property Office, (ii) registered 122189 software copyrights with the PRC National Copyright Administration, (iii) registered 197201 domain names, including ppdai.com, and (iv) registered 200252 trademarks, including our “FINV,” “PPDAI,” “信也”, “拍拍贷” and “魔镜” trademarks.
Despite our efforts to protect our proprietary rights, unauthorized parties may attempt to copy or otherwise obtain and use our technology. Monitoring unauthorized use of our technology is difficult and costly, and we cannot be certain that the steps we have taken will prevent misappropriation of our technology. From time to time, we may have to resort to litigation to enforce our intellectual property rights, which could result in substantial costs and diversion of our resources. In addition, third parties may initiate litigation against us alleging infringement of their proprietary rights or declaring their non-infringement of our intellectual property rights. In the event of a successful claim of infringement and our failure or inability to develop non-infringing technology or license the infringed or similar technology on a timely basis, our business could be harmed. Even if we are able to license the infringed or similar technology, license fees could be substantial and may adversely affect our results of operations. See “Item 3. Key Information—D. Risk Factors—Risks Related to Our Business—We may not be able to prevent others from unauthorized use of our intellectual property, which could harm our business and competitive position” and “Item 3. Key Information—D. Risk Factors—Risks Related to Our Business—We may be subject to intellectual property infringement claims, which may be expensive to defend and may disrupt our business and operations.” Our market position benefits significantly from our large user base and our strong brand recognition throughout China. We believe that our variety of loan products that offer attractive returns, as well as our effective risk management and investorvarious protection mechanisms lead to strong promotion, which drives awareness of our brand among investors. As a supplement to ourword-of-mouth
marketing, we often offer investment promotions on our websiteusers and mobile application to acquire new investors and holdin-person
meetings with investors to enhance brand awareness among existing investors.business partners.We use a variety of traditional and internet marketing channels to acquire borrowers although most of our borrowers are acquired online. Our borrower acquisition channels mainly include: . From time to time, we work with App Stores to promote our mobile applications and with internet companies to place online advertisements. . We team up with certain websites that are able to reach quality borrowers to provide consumer finance services to their customer. . We also use paid placement on major online search engines in China. Offline Direct Sales Team . We also establish an offline direct sales team with a workforce of 1,000 employees as of December 31, 2021.Online consumer finance market is an emerging industry in China. It provides a new means for consumers to obtain financing. As a leading player in China’s online consumer finance platform market, we face fierceintensive competition from other online marketplaces, online finance service providers, technology giant backed internet finance platforms, as well as traditional financial institutions. Consumer finance marketplaces which operate online platforms connecting borrowers and institutional funding partners compete directly with us for both borrowers and institutional funding partners. As of the date of this annual report, our key competitors include Lufax. In addition, for borrowers, we compete with other online platforms. Examples of such companies include Ant Finance, JD.com and WeBank. We also compete with traditional financial institutions, including credit card issuers, consumer finance business units in commercial banks and other consumer finance companies. Some of our larger competitors have substantially broader product or service offerings and rich financial resources to support heavy spending on sales and marketing. We believe that our ability to compete effectively for borrowers and institutional funding partners depends on many factors, including the variety of our products, user experience on our platform, effectiveness of our risk management, the return offered to institutional funding partners, our partnership with third parties, our marketing and selling efforts and the strength and reputation of our brands.
In addition, as our business continues to grow rapidly, we face significant competition for highly skilled personnel, including management, engineers, product managers and risk management personnel. The success of our growth strategy depends in part on our ability to retain existing personnel and add additional highly skilled employees. We experience seasonality in our business, reflecting seasonal fluctuations in internet usage and traditional personal consumption patterns, as our individual borrowers typically use their borrowing proceeds to finance their personal consumption needs. For example, we generally experience lower transaction volume on our online consumer finance platform during national holidays in China, particularly during the Chinese New Year holiday season in the first quarter of each year. As we have morecooperate with institutional funding partners, such as commercial banks, in our investor base, our business may also be affected by liquidity seasonality in the banking system. For example, liquidity in China’s banking sector has historically had a tendency to be looser at the beginning of each calendar year and tighter towards the end of each calendar year. Overall, the seasonality of our business may increase in the future.
This section sets forth a summary of the most significant laws, rules and regulations that affect our business activities in the PRC and our shareholders’ rights to receive dividends and other distributions from us. Regulations Relating to Online Consumer Finance Services Due to the relatively brief history of the online consumer finance industry in China, the regulatory framework governing our industry has not developed comprehensively. Even though few specificThe PRC government and relevant regulatory authorities have issued various laws and regulations ongoverning the online consumer finance industry have been issued in the past two years, detailed guidance and interpretation has yet to be promulgated by the regulators.few years. Regulations on online lending information servicesintermediaries On July 18, 2015, the Guidelines on Promoting the Healthy Development of Online Finance Industry, , or the Guidelines, were promulgated by ten PRC regulatory agencies, including the PBOC, the MIIT and the CBRC. The Guidelines define online lending and borrowing as direct loans between individualslenders and borrowers through an online platform, which is under the supervision of the CBRC, and governed by the PRC Contract Law of the PRC, the General Principles of the PRC Civil Law of the PRC, and related judicial interpretations promulgated by the Supreme People’s Court. The Contract Law of the PRC, and the General Principles of the Civil Law of the PRC, had been repealed by the Civil Code of the PRC, and the Civil Code of the PRC integrates the rules and guidelines set forth by the Contract Law, the General Principles of the Civil Law, the General Provisions of the Civil Law and other basic civil laws of the PRC. Pursuant to the Guidelines, a company that provides online lending information services shall make it clear its nature of being an information intermediary and provide information services rather than engage in illegal fund-raising, which further requires such company to separate funds of the borrowers and the investors from its own funds. On April 13, 2016, the CBRC issued theNotice on the Implementation Plan of the Special Rectification of Peer-to-peer
OnlineLending Risk by the General Office of the State Council
. By categorizing the market players based on their different levels of legal compliance, the CBRC started to regulate the onlinepeer-to-peer
lending service industry.On August 17, 2016, the CBRC, the MIIT, the Ministry of Public SecurityMPS and the CAC jointly issued the Interim Measures on Administration of Business Activities of Online Lending Information Intermediaries, , or the Interim Measures. The Interim Measures also define the online lending information service providers as financial information intermediaries. Pursuant to the Interim Measures, online lending information service providersintermediaries shall complete registration with local financial regulatory authority and apply for appropriate telecommunication business license in accordance with relevant rules issued by competent telecommunication authority. The Interim Measures also require the online lending information service providersintermediaries to substantially cover “online lending information intermediary” in its business scope filed with the local registration regulatory authority.
According to the Interim Measures, online lending information service providers shall not engage in or accept entrustment to engage in certain activities, including, among others, (i) fund raising for the intermediaries themselves, (ii) holding investors’ fund or setting up capital pools with investors’ fund, (iii) providing security or guarantee to investors as to the principals and returns of the investment, (iv) issuing or selling any bank wealth management products, assets management products of securities companies, fund products, insurance products, trust products or other financial products, (v) mismatch between investor’s expected timing of exit and the maturity date, (vi) securitization, (vii) promoting its financing products on physical premises other than through the permitted electronic channels, such as telephones, mobile phones and internet, (viii) providing loans with its own capital, except as otherwise permitted by laws and regulations; and (ix) equity crowd-funding. The Interim Measures require that online lending information service providers shall restrict the maximum balance of fund borrowed by the same borrower on the same online lending information intermediary platform as well as on several such online lending information intermediary platforms so as to prevent credit concentration risks. The maximum balance of fund borrowed by any individual on the same online lending information intermediary lending platform shall be RMB200,000 (US$28,728.2), and the maximum total balance of the fund borrowed by the same individual on several lending information intermediary platforms shall be RMB1,000,000 (US$143,641.0). The maximum balance of fund borrowed by any entity or other kind of organization on the same online lending information intermediary platform shall be RMB1,000,000 (US$143,641.0), and the aggregate maximum total balance of fund borrowed by any entity or other kind of organization on all online lending information intermediary platforms shall be RMB5,000,000 (US$718,205.1).
With respect to the online lending information intermediary platforms established prior to the implementation of the Interim Measures, provided that such platforms have not been in compliance with the applicable requirements of the Interim Measures, the competent local financial regulatory department would require such platforms to make correction or rectification within a12-month
transition period specified by the Interim Measures.Pursuant to the Interim Measures, if an online lending information service provider violates any applicable laws, regulations or relevant regulatory provisions relating to online lending information services, sanctions could be imposed by the local financial regulatory departments or other relevant regulatory departments, including, among others, supervision interviews, regulatory warning, correction order, condemnation, credit record modification, fine up to RMB30,000 (US$4,309.2)4,708), and criminal liabilities if the act constitutes a criminal offense. Pursuant to the Interim Measures, if an online lending information intermediary fails to set up custody accounts with qualified bank for the funds of investors and borrowers, administrative sanctions includes but not limited to fines, warning letter, rectification order, public notice of criticism, filing thenon-compliance
conducts with the public credit record system, and other penalties according to the laws and regulations.In accordance with the Guidelines and the Interim Measures, the CBRC issued theGuidelines for the Funds Custodian Business of Online Lending
, or the Custodian Guidelines on February 22, 2017. The Custodian Guidelines further clarifies the custodian requirement for the funds of investors and borrowers held by online lending information service providers.The Custodian Guidelines specifies that an online lending information service provider may only designate one qualified commercial bank as its fund custodian institution for the funds of investors and borrowers held by it, and further clarifies detailed requirements and procedures for setting up custody accounts with commercial banks. To the extent that the relevant online lending information service providers and commercial banks are not in full compliance with the Custodian Guidelines, they are required to make correction or rectification within asix-month
rectification period specified by the Custodian Guidelines.
In accordance with the Guidelines and the Interim Measures, the CBRC further issued theGuidelines on Information Disclosure of the Business Activities of Online Lending Information Intermediaries
, or the Disclosure Guidelines, on August 23, 2017. The Disclosure Guidelines further clarified the disclosure requirements for online lending information service providers. Pursuant to the Disclosure Guidelines, online lending information service providers should disclose certain information on their websites and all other internet channels, including mobile applications, WeChat official accounts or Weibo, including, among others (i) the record-filing and registration information, the organization information, the examination and verification information, and transaction related information, including transactions matched through the online lending information service providers for the previous month, all of which shall be disclosed to the public; (ii) the basic information of the borrowers and the loans, the risk assessment of such loans, and the information of the outstanding transactions matched, all of which shall be disclosed to the investors; and (iii) any event that would result in a material adverse effect to the operations of online lending information providers, which shall be disclosed to the public within 48 hours upon occurrence. The Disclosure Guidelines also require online lending information service providers to record all the disclosed information and retain such information for no less than five years from the date of the disclosure. To the extent that the relevant online lending information service providers are not in full compliance with the Disclosure Guidelines, they are required to make correction or rectification within asix-month
rectification period starting from the date the Disclosure Guidelines was issued.In December 2017, the Internet Finance Rectification Office and the Online Lending Rectification Office jointly issued theNotice on Regulating and Rectifying “Cash Loan” Business
, or the Circular 141, outlining general requirements on the “cash loan” business conducted by network micro-lending companies, banking financial institutions and online lending information intermediaries. The Circular 141 specifies the features of “cash loans” as not relying on consumption scenarios, with no specified use of loan proceeds, no qualification requirement on customers, and with no security. Borrowers on our platform are required to specify their uses of loan proceeds. The Circular 141 sets forth several general requirements with respect to “cash loan” business, including, without limitation: (i) the aggregated 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; (ii) all relevant institutions shall follow the “know-your-customer” principle and prudentially assess and determine the borrower’s eligibility, credit limit andcooling-off
period, among others; (iii) loans to any borrower without income sources are prohibited; (iv) all relevant institutions shall enhance the internal risk control and prudentially use the “data-driven” risk management model; (v) online lending information intermediaries are prohibited from facilitating any loans to students or other persons without repayment source or repayment capacity, or loans with no designated use of proceeds; (vi) online lending information intermediaries are not permitted to deduct interest, handling fee, management fee or deposit from the principal of loans provided to the borrowers in advance; and (vii) for the financial institutions that participate in the “cash loan” business, no third parties will charge borrowers any interests or fees.On December 8, 2017, the National Online Lending Rectification Office issued the Notice on the Rectification and Inspection Acceptance of Risk of Online Lending Information Intermediaries, or the Circular 57, providing further clarification on several matters in connection with the rectification and record-filing of online lending information intermediaries, including, among other things, requiring the online lending information intermediaries discontinue setting aside additional funds as risk reserve funds or originating new risk reserve funds, and the existing balance of risk reserve funds shall be gradually reduced.
In accordance with the Circular 57 sets forth certain requirements which an online lending information intermediary shall not be in breach before it can qualify for the record-filing, including: (i) an online lending information intermediary may not conduct the “thirteen prohibited actions” or exceed the Individual Lending Amount Limit after August 24, 2016, and shall gradually reduce the balance; (ii) an online lending information intermediary which has participated in businesses of the real estate mortgage, campus loan or “cash loan,” is required to suspend the new loan origination and the outstanding balance of the abovementioned loan shall be gradually reduced within a certain timetable as required under the CBRC Circular 26 and the Circular 141; and (iii) the online lending information intermediaries are required to set up custody accounts with qualified banks that have passed certain testing and evaluation procedures run by the National Online Lending Rectification Office to hold customer funds. For the online lending information intermediaries that are unable to accomplish the rectification and record-filing but are continuing to participate in the online lending business, the relevant authorities shall subject online lending information intermediaries to administrative sanctions, including but not limited to revoking their telecommunicating business operation license, shutting down their business websites and requesting financial institutions not to provide any financial services to such online lending information intermediaries.87
According to the Circular 57, the local governmental authorities shall conduct and complete acceptance inspection of the rectification with the following timetable: (i) completion of record-filing for major online lending information intermediaries by the end of April 2018; (ii) with respect to online lending information intermediaries with substantial outstanding balance of those loans prohibited under the relevant laws and regulations and timely reduction of those balance is difficult, the relevant business and outstanding balance shall be disposed and/or carved out, and record-filing shall be completed by the end of May 2018; (iii) with respect to those online lending information intermediaries with complex and extraordinary circumstances and substantial difficulties exist to complete rectification, the “relevant work” shall be completed by the end of June 2018.
In accordance with the latest regulations regarding online lending information intermediaries issued by relevant departments, Shanghai Financial Office and China Banking Regulatory Commission Shanghai Office jointly issued the Instructions on the Reviewing of Compliance and Rectification and Inspection and Acceptance of Shanghai Online Lending Information Intermediaries, or the Instructions, on December 26, 2017, providing the further clarification on illegal issues and requirements in connection with rectification and acceptance of online lending information intermediaries, including, among others thing:
Violation of prohibited regulations;
Violation of legal obligations and requirements of risk management;
Failure to perform the protection obligation to borrowers and investors;
Violation of requirements of information disclosure;
Violation of regulations of “college online loan” and “cash loan”;
Other violation of relevant regulations and risk disclosure matters.
It is unclear whether our standard loan products would be viewed as the “cash loans” specified in the Circular 141 and thus be subject to the provision thereunder. Nevertheless, we have made several adjustments to comply with these new requirements.
With respect to network micro-lending companies, the Circular 141 requires the relevant regulatory authorities to suspend the approval of the establishment of network micro-lending companies and the approval of any micro-lending business across provinces. The Circular 141 also specifies that network micro-lending companies shall not provide campus loans, and should suspend the funding of network micro-loans with no specific scenario or designated use of loan proceeds, gradually reduce the volume of the existing business relating to such loans and take rectification measures in a period to be separately specified by authorities. Further detailed requirements on network micro-lending companies are provided in a rectification implementation plan issued by the Online Lending Rectification Office on December 8, 2017.
The Circular 141 also sets forth several requirements on banking financial institutions participating in “cash loan” business, including (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.
In additions, the Circular 141 emphasizes several requirements on the online lending information intermediaries. For instance, such intermediaries are prohibited from facilitating any loans to students or other persons without repayment source or repayment capacity, or loans with no designated use of proceeds. Also, such intermediaries are not permitted to deduct interest, handling fee, management fee or deposit from the principal of loans provided to the borrowers in advance.
Any violation of the Circular 141 may result in penalties, including but not limited to suspension of operation, orders to make rectification, condemnation, revocation of license, order to cease business operation, and criminal liabilities.
On March 28, 2018, National Internet Finance Rectification Office issuedthe Notice on Strengthening Rectification and Carrying Out Inspection Acceptance Work of Online Asset Management Operations
, or Circular 29, which provided that without the license or approval from the PRC financial regulatory authorities, no entity may issue or sell asset management products through the internet. The definition of “asset management product” is not provided in Circular 29. The application and interpretation of Circular 29 are ambiguous and may be interpreted and applied inconsistently between different government authorities. Any entities that violate Circular 29 may be deemed to be conducting illegal financial business operation and subject to administrative sanctions such as revoking telecommunication license, revoking business license, shutting down the business website, removing the mobile application from application stores and application distributing channels, requesting financial institutions not to provide any financial services to such entity, and even criminal liability. On April 27, 2018 the People’s Bank of China, the China Banking and Insurance Regulatory Commission, the China Securities Regulatory Commission, and the State Administration of Foreign Exchange issuedthe Guiding Opinions on Regulating the Asset Management Business of Financial Institutions
, or the New Asset Management Rule, which provides, among others, that (i) the “asset management products” includes, among others, thenon-guaranteed
bank wealth management products denominated in RMB or foreign currency, trust products, asset management products issued by security companies and their subsidiaries, fund management companies and their subsidiaries, futures companies and their subsidiaries, insurance asset management institutions, financial asset investment companies; (ii) non-financial
institutions and individuals are not allowed to sell the asset management products as a role of an agent without the approval of the financial regulatory authorities; and (iii) “sell as a role of an agent” means recommending and selling the asset management products lawfully issued by the third-party institutions to the investors within its own sales channel. Thenon-financial
institutions in violation of the New Asset Management Rules to publicly advertise the asset management products through the internet may be deemed as illegal fundraising, illegal securities offering, or illegal absorbing public deposits, and subject to penalties according to the laws and regulations, including criminal liabilities. We display financial products provided by commercial banks and securities fund selling companies on our mobile application and WeChat official account. By one click, individual investors can access directly to the selling webpage of the banks and securities fund selling companies. As we only provide a channel for our individual investors to purchase third-party financial products and we are not directly involved in the sales of those financial products, we do not believe that we are engaged in selling bank wealth management products or fund products on an online lending information platform, which is explicitly prohibited by the Interim Measures, or selling asset management products without license or approval, which is explicitly prohibited by Circular 29 and the New Asset Management Rules. See “Item 3. Key Information—D. Risk Factors—Risks Related to Our Business—If our practice is deemed to violate any PRC laws and regulations, our business, financial condition and results of operations would be materially and adversely affected.”In December 2018, the National Internet Finance Rectification Office and the National Online Lending Rectification Office jointly issued the Guidance on the Classification and Disposal of Risks of Online Lending Information Intermediaries and Risk Prevention, , or Circular 175. Circular 175 refers to normal intermediaries as large-scale online lending information intermediaries that are strictly in compliance with relevant laws and regulations and have not demonstrated any high-risk characteristics. Circular 175 reiterated relevant regulatory requirements by providing that normal intermediaries should strictly control and manage the business scale and the number of investors. Circular 175 further tightens the regulation of the industry by requiring institutions other than normal intermediaries, including shell intermediaries with no substantive operations, small-scale intermediaries, intermediaries with high risks, and intermediaries that are unable to repay investors or otherwise unable to operate their businesses, to exit the online lending information intermediary industry.
We have taken various measures to comply with the Interim Measures, the Custodian Guidelines, the Disclosure Guidelines, the Circular 141, the Inspection Notice and the Checklist, Circular 175, and other laws and regulations that are applicable togoverning online consumer finance, we have ceased facilitating new loans with funding from individual investors on our platform since October 2019 and improve our business operations. For example, we have changed the cooperation model with certainthrough acquisition of better quality borrowers and transition of our funding sources from individual investors to institutional funding partnerspartners. On January 14, 2022, the Shanghai Financial Stability Coordinating Joint Conference Office, the Shanghai Online Lending Risk Rectification Office, and ceased certain practiceother regulatory authorities jointly announced that could be regarded as a formShanghai PPDai, among others, had declared the termination of credit enhancement or guarantee. However, given that detailed regulations and guidance in the area of online lending information services are yet to be promulgated, we cannot be certain that our existing practices would not be deemed to violate any existing or future rules, laws and regulations. In addition, the custody account agreement between China Merchants Bank and us expired in March 2020. We have migrated the funds of outstanding loans historically facilitated by our online lending information platform to a third-party payment system managed by a third-party payment company. Handling the repayment and settlement between borrowers and individual investors by a third-party payment company, as opposed to a custodian bank, is explicitly prohibited by the Interim Measures. See “Item 3. Key Information—D. Risk Factors—Risks Related to Our Business—We started ourits business operation as an online lending information intermediary and the laws and regulations governing online lending information intermediary industry in China are developing and evolving and subject to changes. If our business practices are deemed to violate any existing and future applicable laws, regulations or requirements of local regulatory authorities, our business, financial condition and results of operations would be materially and adversely affected” and “Item 3. Key Information—D. Risk Factors—Risks Related to Our Business—If our practice is deemed to violate any PRC laws and regulations, our business, financial condition and results of operations would be materially and adversely affected.”fully settled all related legacy loan products funded by individual investors.
Regulations on loans between individualslending activities The PRC Contract Law confirms the validity of loan agreement between individuals and provides that a loan agreement becomes effective when an individual lender provides loan to an individual borrower provided that the interest rates charged under the loan agreement do not violate the applicable provisions of the PRC laws and regulations. On December 28, 2019, the Standing Committee of the The 13th National People’s Congress orapproved the SCNPC, approved a resolution to submit the draft Civil Code of the PRC to the third annual session of the 13th
National People’s Congress, or the NPC, for review and approval. If the draft Civil Code of the PRC is approved by the NPC, uponon May 22, 2020. Upon the effectiveness of the Civil Code of the PRC on January 1, 2021, the PRC Contract Law, the General Provisions of the PRC Civil Law, and the General Principles of the PRC Civil Law will behave been abolished and replaced, while their provisions will beare generally incorporated into the Civil Code of the PRC with certain changes and supplements. The third annual session of the 13th
NPC was planned to be held on March 5, 2020, which has been postponed to May 22, 2020 due to the outbreak ofCOVID-19
in China. It remains unclear with respect to the final version of the Civil Code of the PRC, the timetable for enactment, and the relevant interpretations and implementations. Moreover, it remains unclear how theimplementations of certain provisions of the Civil Code of the PRC if enacted as proposed,and how these provisions of the Civil Code of the PRC will apply to our business operations. For example, pursuant to the draft of the Civil Code of the PRC, published by the SCNPC on December 28, 2019, the usurious loans are explicitly banned, but a clear definition or interpretation of “usurious loans” is not provided. Therefore, ifWe cannot rule out the possibility that certain of our operation activities would be deemed to violate or not fully comply with the Civil Code of the PRC will be enacted as proposed, we cannot assure youPRC. If that happens, our business, collaboration with our institutional funding partners willresults of operations and financial condition would be materially and adversely affected.On September 4, 2020, nine local governmental authorities in full compliance with it.Shanghai jointly issued the Guidance on Further Strengthening the Administration of Financial Advertisement, which stipulates, among others, that (i) advertisements released by financial institutions and financial service providers should be within the scope permitted by the local governmental authorities; (ii) any market players without the relevant financial business qualifications cannot advertise or promote financial business; (iii) the financial advertisements should not induce purchase of improper financial products or services; and (iv) financial service provider is required to disclose name of its client when acting as an intermediary. In accordance with the Provisions on Several Issues Concerning Laws Applicable to Trials of Private Lending Cases issued by the Supreme People’s Court on August 6, 2015, or the Private Lending Judicial Interpretations, which came into effect on September 1, 2015, in the event that loans are made through an online lending information intermediary platform and the platform only provides intermediary services, courts shall dismiss any claim concerned against the platform demanding the repayment of loans by the platform as a guarantor.
The Private Lending Judicial Interpretations also provide that agreements between lenders and borrowers on loans with interest rates below 24% per annum are valid and enforceable. As to the loans with interest rates per annum between 24% (exclusive) and 36% (inclusive), if the interest on the loans has already been paid to the lender, and so long as such payment has not damaged the interest of the state, the community and any third parties, the courts will turn down the borrower’s request to demand the return of the excess interest payment. If the annual interest rate of a private loan is higher than 36%, the agreement on the excess part of the interest is invalid, and if the borrower requests the lender to return the part of interest exceeding 36% of the annual interest that has been paid, the courts will support such requests. The interest rates of all our loan products are below 36% and certain loans financed by our investment programs have interest rates that exceed 24%. In addition, on August 4, 2017, the Supreme People’s Court issued the Circular of Several Suggestions on Further Strengthening the Judicial Practice Regarding Financial Cases, , which provides, among others, that (i) the claim of the borrower under a financial loan agreement to adjust or cut down the part of interest exceeding 24% per annum on the basis that the aggregate amount of interest, compound interest, default interest, liquidated damages and other fees collectively claimed by the lender is overly high shall be supported by the PRC courts; (ii) in the context of Internet finance disputes, if the online lending information intermediary platforms and the lender circumvent the upper limit of the judicially protected interest rate by charging intermediary fee, it shall be determined as invalid; and (iii) private lending transaction is defined as lending between individuals, legal persons and other organizations. Loans funded by financial institutions which are licensed by financial regulatory authorities are not private lending transactions. On August 20, 2020, the Supreme People’s Court issued the Decision on Amending the Provisions on Several Issues Concerning Laws Applicable to Trial of Private Lending Cases, which is further amended by the Supreme People’s Court on December 29, 2020, or the Private Lending Judicial Interpretation Amendment, which amended the upper limit of private lending interest rates under judicial protection. The Private Lending Judicial Interpretation Amendment provides that where the lender requests the borrower to pay interest in accordance with the interest rate agreed upon in the agreement, the people’s court shall support such request, except where the interest rate agreed by both parties exceeds four times of theone-year Loan Prime Rate at the time of the establishment of the agreement, or the Quadruple LPR Limit. Theone-year Loan Prime Rate refers to theone-year loan market quoted interest rate issued by the National Bank Interbank Funding Center which was authorized by the PBOC, on the 20th of each month since August 20, 2019. According to the Private Lending Judicial Interpretation Amendment, the upper limit of interest rates of 24% and 36% provided in the 2015 Private Lending Judicial Interpretation, are replaced by the Quadruple LPR Limit. Moreover, if the lender and the borrower agree on both the overdue interest rate and the liquidated damages or other fees, the lender may choose to claim any or all of them, but the portion in total exceeding the Quadruple LPR Limit shall not be supported by the people’s court. The Private Lending Judicial Interpretation Amendment applies to new first-instance cases of private lending disputes accepted by the People’s Court after the implementation of the Judicial Interpretation Amendment on August 20, 2020. If the lending occurred before August 20, 2019, the upper limit of the protected interest rate can be determined by referring to four times of theone-year Loan Prime Rate at the time of the plaintiff’s filing of lawsuit. On January 21, 2021, in the response letter to the Guangdong High People’s Court relating to the inquiry on the scope of application of the Private Lending Judicial Interpretation Amendment issued by the Supreme People’s Court, it further clarifies that seven types of financial organizations, including micro-loan lending companies and financing guarantee companies, are financial institutions licensed by the financial administrative authorities, and the disputes arising out of their financial business activities do not apply to the Private Lending Judicial Interpretation Amendment. However, as the regulatory authorities have wide discretion in administration, interpretation and enforcement of the laws and regulations, we cannot rule out the possibility that the regulatory authorities may hold different opinions on whether Quadruple LPR Limit applies to the loans funded by financial institutions on our platform. For example, according to the Notice on Regulating and Rectifying “Cash Loan” Business, or Circular 141, promulgated by the Internet Finance Rectification Office and the Online Lending Rectification Office in December 2017, in the context of “cash loan” business operated by various types of institutions, the aggregated borrowing costs of borrower charged in forms of interests and all kinds of fees should be annualized and subject to the upper limit on interest rate of private lending set forth in the judicial interpretations issued by the Supreme People’s Court. On March 31, 2021, the PBOC released its No. 3 announcement in 2021, or the PBOC No. 3 Announcement, which stipulates, among others, that the annual interest rate of a loan should be the annualized form of ratio calculated based on the percentage of all expenses charged from the borrower for the borrowing to the principal actually borrowed by this borrower. The expenses charged from the borrower include the interests and the various expenses directly related to the borrowing. If the loan is repaid in installments, the remaining principal after the deduction of the total repaid principal should be deemed as the actual borrowed principal when calculating the annual interest rate. Compound interest rate and simple interest rate are both allowed to be used to calculate the annual interest rate, provided that if simple interest rate is used, it should be explicitly disclosed to the borrower. The PBOC No. 3 Announcement applies to deposit-taking financial institutions, consumer finance companies, micro-loan lending company, and internet platforms providing loan application services like us. See “Item 3. Key Information—D. Risk Factors—Risks Related to Our Business—Interest rates of certain of our loan products exceed the statutory interest rate limit and therefore part of the interests is not enforceable through the PRC judicial system.”
The Circular 141 further clarifies that inspecifies the contextfeatures of “cash loans” as not relying on consumption scenarios, with no specified use of loan proceeds, unsecured, and no qualification requirement on customers, among others. The Circular 141 also sets forth several general requirements with respect to “cash loan” business, operated by various types of institutions,including but without limitation: (i) the aggregated borrowing costs (as opposed to interest rate) of borrowers charged by “cash loan” business operatorsinstitutions 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. Regulations on record-filings of online lending information intermediary service agency
In November 2016,Court;(ii) all relevant institutions shall follow the CBRC,“know-your-customer” principle and prudentially assess and determine the MIITborrower’s eligibility, credit limit and cooling-off period; (iii) all relevant institutions shall enhance the State Administration for Industryinternal risk control and Commerce, orprudentially use the SAIC, jointly published the Guidelines on the Administration of Record-filings of Online Lending Information Intermediary Agencies, or the Record-filings Guidelines, to establish and improve the record-filing mechanisms for online lending information intermediaries.According to the Record-filings Guidelines, a newly established online lending information intermediary shall make the record-filings with the local financial regulatory authority after obtaining the business license; while with respect to any online lending information intermediary which is established and begins to conduct the business prior to the publication of this Record-filings Guidelines, the local financial regulatory authority shall, pursuant to relevant arrangement of specific rectification work for risks in onlinepeer-to-peer
lending, accept the application for record-filings submitted by a qualified online lending information intermediary, or any online lending information intermediary which has completed the rectification confirmed by relevant authorities.On December 8, 2017, the National Online Lending Rectification Office issued the Notice on the Rectification and Inspection Acceptance of Risk of Online Lending Information Intermediaries, or the Circular 57, providing further clarification on several matters in connection with the rectification and record-filing of online lending information intermediaries, including, among other things:
Requirements relating to“data-driven” risk reserve funds
. The online lending information intermediaries shall discontinue setting aside additional funds as risk reserve funds or originating new risk reserve funds. In addition, the existing balance of risk reserve funds shall be gradually reduced. Moreover, online lending information intermediariesmanagement model; (iv) all institutions are prohibited from promoting their services by publicizingextending any loans to any persons without repayment source or repayment capacity, or loans with no designated use of proceed; (v) funds from banks cannot be used for “cash loan” or “campus loan”; and (vi) in the risk reserve funds, and authorities shall actively encouragecase where a financial institution participates in the online lending information intermediaries“cash loan” business, any third parties are not allowed to seekcharge borrowers any interests or fees. Circular 141 further provides that financial institutions cooperating with third parties to engage in lending business (i) are not allowed to outsource any core lending business operations, such as credit assessment and risk management, to third parties, (ii) are not allowed to accept any credit enhancement provided by third parties without any license or approval to provide lendersguarantees, including credit enhancement service in the form of a commitment to assume default risks, (iii) should comply with alternate means of investors protection, including third-party guarantee arrangements.Requirements to qualify for record-filing
. The Circular 57 sets forth certain requirements which an online lending information intermediary shall not be in breach before it can qualify for the record-filing, including: (i) an online lending information intermediary may not conductjudicial interpretations by the “thirteen prohibited actions” or exceed the Individual Lending Amount Limit after 24, 2016, and shall gradually reduce the balance; (ii) an online lending information intermediary which has participated in businessesSupreme People’s Court of the real estate mortgage, campus loanPRC regarding interest rates in private lending regarding the annual borrowing cost charged to a borrower, i.e. interests plus other fees, and (iv) should ensure that third parties do not collect any interests or “cash loan,” is required to suspend the new loan origination and the outstanding balancefees from borrowers.Any violation of the abovementioned loan shall be gradually reduced within a certain timetable as required under the CBRC Circular 26 and the Circular 141; and (iii) the online lending information intermediaries are required to set up custody accounts with qualified banks that have passed certain testing and evaluation procedures run by the National Online Lending Rectification Office to hold customer funds. For the online lending information intermediaries that are unable to accomplish the rectification and record-filing but are continuing to participate141 may result in the online lending business, the relevant authorities shall subject online lending information intermediaries to administrative sanctions,penalties, including but not limited to revoking their telecommunicatingsuspension of operation, orders to make rectification, condemnation, revocation of license, be ordered to cease business operation license, shutting down their operations, and even criminal liabilities. On July 12, 2020 the CBIRC promulgated the Interim Measures for Commercial Banks Doing Online Lending Business, or the Interim Measures for Banks, pursuant to which the banks may collaborate with financing guarantee companies,e-commerce business websitescompanies, third-party payment companies and requesting financial institutions not to provide any financial services to suchinformation technology companies in various online lending business processes and activities, including but not limited to client referral, joint loan origination, risk distribution, information intermediaries.technology and loan collection. However, when collaborating with third parties for online lending businesses, the banks are required to independently manage core risk control procedures, such as the credit assessment and contract conclusion, and should be responsible for post-loan managements. Each of the regional banks, which is an important category of our institutional funding partners, should (i) provide online lending services primarily to its local clients, (ii) be prudent to extend loans to borrowers who reside outside its region, and (iii) take appropriate measures to monitor the business operations when serving the clients who are located outside its region. The banks may not accept credit enhancements, in a direct or a disguised form, provided by a third-party partner without financing guarantee license or credit security insurance license. The banks shall adopt appropriate measures to monitor the use of loan proceeds. The banks should evaluate and review the online lending partners they collaborate with at least once a year and terminate the cooperation if any incompetency is identified. On February 19, 2021, the CBIRC further issued the Notice of Further Regulating Online Loan Business of Commercial Banks, also known as Circular 24, which provides that the commercial banks shall independently carry out the risk management of online loans and are forbidden from outsourcing the material procedures of loan management. The outstanding balance of online loans extended by a bank in collaboration with third-party platforms should not exceed 50% of the bank’s total outstanding balance. Where a commercial bank and its joint lending partner jointly contribute funds to issue online loans, the funding contribution percentage of its joint lending partner shall not be less than 30%. Circular 24 further strengthens the requirement that commercial banks are strictly prohibited from outsourcing the material procedures of loan management, and local commercial banks from engaging in an online loan business outside the territory of their registered place. The requirements on the limit of 30% lower limit for the joint lending loans and the cross-regional prohibition came into effect on January 1, 2022. Thenon-conforming legacy loans that extended before the promulgation of Circular 24 may be settled on their relative maturity dates. With certain limited exceptions, the Interim Measures for Banks and Circular 24 apply to the consumer finance companies and trust companies when they conduct online lending business. As our institutional funding partners include commercial banks, consumer finance companies and trust companies, they are required to evaluate and review us as required by the Interim Measures for Banks. If any of our institutional funding partners identifies any incompetency of us in such evaluation and review, it may terminate the cooperation with us and our business and operation results would be adversely and materially affected. Furthermore, we act as an intermediary between institutional funding partners and borrowers, and we cannot assure you that all the institutional funding partners we cooperate with have been and will be in strict compliance with the Interim Measures for Banks and Circular 24.
Requirements relating toOn December 31, 2021, the timingPBOC, CBIRC and five other regulatory authorities jointly published the Administrative Measures for Online Offering of record-filing
. The local governmental authorities shall conduct and complete acceptance inspection of the rectification with the following timetable: (i) completion of record-filingFinancial Products (Draft for major online lending information intermediaries by the end of April 2018; (ii) with respect to online lending information intermediaries with substantial outstanding balance of those loans prohibited under the relevant laws and regulations and timely reduction of those balance is difficult, the relevant business and outstanding balance shall be disposed and/or carved out, and record-filing shall be completed by the end of May 2018; (iii) with respect to those online lending information intermediaries with complex and extraordinary circumstances and substantial difficulties exist to complete rectification, the “relevant work” shall be completed by the end of June 2018.In August 2018, the National Online Lending Rectification Office issuedthe Notice on Launching Compliance Inspection on Online Lending Information Intermediaries
Comments), or the Inspection Notice,Draft Offering Measures, which requiresstipulates that, online lending information intermediaries, internet finance associations and local online lending rectification offices conduct compliance inspections based on a checklist of 108 compliance criteria, or the Checklist, and that such inspections shall be completedamong others, (i) except otherwise explicitly stipulated by the end of December 2018. Afterlaws or regulations, a financial institution cannot authorize other organizations to offer its financial products; (ii) without approval from the compliance inspection, online lending information intermediaries that comply with applicable rules and regulations are allowed to integrate their business operation systems into the industry-wide information disclosure systems and product registration systems. Upon completion of such integration,competent financial regulatory authorities, any third-party internet platform cannot get involved, or get involved in a disguised form, in the online lendingoffering of financial products, including but not limited to, procedures of interactive consultant with the consumer, know-your-customer, sales contract conclusion, or fund transferring. The third-party internet platform cannot participate, or participate in a disguised form, in sharing the revenue generated from the financial business; (iii) the third-party internet platform cannot illegally crack, hold, nor store customer information intermediariesand business data; (iv) the “online offering” is defined as commercial promotion and recommendation activities of the financial products on the internet platform, including but not limited to exhibiting the financial product information and the financial institution’s brand name or logo, providing sales channel for consumers to purchase financial products. The “financial products” includes deposit products, loan products, asset management products, etc. that are designed, developed, or sold by financial institutions; and (v) a transition period of 6 months would be given to the existingnon-compliance activities before the effectiveness of the draft. As uncertainties remain regarding when the Draft Offering Measures would be adopted and become effective, and to what extent we would be subject to the Draft Offering Measures, we cannot assure you that we will be able to submit filing applications for record-filings pursuantcomply with such regulations in all respects in a timely manner, or at all, and we may be ordered to detailed proceduresrectify or terminate any actions that are deemed illegal by regulatory authorities. If we cannot rectify our business model in a timely manner, or at all, the regulatory authorities may levy fines, confiscate our income, revoke our business licenses, and require us to be issueddiscontinue our relevant business or impose restrictions on the affected portion of our business. Any of these actions by the competent regulatory authorities. However, it remains unclear when the detailed procedures for such system integrationsPRC government may have a material adverse effect on our business and filing applications will be issued.According to the Inspection Notice and the Checklist, compliance inspection should specifically focus on the following ten aspects: (i) whether it is operated as information intermediary as opposed to operating credit intermediary, (ii) whether a capital pool exists and whether there are advance payments on behalfresults of clients, (iii) whether there is any self-financing activities or activities similar to self-financing, (iv) whether guarantees or guaranteed repayment of principal and interest are provided directly or indirectly to lenders, (v) whether guaranteed repayment of principal and payment of interest were made upon maturity, (vi) whether a risk evaluation on lenders is made and whether lenders are managed based on different risk levels, (vii) whether risks regarding borrowers are fully disclose to lenders, (viii) whether thesmall-sized
and diversified online lending principle is followed, (ix) whether wealth management products are offered to raise capital (or offer wealth management products through a divested affiliates), (x) whether large amount and high interest are used in the advertisement to attract borrowers or lenders.We did a self-inspection based on the Inspection Notice and the Checklist and submitted a self-inspection report to Association of Shanghai Internet Financial Industry, or the ASIFI, National Internet Finance Association of China, or the NIFA, and Shanghai Online Lending Rectification Office. operations.Regulations on illegal financial institutions and intermediaries The Measures for Banning of Illegal Financial Institutions and Illegal Financial Business Operations, , or the Measures for Illegal Financial Institutions, promulgated by the State Council on July 13,1998, provides that the establishment of financial institution should be subject to the approval of People’s Bank of China, or PBOC. Without such approval, no entity or individual may establish financial institution or conduct financial business operation. Pursuant to the Measures for Illegal Financial Institutions, extending loans without the approval of PBOC is deemed as illegal financial business operation and the entity extending loans without the approval of PBOC is deemed as an illegal financial institution. The online consumer finance industry is new and developing rapidly, and the regulatory environment has evolved since the promulgation of the Measures for Illegal Financial Institutions. There are uncertainties as to the interpretation of the Measures for Illegal Financial Institutions as well as whether such laws and regulations are applicable to us or our business. Shanghai PPDai acts as an information intermediary for borrowers andWe have ceased facilitating new loans with funding from individual investors and is not a party to the loan agreements of loans facilitated throughon our platform. We entered into a custody account arrangement with China Merchants Bank, whereby funds of borrowers and individual investors were deposited into and settled by custodian bank. Our custody account arrangement with China Merchants Bank expired on March 19, 2020. See “Item 3. Key Information—D. Risk Factors—Risks Related to Our Business—We started our business as an online lending information intermediary, and the laws and regulations governing online lending information intermediary industry in China are developing and evolving and subject to changes. If our business practices are deemed to violate any existing and future applicable laws, regulations or requirements of local regulatory authorities, our business, financial condition and results of operations would be materially and adversely affected.”platform since October 2019. Furthermore, in some cases we repaid outstanding balance of certain loans to the individual investors on our platform. In connection with our quality assurance commitments provided through third-party financing guarantee companies, we purchased creditor’s rights from third-party financing guarantee companies after these financing guarantee company repay the full overdue amounts to our institutional funding partners. We may be deemed to be financing loans without the approval of PBOC. See “Item 3. Key Information—D. Risk Factors—Risks Related to Our Business—We may be deemed to finance certain loans and therefore subject us to regulatory risks.” If our business practices are deemed to violate any existing and future applicable laws, regulations or requirements of local regulatory authorities, our business, financial condition and results of operations would be materially and adversely affected. ” Although the trust management companies that administer the trusts have been licensed and approved by the financial regulatory authorities to extend loans and we believe that it is the licensed trust management companies, not us, that extend loans to the borrowers under such trust arrangements, we cannot assure you that the financial regulatory authorities will hold the same view as ours. Our investments in the trusts may be deemed to be extending loans to the borrowers and we may be regarded as a lender in this arrangements, and therefore we may be deemed to be an illegal financial institution, which may subject us to penalties, including confiscation of illegal gains together with a fine from one time to five times of the illegal gains, or a fine of RMB100,000 to RMB500,000 if there are no illegal gains, and criminal liability if the violation constitutes a criminal offense.
In addition, the Supreme People’s Court, the Supreme Peoples’ Procuratorate, the Ministry of Public Security,MPS, and the Ministry of Justice jointly issued the Guidance on Several Issues for Illegal Lending Regarding Criminal Case, , or the Guidance on Illegal Lending, on July 23, 2019, which provides, among others, that (i) if any entity or individual is engaged in extending loans to the unspecified public individuals consistently for the purpose of profits and without the approval from the regulatory authorities or outside its business scope, which disturbs the stability of financial markets, such entity or individual may face a criminal charge of unfair competition and may be imposed criminal liability in accordance with the applicable laws and regulations; “extending loans to the unspecified public individuals consistently” refers to extending loans to entities and individuals no less than ten times within two years; and (ii) if the actual annual interest rate of the loans extended by such entity or individual exceeds 36%, it would be deemed as an aggravated circumstance when such entity or individual face the abovementioned criminal charge of unfair competition. The Guidance on Illegal Lending is new and does not provide a clear definition to calculate the actual annual interest rate, and it is still unclear how the regulatory authorities will interpret and implement it in the future. We cannot rule out the possibility that regulatory authorities may deem our operation activities under the trust arrangements as unfair competition and impose criminal liability on us. If that happens, our business, results of operations and financial condition would be materially and adversely affected. According to the Civil Code of the PRC, Contract Law, an intermediation contract is a contract whereby an intermediary presents to its client an opportunity for entering into a contract or provides the client with other intermediary services in connection with the conclusion of a contract, and the client pays the intermediary service fees. Our business practice of connecting our institutional funding partners with individual borrowers may constitute intermediary service, and our service agreements with borrowers and investorsinstitutional funding partners may be deemed as intermediation contracts under the PRC Contract Law.Civil Code of the PRC. Pursuant to the Civil Code of the PRC, Contract Law, an intermediary must provide true information relating to the proposed contract. If an intermediary conceals any material fact intentionally or provides false information in connection with the conclusion of the proposed contract, which results in harm to the client’s interests, the intermediary may not claim for service fees and is liable for the damages caused. Regulations on financial guarantee In June 1995, the Standing Committee of the National People’s Congress, or the SCNPC, promulgated the PRC Guarantee Law. According to the PRC Guarantee Law, an action of guarantee means that the guarantor agrees to repay the outstanding debts to the creditor or assume any other relevant responsibilities when the debtor fails to repay the outstanding debts or fulfill the responsibilities. The Regulations on the Administration of Financing Guarantee Companies, or the Financing Guarantee Regulations, was promulgated by the State Council on June 21, 2017 and took effect on October 1, 2017. According to the Financing Guarantee Regulations, the establishment of financing guarantee companies should be subject to the approval of the competent government authority, and unless otherwise stipulated, no entity is allowed to operate the financing guarantee business without such approval. If any entity operates the financing guarantee business without such approval, the entity may be subject to penalties, including termination 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 applicable laws and regulations. In October 2019, the China Banking and Insurance Regulatory Commission,CBIRC, together with eight other regulatory agencies jointly promulgated the Supplemental Rules to the Administration of Financing Guarantee Companies, , or the Supplements to the Financing Guarantee Rules, which provides that any entity providing client referral or credit assessment services to the lending institutions may not provide financing guarantee services in a direct or a disguised form without the regulatory approval. If any entity operates financing guarantee business without appropriate approval, its business operations will be banned by the regulatory authorities and it will be required to properly settle existing business. On July 14, 2020, the CBIRC issued the Guidelines forOff-Site Supervision of Financing Guarantee Companies, or theOff-Site Supervision Guidelines, which took effect on September 1, 2020. TheOff-Site Supervision Guidelines provides, among others, that (i) the relevant regulatory authorities and CBIRC shall collect data andnon-data information from the financing guarantee companies and banks respectively; (ii) financing guarantee companies shall establish and implement anoff-site supervision information report system and submit data andnon-data information timely according to the requirements of the competent regulatory authorities; and (iii) for theoff-site supervision, the competent regulatory authorities shall mainly focus on the corporate governance, internal control, risk management capabilities, guarantee business, . associated guarantee risks, asset quality, liquidity indicators and investment conditions of financing guarantee companies.
We incorporate three financing guarantee companies and provide quality assurance commitments to our institutional funding partners either through our own financing guarantee subsidiarysubsidiaries or through third-party financing guarantee companies/insurance companies. We are subject to certain regulatory risks as a result of such business practices. On December 31, 2021, the PBOC published the Regulations on the Local Financial Supervision and Administration (Draft for Comments), or the Draft Local Financial Regulation, which stipulates that, among others, (i) the local financial organizations should primarily serve their local clients; (ii) the guidance for local financial organizations to carry out business outside provinces where they are registered should be made by the State Council or financial regulatory authorities designated by the State Council; (iii) six types of financial organizations, including financing guarantee companies and micro-lending companies, are deemed as local financial organizations; (iv) transition period will be given to the organizations carrying out business outside provinces before the effectiveness of the draft by the relevant financial regulatory authorities; and (v) organization carrying out business outside provinces without approval of the competent provincial regulatory authorities may be subject to penalties, including correction orders, confiscation of illegal gains or fines, cessation of business operations, and revocation of business license. Currently both the third-party guarantee companies engaged by us and our own guarantee companies provide services to the borrowers nationwide. As uncertainties remain regarding when the Draft Local Financial Regulation would be adopted and become effective, and to what extent we would be subject to the Draft Local Financial Regulation, we cannot assure you that we will be able to comply with such regulations in all respects in a timely manner, or at all, and we may be ordered to rectify or terminate any actions that are deemed illegal by regulatory authorities. See “Item 3. Key Information—D. Risk Factors—Risks Related to Our Business—Limitations on institutional funding partners’ acceptance of credit enhancement may adversely affect our business and access to funding.” Regulations on anti-money laundering The PRC Anti-money Laundering Law, , or the AML Law, promulgated by the PBOC on October 31, 2006 and effective since January 2007, stipulates that special non-financial institutions which are required by relevant regulations to perform obligations of anti-money laundering shall comply with the anti-money laundering obligations. The PBOC and other governmental authorities issued a series of administrative rules and regulations to specify the anti-money laundering obligations of financial institutions and special non-financial institutions. Furthermore, the Guidelines, the Interim Measures and the Custodian Guidelines require online lending information service providers to comply with certain anti-money laundering requirements, including the establishment of a customer identification program, the monitoring and reporting of suspicious transactions, the preservation of customer information and transaction records, and the provision of assistance to the public security department and judicial authority in investigations and proceedings in relation to anti-money laundering matters.
In October 2018, the PBOC, the CBIRC, and the CSRC, jointly issued the Anti-money Laundering and Anti-terrorism Financing Administrative Measures for Internet Finance Institution, , or Anti-money Laundering and Anti-terrorism Measures, providing that internet finance institutions are obliged to accept the anti-money laundering and anti-terrorism financing inspection conducted by the PBOC and its branches. The Anti-money Laundering and Anti-terrorism Measures also authorized the establishment of the internet finance anti-money laundering and anti-terrorism financing monitor platform, or the Monitor Platform, by the National Internet Finance Association, or NIFA under the instruction of PBOC and other financial governmental authorities to improve the online monitoring mechanism and information sharing between the institutions. While we have formulated and implemented policies and procedures, including internal controls and “know-your-customer” policies, aimed at preventing money laundering and terrorism financing, we cannot assure you that we will be able to establish and maintain anti-money laundering policies and procedures which can effectively protect our platform from being exploited for money laundering or terrorism financing purposes, or that such policies and procedures, if adopted, will be deemed to be fully in compliance with all applicable anti-money laundering laws and regulations, including the Interim Measures. See “Item 3. Key Information—D. Risk Factors—Risks Related to Our Business—Any failure by our institutional funding partners or third-party service providers to comply with applicable anti-money laundering and anti-terrorism financing laws and regulations could damage our reputation.”
Regulations Relating to Credit Reference On January 21, 2013, the State Council promulgated the Stipulations for Regulating Credit Reference, provides that any person or organization that conducts personal credit reference business without approval of the competent credit reference administrative department of the State Council may be subject to penalties, including cessation of business operations, confiscation of illegal gains, imposing fines from RMB50,000 to RMB500,000, and even criminal liability. On September 27, 2021, the PBOC issued the Measures for Regulating Credit Reference, which came into effect on January 1, 2022 and stipulates that, among others (i) credit information refers to the following information that should be legally collected and used for financial activities: basic information, loan information, other relevant information and analysis and evaluation information generated from the foregoing information of enterprises and individuals for identifying their credit status; and credit reference business refers to the activities of collecting, sorting, storing and processing the credit information of enterprises and individuals, and providing them to the information users; (ii) the individual credit reference institution license issued by the PBOC is required for engaging in the individual credit reference business, and the licensed individual credit reference institution shall report to the PBOC with respect to its cooperation with any information provider for collecting, sorting, storing and analyzing individual credit information; (iii) the financial institutions are not allowed to cooperate with any commercial entity that does not hold a credit reference license to obtain credit reference service; and (iv) any persons that engage in the individual credit reference business without the individual credit reference institution license will be given 18 months starting from January 1, 2022 to complete compliance rectification. Currently, we provide borrower referral and preliminary credit assessment services to our institutional funding partners, and the information shared by us with such institutional funding partners with due authorization may be deemed as credit information. If the preliminary credit assessment services provided by us to our institutional funding partners would be deemed by the regulatory authorities as the credit reference business, we may be required to obtain a license for individual credit reference business from the competent regulatory authorities or change our business model, pursue cooperation with the licensed credit reference agencies and filing of the relevant cooperation agreement with the PBOC or its provincial branches. If we cannot obtain the regulatory approval or complete the filing in a timely manner, we may be deemed as violating the applicable laws and regulations of credit reference services and we may be subject to penalties, including cessation of business operations, confiscation of illegal gains, imposing fines from RMB50,000 to RMB500,000, and even criminal liability, and our business, financial condition and results of operations would be materially and adversely affected. Regulations Relating to Foreign Investment Investment activities in the PRC by foreign investors are governed by the Guidance Catalog of Industries for Foreign Investment, , or the Catalog, which was promulgated and is amended from time to time by the MOC and the National Development and Reform Commission. The Catalog divides industries into three categories in terms of foreign investment, which are “encouraged”, “restricted” and “prohibited”, and all industries not listed under one of these categories are generally deemed to be permitted. ForeignUnless otherwise provided by relevant laws and regulations, foreign investors are generally not allowed to own more than 50% of the equity interests in a value-added telecommunication service provider and any such foreign investor must have experience in providing value-added telecommunications services overseas and maintain a good track record in accordance with the Guidance Catalog of Industries for Foreign Investment promulgated in 2007, as amended inseveral times during 2011 2015, 2017 and 2018to 2020 and further amended by Special Administrative Measures for the Access of Foreign Investment (Negative List) in 2019,2021. According to the Negative List (2021), the foreign equity interest ownership of entities that engage in value-added telecommunications business (except fore-commerce, domestic multi-party communication, storage and other applicable lawsforwarding and regulations.call center) must not exceed 50%. Foreign investors that invest in sectors on the Negative List (2021) in which foreign investment is restricted shall comply with special management measures with respect to, among others, shareholding and senior management personnel qualification in the Negative List (2021).
On March 15, 2019, the National People’s Congress enacted the Foreign Investment Law of the People’s Republic of China, , or the Foreign Investment Law, which came into effect on January 1, 2020 and replaced the trio of existing laws regulating foreign investment in China, namely, the Sino-foreign Equity Joint Venture Enterprise Law, , the Sino-foreign Cooperative Joint Venture Enterprise Law and the Wholly Foreign-invested Enterprise Law, , together with their implementation rules and ancillary regulations. The Foreign Investment Law sets a general principal that foreign investors and their investments in China will enjoy national treatment and subject to a negative list. It embodies an expected PRC regulatory trend to rationalize its foreign investment regulatory regime in line with prevailing international practice and the legislative efforts to unify the corporate legal requirements for both foreign and domestic investments. However, since it is relatively new, uncertainties still exist in relation to its interpretation and implementation. For instance, under the Foreign Investment Law, “foreign investment” refers to the investment activities directly or indirectly conducted by foreign individuals, enterprises or other entities in China. Though it does not explicitly classify contractual arrangements as a form of foreign investment, there is no assurance that foreign investment via contractual arrangement would not be interpreted as a type of indirect foreign investment activities under the definition in the future. In addition, the definition contains a catch-all provision which includes investments made by foreign investors through means stipulated in laws or administrative regulations or other methods prescribed by the State Council. On December 26, 2019, the State Council promulgated the Implementation Regulations on the Foreign Investment Law, which came into effect on January 1, 2020. However, the Implementation Regulations on the Foreign Investment Law still does not explicitly define whether contractual arrangement would be deemed as a form of foreign investment. Therefore, it still leaves leeway for future laws, administrative regulations or provisions promulgated by the State Council to provide for contractual arrangements as a form of foreign investment. See “Item 3. Key Information—D. Risk Factors—Risks Related to Our Corporate Structure—If the PRC government deems that the contractual arrangements in relation to ourthe consolidated variable interest entities do not comply with PRC regulatory restrictions on foreign investment in the relevant industries, or if these regulations or the interpretation of existing regulations change in the future, we could be subject to severe penalties or be forced to relinquish our interests in those operations.”
Foreign investment in telecommunications companies in the PRC is governed by the Provisions for the Administration of Foreign-Invested Telecommunications Enterprises, , or the Foreign-Invested Telecommunications Enterprises Provisions, which was promulgated by the State Council on December 11, 2001, and amended on September 10, 2008, and February 6, 2016, and April 7, 2022, respectively. TheUnless otherwise provided, the Foreign-Invested Telecommunications Enterprises Provisions prohibit a foreign investor from holding over 50% of the total equity interest in any value-added telecommunications service business in China. In addition,On December 20, 2019, the majorMOFCOM and the SAMR jointly promulgated the Measures on Reporting of Foreign Investment Information, which came into effect on January 1, 2020, and has replaced the Interim Measures for the Administration of Record-filing of the Establishment and Changes in Foreign-Invested Enterprises. Foreign investors or foreign-invested enterprises shall submit investment information to the commerce administrative authorities through the Enterprise. Registration System and the National Enterprise Credit Information Publicity System. On December 19, 2020, the NDRC and the MOFCOM jointly promulgated the Measures on the Security Review of Foreign Investment, effective on January 18, 2021, setting forth provisions concerning the security review mechanism on foreign investment, including the types of investments subject to review, review scopes and procedures, among others. The Office of the Working Mechanism of the Security Review of Foreign Investment (the “Office of the Working Mechanism”) will be established under the NDRC, who will lead the task together with the MOFCOM. Foreign investor who invests in a foreign-invested value-added telecommunications enterprise and operates the value-added telecommunications businessor relevant parties in China must demonstrate a good track recorddeclare the security review to the Office of the Working Mechanism prior to (i) the investments in the military industry, military industrial supporting and experienceother fields relating to the security of national defense, and investments in operationareas surrounding military facilities and military industry facilities; and (ii) investments in important agricultural products, important energy and resources, important equipment manufacturing, important infrastructure, important transport services, important cultural products and services, important information technology and internet products and services, important financial services, key technologies and other important fields relating to national security, and obtain control in the target enterprise. Control exists when the foreign investor (i) holds over 50% equity interests in the target, (ii) has voting rights that can materially impact on the resolutions of value-added telecommunications business.the board of directors or shareholders meeting of the target even when it holds less than 50% equity interests in the target, or (iii) has material impact on target’s business decisions, human resources, accounting and technology. Regulations Relating to Internet Companies Regulations on value-added telecommunication services The Telecommunications Regulations of the PRC, , or the Telecommunications Regulations, promulgated by the State Council on September 25, 2000 and amended on February 6, 2016, provide a regulatory framework for telecommunications services providers in the PRC. The Telecommunications Regulations require telecommunications services providers to obtain an operating license prior to the commencement of their operations. The Telecommunications Regulations categorize telecommunications services into basic telecommunication services and value-added telecommunications services. According to the Catalog of Telecommunications Business, , attached to the Telecommunications Regulations, information services provided via fixed network, mobile network and Internet fall within value-added telecommunications services. In July 2017, the MIIT promulgated theAdministrative Measures on Telecommunications Business Operating Licenses
. Under these regulations, a commercial operator of value-added telecommunications services must first obtain a license for value-added telecommunications business, or VATS License, from the MIIT or its provincial level counterparts.
In July 2006, the Ministry of Information Industry, the predecessor of the MIIT, issued the Circular on Strengthening the Administration of Foreign Investment in the Operation of Value-added Telecommunications Business, , which prohibits holders of these services licenses from leasing, transferring or selling their licenses in any form, or providing any resource, sites or facilities, to any foreign investors intending to conduct such businesses in China.
In July 2017, the issuanceMIIT promulgated the Administrative Measures on Telecommunications Business Operating Licenses. Under these regulations, a commercial operator of value-added telecommunications services must first obtain a license for value-added telecommunications business, or VATS License, from the MIIT or its provincial level counterparts. Foreign ownership of internet-based businesses, such as distribution of online information, is subject to restrictions under current PRC laws and regulations. For example, unless otherwise provided, foreign investors are generally not allowed to own more than 50% of the Interimequity interests in a value-added telecommunication service provider (except fore-commerce, domestic multi-party communication, storage and forwarding and call center) in accordance with the Special Administrative Measures for Foreign Investment Access, the Negative List (2021), which was promulgated by the MOFCOM and the NDRC on December 27, 2021 and became effective on January 1, 2022. Foreign direct investment in Augusttelecommunications companies in China is governed by the Provisions on the Administration of Foreign-Invested Telecommunications Enterprises, which was promulgated by the State Council on December 11, 2001 and amended on September 10, 2008, February 6, 2016, there was no clearand April 7, 2022, respectively. These regulations require that the foreign investors may acquire up to 50% equity interests in foreign-invested value-added telecommunications enterprises in China. PRC regulations impose sanctions for engaging in commercial internet information services, which is asub-set of value-added telecommunication business, without a value-added telecommunication service license for internet content provider, or official regulationthe ICP License, and sanctions for engaging in the operation of online data processing and transaction processing, which is anothersub-set of value-added telecommunication business, without a value-added telecommunication service license for online data processing and transaction processing, or guidancethe ODPTP License. These sanctions include rectification orders and warnings from the PRC government as to whether online consumer finance service was a typecommunication administrations, fines, confiscation of value-added telecommunication servicesillegal gains, and whether its provider should be subject to value-added telecommunication regulations. Aftersuspension or termination of operating of the Interim Measures came into force, an online consumer finance information intermediary shall apply for appropriate telecommunication business licensewebsites and mobile applications in accordance with relevant provisions of competent telecommunications departments. However, the relevant implementation rules regarding such filing is yet to be issued and therefore currently we are not able to make the necessary filing or apply for the VATS License.question. Furthermore, as we are providing mobile applications to mobile device users, it is uncertain if any of our subsidiaries will be required to obtain a separate operating license in addition to the VATS License. We have not applied for such separate license since we have not obtained the VATS License. We cannot assure you that we will not be required to apply for an operating license for our mobile applications in the future. See “Item 3. Key Information—D. Risk Factors—Risks Related to Doing Business in China—We may be adversely affected by the complexity, uncertainties and changes in PRC regulation of internet-related businesses and companies, and any lack of requisite approvals, licenses or permits applicable to our business may have a material adverse effect on our business and results of operations.” Regulation on mobile internet applications information services In addition to the Telecommunications Regulations and other regulations above, mobile applications are especially regulated by the Administrative Provisions on Mobile Internet Applications Information Services, , or the APP Provisions, which was promulgated by the Cyberspace Administration of China, or the CAC, on June 28, 2016 and became effective on August 1, 2016. The APP Provisions regulate mobile application information service providers. According to the APP Provisions, the CAC and local offices of cyberspace administration shall be responsible for the supervision and administration of nationwide or local mobile application information, respectively. Under the APP Provisions, mobile application information service providers are required to obtain relevant qualifications prescribed by laws and regulations and shall be responsible for the supervision and administration of mobile application information required by laws and regulations and implement the information security management responsibilities strictly, including but not limited to: (1)(i) to authenticate the identity information of the registered users, (2)(ii) to protect user information, and obtaining the consent of users while collecting and using users’ personal information in a lawful and proper manner, (3)(iii) to establish information content audit and management mechanism, and take against any information content in violation of laws or regulations depending on circumstances, and (4)(iv) record and keep users’ log information the same for sixty (60) days. We have implemented necessary programs in our mobile application to make sure the collection, protection and preservation of user information are in compliance with the APP Provisions in all material aspects.
Regulations on internet security The National People’s Congress has enacted legislation that prohibits use of the internet that breaches the public security, disseminates socially destabilizing content or leaks state secrets. Breach of public security includes breach of national security and infringement on legal rights and interests of the state, society or citizens. Socially destabilizing content includes any content that incites defiance or violations of PRC laws or regulations or subversion of the PRC government or its political system, spreads socially disruptive rumors or involves cult activities, superstition, obscenities, pornography, gambling or violence. State secrets are defined broadly to include information concerning PRC national defense, state affairs and other matters as determined by the PRC authorities. Internet information in China is regulated and restricted from a national security standpoint. The SCNPC, has enacted the Decisions on Maintaining Internet Security on December 28, 2000 and further amended on August 27, 2009, which may subject violators to criminal punishment in China for any effort to: (i) gain improper entry into a computer or system of strategic importance; (ii) disseminate politically disruptive information; (iii) leak state secrets; (iv) spread false commercial information; or (v) infringe intellectual property rights. In 1997, the Ministry of Public SecurityMPS has promulgated measures that prohibit use of the internet in ways which, among other things, result in a leakage of state secrets or a spread of socially destabilizing content. If an internet information service provider violates these measures, the Ministry of Public SecurityMPS and the local security bureaus may revoke its operating license and shut down its websites.
TableIn December 2015, the Standing Committee of Contentsthe National People’s Congress promulgated the Anti-Terrorism Law of the PRC, or the Anti-Terrorism Law, which took effect on January 1, 2016 and was amended on April 27, 2018. According to the Anti-Terrorism Law, telecommunication service operators or internet service providers shall (i) carry out pertinent anti-terrorism publicity and education to society; (ii) provide technical interfaces, decryption and other technical support and assistance for the competent departments to prevent and investigate terrorist activities; (iii) implement network security and information monitoring systems as well as safety and technical prevention measures to avoid the dissemination of terrorism information, delete the terrorism information, immediately halt its dissemination, keep relevant records and report to the competent departments once the terrorism information is discovered; and (iv) examine customer identities before providing services. Any violation of the Anti-Terrorism Law may result in severe penalties, including substantial fines.The Network Cyber Security Law of the PRC,
, which was promulgated by the SCNPC on November 7, 2016 and became effective on June 1, 2017. Under this regulation, network operators, including online lending information service providers, shall comply with laws and regulations and fulfill their obligations to safeguard security of the network when conducting business and providing services, and take all necessary measures pursuant to laws, regulations and compulsory national requirements to safeguard the safe and stable operation of the networks, respond to network security incidents effectively, prevent illegal and criminal activities, and maintain the integrity, confidentiality and usability of network data. On May 2, 2017, the CAC issued a trial version of the Measures for the Security Review of Network Products and Services (Trial), which took effect on June 1, 2017, to provide for more detailed rules regarding cybersecurity review requirements. On April 29, 2021, the Standing Committee of the National Peoples’ Congress issued a Second Draft for review of the Personal Information Protection Law, which integrates the scattered rules with respect to personal information rights and privacy protection.For the further purposes of regulating data processing activities, safeguarding data security, promoting data development and utilization, protecting the lawful rights and interests of individuals and organizations, and maintaining national sovereignty, security, and development interests, on June 10, 2021, the Standing Committee of the PRC National People’s Congress published the Data Security Law of the People’s Republic of China, which took effect on September 1, 2021. The Data Security Law requires data processing, which includes the collection, storage, use, processing, transmission, provision, publication of data, to be conducted in a legitimate and proper manner. The Data Security Law provides for data security and privacy obligations on entities and individuals carrying out data activities. The Data Security Law also introduces a data classification and hierarchical protection system based on the importance of data in economic and social development, and the degree of harm it may cause to national security, public interests, or legitimate rights and interests of individuals or organizations if such data are tampered with, destroyed, leaked, illegally acquired or illegally used. The appropriate level of protection measures is required to be taken for each respective category of data. For example, a processor of important data is required to designate the personnel and the management body responsible for data security, carry out risk assessments of its data processing activities and file the risk assessment reports with the competent authorities. State core data, i.e. data having a bearing on national security, the lifelines of national economy, people’s key livelihood and major public interests, shall be subject to stricter management system. Moreover, the Data Security Law provides a national security review procedure for those data activities which affect or may affect national security and imposes export restrictions on certain data and information. In addition, the Data Security Law also provides that any organization or individual within the territory of the PRC shall not provide any foreign judicial body and law enforcement body with any data without the approval of the competent PRC governmental authorities. As the Data Security Law was recently promulgated and has not yet taken effect, we may be required to make further adjustments to our business practices to comply with this law, as well as any adjustments that may be required by the ultimate Personal Information Protection Law.
On July 6, 2021, certain PRC regulatory authorities issued Opinions on Strictly Cracking Down on Illegal Securities Activities, which, among others, provides for improving relevant laws and regulations on data security, cross-border data transmission, and confidential information management. It provided that efforts will be made to revise the regulations on strengthening the confidentiality and file management relating to the offering and listing of securities overseas, to implement the responsibility on information security of overseas listed companies, and to strengthen the standardized management of cross-border information provision mechanisms and procedures. On July 30, 2021, the State Council issued the Regulations on Protection of Critical Information Infrastructure, or the Regulations. Pursuant to the Regulations, critical information infrastructure shall mean the important network facilities or information systems of key industries or fields such as public communication and information service, energy, transportation, water conservation, finance, public services,e-government affairs and national defense science, and important network facilities or information systems which may endanger national security, people’s livelihood and public interest once there occur damage, malfunctioning or data leakage to them. The Regulations provide that no individual or organization may carry out any illegal activity of intruding into, interfering with, or sabotaging any critical information infrastructures, or endanger the security of any critical information infrastructures. The Regulations also require that critical information infrastructure operators shall establish a cybersecurity protection system and accountability system, and that the main responsible person of a critical information infrastructure operator shall take full responsibility for the security protection of the critical information infrastructures operated by it. In addition, relevant administration departments of each important industry and sector shall be responsible for formulating the rule of critical information infrastructure determination applicable to their respective industry or sector, and determine the critical information infrastructure operators in their industry or sector. On July 12, 2021, the MIIT and two other authorities jointly issued the Provisions on the Administration of Security Vulnerabilities of Network Products, or the Provisions. The Provisions state that, no organization or individual may abuse the security vulnerabilities of network products to engage in activities that endanger network security, or to illegally collect, sell, or publish the information on such security vulnerabilities. Anyone who is aware of the aforesaid offences shall not provide technical support, advertising, payment settlement and other assistance to the relevant offenders. According to the Provisions, network product providers, network operators, and platforms collecting network product security vulnerabilities shall establish and improve channels for receiving network product security vulnerability information and keep such channels available, and retain network product security vulnerability information reception logs for at least six months. The Provisions also bans provision of undisclosed vulnerabilities to overseas organizations or individuals other than to the product providers. On August 20, 2021, the Standing Committee of the National People’s Congress of China promulgated the Personal Information Protection Law, which integrates the scattered rules with respect to personal information rights and privacy protection and took effect on November 1, 2021. requires, among others, that (i) the processing of personal information should have a clear and reasonable purpose which should be directly related to the processing purpose and should be conducted in a method that has the minimum impact on personal rights and interests, and (ii) the collection of personal information should be limited to the minimum scope as necessary to achieve the processing purpose and avoid the excessive collection of personal information. Personal information processors shall adopt necessary measures to safeguard the security of the personal information they handle. The offending entities could be ordered to correct, or to suspend or terminate the provision of services, and face confiscation of illegal income, fines or other penalties. On October 29, 2021, the CAC issued the Measures for Security Assessment of Cross-border Data Transfer (Draft for Comment). According to these measures, in addition to the self-risk assessment requirement for provision of any data outside China, a data processor shall apply to the competent cyberspace department for data security assessment and clearance of outbound data transfer in any of the following events: (i) outbound transfer of personal information and important data collected and generated by an operator of critical information infrastructure; (ii) outbound transfer of important data; (iii) outbound transfer of personal data by a data processor which has processed more than one million users’ personal data; (iv) outbound transfer of more than one hundred thousand users’ personal information or more than ten thousand users’ sensitive personal information cumulatively; (v) such other circumstances whereex-ante security assessment and evaluation of cross-border data transfer is required by the CAC.
On November 14, 2021, the CAC released the Regulations on the Network Data Security (Draft for Comments), or the Draft Data Security Regulations. The Draft Data Security Regulations provide that data processors refer to individuals or organizations that autonomously determine the purpose and the manner of processing data. In accordance with the Draft Data Security Regulations, data processors shall apply for a cybersecurity review for the following activities: (i) merger, reorganization or division of internet platform operators that have acquired a large number of data resources related to national security, economic development or public interests to the extent that affects or may affect national security; (ii) listing abroad of data processors which process over one million users’ personal information; (iii) listing in Hong Kong which affects or may affect national security; or (iv) other data processing activities that affect or may affect national security. Besides, data processors that are listed overseas shall carry out an annual data security assessment. The Draft Data Security Regulations remain unclear on whether the relevant requirements will be applicable to companies that have been listed in the United States, such as us. We cannot predict the impact of the Draft Data Security Regulations, if any, at this stage, and we will closely monitor and assess any development in the rule-making process. If the enacted versions of the Draft Data Security Regulations mandate clearance of cybersecurity review and other specific actions to be completed by China-based companies listed on a U.S. stock exchange, such as us, we face uncertainties as to whether such clearance can be timely obtained, or at all. In addition, if a final version of the Draft Data Security Regulations is adopted, we may be subject to review when conducting data processing activities and annual data security assessment and may face challenges in addressing its requirements and make necessary changes to our internal policies and practices in data processing. Based on the foregoing, our PRC legal counsel does not expect that, as of the date of this annual report, the current applicable PRC laws on cybersecurity would have a material adverse impact on our business. On January 4, 2022, the CAC, the NDRC, the MIIT, and several other administrations jointly published the Amended Measures for Cybersecurity Review, which became effective on February 15, 2022. The Amended Measures for Cybersecurity Review further restates and expands the applicable scope of the cybersecurity review. Pursuant to the Amended Measures for Cybersecurity Review, (i) when the purchase of network products and services by a critical information infrastructures operator or the data processing activities conducted by a network platform operator affect or may affect national security, a cybersecurity review shall be conducted pursuant to the Review Measures. The operators shall file for a cybersecurity review with Cybersecurity Review Office under the CAC if their behavior affects or may affect national security; (ii) an application for cybersecurity review shall be made by an issuer who is a network platform operator holding personal information of more than one million users before such issuer applies to list its securities on a foreign stock exchange; and (iii) the relevant PRC governmental authorities may initiate cybersecurity review if such governmental authorities determine that the issuer’s network products or services, or data processing activities affect or may affect national security. The Amended Measures for Cybersecurity Review focuses on assessing the following national security risks factors associated with relevant objects or circumstances: (i) the risk of illegal control, interference or destruction of critical information infrastructure, arising from the purchase and utilization of network products and services; (ii) the harm on the business continuity of critical information infrastructure incurring from a disruption of network products and services supply; (iii) the safety, openness, transparency, diversity of sources of network products and services; the reliability of suppliers; and the risk of supply disruption due to political, diplomatic, trade and other reasons; (iv) the level of compliance with the PRC laws, administrative regulations and ministry rules of the suppliers of network products and services; (v) the risk of core data, important data or a large amount of personal information being stolen, leaked, destroyed, and illegally used or illegally exited the country; (vi) the risk of critical information infrastructure, core data, important data or a large amount of personal information being affected, controlled, or maliciously used by foreign governments and the network information security risk in relation to listing abroad; and (vii) other factors that may harm critical information infrastructure, cyber security and/or data security. The Amended Measures for Cybersecurity Review was promulgated recently, and there are substantial uncertainties on the interpretation and application of the Amended Measures for Cybersecurity Review. We are not sure that whether our data processing activities may raise “national security” concern. There can be no assurance that we would be required to apply for cybersecurity review, or that we would be able to complete the applicable cybersecurity review procedures in a timely manner, or at all, if we are required to do so. Any failure in completion of a cybersecurity review may result in administrative penalties, including fines, a shut down of our business, revocation of requisite licenses, as well as reputational damage or legal proceedings or actions against us, which may have material adverse effects on our business, financial condition and results of operations.
We have, in accordance with relevant provisions on network security of the Sate and the requirements of the State’s system for classified protection of information security, conducted the record-filing of class determination and class testing of information system, possessed perfect network security facility and management system such as firewall, intrusion detection, data encryption, and disaster recovery. Regulations on privacy protection The Several Provisions on Regulating the Market Order of Internet Information Services, , issued by the MIIT in December 2011, provide that, an internet information service provider may not collect any user personal information or provide any such information to third parties without the consent of a user. An internet information service provider must expressly inform the users of the method, content and purpose of the collection and processing of such user personal information and may only collect such information necessary for the provision of its services. An internet information service provider is also required to properly maintain the user personal information, and in case of any leak or likely leak of the user personal information, online lending service providers must take immediate remedial measures and, in severe circumstances, make an immediate report to the telecommunications regulatory authority. In addition, pursuant to the Decision on Strengthening the Protection of Online Information issued by the SCNPC in December 2012 and the Order for the Protection of Telecommunication and Internet User Personal Information issued by the MIIT in July 2013, any collection and use of user personal information must be subject to the consent of the user, abide by the principles of legality, rationality and necessity and be within the specified purposes, methods and scopes. Pursuant to the Ninth Amendment to the Criminal Law issued by the SCNPC, in August 2015 and became effective in November 2015, any internet service provider that fails to fulfill the obligations related to internet information security administration as required by applicable laws and refuses to rectify upon orders, should be subject to criminal penalty. On May 8, 2017, the Supreme People’s Court and the Supreme People’s Procuratorate released the Interpretations of the Supreme People’s Court and the Supreme People’s Procuratorate on Several Issues Concerning the Application of Law in the Handling of Criminal Cases Involving Infringement of Citizens’ Personal Information, or the Interpretations, which became effective on June 1, 2017. The Interpretations provide more practical conviction and sentencing criteria for the infringement of citizens’ personal information and mark a milestone for the criminal protection of citizens’ personal information. The Office ofCAC, the Central Cyberspace Affairs Commission,MIIT, the Ministry of Industry and Information Technology, the Ministry of Public Security,MPS, and the State Administration for Market RegulationSAMR jointly promulgated the Notice on Rectification of Illegal Collection of Personal Information on Application, , or the Notice on Illegal Collection on January 23, 2019, which requires application operators to strictly comply with the Cyber Security Law of the PRC and strengthens the personal information protection. Application operators should, among others, (i) clearly state the authorized purpose, methods and scope of the collection and usage of personal information, and obtain the consent of users for collecting and processing such users’ personal information, and (ii) establish appropriate user information protection systems with remedial measures. To further implement and interpret the Notice on Illegal Collection, the Measures on Identifying Illegality of Personal Information Collection Conducts on Application was promulgated on November 28, 2019. Furthermore,The MPS promulgated the Interim Measures require online lending information service providers to reinforce the management of lenders’ and borrowers’ information, so as to ensure the legitimacy and security regarding the collection, processing and use of lenders’ and borrowers’ information. Also, online lending information service providers should keep confidential the lenders’ and borrowers’ information collected in the course of their business, and should not use such information for any other purpose except for services they provide without approval of lenders or borrowers. The Ministry of Public Security promulgated theGuidance on Several Issues for Soft Violence Regarding Criminal Case, , or the Guidance on Soft Violence, on April 9, 2019, which provides that, among others, harassments by means of internet or telecommunication to disturb people’s normal life, work, production, business, and social order may be deemed as soft violence, which may be subject to criminal liabilities. On August 31, 2020, the MIIT published the Administrative Provisions for Text Message and Voice Call Service (Draft) for public comments, which provides that no organization is allowed to send commercial text messages or make commercial calls to users without explicit consents of users, and the organization should no longer send messages or make calls to users if explicitly required by users. In case of violation, the relevant governmental authorities may impose penalties, including orders for rectifications, public warnings, fines from RMB10,000 to 30,000, revocation of telecommunication licenses and cessation of phone number resources.
87With respect to the security of information collected and used by mobile apps, pursuant to the Announcement of Conducting Special Supervision against the Illegal Collection and Use of Personal Information by Apps, which was issued on January 23, 2019, app operators should collect and use personal information in compliance with the Cyber Security Law and should be responsible for the security of personal information obtained from users and take effective measures to strengthen the personal information protection. Furthermore, app operators should not force their users to make authorization by means of bundling, suspending installation or in other default forms and should not collect personal information in violation of laws, regulations or breach of user agreements. Such regulatory requirements were emphasized by the Notice on the Special Rectification of Apps Infringing upon User’s Personal Rights and Interests, which was issued by MIIT on October 31, 2019. On November 28, 2019, the CAC, the MIIT, the Ministry of Public Security and the SAMR jointly issued the Methods of Identifying Illegal Acts of Apps to Collect and Use Personal Information. This regulation further illustrates certain commonly-seen illegal practices of apps operators in terms of personal information protection, including “failure to publicize rules for collecting and using personal information”, “failure to expressly state the purpose, manner and scope of collecting and using personal information”, “collection and use of personal information without consent of users of such App”, “collecting personal information irrelevant to the services provided by such app in violation of the principle of necessity”, “provision of personal information to others without users’ consent”, “failure to provide the function of deleting or correcting personal information as required by laws” and “failure to publish information such as methods for complaints and reporting”. Among others, any of the following acts of an app operator will constitute “collection and use of personal information without consent of users”: (i) collecting an user’s personal information or activating the permission for collecting any user’s personal information without obtaining such user’s consent; (ii) collecting personal information or activating the permission for collecting the personal information of any user who explicitly refuses such collection, or repeatedly seeking for user’s consent such that the user’s normal use of such app is disturbed; (iii) any user’s personal information which has been actually collected by the app operator or the permission for collecting any user’s personal information activated by the app operator is beyond the scope of personal information which such user authorizes such app operator to collect; (iv) seeking for any user’s consent in anon-explicit manner; (v) modifying any user’s settings for activating the permission for collecting any personal information without such user’s consent; (vi) using users’ personal information and any algorithms to directionally push any information, without providing the option ofnon-directed pushing such information; (vii) misleading users to permit collecting their personal information or activating the permission for collecting such users’ personal information by improper methods such as fraud and deception; (viii) failing to provide users with the means and methods to withdraw their permission of collecting personal information; and (ix) collecting and using personal information in violation of the rules for collecting and using personal information promulgated by such app operator.On March 12, 2021, the CAC and three other authorities jointly issued the Rules on the Scope of Necessary Personal Information for Common Types of Mobile Internet Applications. The Rules specifies the scope of necessary personal information to be collected each for a variety of common mobile internet applications, such as maps and navigation apps, online ride-hailing apps, instant messaging apps, online community apps. Operators of such apps shall not refuse to provide basic services to users on the ground of users’ refusal to provide their personalnon-essential information. The basic service of online lending applications is to facilitate loans provided to the users online for use of personal consumption and business operation, and the necessary personal information for an online lending application includes the borrower’s mobile phone number, name, bank account, as well as type, number and valid period of its identity card. On April 26, 2021, the MIIT issued the Interim Administrative Provisions on Personal Information Protection in Internet Mobile Applications (Draft for Comment). The draft of the Interim Administrative Provisions on Personal Information Protection in Internet Mobile Applications sets forth two principles of collection and utilization of personal information, namely “explicit consent” and “minimum necessity.” On August 20, 2021, the Standing Committee of the National People’s Congress of China promulgated the Personal Information Protection Law, which integrates the scattered rules with respect to personal information rights and privacy protection and took effect on November 1, 2021. The Personal Information Protection Law integrates provisions from several rules with respect to personal information rights and privacy protection. According to the Personal Information Protection Law, personal information refers to information related to identified or identifiable natural persons which is recorded by electronic or other means (excluding the anonymized information). The Personal Information Protection Law provides the circumstances under which a personal information processor could process personal information, such as where the consent of the individual concerned is obtained and where it is necessary for the conclusion or performance of a contract to which such individual is a party to such contract. It also stipulates certain specific provisions with respect to the obligations of a personal information processor. In addition, it imposes further obligations on a personal information processor that provides for basic internet platform services, has large amount of users, has complicated business activities, including formulating of an independent institution mainly comprising of outside members to supervise personal information processing activities, termination of provision of services for product or service providers on the platform whose personal information processing activities are in material violation of laws and regulations, and issuing personal information protection social responsibilities reports regularly.
While we have taken measures to protect the confidential information that we have access to, our security measures could be breached. Any accidental or willful security breaches or other unauthorized access to our platform could cause confidential borrower and investorinstitutional funding partner information to be stolen and used for criminal purposes. Security breaches or unauthorized access to confidential information could also expose us to liability related to the loss of the information, time-consuming and expensive litigation and negative publicity. See “Item 3. Key Information—D. Risk Factors—Risks Related to Our Business—Cyber-attacks, computer viruses, physical or electronic break-ins or similar disruptions of us or of a third party could result in disclosure or misuse of confidential informationIf our ability to collect delinquent loans is impaired, our business and misappropriation of funds of our borrowers and investors, subject us to liabilities, cause reputational harm and adversely impact our results of operations might be materially and financial condition.adversely affected.” Regulations Relating to Foreign Exchange Regulations on foreign currency exchange The principal regulations governing foreign currency exchange in China are the Foreign Exchange Administration Regulations, , most recently amended in August 2008. Under the PRC foreign exchange regulations, payments of current account items, such as profit distributions, interest payments and trade and service-related foreign exchange transactions, can be made in foreign currencies without prior approval from SAFE by complying with certain procedural requirements. By contrast, approval from or registration with appropriate government authorities is required where RMB is to be converted into foreign currency and remitted out of China to pay capital account items, such as direct investments, repayment of foreign currency-denominated loans, repatriation of investments and investments in securities outside of China. On February 13, 2015, the SAFE promulgated the Notice on Further Simplifying and Improving the Administration of the Foreign Exchange Concerning Direct Investment, , or SAFE Notice 13. After SAFE Notice 13 became effective on June 1, 2015, instead of applying for approvals regarding foreign exchange registrations of foreign direct investment and overseas direct investment from SAFE, entities and individuals will be required to apply for such foreign exchange registrations from qualified banks. The qualified banks, under the supervision of the SAFE, will directly examine the applications and conduct the registration. On March 30, 2015, the SAFE promulgated Circular 19, to expand the reform nationwide. Circular 19 allows foreign-invested enterprises to make equity investments by using RMB fund converted from foreign exchange capital. Under Circular 19, the foreign exchange capital in the capital account of foreign-invested enterprises upon the confirmation of rights and interests of monetary contribution by the local foreign exchange bureau (or the book-entry registration of monetary contribution by the banks) can be settled at the banks based on the actual operation needs of the enterprises. The proportion of discretionary settlement of foreign exchange capital of foreign-invested enterprises is currently 100%. SAFE can adjust such proportion in due time based on the circumstances of international balance of payments. However, Circular 19 and another circular promulgated by SAFE in June 2016, SAFE Circular 16, continues to, prohibit foreign-invested enterprises from, among other things, using RMB fund converted from its foreign exchange capitals for expenditure beyond its business scope, investment and financing (except for security investment or guarantee products issued by bank), providing loans to non-affiliated enterprises or constructing or purchasing real estate not for self-use. On October 23, 2019, the SAFE promulgated the Notice of the Administration of Foreign Exchange on Further Promoting the Convenience of Cross-border Trade and Investment, , or the SAFE Circular 28. The SAFE Circular 28 provides that non-investment foreign-invested entities may use foreign exchange capital or Renminbi funds converted from the foreign exchange capital to make equity investments, provided that such investments should comply with the 2019 Negative List and other relevant PRC laws and regulations. On April 10, 2020, SAFE issued the Notice on Optimizing Foreign Exchange Administration to Support the Development of Foreign-related Business, or the SAFE Circular 8. The SAFE Circular 8 provides that on the premise of ensuring the true and compliant use of funds and compliance with the existing regulations on use of income under the capital account, enterprises which satisfy the criteria are allowed to use income under the capital account, such as capital funds, foreign debt and overseas listing for domestic payment, without prior provision of proof materials for veracity to the bank for each transaction. However, there are substantial uncertainties of the further implementation of SAFE Circular 28.28 and SAFE Circular 8. See “Item 3. Key Information—D. Risk Factors—Risks Related to Doing Business in China—PRC regulation of loans to and direct investment in PRC entities by offshore holding companies and governmental control of currency conversion may delay or prevent us from using the proceeds of our initial public offering and the concurrent private placement to make loans to or make additional capital contributions to our PRC subsidiaries, which could materially and adversely affect our liquidity and our ability to fund and expand our business.”
Regulations on foreign exchange registration of overseas investment by PRC residents SAFE promulgated the Circular on Relevant Issues Concerning Foreign Exchange Control on Domestic Residents’ Offshore Investment and Financing and Round-trip Investment through Special Purpose Vehicles, , or SAFE Circular 37, on July 4, 2014, which replaced the former circular commonly known as “SAFE Circular 75”. SAFE Circular 37 requires PRC residents to register with local branches of SAFE in connection with their direct establishment or indirect control of an offshore entity, for the purpose of overseas investment and financing, with such PRC residents’ legally owned assets or equity interests in domestic enterprises or offshore assets or interests, referred to in SAFE Circular 37 as a “special purpose vehicle”. SAFE Circular 37 further requires amendment to the registration in the event of any significant changes with respect to the special purpose vehicle, such as increase or decrease of capital contributed by PRC individuals, share transfer or exchange, merger, division or other material event. In the event that a PRC shareholder holding interests in a special purpose vehicle fails to fulfill the required SAFE registration, the PRC subsidiaries of that special purpose vehicle may be prohibited from making profit distributions to the offshore parent and from carrying out subsequent cross-border foreign exchange activities, and the special purpose vehicle may be restricted in its ability to contribute additional capital into its PRC subsidiary. Furthermore, failure to comply with the various SAFE registration requirements described above could result in liability under PRC law for evasion of foreign exchange controls. Mr. Jun Zhang, Mr. Tiezheng Li, Mr. Honghui Hu, and Mr. Shaofeng Gu, who directly or indirectly hold shares in our Cayman Islands holding company and are known to us as mainland China residents have completed the foreign exchange registrations in accordance with SAFE Circular 75 then in effect and have updated their registrations in accordance with SAFE Circular 37. They are now in the process of updating their registration required in connection with our recent corporate restructuring. Ms. Wei Luo, who indirectly hold shares in our Cayman Islands holding company and is known to us previously to be a mainland China resident, has changed her citizenship to Hong Kong. Ms. Wei Luo registered in accordance with SAFE Circular 75 previously and now is seeking to cancel or update the registration in accordance with SAFE Circular 37. On February 13, 2015, SAFE released Circular of the State Administration of Foreign Exchange on Further Simplifying and Improving the Direct Investment-related Foreign Exchange Administration Policies, , or SAFE Circular 13, under which local banks will examine and handle foreign exchange registration for overseas direct investment, including the initial foreign exchange registration and amendment registration, starting from June 1, 2015. See “Item 3. Key Information—D. Risk Factors—Risks Related to Doing Business in China—PRC regulations relating to offshore investment activities by PRC residents may limit our PRC subsidiaries’ ability to increase their registered capital or distribute profits to us or otherwise expose us or our PRC resident beneficial owners to liability and penalties under PRC law.” Regulations on employee stock incentive plans of overseas publicly-listed company Pursuant to the Notices on Issues concerning the Foreign Exchange Administration for Domestic Individuals Participating in Stock Incentive Plan of Overseas Publicly-Listed Company, , issued by SAFE in February 2012, individuals participating in any stock incentive plan of any overseas publicly listed company who are PRC citizens or non-PRC citizens who reside in China for a continuous period of not less than one year, subject to a few exceptions, are required to register with SAFE through a domestic qualified agent, which could be a PRC subsidiary of such overseas listed company, and complete certain other procedures. We and our executive officers and other employees who are PRC citizens or non-PRC citizens who reside in China for a continuous period of not less than one year and have been granted options are subject to these regulations. Failure by these individuals to complete their SAFE registrations may subject us and them to fines and other legal sanctions. See “Item 3. Key Information—D. Risk Factors—Risks Related to Doing Business in China—Any failure to comply with PRC regulations regarding the registration requirements for employee stock incentive plans may subject the PRC plan participants or us to fines and other legal or administrative sanctions.”
The SAT has issued certain circulars concerning employee share options and restricted shares. Under these circulars, our employees working in China who exercise share options will be subject to PRC individual income tax. Our PRC subsidiaries have obligations to file documents related to employee share options with relevant tax authorities and to withhold individual income taxes of those employees who exercise their share options. If our employees fail to pay or we fail to withhold their income taxes according to relevant laws and regulations, we may face sanctions imposed by the tax authorities or other PRC governmental authorities.
Regulations on Intellectual Property Rights The PRC has adopted comprehensive legislation governing intellectual property rights, including copyrights, patents, trademarks and domain names. . Copyright in the PRC, including copyrighted software, is principally protected under the Copyright Law and related rules and regulations. Under the Copyright Law, the term of protection for copyrighted software is 50 years. . The Patent Law provides for patentable inventions, utility models and designs, which must meet three conditions: novelty, inventiveness and practical applicability. The State Intellectual Property Office under the State Council is responsible for examining and approving patent applications. The duration of a patent right is either 10 years or 20 years from the date of application, depending on the type of patent right. . The PRC Trademark Law and its implementation rules protect registered trademarks. The PRC Trademark Law has adopted a principle with respect to trademark registration. The Trademark Office under the State Administration of Industry and Commerce is responsible for the registration and administration of trademarks throughout the PRC, and grants a term of ten years to registered trademarks and another ten years if requested upon expiry of the initial or extended term. Trademark license agreements must be filed with the Trademark Office for record. . Domain names are protected under the Administrative Measures on the China Internet Domain Names promulgated by the MIIT in 2004, which will be replaced by the Administrative Measures on the Internet Domain Names effective on November 1, 2017. The MIIT is the major regulatory authority responsible for the administration of the PRC Internet domain names. The registration of domain names in PRC is on a “first-apply-first-registration” basis. A domain name applicant will become the domain name holder upon the completion of the application procedure. Our major domain name “ppdai.com” has been registered. Regulations Relating to Dividend Distribution Under our current corporate structure, our Cayman Islands holding company may rely on dividend payments from Shanghai Guangjian, Beijing Prosper and Shanghai Manyin, which is aare wholly foreign-owned enterpriseenterprises incorporated in China, to fund any cash and financing requirements we may have. The principal regulations governing distribution of dividends of foreign-invested enterprises include the Foreign-Invested Enterprise Law, as amended in September 2016, and its implementation rules. Under these laws and regulations, wholly foreign-owned enterprises in China may pay dividends only out of their accumulated after-tax profits, if any, determined in accordance with PRC accounting standards and regulations. In addition, wholly foreign-owned enterprises in China are required to allocate at least 10% of their respective accumulated profits each year, if any, to fund certain reserve funds until these reserves have reached 50% of the registered capital of the enterprises. Wholly foreign-owned companies may, at their discretion, allocate a portion of their after-tax profits based on PRC accounting standards to staff welfare and bonus funds. These reserves are not distributable as cash dividends. Regulations Relating to Employment The and the require that employers must execute written employment contracts with full-time employees. All employers must compensate their employees with wages equal to at least the local minimum wage standards. Violations of the PRC Labor Law and the Labor Contract Law may result in the imposition of fines and other administrative sanctions, and serious violations may result in criminal liabilities.
Enterprises in China are required by PRC laws and regulations to participate in certain employee benefit plans, including social insurance funds, namely a pension plan, a medical insurance plan, an unemployment insurance plan, a work-related injury insurance plan and a maternity insurance plan, and a housing provident fund, and contribute to the plans or funds in amounts equal to certain percentages of salaries, including bonuses and allowances, of the employees as specified by the local government from time to time at locations where they operate their businesses or where they are located. According to the Social Insurance Law, an employer that fails to make social insurance contributions may be ordered to rectify the non-compliance and pay the required contributions within a stipulated deadline and be subject to a late fee of up to 0.05% or 0.2% per day, as the case may be. If the employer still fails to rectify the failure to make social insurance contributions within the stipulated deadline, it may be subject to a fine ranging from one to three times the amount overdue. In addition, the PRC Individual Income Tax Law requires companies operating in China to withhold individual income tax on employees’ salaries based on the actual salary of each employee upon payment. The General Office of the Central Committee of the Communist Party of China and the General Office of the State Council of the PRC issued the Reform Plan of the State Tax and Local Tax Collection Administration System, , or the Tax Reform Plan, on July 20, 2018, which provides that commencing from January 1, 2019, tax authorities would be responsible for the collection of social insurance contributions. The effect of the Tax Reform Plan is still uncertain. We have not made adequate contributions to employee benefit plans, as required by applicable PRC laws and regulations. We have recorded accruals for the estimated underpaid amounts for the current employees in our financial statements. However, we have not made any accruals for the interest on underpayment and penalties that may be imposed by the relevant PRC government authorities in the financial statements as we believe it would be unlikely that the relevant PRC government authorities will impose any significant interests or penalties. See “Item 3. Key Information—D. Risk Factors—Risks Related to Doing Business in China—Failure to make adequate contributions to various employee benefit plans and withhold individual income tax on employees’ salaries as required by PRC regulations may subject us to penalties.” Regulations Relating to Tax Pursuant to the Enterprise Income Tax Law and its implementation rules, if a non-resident enterprise has not set up an organization or establishment in the PRC, or has set up an organization or establishment but the income derived has no actual connection with such organization or establishment, it will be subject to a withholding tax on its PRC-sourced income at a rate of 10%. Pursuant to the Arrangement between Mainland China and the Hong Kong Special Administrative Region for the Avoidance of Double Taxation and Tax Evasion on Income, , the withholding tax rate in respect to the payment of dividends by a PRC enterprise to a Hong Kong enterprise is reduced to 5% from a standard rate of 10% if the Hong Kong enterprise directly holds at least 25% of the PRC enterprise. Pursuant to the Notice of the State Administration of Taxation on the Issues concerning the Application of the Dividend Clauses of Tax Agreements, , or Circular 81, a Hong Kong resident enterprise must meet the following conditions, among others, in order to enjoy the reduced withholding tax: (i) it must directly own the required percentage of equity interests and voting rights in the PRC resident enterprise; and (ii) it must have directly owned such percentage in the PRC resident enterprise throughout the 12 months prior to receiving the dividends. There are also other conditions for enjoying the reduced withholding tax rate according to other relevant tax rules and regulations. In August 2015, the State Administration of Taxation promulgated the Administrative Measures for Non-Resident Taxpayers to Enjoy Treatments under Tax Treaties, , or Circular 60, which became effective on November 1, 2015. Circular 60 provides that non-resident enterprises are not required to obtain pre-approval from the relevant tax authority in order to enjoy the reduced withholding tax rate. Instead, non-resident enterprises and their withholding agents may, by self-assessment and on confirmation that the prescribed criteria to enjoy the tax treaty benefits are met, directly apply the reduced withholding tax rate, and file necessary forms and supporting documents when performing tax filings, which will be subject to post-tax filing examinations by the relevant tax authorities. Accordingly, FinVolution (HK) Limited, our Hong Kong subsidiary, may be able to enjoy the 5% withholding tax rate for the dividends they receive from our PRC subsidiaries, if it satisfies the conditions prescribed under Circular 81 and other relevant tax rules and regulations. However, according to Circular 81 and Circular 60, if the relevant tax authorities consider the transactions or arrangements we have are for the primary purpose of enjoying a favorable tax treatment, the relevant tax authorities may adjust the favorable withholding tax in the future.
The Enterprise Income Tax Law, , or the EIT Law, and its implementing rules, which became effective on January 1, 2008, are the principal regulations governing enterprise income tax in the PRC. The EIT Law imposes a uniform enterprise income tax rate of 25% on all resident enterprises in the PRC, including foreign-invested enterprises.
Uncertainties exist with respect to how the EIT Law applies to the tax residence status of FinVolution Group and our offshore subsidiaries. Under the EIT Law, an enterprise established outside China with its “de facto management bodies” located within China is considered a “resident enterprise”, which means that it is treated in a manner similar to a PRC domestic enterprise for enterprise income tax purposes. The implementing rules of the EIT Law define de facto management body as a managing body that in practice exercises “substantial and overall management and control over the production and operations, personnel, accounting, and properties” of the enterprise. The SAT issued the Circular of the State Administration of Taxation on Issues Concerning the Identification of Chinese- Controlled Overseas Registered Enterprises as Resident Enterprises in Accordance With the Actual Standards of Organizational Management, , or SAT Circular 82 in 2009. According to SAT Circular 82, a Chinese-controlled offshore incorporated enterprise will be regarded as a PRC tax resident by virtue of having a “de facto management body” in China and will be subject to PRC enterprise income tax on its worldwide income only if all of the following criteria are met:(a) the primary location of the operational management is in China; (b) decisions relating to the enterprise’s financial and human resource matters are made or are subject to approval by organizations or personnel in China; (c) the enterprise’s primary assets, accounting books and records, company seals, and board and shareholders meeting minutes are located or maintained in China; and (d) 50% or more of voting board members or senior executives habitually reside in China. We do not believe that we meet all of the conditions outlined in the immediately preceding paragraph. We believe that FinVolution Group and our offshore subsidiaries should not be treated as a “resident enterprise” for PRC tax purposes if the criteria for “de facto management body” as set forth in SAT Circular 82 were deemed applicable to us. However, as the tax residency status of an enterprise is subject to determination by the PRC tax authorities and uncertainties remain with respect to the interpretation of the term “de facto management body” as applicable to our offshore entities, we may be treated as a resident enterprise for PRC tax purposes under the EIT Law, and we may therefore be subject to PRC income tax on our global income. We are actively monitoring the possibility of “resident enterprise” treatment for the applicable tax years and are evaluating appropriate organizational changes to avoid this treatment, to the extent possible. In the event that FinVolution Group or any of our offshore subsidiaries is considered to be a PRC resident enterprise: FinVolution Group or our offshore subsidiaries, as the case may be, may be subject to the PRC enterprise income tax at the rate of 25% on our worldwide taxable income; dividend income that FinVolution Group or our offshore subsidiaries, as the case may be, received from our PRC subsidiaries may be exempt from the PRC withholding tax; and interest paid to our overseas shareholders or ADS holders who are non-PRC resident enterprises as well as gains realized by such shareholders or ADS holders from the transfer of our shares or ADSs may be regarded as PRC-sourced income and as a result be subject to PRC withholding tax at a rate of up to 10%, subject to any reduction or exemption set forth in relevant tax treaties, and similarly, dividends paid to our overseas shareholders or ADS holders who are non-PRC resident individuals, as well as gains realized by such shareholders or ADS holders from the transfer of our shares or ADSs, may be regarded as PRC-sourced income and as a result be subject to PRC withholding tax at a rate of 20%, subject to any reduction or exemption set forth in relevant tax treaties. See “Item 3. Key Information—D. Risk Factors—Risks Related to Doing Business in China—If we are classified as a PRC resident enterprise for PRC income tax purposes, such classification could result in unfavorable tax consequences to us and our non-PRC shareholders or ADS holders.”
SAT issued a Notice Regarding Certain Corporate Income Tax Matters on Indirect Transfer of Properties by Non-Resident Enterprises, , or SAT Public Notice 7, on February 3, 2015, which replaced or supplemented certain previous rules under the Circular on Strengthening Administration of Enterprise Income Tax for Share Transfers by Non-Resident Enterprises, , or SAT Circular 698. Under SAT Public Notice 7, an “indirect transfer” of assets, including equity interests in a PRC resident enterprise, by non-PRC resident enterprises may be re-characterized and treated as a direct transfer of PRC taxable assets, if such arrangement does not have a reasonable commercial purpose and was established for the purpose of avoiding payment of PRC enterprise income tax. As a result, gains derived from such indirect transfer may be subject to PRC enterprise income tax. According to SAT Public Notice 7, “PRC taxable assets” include assets attributed to an establishment in China, immoveable properties in China, and equity investments in PRC resident enterprises. In respect of an indirect offshore transfer of assets of a PRC establishment, the relevant gain is to be regarded as effectively connected with the PRC establishment and therefore included in its enterprise income tax filing, and would consequently be subject to PRC enterprise income tax at a rate of 25%. Where the underlying transfer relates to the immoveable properties in China or to equity investments in a PRC resident enterprise, which is not effectively connected to a PRC establishment of a non-resident enterprise, a PRC enterprise income tax at 10% would apply, subject to available preferential tax treatment under applicable tax treaties or similar arrangements, and the party who is obligated to make the transfer payments has the withholding obligation. There is uncertainty as to the implementation details of SAT Public Notice 7. If SAT Public Notice 7 was determined by the tax authorities to be applicable to some of our transactions involving PRC taxable assets, our offshore subsidiaries conducting the relevant transactions might be required to spend valuable resources to comply with SAT Public Notice 7 or to establish that the relevant transactions should not be taxed under SAT Public Notice 7. See “Item 3. Key Information—D. Risk Factors—Risks Related to Doing Business in China—We face uncertainty with respect to indirect transfers of equity interests in PRC resident enterprises by their non-PRC holding companies.” Under applicable PRC laws, payers of PRC-sourced income to non-PRC residents are generally obligated to withhold PRC income taxes from the payment. In the event of a failure to withhold, the non-PRC residents are required to pay such taxes on their own. Failure to comply with the tax payment obligations by the non-PRC residents will result in penalties, including full payment of taxes owed, fines and default interest on those taxes. Pursuant to applicable PRC regulations promulgated by the Ministry of Finance of China and the SAT, entities or individuals conducting business in the service industry are required to pay a valued-added tax, or VAT, at a rate of 6% with respect to revenues derived from the provision of online information services. A taxpayer is allowed to offset the qualified input VAT paid on taxable purchases against the output VAT chargeable on the revenue from services provided. Regulations Relating to Overseas Listing and M&A 93On August 8, 2006, six PRC governmental and regulatory agencies, including the MOFCOM and the CSRC, jointly promulgated the Regulations on Mergers and Acquisitions of Domestic Enterprises by Foreign Investors (the “M&A Rules”), a new regulation with respect to the mergers and acquisitions of domestic enterprises by foreign investors that became effective on September 8, 2006 and revised on June 22, 2009. Foreign investors shall comply with the M&A rules when they purchase equity interests of a domestic company or subscribe for the increased capital of a domestic company, and thus changing the nature of the domestic company into a foreign- invested enterprise; or when the foreign investors establish a foreign-invested enterprise in the PRC for the purpose of purchasing the assets of a domestic company and operating the asset; or when the foreign investors purchase the asset of a domestic company, establish a foreign-invested enterprise by injecting such assets, and operate the assets. The M&A rules, among other things, purports to require that an offshore special vehicle, or a special purpose vehicle, formed for listing purposes and controlled directly or indirectly by PRC companies or individuals, shall obtain the approval of the CSRC prior to the listing and trading of such special purpose vehicle’s securities on an overseas stock exchange.
On July 6, 2021, the relevant PRC government authorities issued Opinions on Strictly Cracking Down Illegal Securities Activities in Accordance with the Law. These opinions emphasized the need to strengthen the administration over illegal securities activities and the supervision on overseas listings by China-based companies and proposed to take effective measures, such as promoting the construction of relevant regulatory systems to deal with the risks and incidents faced by China-based overseas-listed companies.
On December 27, 2021, the NDRC and the MOC jointly issued the Special Administrative Measures (Negative List) for Foreign Investment Access (2021 Version), or the 2021 Negative List, which will become effective on January 1, 2022. Pursuant to such Special Administrative Measures, if a domestic company engaging in the prohibited business stipulated in the 2021 Negative List seeks an overseas offering and listing, it shall obtain the approval from the competent governmental authorities. Besides, the foreign investors of the company shall not be involved in the company’s operation and management, and their shareholding percentage shall be subject, mutatis mutandis, to the relevant regulations on the domestic securities investments by foreign investors. In a Q&A released on NDRC’s official website on January 18, 2022, the respondent NDRC official indicates that these requirements are only imposes on PRC domestic companies that directly offer or list their securities in an overseas market. We are a Cayman Islands holding company with no equity ownership in the consolidated variable interest entities and we conduct our operations in China primarily through the consolidated variable interest entities with which we have maintained contractual arrangements. We believe we are not a domestic company that directly offered or listed securities in an overseas market. On December 24, 2021, the State Council issued a draft of the Provisions of the State Council on the Administration of Overseas Securities Offering and Listing by Domestic Companies, or the Draft Provisions, and the CSRC issued a draft of Administration Measures for the Filing of Overseas Securities Offering and Listing by Domestic Companies, or the Draft Administration Measures, for public comments. According to the Draft Provisions and the Draft Administration Measures, the overseas offering and listing by a domestic company, whether directly or indirectly, shall be filed with the CSRC. Specifically, the determination of an indirect offering and listing will be conducted on a “substance over form” basis, and an offering and listing shall be considered as an indirect overseas offering and listing by a domestic company if the issuer meets the following conditions: (i) the operating income, gross profit, total assets, or net assets of the domestic enterprise in the most recent fiscal year was more than 50% of the relevant line item in the issuer’s audited consolidated financial statement for that year; and (ii) senior management personnel responsible for business operations and management are mostly PRC citizens or are ordinarily resident in the PRC, and the main place of business is in the PRC or carried out in the PRC. According to the Draft Administration Measures, an overseas offering and listing is prohibited under any of the following circumstances: (i) if the intended securities offering and listing is specifically prohibited by national laws and regulations and relevant provisions; (ii) if the intended securities offering and listing may constitute a threat to or endangers national security as reviewed and determined by competent authorities under the State Council in accordance with law; (iii) if there are material ownership disputes over the equity, major assets, and core technology, etc. of the issuer; (iv) if, in the past three years, the domestic enterprise or its controlling shareholders or actual controllers have committed corruption, bribery, embezzlement, misappropriation of property, or other criminal offenses disruptive to the order of the socialist market economy, or are currently under judicial investigation for suspicion of criminal offenses, or are under investigation for suspicion of major violations; (v) if, in past three years, directors, supervisors, or senior executives have been subject to administrative punishments for severe violations, or are currently under judicial investigation for suspicion of criminal offenses, or are under investigation for suspicion of major violations; (vi) other circumstances as prescribed by the State Council. According to the Draft Administration Measures, the issuer or its affiliated domestic company, as the case may be, shall file with the CSRC (i) with respect to its initial public offering and listing within three business days, after its initial filing of the listing application to the regulator in the place of the intended listing, (ii) with respect to itsfollow-on offering within three business days after completion of thefollow-on offering, (iii) with respect to itsfollow-on offering for purpose of acquiring specific assets, within three business days after the first public announcement of the transaction, and (iv) with respect to listing by means of reverse takeover, share swap, acquisition and similar transactions, within three business days after its initial filing of the listing application or the first public announcement of the transaction, as case may be.Non-compliance with the Draft Administration Measures or an overseas listing completed in breach of Draft Administration Measures may result in a warning on the relevant domestic companies or a fine of RMB1 million to RMB10 million on them. If the circumstances are serious, they may be ordered to suspend their business or suspend their business pending rectification, or their permits or businesses license may be revoked. Furthermore, the controlling shareholder, actual controllers, directors, supervisors, and other legally appointed persons of the domestic enterprises may be warned, or fined between RMB500,000 to RMB5,000,000 either individually or collectively. On April 2, 2022, the CSRC published the Provisions on Strengthening the Confidentiality and Archives Management of Overseas Issuance and Listing of Securities (Draft for Comments) for public comments. Pursuant to this draft, domestic joint-stock enterprises listed in overseas markets via direct offering and domestic operational entities of enterprises listed in overseas markets via indirect offering must obtain approval and complete filing or other requirements before they publicly disclose any documents and materials that contain state secrets or government work secrets or that, if divulged, will jeopardize China’s national security or public interest, or before they provide such documents or materials to entities or individuals such as securities companies, securities service providers and overseas regulators. As of the date of this annual report, it is still unclear as to what approvals and procedures might be required in practice.
The following diagram illustrates our corporate structure as of the date of this annual report, including our principal subsidiaries and our principal consolidated variable interest entityentities and itstheir principal subsidiaries. (1) | Beijing Paipairongxin currently has four shareholders: Jun Zhang, our co-founder and director, Tiezheng Li, our co-founder, vice chairman and chief strategy officer,president, Honghui Hu, our co-founder director and president,director, and Shaofeng Gu, our co-founder, chairman and chief innovation officer, each holding 13.22%, 4.81%, 12.85%, and 69.12% of Beijing Paipairongxin’s equity interests, respectively. |
(2) | Shanghai Zihe currently has four shareholders: Jun Zhang our co-founder and director, Tiezheng Li, our co-founder, vice chairman and chief strategy officer,president, Honghui Hu, our co-founder director and president,director, Shaofeng Gu, our co-founder, chairman and chief innovation officer, each holding 25% of Shanghai Zihe’s equity interests, respectively. |
(3) | Shanghai Ledao currently has two shareholders: Lizhong Chen, a family relative of Tiezheng Li, and Yejun Jiang, a family relative of Honghui Hu, each holding 50% of Shanghai Ledao’s equity interests, respectively. |
(4) | Shanghai Nianqiao currently has two shareholders: Zhouhao Gu, a family relative of Shaofeng Gu, and Xiumeng Chen, a family relative of Jun Zhang, each holding 50% of Shanghai Nianqiao’s equity interests, respectively. |
PRC laws and regulations impose restrictions on foreign ownership and investment in internet-based businesses such as distribution of online information, value-added telecommunications services. We are a Cayman Islands company and our PRC subsidiary is considered a foreign-invested enterprise. Before the Interim Measures on Administration of Business Activities of Online Lending Information Intermediaries was published in August 2016, there was no official guidance or interpretation from the PRC government clarifying whether online consumer finance services fall within the category of value-added telecommunication services and whether providers of such services should be subject to value-added telecommunication regulations. However, we believe the online consumer finance services offered through our platform constitute a type of value-added telecommunication services that foreign ownership and investment are restricted; and therefore, we should operate our platform through contractual arrangements with a consolidated variable interest entity and its shareholders to ensure compliance with the relevant PRC laws and regulations.
We had entered into a series of contractual arrangements, through Beijing Prosper, with Beijing Paipairongxin, the shareholders of Beijing Paipairongxin and Shanghai PPDai (with respect to the amended and restated exclusive technology consulting and service agreement only) to obtain effective control over Beijing Paipairongxin and its subsidiaries. In June 2017, we, through Shanghai Guangjian and Shanghai Shanghu (with respect to the business operation agreement and the exclusive technology consulting and service agreement only), entered into a new set of contractual arrangements with Beijing Paipairongxin, the shareholders of Beijing Paipairongxin and Shanghai PPDai (with respect to the exclusive technology consulting and service agreement only) to replace the previous contractual arrangements and continue our effective control over Beijing Paipairongxin and its subsidiaries, in particular Shanghai PPDai, through which we operate our online lending information intermediary business. Shanghai PPDai has made applications for value-added telecommunication business license with the relevant local telecommunication regulatory authority, but due to the lack of detailed implementation rules, the local authority has tentatively put its applications on hold. Shanghai PPDai intends to apply for a value-added telecommunication business license again once it becomes feasible under PRC laws and regulations. In March 2018, we restated the contractual arrangements with Beijing Paipairongxin, the shareholders of Beijing Paipairongxin and Shanghai PPDai (the “Newly Restated Contractual Arrangements”). In March 2018, we entered into another set of contractual arrangements, through Shanghai Manyin, with Shanghai Zihe, and the shareholders of Shanghai Zihe. These contractual arrangements consist of (i) loan agreement between Shanghai Manyin and shareholders of Shanghai Zihe, (ii) business operation agreement among Shanghai Manyin, Shanghai Zihe and shareholders of Shanghai Zihe, (iii) exclusive technology consulting and service framework agreement between Shanghai Manyin and Shanghai Zihe, (iv) equity pledge agreement among Shanghai Manyin, Shanghai Zihe and shareholders of Shanghai Zihe, (v) exclusive call option agreement among Shanghai Manyin, Shanghai Zihe and shareholders of Shanghai Zihe, and (vi) power of attorney between shareholders of Shanghai Zihe and Shanghai Manyin. In January 2019, we entered into another set of contractual arrangements, through Shanghai Manyin, with Shanghai Ledao, and the shareholders of Shanghai Ledao. These contractual arrangements consist of (i) loan agreement between Shanghai Manyin and shareholders of Shanghai Ledao, (ii) business operation agreement among Shanghai Manyin, Shanghai Ledao and shareholders of Shanghai Ledao, (iii) exclusive technology consulting and service framework agreement between Shanghai Manyin and Shanghai Ledao, (iv) equity pledge agreement among Shanghai Manyin, Shanghai Ledao and shareholders of Shanghai Ledao, (v) exclusive option agreement among Shanghai Manyin, Shanghai Ledao and shareholders of Shanghai Ledao, and (vi) power of attorney between shareholders of Shanghai Ledao and Shanghai Manyin.
In November 2018, we entered into another set of contractual arrangements, through Shanghai Manyin, with Shanghai Nianqiao, and the shareholders of Shanghai Nianqiao. These contractual arrangements consist of (i) loan agreement between Shanghai Manyin and shareholders of Shanghai Nianqiao, (ii) business operation agreement among Shanghai Manyin, Shanghai Nianqiao and shareholders of Shanghai Nianqiao, (iii) exclusive technology consulting and service framework agreement between Shanghai Manyin and Shanghai Nianqiao, (iv) equity pledge agreement among Shanghai Manyin, Shanghai Nianqiao and shareholders of Shanghai Nianqiao, (v) exclusive call option agreement among Shanghai Manyin, Shanghai Nianqiao and shareholders of Shanghai Nianqiao, and (vi) power of attorney between shareholders of Shanghai Nianqiao and Shanghai Manyin. In February 2022, our contractual arrangements with Shanghai Nianqiao and the shareholders of Shanghai Nianqiao were terminated and all equity interests in Shanghai Nianqiao had been transferred to Shanghai Zihe. In January 2019, we entered into another set of contractual arrangements, through Shanghai Manyin, with Shanghai Ledao, and the shareholders of Shanghai Ledao. These contractual arrangements consist of (i) loan agreement between Shanghai Manyin and shareholders of Shanghai Ledao, (ii) business operation agreement among Shanghai Manyin, Shanghai Ledao and shareholders of Shanghai Ledao, (iii) exclusive technology consulting and service framework agreement between Shanghai Manyin and Shanghai Ledao, (iv) equity pledge agreement among Shanghai Manyin, Shanghai Ledao and shareholders of Shanghai Ledao, (v) exclusive call option agreement among Shanghai Manyin, Shanghai Ledao and shareholders of Shanghai Ledao, and (vi) power of attorney between shareholders of Shanghai Ledao and Shanghai Manyin.
In September 2020, we entered into another set of contractual arrangements, through Shanghai Manyin, with Chengdu Yougao, and the shareholders of Chengdu Yougao. These contractual arrangements consist of (i) loan agreement between Shanghai Manyin and shareholders of Chengdu Yougao, (ii) business operation agreement among Shanghai Manyin, Chengdu Yougao and shareholders of Chengdu Yougao, (iii) exclusive technology consulting and service framework agreement between Shanghai Manyin and Chengdu Yougao, (iv) equity pledge agreement among Shanghai Manyin, Chengdu Yougao and shareholders of Chengdu Yougao, (v) exclusive call option agreement among Shanghai Manyin, Chengdu Yougao and shareholders of Chengdu Yougao, and (vi) power of attorney between shareholders of Chengdu Yougao and Shanghai Manyin. In January 2022, our contractual arrangements with Chengdu Yougao and the shareholders of Chengdu Yougao were terminated and all equity interests in Chengdu Yougao had been transferred to Shanghai Zihe. The contractual arrangements with Beijing Paipairongxin, Shanghai Zihe, Shanghai Ledao and Shanghai NianqiaoLedao allow us to: exercise effective control over Beijing Paipairongxin, Shanghai Zihe, Shanghai Ledao Shanghai Nianqiao, and their respective subsidiaries; receive substantially all of the economic benefits of Beijing Paipairongxin, Shanghai Zihe, Shanghai Ledao, Shanghai Nianqiao, and their respective subsidiaries; and
have an exclusive option to purchase all or part of the equity interests in Beijing Paipairongxin, Shanghai Zihe, Shanghai Ledao, Shanghai Nianqiao, and their respective subsidiaries when and to the extent permitted by PRC law. As a result of these contractual arrangements, we have become the primary beneficiary of Beijing Paipairongxin, Shanghai Zihe, Shanghai Ledao and Shanghai Nianqiao,Ledao, and we treat Beijing Paipairongxin, Shanghai Zihe, and Shanghai Ledao and Shanghai Nianqiao as ourthe consolidated variable interest entities under U.S. GAAP. We have consolidated the financial results of Beijing Paipairongxin, Shanghai Zihe, Shanghai Ledao and Shanghai NianqiaoLedao and their respective subsidiaries in our consolidated financial statements in accordance with U.S. GAAP. Contractual Arrangements with Beijing Paipairongxin The following is a summary of the currently effective contractual arrangements by and among our wholly-owned subsidiary, Shanghai Guangjian and its wholly-owned subsidiary, Shanghai Shanghu (with respect to the business operation agreement and the exclusive technology consulting and service agreement only), our consolidated variable interest entity, Beijing Paipairongxin, the shareholders of Beijing Paipairongxin, and Shanghai PPDai (with respect to the exclusive technology consulting and service agreement only). Agreements that provide us with effective control over Beijing Paipairongxin Shanghai Guangjian entered into a loan agreement with each of the shareholders of Beijing Paipairongxin, namely Mr. Jun Zhang, Mr. Tiezheng Li, Mr. Honghui Hu and Mr. Shaofeng Gu, our co-founders and shareholders in March 2018. Under these loan agreements, Shanghai Guangjian has granted an interest-free loan of RMB100.0 million to the shareholders of Beijing Paipairongxin solely for the capital contributions to Beijing Paipairongxin. Upon written notice by Shanghai Guangjian, the loan shall be repaid by the shareholders of Beijing Paipairongxin from the proceeds received by transferring their equity interests in Beijing Paipairongxin to Shanghai Guangjian pursuant to the terms and conditions of the call option agreement among Shanghai Guangjian, Beijing Paipairongxin, Beijing Prosper and the shareholders of Beijing Paripairongxin.Paipairongxin. If the proceeds received by the shareholders of Beijing Paipairongxin from such transferring is higher than the principal of the loan, the amount exceeding the principal shall be deemed as cost for using the principal and shall be paid, to the extent permitted by laws, to Shanghai Guangjian together with the principal. Shanghai Guangjian has the right to request repayment of the loan before maturity.
Restated Business Operation Agreement.Agreement . Shanghai Guangjian, Shanghai Shanghu, Beijing Paipairongxin, the shareholders of Beijing Paipairongxin and Beijing Prosper entered into a restated business operation agreement in March 2018. Pursuant to this restated agreement, Beijing Paipairongxin and its shareholders agree that to the extent permitted by law, they will accept and unconditionally execute instructions from Shanghai Guangjian and Shanghai Shanghu on business operations, such as appointment of directors and executive officers. Beijing Paipairongxin and its shareholders further agree that, without prior written consent of Shanghai Guangjian and Shanghai Shanghu, Beijing Paipairongxin will not take any action that may have material adverse effects on its assets, businesses, human resources, rights, obligations, or business operations. The shareholders of Beijing Paipairongxin agree to transfer any dividends or other similar income or interests they receive as the shareholders of Beijing Paipairongxin, if any, immediately and unconditionally to Shanghai Guangjian and Shanghai Shanghu. This restated agreement also requires each of Beijing Paipairongxin’s shareholders to issue an irrevocable power of attorney authorizing Shanghai Guangjian or any person(s) designated by Shanghai Guangjian to execute shareholders’ rights on behalf of such shareholder. Unless Shanghai Guangjian and Shanghai Shanghu terminate this agreement in advance, this restated agreement will remain effective until Beijing Paipairongxin is dissolved pursuant to PRC law. Restated Power of Attorney.Attorney . Through a restated power of attorney dated March 21, 2018, each shareholder of Beijing Paipairongxin irrevocably authorizes Shanghai Guangjian or any person(s) designated by Shanghai Guangjian to act as his or her to exercise all of such shareholder’s voting and other rights associated with the shareholder’s equity interest in Beijing Paipairongxin, such as the right to appoint directors, supervisors and officers, as well as the right to sell, transfer, pledge and dispose of all or a portion of the shares held by such shareholder. The power of attorney will remain in force for ten years unless the restated business operation agreement is terminated earlier than the expiration of the 10-year term. Upon request by Shanghai Guangjian, the shareholders of Beijing Paipairongxin shall extend the term of this power of attorney accordingly.
Restated Equity Pledge Agreement. Shanghai Guangjian, Beijing Paipairongxin, the shareholders of Beijing Paipairongxin and Beijing Prosper entered into a restated equity pledge agreement in March 2018. Pursuant to the equity pledge agreement, each shareholder of Beijing Paipairongxin has pledged all of his equity interest in Beijing Paipairongxin to Shanghai Guangjian to guarantee the performance by such shareholder and Beijing Paipairongxin of their respective obligations under the restated business operation agreement (including the power of attorney), the restated option agreement, the restated exclusive technology consulting and service agreement and the loan agreement. If Beijing Paipairongxin or any of its shareholders breaches any obligations under these agreements, Shanghai Guangjian, as pledgee, will be entitled to dispose of the pledged equity and have priority to be compensated by the proceeds from the disposal of the pledged equity. Each of the shareholders of Beijing Paipairongxin agrees that before his or her obligations under the contractual arrangements are discharged, he or she will not dispose of the pledged equity interests, create or allow any encumbrance on the pledged equity interests, or take any action which may result in the change of the pledged equity that may have material adverse effects on the pledgee’s rights under this restated agreement without the prior written consent of Shanghai Guangjian. The restated equity pledge agreement will remain effective until Beijing Paipairongxin and its shareholders discharge all their obligations under the contractual arrangements and the pledgee consents such discharge in writing. We are preparing for the registration of the equity pledge with the relevant office of the Administration for Industry and Commerce in accordance with the PRC Property Rights Law. Agreement that allows us to receive economic benefits from Beijing Paipairongxin and Shanghai PPDai Restated Exclusive Technology Consulting Shanghai Guangjian and Shanghai Shanghu, Beijing Paipairongxin, Shanghai PPDai and Beijing Prosper entered into a restated exclusive technology consulting and service agreement in March 2018. Pursuant to this agreement, Shanghai Guangjian, Shanghai Shanghu or their designated party has the exclusive right to provide Beijing Paipairongxin and Shanghai PPDai with technical support, consulting services and other services. Without prior written consent from Shanghai Guangjian and Shanghai Shanghu, Beijing Paipairongxin and Shanghai PPDai shall not accept any technical support and services covered by this agreement from any third party. The service fees that Beijing Paipairongxin and Shanghai PPDai are going to pay to Shanghai Guangjian and Shanghai Shanghu shall be determined on a basis based on the level of difficulty and complexity, time spend by Shanghai Guangjian and Shanghai Shanghu and their employees in providing the services, the specific scope and commercial value of the services, the revenue generated by Beijing Paipairongxin and Shanghai PPDai resulting from such services, and other relevant factors. Shanghai Guangjiang and Shanghai Shanghu own the intellectual property rights arising out of the provisions of services under this agreement. Unless Shanghai Guangjian and Shanghai Shanghu terminate this restated agreement in advance, this restated agreement will remain effective until Beijing Paipairongxin and Shanghai PPDai are dissolved in accordance with PRC law. Although this restated agreement can be terminated by mutual agreement among Shanghai Guangjian and Shanghai Shanghu, Beijing Paipairongxin, Shanghai PPDai and Beijing Prosper, Beijing Paipairongxin and Shanghai PPDai have no right to unilaterally terminate this restated agreement.
Agreement that provides us with the option to purchase the equity interest in Beijing Paipairongxin Restated Option Agreement. Shanghai Guangjian, Beijing Paipairongxin, the shareholders of Beijing Paipairongxin and Beijing Prosper entered into a restated option agreement in March 2018. Pursuant to the restated option agreement, the shareholders of Beijing Paipairongxin have irrevocably granted Shanghai Guangjian or any third party designated by Shanghai Guangjian an exclusive option to purchase all or part of their respective equity interests in Beijing Paipairongxin. The purchase price is equal to the registered capital corresponding to the concerning equity interest. Unless otherwise agreed, the shareholders of Beijing Paipairongxin will immediately gift Shanghai Guangjian or any third party designated by Shanghai Guangjian with the purchase price after Shanghai Guangjian or any third party designated by Shanghai Guangjian exercises the option. The shareholders of Beijing Paipairongxin agree that without their separate consent, Shanghai Guangjian may transfer all or part of its option under this agreement to a third party. Without prior written consent from Shanghai Guangjian or its designated third party, Beijing Paipairongxin shall not, among other things, amend its articles of association, increase or decrease the registered capital, sell, dispose of or set any encumbrance on its assets, business or revenue outside the ordinary course of business, enter into any material contract, merge with any other persons or make any investments, distribute dividends, or enter into any transactions which have material adverse effects on its business. The shareholders of Beijing Paipairongxin also jointly and severally undertake that they will not transfer, gift or otherwise dispose of their equity interests in Beijing Paipairongxin to any third party or create or allow any encumbrance on their equity interests within the term of this restated agreement. This restated agreement will remain effective until Shanghai Guangjian has acquired all equity interests of Beijing Paipairongxin from its shareholders.
Contractual Arrangements with Shanghai Zihe The following is a summary of the currently effective contractual arrangements by and among our wholly-owned subsidiary, Shanghai Manyin, our consolidated variable interest entity, Shanghai Zihe, and the shareholders of Shanghai Zihe. Agreements that provide us with effective control over Shanghai Zihe . Shanghai Manyin entered into a loan agreement with each of the shareholders of Shanghai Zihe, namely Mr. Jun Zhang, Mr. Tiezheng Li, Mr. Honghui Hu and Mr. Shaofeng Gu, our co-founders and shareholders in March 2018. Under the loan agreements, Shanghai Manyin has granted an interest-free loan of RMB100.0 million to the shareholders of Shanghai Zihe solely for the capital contributions to Shanghai Zihe. Upon written notice by Shanghai Manyin, the loan shall be repaid by the shareholders of Shanghai Zihe from the proceeds received by transferring their equity interests in Shanghai Zihe to Shanghai Manyin pursuant to the terms and conditions of the exclusive call option agreement among Shanghai Manyin, Shanghai Zihe, and the shareholders of Shanghai Zihe. If the proceeds received by the shareholders of Shanghai Zihe from such transferring is higher than the principal of the loan, the amount exceeding the principal shall be deemed as cost for using the principal and shall be paid, to the extent permitted by laws, to Shanghai Manyin together with the principal. Shanghai Manyin has the right to request repayment of the loan before maturity. Business Operation AgreementAgreement. . Shanghai Manyin, Shanghai Zihe, and the shareholders of Shanghai Zihe entered into a business operation agreement on March 21, 2018. Pursuant to this agreement, Shanghai Zihe and its shareholders agree that to the extent permitted by law, they will accept and strictly execute instructions from Shanghai Manyin on business operations, such as appointment of directors and senior management. Shanghai Zihe and its shareholders further agree that, without prior written consent of Shanghai Manyin, Shanghai Zihe will not take any action that may have material effects on its assets, businesses, human resources, rights, obligations, or business operations. This agreement also requires each of Shanghai Zihe’s shareholders to issue an irrevocable power of attorney authorizing Shanghai Manyin or any person(s) designated by Shanghai Manyin to execute shareholders’ rights on behalf of such shareholder. Unless terminated in advance pursuant this agreement, this agreement will remain effective for 30 years, renewable upon advance written notice by Shanghai Manyin.
Power of AttorneyAttorney. . Through a power of attorney dated March 21, 2018, each shareholder of Shanghai Zihe irrevocably authorizes Shanghai Manyin or any person(s) designated by Shanghai Manyin to act as his or her attorney-in-fact to exercise all of such shareholder’s voting and other rights associated with the shareholder’s equity interest in Shanghai Zihe, such as the right to call a shareholders’ meeting, join a shareholders’ meeting and sign any shareholders resolutions; the right to nominate and appoint legal representative, directors, supervisors, general manager, chief financial officer and other officers, as well as all rights a shareholder may have as a shareholder under laws and constitutional documents. The power of attorney will remain in force and irrevocable during the term each shareholder remains as a shareholder of Shanghai Zihe. Equity Pledge AgreementAgreement. . Shanghai Manyin, Shanghai Zihe, and the shareholders of Shanghai Zihe entered into an equity pledge agreement on March 21, 2018. Pursuant to the equity pledge agreement, each shareholder of Shanghai Zihe has pledged all of his equity interest in Shanghai Zihe to Shanghai Manyin to guarantee the performance by such shareholder and Shanghai Zihe of their respective obligations under the loan agreement, the business operation agreement (including the power of attorney), the exclusive call option agreement and the exclusive technology consulting and service framework agreement. If Shanghai Zihe or any of its shareholders breaches any obligations under these agreements, Shanghai Manyin, as pledgee, will be entitled to dispose of the pledged equity and have priority to be compensated by the proceeds from the disposal of the pledged equity. Each of the shareholders of Shanghai Zihe agrees that before his obligations under the contractual arrangements are discharged, he will not dispose of the pledged equity interests, create or allow any encumbrance on the pledged equity interests, or take any action which may result in the change of the pledged equity that may have material adverse effects on the pledgee’s rights under this agreement without the prior written consent of Shanghai Zihe.Manyin. The equity pledge agreement will remain effective until Shanghai Zihe and its shareholders discharge all their obligations under the contractual arrangements and the pledgee consents such discharge in writing. We have completed the registration of the equity pledge with the relevant office of the Administration for Industry and Commerce in accordance with the PRC Property Rights Law.
Agreement that allows us to receive economic benefits from Shanghai Zihe Exclusive Technology Consulting and Service Framework Agreement. Shanghai Manyin, and Shanghai Zihe entered into an exclusive technology consulting and service framework agreement on March 21, 2018. Pursuant to this agreement, Shanghai Manyin or its designated party has the exclusive right to provide Shanghai Zihe with technical support, consulting services and other services. Without prior written consent from Shanghai Manyin, Shanghai Zihe shall not accept any technical support and services covered by this agreement from any third party. The service fees Shanghai Zihe is going to pay to Shanghai Manyin shall be determined on a basis based on the content of technology consulting and service, level of difficulty and complexity, time spend by Shanghai Manyin and its employees, the commercial value of the technology consulting and service to be provided by Shanghai Manyin and the revenue Shanghai Zihe generates due to the technology consulting and service provided by Shanghai Manyin. Shanghai Manyin shall own the intellectual property rights arising out of the provisions of services under this agreement. Unless Shanghai Manyin terminates this agreement in advance, this agreement will remain effective for 30 years, renewable upon Shanghai Manyin’s advance written notice. Although this agreement can be terminated by mutual agreement between Shanghai Manyin and Shanghai Zihe, Shanghai Zihe has no right to unilaterally terminate this agreement. Agreement that provides us with the option to purchase the equity interest in Shanghai Zihe Shanghai Manyin, Shanghai Zihe, and the shareholders of Shanghai Zihe entered into an exclusive call option agreement on March 21, 2018. Pursuant to the exclusive call option agreement, the shareholders of Shanghai Zihe have irrevocably granted Shanghai Manyin or any third party designated by Shanghai Manyin an exclusive option to purchase all of their respective equity interests in Shanghai Zihe at the lowest price permitted by the PRC laws. The shareholders of Shanghai Zihe will immediately gift Shanghai Manyin or any third party designated by Shanghai Manyin with the purchase price after Shanghai Manyin or any third party designated by Shanghai Manyin exercises the option. The shareholders of Shanghai Zihe agree that without their separate consent, Shanghai Manyin may transfer all or part of its option under this agreement to a third party. Without prior written consent from Shanghai Manyin or its designated third party, Shanghai Zihe shall not, among other things, amend its articles of association, increase or decrease the registered capital, sell, dispose of or set any encumbrance on its assets, business or revenue outside the ordinary course of business, enter into any material contract, merge with any other persons or make any investments, distribute dividends, or enter into any transactions which have material adverse effects on its business. The shareholders of Shanghai Zihe also jointly and severally undertake that they will not transfer, gift or otherwise dispose of their equity interests in Shanghai Zihe to any third party or create or allow any encumbrance on their equity interests within the term of this agreement. This agreement will remain effective for 30 years, renewable upon Shanghai Manyin’s advance written notice.
Contractual Arrangements with Shanghai Ledao The following is a summary of the currently effective contractual arrangements by and among our wholly-owned subsidiary, Shanghai Manyin, our consolidated variable interest entity, Shanghai Ledao, and the shareholders of Shanghai Ledao. Agreements that provide us with effective control over Shanghai Ledao . Shanghai Manyin entered into a loan agreement with each of the shareholders of Shanghai Ledao, namely Mr. Lizhong Chen and Mr. Yejun Jiang on January 14, 2019. Under the loan agreements, Shanghai Manyin has granted an interest-free loan of RMB50.0 million to the shareholders of Shanghai Ledao solely for the capital contributions to Shanghai Ledao. Upon written notice by Shanghai Manyin, the loan shall be repaid by the shareholders of Shanghai Ledao from the proceeds received by transferring their equity interests in Shanghai Ledao to Shanghai Manyin pursuant to the terms and conditions of the exclusive call option agreement among Shanghai Manyin, Shanghai Ledao, and the shareholders of Shanghai Ledao. If the proceeds received by the shareholders of Shanghai Ledao from such transferring is higher than the principal of the loan, the amount exceeding the principal shall be deemed as cost for using the principal and shall be paid, to the extent permitted by laws, to Shanghai Manyin together with the principal. Shanghai Manyin has the right to request repayment of the loan before maturity.
Business Operation AgreementAgreement. . Shanghai Manyin, Shanghai Ledao, and the shareholders of Shanghai Ledao entered into a business operation agreement on January 14, 2019. Pursuant to this agreement, Shanghai Ledao and its shareholders agree that to the extent permitted by law, they will accept and strictly execute instructions from Shanghai Manyin on business operations, such as appointment of directors and senior management. Shanghai Ledao and its shareholders further agree that, without prior written consent of Shanghai Manyin, Shanghai Ledao will not take any action that may have material effects on its assets, businesses, human resources, rights, obligations, or business operations. This agreement also requires each of Shanghai Ledao’s shareholders to issue an irrevocable power of attorney authorizing Shanghai Manyin or any person(s) designated by Shanghai Manyin to execute shareholders’ rights on behalf of such shareholder. Unless terminated in advance pursuant this agreement, this agreement will remain effective for 30 years, renewable upon advance written notice by Shanghai Manyin. Power of AttorneyAttorney. . Through a power of attorney dated January 14, 2019, each shareholder of Shanghai Ledao irrevocably authorizes Shanghai Manyin or any person(s) designated by Shanghai Manyin to act as his or her to exercise all of such shareholder’s voting and other rights associated with the shareholder’s equity interest in Shanghai Ledao, such as the right to call a shareholders’ meeting, join a shareholders’ meeting and sign any shareholders resolutions; the right to nominate and appoint legal representative, directors, supervisors, general manager, chief financial officer and other officers, as well as all rights a shareholder may have as a shareholder under laws and constitutional documents. The power of attorney will remain in force and irrevocable during the term each shareholder remains as a shareholder of Shanghai Ledao. Equity Pledge AgreementAgreement. . Shanghai Manyin, Shanghai Ledao, and the shareholders of Shanghai Ledao entered into an equity pledge agreement on January 14, 2019. Pursuant to the equity pledge agreement, each shareholder of Shanghai Ledao has pledged all of his equity interest in Shanghai Ledao to Shanghai Manyin to guarantee the performance by such shareholder and Shanghai Ledao of their respective obligations under the loan agreement, the business operation agreement (including the power of attorney), the exclusive call option agreement and the exclusive technology consulting and service framework agreement. If Shanghai Ledao or any of its shareholders breaches any obligations under these agreements, Shanghai Manyin, as pledgee, will be entitled to dispose of the pledged equity and have priority to be compensated by the proceeds from the disposal of the pledged equity. Each of the shareholders of Shanghai Ledao agrees that before his obligations under the contractual arrangements are discharged, he will not dispose of the pledged equity interests, create or allow any encumbrance on the pledged equity interests, or take any action which may result in the change of the pledged equity that may have material adverse effects on the pledgee’s rights under this agreement without the prior written consent of Shanghai Ledao.Manyin. The equity pledge agreement will remain effective until Shanghai Ledao and its shareholders discharge all their obligations under the contractual arrangements and the pledgee consents such discharge in writing. We have completed the registration of the equity pledge with the relevant office of the Administration for Industry and Commerce in accordance with the PRC Property Rights Law.
Agreement that allows us to receive economic benefits from Shanghai Ledao Exclusive Technology Consulting and Service Framework AgreementAgreement. . Shanghai Manyin, and Shanghai Ledao entered into an exclusive technology consulting and service framework agreement on January 14, 2019. Pursuant to this agreement, Shanghai Manyin or its designated party has the exclusive right to provide Shanghai Ledao with technical support, consulting services and other services. Without prior written consent from Shanghai Manyin, Shanghai Ledao shall not accept any technical support and services covered by this agreement from any third party. The service fees Shanghai Ledao is going to pay to Shanghai Manyin shall be determined on a basis based on the content of technology consulting and service, level of difficulty and complexity, time spend by Shanghai Manyin and its employees, the commercial value of the technology consulting and service to be provided by Shanghai Manyin and the revenue Shanghai Ledao generates due to the technology consulting and service provided by Shanghai Manyin. Shanghai Manyin shall own the intellectual property rights arising out of the provisions of services under this agreement. Unless Shanghai Manyin terminates this agreement in advance, this agreement will remain effective for 30 years, renewable upon Shanghai Manyin’s advance written notice. Although this agreement can be terminated by mutual agreement between Shanghai Manyin and Shanghai Ledao, Shanghai Ledao has no right to unilaterally terminate this agreement.
Agreement that provides us with the option to purchase the equity interest in Shanghai Ledao Exclusive Call Option Agreement. Shanghai Manyin, Shanghai Ledao, and the shareholders of Shanghai Ledao entered into an exclusive call option agreement on January 14, 2019. Pursuant to the exclusive call option agreement, the shareholders of Shanghai Ledao have irrevocably granted Shanghai Manyin or any third party designated by Shanghai Manyin an exclusive option to purchase all of their respective equity interests in Shanghai Ledao at the lowest price permitted by the PRC laws. The shareholders of Shanghai Ledao will immediately gift Shanghai Manyin or any third party designated by Shanghai Manyin with the purchase price after Shanghai Manyin or any third party designated by Shanghai Manyin exercises the option. The shareholders of Shanghai Ledao agree that without their separate consent, Shanghai Manyin may transfer all or part of its option under this agreement to a third party. Without prior written consent from Shanghai Manyin or its designated third party, Shanghai Ledao shall not, among other things, amend its articles of association, increase or decrease the registered capital, sell, dispose of or set any encumbrance on its assets, business or revenue outside the ordinary course of business, enter into any material contract, merge with any other persons or make any investments, distribute dividends, or enter into any transactions which have material adverse effects on its business. The shareholders of Shanghai Ledao also jointly and severally undertake that they will not transfer, gift or otherwise dispose of their equity interests in Shanghai Ledao to any third party or create or allow any encumbrance on their equity interests within the term of this agreement. This agreement will remain effective for 30 years, renewable upon Shanghai Manyin’s advance written notice. Contractual Arrangements with Shanghai Nianqiao
The following is a summary of the currently effective contractual arrangements by and among our wholly-owned subsidiary, Shanghai Manyin, our variable interest entity, Shanghai Nianqiao, and the shareholders of Shanghai Nianqiao.
Agreements that provide us with effective control over Shanghai Nianqiao
. Shanghai Manyin entered into a loan agreement with each of the shareholders of Shanghai Nianqiao, namely Mr. Zhouhao Gu and Mrs. Xiumeng Chen on November 29, 2018. Under the loan agreements, Shanghai Manyin has granted an interest-free loan of RMB50.0 million to the shareholders of Shanghai Nianqiao solely for the capital contributions to Shanghai Nianqiao. Upon written notice by Shanghai Manyin, the loan shall be repaid by the shareholders of Shanghai Nianqiao from the proceeds received by transferring their equity interests in Shanghai Nianqiao to Shanghai Manyin pursuant to the terms and conditions of the exclusive option agreement among Shanghai Manyin, Shanghai Nianqiao, and the shareholders of Shanghai Nianqiao. If the proceeds received by the shareholders of Shanghai Nianqiao from such transferring is higher than the principal of the loan, the amount exceeding the principal shall be deemed as cost for using the principal and shall be paid, to the extent permitted by laws, to Shanghai Manyin together with the principal. Shanghai Manyin has the right to request repayment of the loan before maturity.Business Operation Agreement
. Shanghai Manyin, Shanghai Nianqiao, and the shareholders of Shanghai Nianqiao entered into a business operation agreement on November 29, 2018. Pursuant to this agreement, Shanghai Nianqiao and its shareholders agree that to the extent permitted by law, they will accept and strictly execute instructions from Shanghai Manyin on business operations, such as appointment of directors and senior management. Shanghai Nianqiao and its shareholders further agree that, without prior written consent of Shanghai Manyin, Shanghai Nianqiao will not take any action that may have material effects on its assets, businesses, human resources, rights, obligations, or business operations. This agreement also requires each of Shanghai Nianqiao’s shareholders to issue an irrevocable power of attorney authorizing Shanghai Manyin or any person(s) designated by Shanghai Manyin to execute shareholders’ rights on behalf of such shareholder. Unless terminated in advance pursuant this agreement, this agreement will remain effective for 30 years, renewable upon advance written notice by Shanghai Manyin.. Through a power of attorney dated November 29, 2018, each shareholder of Shanghai Nianqiao irrevocably authorizes Shanghai Manyin or any person(s) designated by Shanghai Manyin to act as his or herattorney-in-fact
to exercise all of such shareholder’s voting and other rights associated with the shareholder’s equity interest in Shanghai Nianqiao, such as the right to call a shareholders’ meeting, join a shareholders’ meeting and sign any shareholders resolutions; the right to nominate and appoint legal representative, directors, supervisors, general manager, chief financial officer and other officers, as well as all rights a shareholder may have as a shareholder under laws and constitutional documents. The power of attorney will remain in force and irrevocable during the term each shareholder remains as a shareholder of Shanghai Nianqiao.
. Shanghai Manyin, Shanghai Nianqiao, and the shareholders of Shanghai Nianqiao entered into an equity pledge agreement on November 29, 2018. Pursuant to the equity pledge agreement, each shareholder of Shanghai Nianqiao has pledged all of his equity interest in Shanghai Nianqiao to Shanghai Manyin to guarantee the performance by such shareholder and Shanghai Nianqiao of their respective obligations under the loan agreement, the business operation agreement (including the power of attorney), the exclusive option agreement and the exclusive technology consulting and service framework agreement. If Shanghai Nianqiao or any of its shareholders breaches any obligations under these agreements, Shanghai Manyin, as pledgee, will be entitled to dispose of the pledged equity and have priority to be compensated by the proceeds from the disposal of the pledged equity. Each of the shareholders of Shanghai Nianqiao agrees that before his obligations under the contractual arrangements are discharged, he will not dispose of the pledged equity interests, create or allow any encumbrance on the pledged equity interests, or take any action which may result in the change of the pledged equity that may have material adverse effects on the pledgee’s rights under this agreement without the prior written consent of Shanghai Nianqiao. The equity pledge agreement will remain effective until Shanghai Nianqiao and its shareholders discharge all their obligations under the contractual arrangements and the pledgee consents such discharge in writing. We have completed the registration of the equity pledge with the relevant office of the Administration for Industry and Commerce in accordance with the PRC Property Rights Law.Agreement that allows us to receive economic benefits from Shanghai Nianqiao
Exclusive Technology Consulting and Service Framework Agreement
. Shanghai Manyin, and Shanghai Nianqiao entered into an exclusive technology consulting and service framework agreement on November 29, 2018. Pursuant to this agreement, Shanghai Manyin or its designated party has the exclusive right to provide Shanghai Nianqiao with technical support, consulting services and other services. Without prior written consent from Shanghai Manyin, Shanghai Nianqiao shall not accept any technical support and services covered by this agreement from any third party. The service fees Shanghai Nianqiao is going to pay to Shanghai Manyin shall be determined on acase-by-case
basis based on the content of technology consulting and service, level of difficulty and complexity, time spend by Shanghai Manyin and its employees, the commercial value of the technology consulting and service to be provided by Shanghai Manyin and the revenue Shanghai Nianqiao generates due to the technology consulting and service provided by Shanghai Manyin. Shanghai Manyin shall own the intellectual property rights arising out of the provisions of services under this agreement. Unless Shanghai Manyin terminates this agreement in advance, this agreement will remain effective for 30 years, renewable upon Shanghai Manyin’s advance written notice. Although this agreement can be terminated by mutual agreement between Shanghai Manyin and Shanghai Nianqiao, Shanghai Nianqiao has no right to unilaterally terminate this agreement.Agreement that provides us with the option to purchase the equity interest in Shanghai Nianqiao
Exclusive Option Agreement
. Shanghai Manyin, Shanghai Nianqiao, and the shareholders of Shanghai Nianqiao entered into an exclusive option agreement on November 29, 2018. Pursuant to the exclusive option agreement, the shareholders of Shanghai Nianqiao have irrevocably granted Shanghai Manyin or any third party designated by Shanghai Manyin an exclusive option to purchase all of their respective equity interests in Shanghai Nianqiao at the lowest price permitted by the PRC laws. The shareholders of Shanghai Nianqiao will immediately gift Shanghai Manyin or any third party designated by Shanghai Manyin with the purchase price after Shanghai Manyin or any third party designated by Shanghai Manyin exercises the option. The shareholders of Shanghai Nianqiao agree that without their separate consent, Shanghai Manyin may transfer all or part of its option under this agreement to a third party. Without prior written consent from Shanghai Manyin or its designated third party, Shanghai Nianqiao shall not, among other things, amend its articles of association, increase or decrease the registered capital, sell, dispose of or set any encumbrance on its assets, business or revenue outside the ordinary course of business, enter into any material contract, merge with any other persons or make any investments, distribute dividends, or enter into any transactions which have material adverse effects on its business. The shareholders of Shanghai Nianqiao also jointly and severally undertake that they will not transfer, gift or otherwise dispose of their equity interests in Shanghai Nianqiao to any third party or create or allow any encumbrance on their equity interests within the term of this agreement. This agreement will remain effective for 30 years, renewable upon Shanghai Manyin’s advance written notice.
In the opinion of Jingtian & GongchengHui Ye Law Firm, (Shanghai), our PRC counsel: the ownership structures of Shanghai Guangjian and Beijing Paipairongxin are in compliance with PRC laws or regulations currently in effect; the ownership structures of Shanghai Manyin and Shanghai Zihe are in compliance with PRC laws or regulations currently in effect; the ownership structures of Shanghai Manyin and Shanghai Nianqiao are in compliance with PRC laws or regulations currently in effect;
the ownership structures of Shanghai Manyin and Shanghai Ledao are in compliance with PRC laws or regulations currently in effect; the contractual arrangements among Shanghai Guangjian, Shanghai Shanghu (with respect to the business operation agreement and the exclusive technology consulting and service agreement only), Beijing Paipairongxin, the shareholders of Beijing Paipairongxin and Shanghai PPDai (with respect to the exclusive technology consulting and service agreement only) governed by PRC law are valid, binding and enforceable under PRC law, and do not and will not result in any violation of applicable PRC laws or regulations currently in effect;
the contractual arrangements among Shanghai Manyin, Shanghai Zihe and the shareholders of Shanghai Zihe governed by PRC law are valid, binding and enforceable under PRC law, and do not and will not result in any violation of applicable PRC laws or regulations currently in effect; and the contractual arrangements among Shanghai Manyin, Shanghai Nianqiao and the shareholders of Shanghai Nianqiao governed by PRC law are valid, binding and enforceable under PRC law, and do not and will not result in any violation of applicable PRC laws or regulations currently in effect; and
the contractual arrangements among Shanghai Manyin, Shanghai Ledao and the shareholders of Shanghai Ledao governed by PRC law are valid, binding and enforceable under PRC law, and do not and will not result in any violation of applicable PRC laws or regulations currently in effect. However, there are substantial uncertainties regarding the interpretation and application of current and future PRC laws, regulations and rules. For example, on March 15, 2019, the National People’s Congress enacted the Foreign Investment Law of the PRC, , or the Foreign Investment Law, which came into effect on January 1, 2020 and replaced the trio of existing laws regulating foreign investment in China, namely, the Sino-foreign Equity Joint Venture Enterprise Law, , the Sino-foreign Cooperative Joint Venture Enterprise Law and the Wholly Foreign-invested Enterprise Law, , together with their implementation rules and ancillary regulations. The Foreign Investment Law embodies an expected PRC regulatory trend to rationalize its foreign investment regulatory regime in line with prevailing international practice and the legislative efforts to unify the corporate legal requirements for both foreign and domestic investments. However, since it is relatively new, uncertainties still exist in relation to its interpretation and implementation. For instance, under the Foreign Investment Law, “foreign investment” refers to the investment activities directly or indirectly conducted by foreign individuals, enterprises or other entities in China. Though it does not explicitly classify contractual arrangements as a form of foreign investment, there is no assurance that foreign investment via contractual arrangement would not be interpreted as a type of indirect foreign investment activities under the definition in the future. In addition, the definition contains a catch-all provision which includes investments made by foreign investors through means stipulated in laws or administrative regulations or other methods prescribed by the State Council. On December 26, 2019, the State Council promulgated the Implementation Regulations on the Foreign Investment Law, which came into effect on January 1, 2020. However, the Implementation Regulations on the Foreign Investment Law still does not explicitly define whether contractual arrangement would be deemed as a form of foreign investment. Therefore, it still leaves leeway for future laws, administrative regulations or provisions promulgated by the State Council to provide for contractual arrangements as a form of foreign investment. Accordingly, the PRC regulatory authorities may in the future take a view that is contrary to the above opinion of our PRC counsel. If the PRC government finds that the agreements that establish the structure for operating our online consumer finance platform business do not comply with PRC government restrictions on foreign investment in value-added telecommunications services business, such as the internet content provision services, we could be subject to severe penalties, including being prohibited from continuing operations. See “Item 3. Key Information—D. Risk Factors—Risks Related to Our Corporate Structure—If the PRC government deems that the contractual arrangements in relation to ourthe consolidated variable interest entities and their subsidiaries do not comply with PRC regulatory restrictions on foreign investment in the relevant industries, or if these regulations or the interpretation of existing regulations change in the future, we could be subject to severe penalties or be forced to relinquish our interests in those operations,” “Item 3. Key Information—D. Risk Factors—Risks Related to Doing Business in China—We may be adversely affected by the complexity, uncertainties and changes in PRC regulation of internet-related businesses and companies, and any lack of requisite approvals, licenses or permits applicable to our business may have a material adverse effect on our business and results of operations,”operations” and “Item 3. Key Information—D. Risk Factors—Risks Related to Doing Business in China—“—Uncertainties in the interpretation and enforcement of PRC laws and regulations could limit the legal protections available to us.”
| Property, Plants and Equipment |
Our corporate headquarters is located in Shanghai, where we lease office space with an area of approximately 23,54820,393.21 square meters as of the date of this annual report. For our customer services and loan collection services, we lease an area of approximately 2,070 square meters in Wuxi, approximately 3,352 square meters in Changsha, approximately 9,5286,715 square meters in Hefei, and approximately 2,665 square meters in Zhengzhou. We also lease office space in Beijing, Hainan, Indonesia, Singapore, Vietnam and Indonesia.Philippines. We lease our premises from unrelated third parties under operating lease agreements. The lease term varies from one year to five years. Our servers are primarily hosted at internet data centers owned by major domestic internet data center providers. We believe that our existing facilities are generally adequate to meet our current needs, but we expect to seek additional space as needed to accommodate future growth.
| UNRESOLVED STAFF COMMENTS |
| OPERATING AND FINANCIAL REVIEW AND PROSPECTS |
The following discussion of our financial condition and results of operations is based upon, and should be read in conjunction with, our audited consolidated financial statements and the related notes included in this annual report on Form 20-F. This report contains forward-looking statements. See “Forward-Looking Statements” on page 3 of this annual report. In evaluating our business, you should carefully consider the information provided under the caption “Item 3. Key Information—D. Risk Factors” in this annual report on Form 20-F. We caution you that our businesses and financial performance are subject to substantial risks and uncertainties. We are a leading online consumer finance in China with strong brand recognition. Launched in 2007, we are a pioneer in China’s online consumer finance platform industry connecting borrowers, whose needs are unserved or underserved by traditional financial institutions, with investors and financial institutions. As of December 31, 2019,2021, we had over 105.9131.2 million registered users.users in China. We strategically focus on serving borrowers between the ages of 20 and 40, the young generation that is typically more receptive to internet financial services and many of whom have very limited or no credit record. We primarily offer short-term loans to our borrowers to meet their immediate credit needs while allowing them to gradually establish their credit history through activities on our platform. We provide individual investors and institutional funding partners with an opportunity to invest inconnect with an emerging asset class—consumer loans—through a variety of investmentproduct options. We offer attractive risk-adjusted returns supported by a set of comprehensive risk management procedures and different investor protection mechanisms to control and mitigate investors’ risk exposure.
We generate revenues primarily by collecting transaction service fees. For loans funded by individual investors, we collect transaction service fees from borrowers for our services in matching them with investors and for other services we provide over the loans’ lifecycle. For loans funded by institutional funding partners, we collect transaction service fees primarily from institutional funding partners for our services provided to them such as borrower introduction and preliminary credit assessment, as well as other services we provide along the lifecycle of loans. Historically, for loans funded by individual investors, we collected transaction service fees from borrowers for our services in matching them with investors and for other services we provided over the loans’ lifecycle. Our operating revenues grew from RMB3.9RMB6.0 billion in 20172019 to RMB4.5RMB7.6 billion in 2018,2020, and further to RMB6.0RMB9.5 billion (US$856.5 million)1.5 billion) in 2019.2021. A substantial portion of our operating revenues for these periods were attributable to fees collected from borrowers.borrowers, third party guarantee companies and institutional funding partners. Our net profit increased from RMB1.1was RMB2.4 billion in 2017 to2019, RMB2.0 billion in 2020 and RMB2.5 billion in 2018 and RMB2.4 billion (US$341.1391.6 million) in 2019.2021. Our total assets as of December 31, 20172019, 2020 and 2018 and 20192021 were RMB8.6RMB18.3 billion, RMB13.1RMB14.9 billion, and RMB18.3RMB18.1 billion (US$2.62.8 billion), respectively. General Factors Affecting Our Results of Operations Our business and results of operations are affected by general factors affecting China’s online consumer finance industry, which include, among other things: China’s overall economic growth, impact and development of theCOVID-19 pandemic, per capita disposable income,
fluctuation of interest rates, development of regulatory environment for the China’s online consumer finance industry, and growth of mobile internet penetration, including the popularity of smart mobile devices. Unfavorable changes in any of these general industry conditions could negatively affect demand for our services. For example, in August 2017, the Shanghai financial regulatory authorities required Shanghai PPDai to provide certain undertakings with respect to its “business scale.” Accordingly, Shanghai PPDai has undertaken to ensure that its “business scale” (which we understand, based on our communication with the authorities, refers to the outstanding balance of loans invested by individual investors facilitated by our Shanghai operations) does not exceed the total outstanding balance of loans invested through our platform as of June 30, 2017 which amounted to RMB20.6 billion, until March 31, 2018 or as otherwise specified by relevant regulatory authorities in the future, which we believe to be the completion of registration with Shanghai financial regulatory authorities. Circular 175 further requires that normal intermediaries, which are defined as large-scale online lending information intermediaries that are strictly in compliance with relevant laws and regulations and have not demonstrated any high-risk characteristics, shall strictly control and manage the business scale and the number of investors. As of March 31, early 2020, in response to intensifying efforts to contain the spread of COVID-19, the Chinese government took a number of actions, which included extending the Chinese New Year holiday, quarantining and otherwise treating individuals in China who had the COVID-19, asking China residents to remain at home and to avoid gathering in public, and other actions. The COVID-19 has had also resulted in temporary closure of many corporate offices, retail stores, and manufacturing facilities and factories across China. In response to the pandemic, we made remote working arrangements and suspended business travels to ensure the safety and health of our employees. All of the above measures reducereduced our business operation capacity and negatively affectaffected our operating results. The outbreak of COVID-19 also caused an increase in default of the loans on our platform as the extension of the Chinese New Year holiday and suspension of business activities across various sectors are likely to hurt income of the borrowers on our platform. As a result, the provision for loans receivable, accounts receivable and quality assurance payable increased which negatively impacted our earnings in the firsthalf quarter of 2020. AsAlso, as a result of the sharp slowdown in consumption activities and the increase in default by borrowers on our platform, our loan volume also experienced a decline in the first quarterhalf of 2020 compared to the first quarterhalf of 2019 and the fourth quarter of 2019 due to our adoption of a more prudent approach in facilitating new loans,loans. In addition, in the spring of 2022, there was an uptick in cases in Shanghai, attributed to the highly contagious Omicron variant. The outbreak in Shanghai spread to many other provinces and cities in China. Certain travel restrictions and other limitations were re-imposed in various places in response to these new cases. In response to the uptick in cases in Shanghai, we made remote working arrangements and suspended business travels again to ensure the safety and health of our employees, which may reduce our business operation capacity and negatively impactedaffected our revenue for the three months ended March 31, 2020. In addition,operating results. Furthermore, normal economic life throughout China was sharply curtailed during the outbreak of COVID-19 and opportunities for discretionary consumption were extremely limited. Our results of operations could be adversely affected to the extent that any of these pandemicstheCOVID-19 pandemic harms the Chinese economy in general. See “Item 3. Key Information—D. Risk Factors—Risks Related to Our Business—We face risks related to COVID-19 outbreaks, other health epidemics and outbreaks and natural disasters, which could significantly disrupt our operations” for more information. Specific Factors Affecting Our Results of Operations While our business is exposed to general factors affecting the online consumer finance industry in China, we believe our results of operations are more directly affected by company specific factors, including the following major factors. Ability to Maintainmaintain and Expandexpand our Borrower Baseborrower base in a Cost-Effective Mannercost-effective manner Our revenues are dependent on our ability to acquire new borrowers and retain and increase engagement of existing borrowers. In 2017, 20182019, 2020 and 2019,2021, we served approximately 8.76.7 million, 6.83.5 million and 6.75.6 million borrowers, respectively. We use various means, including mobile app stores, search engine marketing, online advertising and online partnerships, to attract new borrowers. We also establish an offline direct sales team to acquire new borrowers across different cities in China. We are continuously seeking to improve and optimize user experience to achieve a high level of borrower satisfaction, which helps to attract and retain borrowers. We will also continue to develop new loan products to enhance engagement of our borrowers.
Our results of operations and ability to sustain and increase loan volumes will depend, in part, on the effectiveness of our sales and marketing efforts. Our sales and marketing expenses were 20.1%12.1%, 15.6%6.4% and 12.1%16.7% of our total operating revenues in 2017, 20182019, 2020 and 2019,2021, respectively. The significant decrease in our sales and marketing expenses as a percentage of our total operating revenues in 2020 was attributable to our efforts to optimize effectiveness of borrower acquisition, an increase in revenues contribution by existing borrowers and in 2018, the decline in online customer acquisition expenses. The significant increase in our sales and marketing expenses as a percentage of our total operating revenues in 2021 was attributable to the increase in revenue contribution by new borrowers and the increase in online customer acquisition expenses. We intend to continuously dedicate significant resources to borrower acquisition and improve the effectiveness of these efforts. Ability to Maintainmaintain and Expandexpand our Investor Basecooperation with institutional funding partners Our revenues are also dependent on the maintenance and growth inof our investor base. The number of individual investors who invested through our platform was over 307,000 in 2017, over 249,000 in 2018 and over 160,000 in 2019.cooperation with institutional funding partner. We have also had increased investments from institutional funding partners. As of December 31, 2019,2021, we had over 30cumulatively cooperated with 63 institutional funding partners active on our platform.in China. Going forward, we will continue to retain existing institutional funding partners and attract new institutional funding partners by offering attractive returns and providing enhanced tools to meet their needs.
Maintenance of Effective Risk Managementeffective risk management Our ability to effectively segment borrowers into appropriate risk profiles impacts our ability to attract and retain borrowers and investorsinstitutional funding partners as well as our ability to offer investors attractive risk-adjusted returns, both of which directly relate to users’ confidence in our platform. We intend to optimize our fraud detection capabilities, improve accuracy of our credit scoring model and enhance our collection effectiveness on a continuing basis through the combination of our big-data analytical capabilities and the increasing amount of data we accumulate through our operations. Furthermore, we have established a quality assurance fund mechanism to protect individual investors from potential losses resulting from delinquent loans. Historically, we also had several investor reserve funds to protect individual investors from underperformance of investment programs. See “Item 4. Information on the Company—B. Business Overview—Investor Protection.” We determine the contributions to these funds based on the estimated loan delinquency rates. For our institutional funding partners, we provide our institutional funding partners with quality assurance commitments either through our own financing guarantee subsidiary or through third-party financing guarantee companies/insurance companies for a substantial majority of the loans funded by our institutional funding partners. See “Item 4. Information on the Company—B. Business Overview—Investor Protection.” As a result, we are subject to credit risk for such loans. Our ability to accurately estimate loan delinquency rates and our ability to collect delinquent loans have an impact on the amount we need to pay to third-party financing guarantee companies or insurance companies and our own financial condition, which have an impact on our consolidated statements of comprehensive income/(loss). See “—Critical Accounting Policies, Judgments and Estimates— Quality Assurance Payable and Receivable,” “—Critical Accounting Policies, Judgments and Estimates—Financial Guarantee Derivative,Allowance for Credit Losses,” and “Item 3. Key Information—D. Risk Factors—Risks Related to Our Business—Limitations on institutional funding partners’ acceptance of credit enhancement may adversely affect our business and access to funding”funding.”
Historically, we established a quality assurance fund mechanism to protect individual investors from potential losses resulting from delinquent loans, and we also had several investor reserve funds to protect individual investors from underperformance of investment programs. See “Item 4. Information on the Company—B. Business Overview—Investor Protection.” We determined the contributions to these funds based on the estimated loan delinquency rates. Ability to Price Accuratelyprice accurately Our profitability largely depends on our ability to reasonably price the loans facilitated through our platform. We implement segmented pricing for our standard loan products, which contributed a majority of our revenues in the periods presented in this annual report. Prospective borrowers for our standard loan products are divided into eight segments based on our proprietary credit scoring model: Level I applicants have the lowest risk of default whereas Level VIII loan applicants, whose applications will be rejected, have the highest risk of default. The transaction service fee rate that we collected from borrowers for standard loan products varies depending on their respective credit levels and duration of the underlying loan.
Ability to Innovateinnovate Our growth to date has depended on, and our future success will depend in part on, successfully meeting borrower and investorinstitutional funding partner demand for new loan products and innovative investment options.services. We have made and intend to continue to make substantial investments to develop loan products and investment optionsimprove services for borrowers and investors.institutional funding partners. For borrowers, we plan to introduce new features and products that meet their evolving financial needs at different stages of their lives. For our institutional funding partners, we will continue to expand our products and services to meet their needs for target returns, risk preferences, investment horizon and liquidity requirements. Failure to continue to successfully develop and offer innovative products could adversely affect our operating results and we may not recoup the costs of launching and marketing new products. In addition, our success to date is largely attributable to our ability to seamlessly integrate the use of technologies into provision of financial services. We have been focusing on leveraging our big-data analytics and machine learning capabilities to increase the automation level of our platform and optimize our operational efficiency in various aspects. As our business grows, we will continue to invest in strengthening our technology infrastructure, which may result in the increase of our research and development expenses, and origination and servicing expenses.
Ability to Compete Effectivelycompete effectively We compete for both borrowers and investorsinstitutional funding partners with a variety of players in the consumer finance industry, ranging from traditional financial institutions to emerging online finance providers and marketplaces. We must compete effectively in order to grow our platform and increase our revenues. We intend to continue to invest in product development, technology infrastructure and our sales and marketing capabilities to address the competition we face. Delinquency Raterate by Balancebalance We define delinquency rate as the balance of the outstanding principal for loans that were 15 to 29, 30 to 59, 60 to 89, 90 to 119, 120 to 149 and 150 to 179 calendar days past due as a percentage of the total outstanding balance of principal for the loans on our platform as of a specific date. Loans that are delinquent for 180 days or more are typically considered charged-off and and are not included in the delinquency rate calculation. The following table provides the delinquency rates for all outstanding loans on our platform as of the respective dates indicated. Since the origination amount of our standard loan products accounted for the vast majority of the total amount of loans facilitated through our platform for the periods presented, the delinquency information below mainly reflects the performance of our standard loan products. The delinquency rates in late 20172020 and 2021 were relatively higherlower than previous delinquency rates primarily due to a sudden adverse change in market conditions.our acquisition of better quality borrowers. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | % | | | | % | | | | % | | | | % | | | | % | | | | % | | | | | % | | | | % | | | | % | | | | % | | | | % | | | | % | | | | | % | | | | % | | | | % | | | | % | | | | % | | | | % | | | | | % | | | | % | | | | % | | | | % | | | | % | | | | % | | | | | % | | | | % | | | | % | | | | % | | | | % | | | | % | | | | | % | | | | % | | | | % | | | | % | | | | % | | | | % | | | | | % | | | | % | | | | % | | | | % | | | | % | | | | % | | | | | % | | | | % | | | | % | | | | % | | | | % | | | | % | | | | | % | | | | % | | | | % | | | | % | | | | % | | | | % | | | | | % | | | | % | | | | % | | | | % | | | | % | | | | % | | | | | % | | | | % | | | | % | | | | % | | | | % | | | | % | | | | | % | | | | % | | | | % | | | | % | | | | % | | | | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 0.80 | % | | | 1.61 | % | | | 1.45 | % | | | 1.29 | % | | | 1.31 | % | | | 1.20 | % | | | | 0.86 | % | | | 1.42 | % | | | 1.37 | % | | | 1.19 | % | | | 1.26 | % | | | 1.21 | % | | | | 0.90 | % | | | 1.50 | % | | | 1.35 | % | | | 1.31 | % | | | 1.17 | % | | | 1.20 | % | | | | 1.34 | % | | | 2.40 | % | | | 1.86 | % | | | 1.76 | % | | | 1.62 | % | | | 1.53 | % | | | | 1.34 | % | | | 3.03 | % | | | 2.33 | % | | | 2.44 | % | | | 2.64 | % | | | 2.17 | % | | | | 0.71 | % | | | 1.36 | % | | | 1.70 | % | | | 2.00 | % | | | 2.75 | % | | | 2.38 | % | | | | 0.46 | % | | | 0.72 | % | | | 0.74 | % | | | 0.90 | % | | | 1.07 | % | | | 1.43 | % | | | | 0.35 | % | | | 0.55 | % | | | 0.48 | % | | | 0.52 | % | | | 0.49 | % | | | 0.55 | % | | | | 0.29 | % | | | 0.52 | % | | | 0.43 | % | | | 0.39 | % | | | 0.38 | % | | | 0.36 | % | | | | 0.30 | % | | | 0.45 | % | | | 0.39 | % | | | 0.32 | % | | | 0.36 | % | | | 0.33 | % | | | | 0.34 | % | | | 0.51 | % | | | 0.43 | % | | | 0.39 | % | | | 0.33 | % | | | 0.32 | % | | | | 0.39 | % | | | 0.67 | % | | | 0.55 | % | | | 0.49 | % | | | 0.41 | % | | | 0.36 | % |
Delinquency Raterate by Vintagevintage We refer to loans facilitated during a specified time period as a vintage. We define vintage delinquency rate as (i) the total amount of principal for all loans in a vintage that become delinquent, less (ii) the total amount of recovered past due principal for all loans in the same vintage, and divided by (iii) the total amount of initial principal for all loans in such vintage. Loans that have been considered charged-off are included in the calculation of vintage delinquency rates. In the first quarter of 2020, we adjusted the definition of 30-day plus past due delinquent loans in a vintage to better present delinquency rate by vintage. Under the adjusted definition, a loan is 30-day plus past due after 30 days pass its actual due date, while under our previous definition, a loan was 30-day plus past due after 30 days passed the presumed due date, which was one-month after the loan’s funding date. The following chart and table display the historical cumulative 30-day plus past due delinquency rates by loan origination vintage for all continuing loan products facilitated through our online platform under the adjusted definition of 30-day plus past due delinquent loans.
(1) | Our vintage delinquency rate for loans facilitated during 20172019 was 6.82%6.68%, calculated as the volume weighted average of the quarterly vintage delinquency rates at the end of the 12th month following the inception of each loan in an applicable vintage. |
(2) | Our vintage delinquency rate for loans facilitated during 20182020 was 7.04%2.53%, calculated as the volume weighted average of the quarterly vintage delinquency rates at the end of the 12th month following the inception of each loan in an applicable vintage. |
(3) | As of December 31, 2019,2021, our vintage delinquency rate for loans facilitated during the first three quarters was 4.43%1.53%, calculated as the volume weighted average of the quarterly vintage delinquency rates as of December 31, 2019.2021. As loans facilitated during 20182020 continue to age, the delinquency rate for the 20192021 vintage, calculated as the volume weighted average of the quarterly vintage delinquency rates at the end of the 12th month following the inception of each loan in an applicable vintage, may be different from the vintage delinquency rate of 4.43%1.53% as of December 31, 2019.2021. |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 1.34 | | | | 2.38 | | | | 3.45 | | | | 4.36 | | | | 5.13 | | | | 5.75 | | | | 6.22 | | | | 6.65 | | | | 6.99 | | | | 7.25 | | | | 7.43 | | | | | 1.33 | | | | 2.34 | | | | 3.31 | | | | 4.18 | | | | 5.05 | | | | 5.82 | | | | 6.44 | | | | 6.98 | | | | 7.34 | | | | 7.50 | | | | 7.52 | | | | | 1.02 | | | | 2.16 | | | | 3.42 | | | | 4.55 | | | | 5.64 | | | | 6.45 | | | | 6.92 | | | | 7.13 | | | | 7.20 | | | | 7.20 | | | | 7.15 | | | | | 0.83 | | | | 2.07 | | | | 3.37 | | | | 4.45 | | | | 5.12 | | | | 5.50 | | | | 5.68 | | | | 5.79 | | | | 5.83 | | | | 5.80 | | | | 5.73 | | | | | 0.81 | | | | 1.73 | | | | 2.46 | | | | 2.97 | | | | 3.35 | | | | 3.59 | | | | 3.71 | | | | 3.78 | | | | 3.82 | | | | 3.82 | | | | 3.80 | | | | | 0.44 | | | | 0.92 | | | | 1.34 | | | | 1.65 | | | | 1.90 | | | | 2.08 | | | | 2.21 | | | | 2.30 | | | | 2.36 | | | | 2.38 | | | | 2.38 | | | | | 0.41 | | | | 0.81 | | | | 1.16 | | | | 1.47 | | | | 1.72 | | | | 1.89 | | | | 2.01 | | | | 2.10 | | | | 2.16 | | | | 2.20 | | | | 2.21 | | | | | 0.36 | | | | 0.70 | | | | 1.01 | | | | 1.28 | | | | 1.50 | | | | 1.68 | | | | 1.82 | | | | 1.93 | | | | 2.02 | | | | 2.08 | | | | 2.11 | | | | | 0.27 | | | | 0.55 | | | | 0.84 | | | | 1.10 | | | | 1.34 | | | | 1.56 | | | | 1.74 | | | | 1.91 | | | | — | | | | — | | | | — | | | | | 0.29 | | | | 0.57 | | | | 0.87 | | | | 1.17 | | | | 1.46 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | | 0.29 | | | | 0.63 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
The following table sets forth a summary of our consolidated results of operations for the periods presented, both in absolute amount and as a percentage of our total operating revenues for the periods presented. This information should be read together with our consolidated financial statements and related notes included elsewhere in this annual report. The results of operations in any period are not necessarily indicative of our future trends. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | For the Year Ended December 31, | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | (in thousands, except for percentages) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Loan facilitation service fees | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Post-facilitation service fees | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Changes in expected discretionary payment to investors protected by investor reserve funds | | | | ) | | | | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Origination and servicing expenses | | | | ) | | | | ) | | | | ) | | | | ) | | | | ) | | | | ) | | | | ) | Origination and servicing expenses-related party | | | | ) | | | | ) | | | | ) | | | | ) | | | | ) | | | | ) | | | | ) | Sales and marketing expenses | | | | ) | | | | ) | | | | ) | | | | ) | | | | ) | | | | ) | | | | ) | General and administrative expenses | | | | ) | | | | ) | | | | ) | | | | ) | | | | ) | | | | ) | | | | ) | Research and development expenses | | | | ) | | | | ) | | | | ) | | | | ) | | | | ) | | | | ) | | | | ) | Provision for loans receivable (2) | | | | ) | | | | ) | | | | ) | | | | ) | | | | ) | | | | ) | | | | ) | Provision for accounts receivable | | | | | | | | | | | | ) | | | | ) | | | | ) | | | | ) | | | | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | ) | | | | ) | | | | ) | | | | ) | | | | ) | | | | ) | | | | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Other income/(expenses) (3) | | | | ) | | | | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Profit before income tax expenses | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | ) | | | | ) | | | | ) | | | | ) | | | | ) | | | | ) | | | | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | For the Year Ended December 31, | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | (in thousands, except for percentages) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Loan facilitation service fees | | | 3,310,875 | | | | 55.5 | | | | 1,908,851 | | | | 25.2 | | | | 3,794,182 | | | | 595,390 | | | | 40.1 | | Post-facilitation service fees | | | 1,200,373 | | | | 20.1 | | | | 672,981 | | | | 8.9 | | | | 1,309,565 | | | | 205,499 | | | | 13.8 | | | | | — | | | | — | | | | 3,386,032 | | | | 44.8 | | | | 2,593,512 | | | | 406,979 | | | | 27.4 | | | | | 1,106,669 | | | | 18.6 | | | | 1,113,337 | | | | 14.7 | | | | 1,216,170 | | | | 190,844 | | | | 12.8 | | | | | 344,840 | | | | 5.8 | | | | 481,886 | | | | 6.4 | | | | 556,699 | | | | 87,358 | | | | 5.9 | | Changes in expected discretionary payment to investors protected by investor reserve funds | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 5,962,757 | | | | 100.0 | | | | 7,563,087 | | | | 100.0 | | | | 9,470,128 | | | | 1,486,070 | | | | 100.0 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Origination, servicing expenses and other cost of revenue | | | (1,164,716 | ) | | | (19.5 | ) | | | (1,315,496 | ) | | | (17.4 | ) | | | (1,834,453 | ) | | | (287,866 | ) | | | (19.4 | ) | Origination, servicing expenses and other cost of revenue | | | (43,494 | ) | | | (0.7 | ) | | | (10,104 | ) | | | (0.1 | ) | | | (7,503 | ) | | | (1,177 | ) | | | (0.1 | ) | Sales and marketing expenses | | | (720,333 | ) | | | (12.1 | ) | | | (482,859 | ) | | | (6.4 | ) | | | (1,584,233 | ) | | | (248,601 | ) | | | (16.7 | ) | General and administrative expenses | | | (435,816 | ) | | | (7.3 | ) | | | (461,116 | ) | | | (6.1 | ) | | | (518,245 | ) | | | (81,324 | ) | | | (5.5 | ) | Research and development expenses | | | (390,585 | ) | | | (6.6 | ) | | | (370,175 | ) | | | (4.9 | ) | | | (434,850 | ) | | | (68,237 | ) | | | (4.6 | ) | Credit losses for quality assurance commitment | | | — | | | | — | | | | (2,007,968 | ) | | | (26.5 | ) | | | (1,963,609 | ) | | | (308,133 | ) | | | (20.7 | ) | Provision for loans receivable (2) | | | (299,504 | ) | | | (5.0 | ) | | | (463,175 | ) | | | (6.1 | ) | | | (374,243 | ) | | | (58,727 | ) | | | (4.0 | ) | Provision for accounts receivable and other receivables | | | (261,882 | ) | | | (4.4 | ) | | | (144,661 | ) | | | (1.9 | ) | | | (139,226 | ) | | | (21,848 | ) | | | (1.5 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | (3,316,330 | ) | | | (55.6 | ) | | | (5,255,554 | ) | | | (69.5 | ) | | | (6,856,362 | ) | | | (1,075,913 | ) | | | (72.4 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 210,053 | | | | 3.5 | | | | 116,469 | | | | 1.5 | | | | 122,368 | | | | 19,202 | | | | 1.3 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Profit before income tax expenses | | | 2,856,480 | | | | 47.9 | | | | 2,424,002 | | | | 32.1 | | | | 2,736,134 | | | | 429,359 | | | | 29.0 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | (481,962 | ) | | | (8.1 | ) | | | (455,421 | ) | | | (6.0 | ) | | | (240,818 | ) | | | (37,790 | ) | | | (2.5 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 2,374,518 | | | | 39.8 | | | | 1,968,581 | | | | 26.0 | | | | 2,495,316 | | | | 391,569 | | | | 26.3 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(1) | On January 1, 2018,2020, we adopted new revenue guidancethe ASC Topic 606, “Revenue from Contracts with Customers,”326, Measurement of Credit Losses on Financial Instruments or “CECL”, using thea modified retrospective method applied to those contracts the performance of which was not completed as of January 1, 2018. Results for reportingwith prior periods beginning after January 1, 2018 are presented under Topic 606, while prior period amounts are not adjusted and continue to be reported in accordance with our historic accounting method undermethod. Upon adoption of ASC Topic 605.326, expected credit losses related to guarantee contracts be recorded separately from and in addition to the stand ready guarantee liability accounted for in accordance with ASC Topic 460. The stand ready component of the guarantee contract is recognized systematically as guarantee income when we’re released from the underlying risk. |
(2) | We historically presented interest income, interest expenses and provision for loan receivablesloans receivable within the financial statement line item “net interest income (expense) and loan provision losses.” In 2019, we reclassified provision for loan receivablesloans receivable amounting RMB299.5 million from “net interest income (expense) and loan provision losses” in operating revenue to “provision for loan receivables”loans receivable” in operating expenses. The amount of provision for loan receivables that have been reclassified to conform to the current period financial statement presentation were RMB46.6 million and RMB192.7 million for the year ended December 31, 2017 and 2018, respectively. |
(3) | The following table sets forth the breakdown of our other income/(expenses):income: |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | For the Year Ended December 31, | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | (in thousands, except for percentages) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Gain from quality assurance | | | 98,405 | | | | 1.6 | | | | — | | | | — | | | | | | | | — | | | | — | | Realized gain/(loss) from financial guarantee derivatives | | | 31,444 | | | | 0.5 | | | | — | | | | — | | | | — | | | | — | | | | — | | Fair value change of financial guarantee derivatives | | | (56,287 | ) | | | (0.9 | ) | | | — | | | | — | | | | — | | | | — | | | | — | | | | | 136,491 | | | | 2.3 | | | | 116,469 | | | | 1.5 | | | | 122,368 | | | | 19,202 | | | | 1.3 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 210,053 | | | | 3.5 | | | | 116,469 | | | | 1.5 | | | | 122,368 | | | | 19,202 | | | | 1.3 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | For the Year Ended December 31, | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | (in thousands, except for percentages) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Gain from quality assurance | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Realized gain/(loss) from financial guarantee derivatives | | | | | | | | | | | | ) | | | | ) | | | | | | | | | | | | | Fair value change of financial guarantee derivatives | | | | ) | | | | ) | | | | | | | | | | | | ) | | | | ) | | | | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total other income/(expenses) | | | | ) | | | | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Our operating revenues include loan facilitation service fees, post-facilitation service fees, net interest income and other revenues. We generate revenues primarily by collecting transaction service fees from borrowers for loans funded by individual investors and primarily from institutional funding partners for loans funded by such institutional funding partners. Loan facilitation service fees For each loan facilitated on our platform, we collect transaction service fees and allocate such fees between loan facilitation services and post-facilitation services that we provide. Loan facilitation service fees are the portion of transaction service fees collected in relation to the work we perform through our platform in connecting borrowers with individual investors or institutional funding partners and facilitating the origination of loan transactions. 20192021 Compared to 20182020.
. Loan facilitation service fees increased by 13.4%98.8% to RMB3,310.9RMB3,794.2 million (US$ 475.6595.4 million) in 20192021 from RMB2,919.2RMB1,908.9 million in 2018,2020, primarily due to the increase in the totalloan origination amount of loans facilitated through our platform,volume in China, partially offset by the decrease in the average rate of transaction fees. The loan origination volume in China increased from approximately RMB64.1 billion in 2020 to RMB137.4 billion (US$21.6 billion) in 2021. The increase in the loan origination volume in China was primarily driven by the increased loan volume generated from new borrowers.The loan volume generated from repeat borrowers, who had at least one drawdown before, in China as a percentage of the total loan volume facilitated on our platform in China decreased from 88.2% in 2020 to 80.0% in 2021.Loan facilitation service fees as a resultdecreased by 42.3% to RMB1,908.9 million in 2020 from RMB3,310.9 million in 2019, primarily due to the decline in loan origination volume and decrease in the average rate of transaction service fees. The loan origination volume in China decreased from approximately RMB82.2 billion in 2019 to RMB64.1 billion in 2020. The decrease in the shiftloan origination volume in China was primarily due to our business model transformation for transitioning our funding on the platformsources from individual investors to institutional funding partners which typically have a lower rateand the impact of transaction service fees.COVID-19 on the Chinese economy in general. The total origination amount of loans increased from approximately RMB61.5 billion in 2018 to RMB82.2 billion (US$11.8 billion) in 2019. The increase in the loan origination amount was primarily driven by the increase in borrowingvolume generated from repeat borrowers, which typically have higher loan outstanding amounts than new borrowers. Thewho had at least one drawdown before, in China as a percentage of the total loan volume generated by repeat borrowers who have successfully borrowedfacilitated on our platform beforein China increased from 73.6% in 2018 to 78.1% in 2019. 2018 Compared2019 to 2017
. Loan facilitation service fees increased by 2.7% to RMB2,919.2 million88.2% in 2018 from RMB2,843.3 million in 2017, primarily due to the old revenue recognition standard ASC 605 used in 2017. Under ASC 605, transaction service fees collected on a monthly basis are considered contingent and therefore not allocable until received. Under ASC 606, all transaction price is allocated to the performance obligations in the arrangement irrespective of whether additional goods or services need to be provided before the transaction service fee is paid. The average rate of transaction service fees collected from borrowers for loans funded by individual investors was 6.77% in 2018, compared with 6.5% in 2017.2020.Post-facilitation service fees Post-facilitation service fees are the portion of transaction service fees collected in relation to services we provide after loan origination, such as repayment facilitation and loan collection. 20192021 Compared to 20182020.
. Post-facilitation service fees increased by 30.1%94.6% to RMB1,200.4RMB1,309.6 million (US$ 172.4205.5 million) in 20192021 from RMB922.8RMB673.0 million in 2018,2020, primarily due to the increase in outstanding loans served by the company and the rolling impact of deferred transaction service fees. 20182020 Compared to 20172019.
. Post-facilitation service fees increaseddecreased by 38.0%43.9% to RMB922.8RMB673.0 million in 20182020 from RMB668.8RMB1,200.4 million in 2017,2019, primarily due to (i)the decline in the total amount of outstanding loans served by us and the rolling impact of deferred transaction service fees, and (ii)fees.Liabilities of quality assurance commitment are released as guarantee income systematically over the term of the loans subject to quality assurance commitment due to our adoption of ASC 606 effective326, Measurement of Credit Losses on Financial Instruments, on January 1, 2018, pursuant to which we reallocated loan collection fees of RMB125.2 million recorded previously under other revenue to post-facilitation service fees.2020. 1102021 Compared to 2020.
Our guarantee income decreased by 23.4% to RMB2,593.5 million (US$407.0 million) in 2021 from RMB3,386.0 million in 2020. The fair value of quality assurance commitment upon loan origination is released as guarantee income systematically over the term of the loans subject to quality assurance commitment. Along with our strategical transition of our business towards better quality borrowers, the fair value of quality assurance commitment upon loan origination decreased due to the better asset quality, which resulted in the decrease in our guarantee income.
Other revenue mainly includes, collection fees charged to borrowers, management fees charged to investors who subscribe to investment programs that invest in loans protected by the quality assurance fund, customer referral fees and services fees charged to investors for selling loans over our secondary loan market.revenue generated from new business segments. 20192021 Compared to 20182020.
. Other revenue decreasedincreased by 8.5%15.5% to RMB344.8RMB556.7 million (US$ 49.587.4 million) in 20192021 from RMB376.9RMB481.9 million in 2018,2020, primarily due to the increase in revenue generated from new business segments, partially offset by the decrease in managementcustomer referral fees from investment programs that invest in loans protected by the quality assurance fund due to the winding down of our investment programs in the fourth quarter of 2019 as a result of our decision to discontinue our online lending information intermediary business.other third-party platforms.20182020 Compared to 20172019.
. Other revenue decreasedincreased by 23.3%39.8% to RMB376.9RMB481.9 million in 20182020 from RMB491.4RMB344.8 million in 2017,2019, primarily due to the adoption of ASC 606 effective January 1, 2018, pursuant to which we reallocated loan collection fees recorded previously under other revenue to loan facilitation fees and post-facilitation fees. This was partially offset by an increase in managementcustomer referral fees we receivedcollected from investment programs that invest in loans protected by the quality assurance fund.Changes in expected discretionary payment to investors protected by investor reserve funds
Expected discretionary payment to investors protected by investor reserve funds represents aone-off
voluntary provision we made in December 2017 to compensate investors who invested in investment programs we offered before January 1, 2018 for potential differences between the lower limits of estimated rates of return of the investment programs they invested in and the expected returns of the underlying loans corresponding to those investment programs. In 2018, due the changes in the market environment, we experienced improved loan performance in investment programs protected by investor reserve funds. As the actual default rate was lower than previously expected, RMB68.6 million of discretionary payment provision was reversed to reflect expected future payout in 2018. In 2019, the changes in expected discretionary payment to investors protected by investor reserve funds was zero as the related investment programs matured.third-party service providers.In 2021, we recorded RMB1,290.0 million (US$202.4 million) interest income and RMB73.8 million (US$11.6 million) interest expenses, compared to RMB1,341.7 million interest income and RMB228.3 million interest expenses in 2020. A substantial portion of our interest income and interest expenses in 2021 was related to the trusts we set up in collaboration with trust management companies. In order to provide more flexibilities and access a broader range of investors, we have collaborated with third-party trust management companies to set up numerous trusts. Those trusts are administered by third-party trust management companies. We are considered the primary beneficiary of those trusts and therefore consolidated the financial results of those trusts in our consolidated financial statements in accordance with U.S. GAAP. In 2020, we recorded RMB1,341.7 million interest income and RMB228.3 million interest expenses, compared to RMB1,342.3 million interest income and RMB235.6 million interest expenses in 2019. A substantial portion of our interest income and interest expenses in 2020 was related to the trusts we set up in collaboration with trust management companies. In order to provide more flexibilities and access a broader range of investors, we have collaborated with third-party trust management companies to set up numerous trusts. Those trusts are administered by third-party trust management companies. We are considered the primary beneficiary of those trusts and therefore consolidated the financial results of those trusts in our consolidated financial statements in accordance with U.S. GAAP. In 2019, we recorded RMB1,342.3 million (US$192.8 million) interest income and RMB235.6 million (US$33.8 million) interest expenses, compared to RMB316.2 million interest income and RMB60.1 million interest expenses in 2018. In 2019, loan provision losses was reclassified as provision for loan receivables as a separate item under operating expenses with comparative figures also reclassified to conform to current year presentation. In 2019, provision for loan receivables was RMB299.5 million, (US$43.0 million), compared to loan provision losses of RMB192.7 million in 2018. See note 2(ai) to our consolidated financial statements on pageF-46
for further details.A substantial portion of our interest income and interest expenses in 2019 was related to the trusts we set up in collaboration with trust management companies. In order to provide more flexibilities and access a broader range of investors, we have collaborated with third-party trust management companies to set up numerous trusts. Those trusts are administered by third-party trust management companies. We are considered the primary beneficiary of those trusts under U.S. GAAP. We haveand therefore consolidated the financial results of those trusts in our consolidated financial statements in accordance with U.S. GAAP. See note 43 to our consolidated financial statements attached hereto for more details of those trusts. In 2018, we recorded RMB316.2 million interest income, RMB60.1 million interest expenses and RMB192.7 million loan provision losses, compared to RMB47.0 million interest income, RMB15.6 million interest expenses and RMB46.6 million loan provision losses in 2017.
A substantial portion of our interest income, interest expenses and loan provision losses in 2018 was related to the trusts we set up in collaboration with trust management companies. Since September 2016, as part of our efforts to develop new products offerings, we have collaborated with third-party trust management companies to set up numerous trusts. Those trusts are administered by third-party trust management companies. We are considered the primary beneficiary of those trusts under U.S. GAAP. We have consolidated the financial results of those trusts in our consolidated financial statements in accordance with U.S. GAAP. In 2017, we recorded total interest income of RMB45.0 million, total interest expense of RMB14.4 million, and a total loan provisions loss of RMB44.4 million in relation to trusts. See note 4 to our consolidated financial statements attached hereto for more details of those trusts.125
Operating Expensesexpenses Our operating expenses consist of origination and servicing expenses, sales and marketing expenses and general and administrative expenses, research and development expenses, provision for accounts receivable and provision for loans receivable. Origination, and servicing expenses and other cost of revenue Origination, and servicing expenses and other cost of revenue consist primarily of expenses for credit assessment, loan origination, salaries and benefits for the personnel who work on credit checking, data processing and analysis, loan origination, customer service, loan collection and loan collection.other cost of revenue. 20192021 Compared to 20182020.
. Our origination, and servicing expenses and other cost of revenue increased by 33.0%39.4% to RMB1,164.7RMB1,834.5 million (US$ 167.3287.9 million) in 20192021 from RMB875,9RMB1,315.5 million in 2018,2020, primarily due to anthe increase in expenditures for employee benefits and fees paid to third party service providers. Origination, servicing expenses and other cost of revenue for the period included share-based compensation of RMB13.5 million (US$2.1 million).Our origination, servicing expenses and other cost of revenue increased by 12.9% to RMB1,315.5 million in 2020 from RMB1,164.7 million in 2019, primarily due to the increase in fees paid to third parties for loan collection services as a result of the increased volume of loans serviced by us. . Our origination andthird-party service providers. Origination, servicing expenses decreased by 1.6% to RMB875,9and other cost of revenue for the period included share-based compensation of RMB7.6 million in 2018 from RMB890.2 million in 2017, primarily due to an increase in fees paid to third parties for loan collection services, which was largely offset by (i) a decrease in salaries and benefits as a result of a decrease in headcount particularly for consumption loan products, and (ii) a decrease in referral fees paid to third parties for successful loan originations.(US$1.2 million).Origination, servicing expenses and servicing expenses-relatedother cost of revenue-related party Origination, servicing expenses and servicing expenses-relatedother cost of revenue-related party was reclassified separately from general and administrative expenses in 2019, which consists of expenses for data collection service provided by PPcredit Data Service (Shanghai) Co., Ltd., or PPcredit, a related party controlled by our founders, for its data collection services. See “Item 7. Major Shareholders and Related Party Transactions—B. Related Party Transactions—Transactions with PPcredit.” 20192021 Compared to 20182020.
. Our origination, and servicing expenses expenses-relatedand other cost of revenue-related party decreased by 60.3%25.7% to RMB43.5RMB7.5 million (US$ 6.21.2 million) in 20192021 from RMB109.7RMB10.1 million in 2018,2020, primarily due to decreased data collection service from related party. 20182020 Compared to 20172019.
. Our origination, and servicing expenses expenses-relatedand other cost of revenue-related party increaseddecreased by 30.0%76.8% to RMB109.7RMB10.1 million in 20182020 from RMB84.4RMB43.5 million in 2017,2019, primarily due to increaseddecreased data collection service from related party. Sales and marketing expenses Sales and marketing expenses consist primarily of advertising and online marketing promotion expenses. 20192021 Compared to 20182020.
. Our sales and marketing expenses increased by 1.3%228.1% to RMB720.3RMB1,584.2 million (US$ 103.5248.6 million) in 20192021 from RMB710.8RMB482.9 million in 2018,2020, primarily due to anthe increase in online customer acquisition expenses from RMB430.2RMB429.7 million in 20182020 to RMB466.3RMB1,377.8 million (US$67.0 million) in 2019.2021. Our online customer acquisition expenses primarily include expenses paid to internet marketing channels for online advertising and search engine marketing as well as to certain websites that enable us to reach quality borrowers. The increase in expenses associated with online customer acquisition was primarily due to the increase in online advertisingthe number of new registered users on social media channels.our platform. Our sales and marketing expenses as a percentage of our total operating revenues decreasedincreased from 15.6%6.4% to 12.1%16.7% during the same period, primarily attributable to the increase in revenue contribution by existingnew borrowers.
20182020 Compared to 20172019.
. Our sales and marketing expenses decreased by 9.8%33% to RMB710.8RMB482.9 million in 20182020 from RMB788.3RMB720.3 million in 2017,2019, primarily due to a declinedecrease in online customer acquisition expenses from RMB482.6RMB466.3 million in 20172019 to RMB430.2RMB429.7 million in 2018.2020. Our online customer acquisition expenses primarily include expenses paid to internet marketing channels for online advertising and search engine marketing as well as to certain websites that enable us to reach quality borrowers. The declinedecrease in expenses associated with online customer acquisition was primarily due to the decrease in the number of new borrowers from 6.8 million in 2017 to approximately 3.9 million in 2018.online advertising on social media channels. Our sales and marketing expenses as a percentage of our total operating revenues decreased from 20.1%12.1% to 15.6%6.4% during the same period, primarily attributable to the decline in online customer acquisition expenses and an increase in revenue contribution by existing borrowers.
General and administrative expenses General and administrative expenses consist primarily of salaries and benefits for general management, finance and administrative personnel, rental, professional service fees and other expenses. 20192021 Compared to 20182020.
. Our general and administrative expenses increased by 13.7%12.4% to RMB435.8RMB518.2 million (US$ 62.681.3 million) in 20192021 from RMB383.4RMB461.1 million in 2018,2020, primarily due to anthe increase in fees paid to third partiesexpenditures for trust management.employee benefits. General and administrative expenses for the period included share-based compensation of RMB36.4RMB41.3 million (US$ 5.26.5 million). Our general and administrative expenses as a percentage of our total operating revenues decreased from 8.4%6.1% to 7.3%5.5% during the same period, primarily because of the rapid growth in total operating revenues in 2019.2021.20182020 Compared to 20172019.
. Our general and administrative expenses decreasedincreased by 9.5%5.8% to RMB383.4RMB461.1 million in 20182020 from RMB423.8RMB435.8 million in 2017,2019, primarily due to the recognition of share-based compensation expenses of RMB106.2 million related to employee options granted historically with a performance target contingent upon IPOincrease in 2017.expenditures for employees benefits. General and administrative expenses for the period included share-based compensation of RMB50.3RMB18.1 million. Our general and administrative expenses as a percentage of our total operating revenues decreased from 10.8%7.3% to 8.4%6.1% during the same period, primarily because of the rapid growth in total operating revenues in 2018.2020.Research and development expenses Research and development expenses was reclassified separately from general and administrative expenses in 2019. 20192021 Compared to 20182020.
. Research and development expenses increased by 22.8%17.5% to RMB390.6RMB434.9 million (US$ 56.168.2 million) in 20192021 from RMB318.0RMB370.2 million in 20182020 as we continuecontinued to invest in technology.our technology capabilities in 2021.Our research and development expenses in 2021 included the share-based compensation expenses of RMB40.4 million (US$6.3 million). Our research and development expenses as a percentage of our total operating revenues decreased from 7.0%4.9% to 6.6%4.5%. 20182020 Compared to 20172019.
. Research and development expenses increaseddecreased by 92.9%5.2% to RMB318.0RMB370.2 million in 20182020 from RMB164.9RMB390.6 million in 2017 as we continue2019 due to investa more streamlined workforce in technology.technology-related departments. Our research and development expenses in 2020 included the share-based compensation expenses of RMB16.5 million. Our research and development expenses as a percentage of our total operating revenues increaseddecreased from 4.2%6.6% to 7.0% during4.9%.Credit losses for quality assurance commitment Credit losses for quality assurance commitment was accounted for in addition to and separately from the same period,guarantee liabilities accounted for under ASC 460 due to our adoption of ASC 326, Measurement of Credit Losses on Financial Instruments, on January 1, 2020. Credit losses for quality assurance commitment decreased by 2.2% to RMB1,963.6 million (US$308.1 million) in 2021 from RMB2,008.0 million in 2020, primarily because of andue to the improved asset quality, partially offset by the increase of technology investments in 2018.outstanding loan balance. Provision for loans receivable 20192021 Compared to 20182020
Our provision for loans receivables increaseddecreased by 55.4%19.2% to RMB299.5RMB374.2 million (US$ 43.058.7 million) in 20192021 from RMB192.7RMB463.2 million in 2018,2020, primarily due to the increased number of consolidated trustsimproved delinquency rates, partially offset by the increase in 2019.loan origination volume.20182020 Compared to 2017.2019.
Our provision for loans receivables increased by 313.7%54.7% to RMB192.7RMB463.2 million in 20182020 from RMB46.6RMB299.5 million in 2017,2019, primarily due to our adoption of ASC 326, Measurement of Credit Losses on Financial Instruments, on January 1, 2020, which requires us to recognize the increased number of consolidated trustslifetime credit losses upon initial recognition and change in 2018.loan portfolio mix in 2020.Provision for accounts receivable
. Our provision for accounts receivables increased by 145.5% to RMB261.9 million (US$37.6 million) in 2019 from RMB106.7 million in 2018, primarily due to the increase in loan origination volume.
2018Provision for accounts receivable and other receivables 2021 Compared to 20172020. . Our provision for accounts receivables increasedand other receivables decreased by 3.8% to RMB106.7RMB139.2 million (US$21.8 million) in 2021 from RMB144.7 million in 2018 from nil in 2017,2020, primarily due to the improvement in delinquency rates and partially offset by the increase in outstanding loan balance.Our provision for accounts receivables and other receivables decreased by 44.8% to RMB144.7 million in 2018.2020 from RMB261.9 million in 2019, primarily due to the decline in loan origination volume and the improvement in delinquency rates. 20192021 Compared to 20182020.
. We recorded other income of RMB210.1RMB122.4 million (US$ 30.219.2 million) in 2019,2021, compared to other income of RMB774.1RMB116.5 million in 2018.2020. We recorded other income in 2021 primarily due to the interest income from short-term investments and the government subsidies. Gain from quality assurance was nil in 2021, due to our adoption of ASC 326, Measurement of Credit Losses on Financial Instruments, on January 1, 2020. Realized gain (loss) from financial guarantee derivatives and fair value change of financial guarantee derivatives was nil in 2021, due to the winding down of our investment programs in the fourth quarter of 2019 as a result of our decision to discontinue our online lending information intermediary business.We recorded other income of RMB116.5 million in 2020, compared to other income of RMB210.1 million in 2019. We recorded other income in 2020 primarily because we had (i) a gain of RMB98.4 million (US$14.1 million) from quality assurance commitment and quality assurance fund due to the growth of the loans facilitated by us that are protected by the quality assurance commitment and quality assurance fund, (ii) a realized gain of RMB31.4 million (US$4.5 million) from financial guarantee derivatives due to the maturity of certain investment programs during the period, and (iii) other income of RMB136.5RMB116.5 million (US$ 19.6 million) from government subsidies and investment income from financial assets held for trading, which were partially offset by a loss of RMB56.3 million (US$8.1 million) from fair value change of financial guarantee derivatives. . We recorded other income of RMB774.1 million in 2018, compared to a loss of RMB171.5 million in 2017. We recorded other income in 2018 primarily because we had (i) a gain of RMB510.9 milliontrading. Gain from quality assurance commitment and quality assurance fundwas nil in 2020 due to the growthour adoption of the loans facilitated by us that are protected by the quality assurance commitmentASC 326, Measurement of Credit Losses on Financial Instruments, on January 1, 2020. Realized gain (loss) from financial guarantee derivatives and quality assurance fund, and (ii) a gain of RMB272.1 million from the fair value change of financial guarantee derivatives was nil in 2020 due to an improvement in the default rate for the underlying loanswinding down of our investment programs protected by investor reserve funds, which were partially offset byin the fourth quarter of 2019 as a realized lossresult of RMB157.2 million from financial guarantee derivatives dueour decision to the maturity of certain investment programs during the period.discontinue our online lending information intermediary business.20192021 Compared to 2018
. Our income tax expenses increased from RMB151.2 million in 2018 to RMB482.0 million (US$69.2 million) in 2019, primarily due to thenon-recurrence
of accrued income tax write-back for 2018, amounting to RMB136.4 million for 2017, as one of our subsidiaries in China enjoyed a preferential tax treatment in 2018 as a result of our “software enterprise” status recognized by relevant PRC government authorities.2018 Compared to 2017.2020.
Our income tax expenses decreased from RMB274.7RMB455.4 million in 20172020 to RMB151.2RMB240.8 million (US$37.8 million) in 2021, primarily due to change in preferential tax rate for certain qualified subsidiaries, partially offset by the increase inpre-tax profit.Our income tax expenses decreased from RMB482.0 million in 2018,2019 to RMB455.4 million in 2020, primarily due to the write-back of accrued incomedecrease inpre-tax profit and change in effective tax for 2017, amountingrate due to RMB136.4 million, as one of our subsidiarieschange in China enjoyed a preferential tax treatment in 2018 as a result of our “software enterprise” status recognized by relevant PRC government authorities.revenue contribution from different subsidiaries. As a result of the foregoing, our net profit increased from RMB1,082.9 millionwas RMB2.4 billion in 2017, to RMB2,469.5 million2019, RMB2.0 billion in 2018,2020 and decreased to RMB2,374.5 millionRMB2.5 billion (US$341.1391.6 million) in 2019.2021. We are incorporated in the Cayman Islands. The Cayman Islands currently have no income, corporation or capital gains tax and no estate duty, inheritance tax or gift tax. The Cayman Islands does not impose a withholding tax on payments of dividends to shareholders. Our subsidiary incorporated in Hong Kong is subject to Hong Kong profit tax at a rate of 16.5%. No Hong Kong profit tax has been levied as we did not have assessable profit that was earned in or derived from the Hong Kong subsidiary during the periods presented. Hong Kong does not impose a withholding tax on dividends.
Generally, our PRC subsidiaries, consolidated variable interest entities and their respective subsidiaries, which are considered PRC resident enterprises under PRC tax law, are subject to enterprise income tax on their worldwide taxable income as determined under PRC tax laws and accounting standards at a rate of 25%. A “high and new technology enterprise” is entitled to a favorable statutory tax rate of 15% and such qualification is reassessed by relevant governmental authorities every three years. Besides, a company is qualified as a “software enterprise,” that company is entitled to an exemption of income tax for the first two fiscal years and a favorable tax rate of 12.5% from the third to the fifth year. Such qualification is reassessed by relevant governmental authorities annually. In 2019,2021, four of our PRC subsidiaries were qualified as high and new technology enterprises and are entitled to a preferential income tax rate of 15%. In 2018, another2021, one of our PRC subsidiary wassubsidiaries were recognized as a “software enterprise.”, which has been renewed in 2019. As such, it isthey are entitled to enjoy an income tax exemption in 2017 and 2018 andor a 50% reduction for 2019 through 2021. We are subject to value added tax, or VAT, at a rate of 6% on the services we provide to borrowers and investors,institutional funding partners, less any deductible VAT we have already paid or borne. We are also subject to surcharges on VAT payments in accordance with PRC law. VAT has been phased in since May 2012 to replace the business tax that was previously applicable to the services we provide. During the periods presented, we were not subject to business tax on the services we provide. Dividends paid by our wholly foreign-owned subsidiary in China to our intermediary holding company in Hong Kong will be subject to a withholding tax rate of 10%, unless the relevant Hong Kong entity satisfies all the requirements under the Arrangement between the PRC and the Hong Kong Special Administrative Region on the Avoidance of Double Taxation and Prevention of Fiscal Evasion with respect to Taxes on Income and Capital and receives approval from the relevant tax authority. If our Hong Kong subsidiary satisfies all the requirements under the tax arrangement and receives approval from the relevant tax authority, then the dividends paid to the Hong Kong subsidiary would be subject to withholding tax at the standard rate of 5%. See “Item 3. Key Information—D. Risk Factors—Risks Related to Doing Business in China—We rely on dividends and other distributions on equity paid by our PRC subsidiaries to fund any cash and financing requirements we may have, and any limitation on the ability of our PRC subsidiaries to make payments to us could have a material adverse effect on our ability to conduct our business.” If our holding company in the Cayman Islands or any of our subsidiaries outside of China were deemed to be a “resident enterprise” under the PRC Enterprise Income Tax Law, it would be subject to enterprise income tax on its worldwide income at a rate of 25%. See “Item 3. Key Information—D. Risk Factors—Risks Related to Doing Business in China—If we are classified as a PRC resident enterprise for PRC income tax purposes, such classification could result in unfavorable tax consequences to us and our non-PRC shareholders or ADS holders.” Discussion of Certain Balance Sheet Items The following table sets forth selected information from our consolidated balance sheet as of December 31, 2017, 20182019, 2020 and 2019.2021. This information should be read together with our consolidated financial statements and related notes included elsewhere in this annual report. The following selected consolidated balance sheet as of December 31, 2019 are derived from our audited consolidated balance sheet as of December 31, 2019 not included in this annual report. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Cash and cash equivalents | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Quality assurance receivable | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Financial guarantee derivative assets | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Cash and cash equivalents | | | 2,324,542 | | | | 2,632,174 | | | | 4,418,127 | | | | 693,301 | | | | | 3,686,203 | | | | 3,484,227 | | | | 4,073,414 | | | | 639,208 | | | | | 114,560 | | | | 1,970,958 | | | | 1,204,901 | | | | 189,075 | | Quality assurance receivable, net of credit loss allowance for quality assurance receivable | | | 3,649,642 | | | | 1,121,554 | | | | 931,798 | | | | 146,219 | | | | | 952,833 | | | | 950,515 | | | | 971,117 | | | | 152,389 | | | | | 20,555 | | | | — | | | | — | | | | — | |
| | | | | | �� | | | | | | | | | | | Liabilities and shareholders’ equity | | | | | | | | | | | | | | | | | Liabilities: | | | | | | | | | | | | | | | | | Payable to platform customers | | | 1,113,966 | | | | 905,034 | | | | 684,630 | | | | 98,341 | | Quality assurance payable | | | 2,062,844 | | | | 3,819,379 | | | | 4,776,153 | | | | 686,051 | | Deferred revenue | | | 265,094 | | | | — | | | | — | | | | — | | Provision for payment to investor reserve fund investor | | | 107,660 | | | | — | | | | — | | | | — | | Contract liabilities | | | — | | | | 165,469 | | | | 55,728 | | | | 8,005 | | Financial guarantee derivative liabilities | | | 215,770 | | | | — | | | | — | | | | — | | | | | | | | | | | | | | | | | | | Total liabilities | | | 4,921,475 | | | | 7,156,729 | | | | 10,292,976 | | | | 1,478,494 | | | | | | | | | | | | | | | | | | | Total shareholders’ equity | | | 3,682,188 | | | | 5,985,738 | | | | 8,011,480 | | | | 1,150,774 | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Account receivable and contract assets, net of credit loss allowance for accounts receivable and contract assets | | | 902,860 | | | | 863,906 | | | | 1,890,846 | | | | 296,715 | | | | | 18,304,456 | | | | 14,882,185 | | | | 18,138,551 | | | | 2,846,335 | | Liabilities and shareholders’ equity | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Payable to platform customers | | | 684,630 | | | | 103,453 | | | | 81,150 | | | | 12,734 | | Quality assurance payable | | | 4,776,153 | | | | — | | | | — | | | | — | | Deferred guarantee income | | | — | | | | 1,259,396 | | | | 1,089,503 | | | | 170,967 | | Expected credit losses for quality assurance commitment | | | — | | | | 2,390,501 | | | | 3,188,561 | | | | 500,355 | | Funds payable to investors of consolidated trusts | | | 3,660,483 | | | | 1,661,841 | | | | 1,795,640 | | | | 281,775 | | | | | 10,292,976 | | | | 6,451,855 | | | | 7,428,941 | | | | 1,165,762 | | | | | | | | | | | | | | | | | | | Total shareholders’ equity | | | 8,011,480 | | | | 8,430,330 | | | | 10,709,610 | | | | 1,680,573 | | | | | | | | | | | | | | | | | | |
Cash and Cash Equivalentscash equivalents Our cash and cash equivalents decreasedincreased by 14.5%13.2% from RMB1.9RMB2.3 billion as of December 31, 20172019 to RMB1.6RMB2.6 billion as of December 31, 2018,2020, primarily due to an increase in investments by us in newly established trusts during the period, funds used for share repurchases in the open market, and reducedoperating cash receipts from transaction service fees due to the change in December 2017 from collection of transaction service fees upfront to collection in monthly installments. flows. Our cash and cash equivalents increased by 43.8%67.9% from RMB1.6RMB2.6 billion as of December 31, 20182020 to RMB2.3RMB4.4 billion (US$693.3 million) as of December 31, 2019,2021, primarily due to the maturity of some of the wealth management products we purchased previously. Restricted cash mainly included cash under the quality assurance commitment and in the quality assurance fund, cash in investor reserve funds, cash received from investors and borrowers that has yet to be disbursed, cash received via consolidated trust that has not been distributed, cash held as collateral for short-term borrowings and cash held in escrow accounts. The following table sets forth a breakdown of our restricted cash as of December 31, 2017, 20182019, 2020 and 2019:2021: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Quality assurance commitment and quality assurance fund | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Cash received from investors and borrowers | | | | | | | | | | | | | | | | | Cash received via consolidated trust that has not yet been distributed | | | | | | | | | | | | | | | | | Collateral for short-term borrowings | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Designated accounts for security deposits | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Quality assurance commitment and quality assurance fund | | | 1,473,749 | | | | 1,671,785 | | | | 2,042,084 | | | | 320,448 | | | | | 41,958 | | | | — | | | | — | | | | — | | Cash received from investors and borrowers | | | 684,630 | | | | 103,453 | | | | 81,150 | | | | 12,734 | | Cash received via consolidated trust that has not yet been distributed | | | 799,646 | | | | 482,285 | | | | 341,397 | | | | 53,573 | | Collateral for short-term borrowings | | | 251,853 | | | | — | | | | — | | | | — | | | | | 44,367 | | | | 701,673 | | | | 1,281,869 | | | | 201,153 | | Designated accounts for security deposits | | | 390,000 | | | | — | | | | — | | | | — | | Cash received from borrower to be distributed to funding partners | | | — | | | | 225,031 | | | | 326,914 | | | | 51,300 | | Cash held in capital verification account | | | — | | | | 300,000 | | | | — | | | | — | | | | | | | | | | | | | | | | | | | | | | 3,686,203 | | | | 3,484,227 | | | | 4,073,414 | | | | 639,208 | | | | | | | | | | | | | | | | | | |
Restricted cash increaseddecreased by 53.7%5.5% from RMB2.4 billion as of December 31, 2017 to RMB3.7 billion as of December 31, 2018,2019 to RMB3.5 billion as of December 31, 2020, primarily due to (i) a decrease of RMB581.2 million in cash received from investors or borrowers due to a settlement time lag, (ii) a decrease of RMB317.4 million in cash received via consolidated trusts that has not yet been distributed resulting from the decrease in the outstanding loan balances of consolidated trusts, (iii) a decrease of RMB251.9 million in cash held as collateral for short-term borrowings due to a decrease in short-term borrowings, (iv) a decrease of RMB390.0 million in cash held in designated account, and (v) a decrease of RMB42.0 million in cash held in investor reserve funds, which was largely offset by (i) an increase of RMB1.4 billionRMB300.0 million in cash held in capital verification account under the name of a newly formed subsidiary of us as thepaid-in capital, (ii) an increase of RMB225.0 million in cash received from borrowers that has not yet been disbursed to institutional funding partners due to a settlement time lag, (iii) an increase of RMB198.0 million in cash in quality assurance commitmentdue to improvement in asset quality, and (iv) an increase of RMB657.3 million in the quality assurance fund resultingcash held in escrow accounts.
Restricted cash increased by 16.9% from theRMB3.5 billion as of December 31, 2020 to RMB4.1 billion (US$639.2 million) as of December 31, 2021, primarily due to (i) an increase of RMB580.2 million in loans facilitated by us that are protected byescrow accounts due to increased guarantee amount for our financing guarantee, (ii) an increase of RMB370.3 million in quality assurance commitment and quality assurance fund in 2018. Restricted cash was flat at RMB3.7 billion as of December 31, 2018 and December 31, 2019, primarily due to (i)the increase in loan origination volume, partially offset by the improved delinquency rates, and (iii) an increase of RMB496.0RMB101.9 million in cash received from borrower to be distributed to funding partners due to a settlement time lag, which was largely offset by (i) a decrease of RMB300.0 million in cash held in capital verification account due to no capital verification in progress at the end of 2021, and (ii) a decrease of RMB140.9 million in cash received via consolidated trust that has not yet been distributed resulting fromdue to the expansiondecrease in the outstanding loan balances of consolidated trusts, (ii) an increaseand (iii) a decrease of RMB225.9RMB22.3 million in cash under collateral for short-term borrowings resultingreceived from the increase in short-term borrowings in 2019, (iii) an increase of RMB390.0 million in cash held in designated account asinvestors and borrowers due to a security deposit for an institutional funding partner, which was largely offset by an decrease of RMB940.7 million in cash under quality assurance commitment and quality assurance fund resulting from the discontinuation of our investment programs in 2019.settlement time lag.
Short-term Investmentsinvestments Short-term investments mainly consist of investments in time deposits placed with banks with original maturities between three months and one year and investments in short-term wealth management products. Our short-term investments increased significantly from RMB114.6 million as of December 31, 2019 to RMB1,971.0 million as of December 31, 2020, primarily due to our purchase of wealth management products. Our short-term investments decreased by 13.5%38.9% from RMB2.0 billionRMB1,971.0 million as of December 31, 20172020 to RMB1.7 billionRMB1,204.9 million (US$189.1 million) as of December 31, 2018,2021, primarily due to the maturity of some of the wealth management products we purchased previously. Our short-term investments decreased by 93.2% from RMB1.7 billion as of December 31, 2018 to RMB114.6 million (US$16.5 million) as of December 31, 2019, primarily due to the maturity of some of the wealth management products we purchased previously. Contract assetsQuality assurance receivable
Contract assets mainly consistQuality assurance receivable decreased by 69.3% from RMB3.6 billion as of investment management fees for investment programs. Contract assets decreased from RMB112.1 million in 2018December 31, 2019 to RMB20.6 million (US$3.0 million) in 2019, mainlyRMB1.1 billion as of December 31, 2020, primarily due to the discontinuation of our investment programs in 2019.
Quality Assurance Receivable
2020.Quality assurance receivable increaseddecreased by 79.1%16.9% from RMB1.2RMB1.1 billion as of December 31, 20172020 to RMB2.1RMB0.9 billion as of December 31, 2018 and further increased by 76.8% to RMB3.6 billion (US$524.2146.2 million) as of December 31, 2019,2021, primarily due to the growth of loans facilitatedimproved delinquency rates, partially offset by us that are protected by quality assurance commitment and quality assurance fund.the increase in loan origination volume. Provision for Payment to Investor Reserve Fund InvestorAccounts receivable and contract assets and related provision
See “Item 5. OperatingAccounts receivable and Financial Reviewcontract assets primarily consists of transaction service fees for facilitation and Prospects—A. Operating Results—Resultspost facilitation services. Provision for credit loss allowance mainly consist of Operations—Revenues—Changes in expected discretionary payment to investors protected by investor reserve funds.” provision for accounts receivable and contract assets for loan facilitation and post facilitation services.Financial Guarantee Derivative
We recorded a financial guarantee derivative asset of RMB0 as of December 31,Accounts receivable increased by 0.4% to RMB1.1 billion in 2020 from RMB1.0 billion in 2019, primarilymainly due to the maturityincrease in loan origination volume in the fourth quarter of related investment programs. We recorded a financial guarantee derivative asset of RMB56.32020. Provision for credit loss allowance increased from RMB145.7 million as of December 31, 2018 primarilyin 2019 to RMB188.7 million in 2020, mainly due to improvementour adoption of ASC 326, Measurement of Credit Losses on Financial Instruments, on January 1, 2020.
Accounts receivable and contract assets increased by 103.4% to RMB2.1 billion (US$336.1 million) in default rates2021 from RMB1.1 billion in 2020, mainly due to the increase in loan origination volume in the underlying loansfourth quarter of 2021. Provision for credit loss allowance increased from RMB188.7 million in 2020 to RMB250.7 million (US$39.3 million) in 2021, mainly due to the investment programs that were protected by investor reserve funds, and the maturity of such investment programs.increase in loan origination volume in 2021. Payable to Platform Customersplatform customers Payable to platform customers primarily represents the amount payable to investors or borrowers but was temporarily held by us due to a settlement time lag. Payable to platform customers decreased by 18.8% from RMB1.1 billion as of December 31, 2017 to RMB905.0 million as of December 31, 2018, primarily due to a decrease in loans facilitated on our platform. Payable to platform customers decreased by 24.4% from RMB905.0 million as of December 31, 2018 to RMB684.6 million (US$98.3 million) as of December 31, 2019, primarily due to a decrease in loans facilitated by individual investors on our platform. Quality Assurance Payable
Quality assurance payable increased by 85.2% from RMB2.1 billion as of December 31, 2017 to RMB3.8 billion as of December 31, 2018 and further increased by 25.1% to RMB4.8 billion (US$686.1 million) as of December 31, 2019, primarily due to the growth of loans facilitated by us that are protected by quality assurance commitment and quality assurance fund.131
Deferred Revenue/Contract Liabilities
As of December 31, 2017, we had deferred revenue of RMB265.1 million. Deferred revenue was reclassified as contract liability under ASC 606, which we adopted on January 1, 2018. Contract liabilities deceased from RMB165.5 million as of December 31, 2018 to RMB55.7 million (US$8.0 million) as of December 31, 2019, primarily due to the change from collection of transaction service fees in three installments over the loan period in 2018 to collection in monthly installments in 2019.
Payable to platform customers decreased by 84.9% from RMB684.6 million as of December 31, 2019 to RMB103.5 million as of December 31, 2020, primarily due to a decrease in outstanding loans facilitated by individual investors on our platform as we ceased facilitating new loans with funding from individual investors in October 2019. Total Mezzanine EquityPayable to platform customers decreased by 21.6% from RMB103.5 million as of December 31, 2020 to RMB81.2 million (US$12.7 million) as of December 31, 2021, primarily because we ceased facilitating new loans with funding from individual investors in October 2019. Quality assurance payable Total mezzanine equityQuality assurance payable was nil as of December 31, 2017,2020 and nil as our preferred shares had been converted into ordinary shares upon our initial public offering. As of December 31, 2018 and2021, primarily due to our adoption of ASC 326, Measurement of Credit Losses on Financial Instruments, on January 1, 2020.
Deferred guarantee income Deferred guarantee income was RMB1.3 billion as of December 31, 2020 compared to nil as of December 31, 2019, we recorded nil mezzanine equityprimarily due to our adoption of ASC 326, Measurement of Credit Losses on Financial Instruments, on January 1, 2020. Deferred guarantee income was RMB1.1 billion (US$171.0 million) as of December 31, 2021 compared to RMB1.3 billion as of December 31, 2020, primarily due to the same reason.improved delinquency rates. Accounts receivable and related provisionExpected credit losses for quality assurance commitment
Accounts receivableExpected credit losses for quality assurance commitment was RMB2.4 billion as of December 31, 2020 compared to nil as of December 31, 2019, primarily consistsdue to our adoption of transaction service feesASC 326, Measurement of Credit Losses on Financial Instruments, on January 1, 2020.
Expected credit losses for facilitation and post facilitation services. Provision for doubtful accounts mainly consistquality assurance commitment was RMB3.2 billion (US$500.4 million) as of provision for accounts receivable for loan facilitation and post facilitation services. Accounts receivable increased by 19.2%December 31, 2021 compared to RMB1.0RMB2.4 billion (US$147.6 million) in 2019 from RMB862.6 million in 2018, mainlyas of December 31, 2020, primarily due to the increase in the outstanding loan origination volume in 2019. Provision for doubtful accounts increased from RMB50.5 million in 2018 to RMB145.7 million (US$20.9 million) in 2019, mainly due tobalance, partially offset by the increase in accounts receivable. The Company maintains a provision for doubtful accounts to reserve for potentially uncollectible receivable amounts.improved delinquency rates. Funds payable to investors of consolidated trusts Funds payable to investors of consolidated trusts decreased by 54.6% to RMB1.7 billion in 2020 from RMB3.7 billion in 2019, mainly due to the decrease in the volume of consolidated trusts. Funds payable to investors of consolidated trusts increased by 143.1%8.1% to RMB3,660.5 millionRMB1.8 billion (US$525.8281.8 million) in 20192021 from RMB1,505.9 millionRMB1.7 billion in 2018,2020, mainly due to the increase in the loan origination volume of consolidated truststrusts.
Recent Accounting Pronouncements See note 2 to the consolidated financial statements on pageF-42 for details on recent accounting pronouncements and our adoption of certain accounting rules. To date, inflation in China has not materially impacted our results of operations. According to the National Bureau of Statistics of China, the year-over-year percent changes in the consumer price index for December 2019, 2020 and 2021 were increases of 4.5%, 0.2% and 1.5%, respectively. Although we have not been materially affected by inflation in the past, we can provide no assurance that we will not be affected by higher rates of inflation in China in the future. | Liquidity and Capital Resources |
Cash Flows and Working Capital To date, we have financed our operations primarily through cash generated by operating activities. As of December 31, 2019, 2020 and 2021, we had RMB2.3 billion, RMB2.6 billion and RMB4.4 billion (US$693.3 million), respectively, in cash and cash equivalents. In November 2017, we completed our initial public offering in which we issued and sold an aggregate of 17,000,000 ADSs, representing 85,000,000 class A ordinary shares, resulting in net proceeds to us of approximately US$205.0 million. Concurrently with our initial public offering, we sold 19,230,769 ordinary shares to Sun Hung Kai & Co. Limited in a private placement, resulting in net proceeds to us of approximately US$49.5 million. Our cash and cash equivalents primarily consist of cash on hand and short-term bank demand deposits. We believe that our current cash and cash equivalents and our anticipated cash flows from operations will be sufficient to meet our anticipated working capital requirements and capital expenditures for the next 12 months.We may, however, need additional capital in the future to fund our continued operations. If we determine that our cash requirements exceed the amount of cash and cash equivalents we have on hand at the time, we may seek to issue equity or debt securities or obtain credit facilities. The issuance and sale of additional equity would result in further dilution to our shareholders. The incurrence of indebtedness would result in increased fixed obligations and could result in operating covenants that might restrict our operations. We cannot assure you that financing will be available in amounts or on terms acceptable to us, if at all.
Although we consolidate the results of Beijing Paipairongxin, Shanghai Zihe, and Shanghai Ledao, three of the consolidated variable interest entities, and their subsidiaries, we only have access to the assets or earnings of Beijing Paipairongxin, Shanghai Zihe, Shanghai Ledao and their subsidiaries through our contractual arrangements with Beijing Paipairongxin, Shanghai Zihe, Shanghai Ledao and their shareholders. See “Item 4. Information on the Company—C. Organizational Structure.” For restrictions and limitations on liquidity and capital resources as a result of our corporate structure, see “—Holding Company Structure.” Substantially all of our future revenues are likely to continue to be in the form of RMB. Under existing PRC foreign exchange regulations, payments of current account items, including profit distributions, interest payments and trade and service-related foreign exchange transactions, can be made in foreign currencies without prior SAFE approval as long as certain routine procedural requirements are fulfilled. Therefore, our PRC subsidiary is allowed to pay dividends in foreign currencies to us without prior SAFE approval by following certain routine procedural requirements. However, current PRC regulations permit our PRC subsidiary to pay dividends to us only out of its accumulated profits, if any, determined in accordance with Chinese accounting standards and regulations. Our PRC subsidiary is required to set aside at least 10% of itsafter-tax profits after making up previous years’ accumulated losses each year, if any, to fund certain reserve funds until the total amount set aside reaches 50% of its registered capital. These reserves are not distributable as cash dividends. Furthermore, capital account transactions, which include foreign direct investment and loans, must be approved by and/or registered with SAFE and its local branches. See “Item 3. Key Information—D. Risk Factors—Risks Related to Doing Business in China—Governmental control of currency conversion may limit our ability to utilize our net revenues effectively and affect the price of our ADSs.” The following table sets forth a summary of our cash flows for the periods presented: | | | | | | | | | | | | | | | | | | | For the Year Ended December 31, | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Summary Consolidated Cash Flows Data: | | | | | | | | | | | | | | | | | Net cash provided by/(used in) operating activities | | | (215,522 | ) | | | 2,206,909 | | | | 630,227 | | | | 98,896 | | Net cash provided by/(used in) investing activities | | | (828,219 | ) | | | 1,041,496 | | | | 1,994,845 | | | | 313,035 | | Net cash provided by/(used in) financing activities | | | 1,749,512 | | | | (3,091,279 | ) | | | (239,800 | ) | | | (37,631 | ) | Net increase in cash, cash equivalents and restricted cash | | | 717,024 | | | | 105,656 | | | | 2,375,140 | | | | 372,712 | | Cash, cash equivalents and restricted cash at beginning of year | | | 5,293,721 | | | | 6,010,745 | | | | 6,116,401 | | | | 959,797 | | Cash, cash equivalents and restricted cash at end of year | | | 6,010,745 | | | | 6,116,401 | | | | 8,491,541 | | | | 1,332,509 | |
Net cash provided by operating activities was RMB630.2 million (US$98.9 million) in 2021. In 2021, the difference between our net cash provided by operating activities and our net profit of RMB2.5 billion (US$391.6 million) resulted mainly from a net gain from investment in loans of RMB1.2 billion (US$190.8 million), an increase in accounts receivable of RMB1.2 billion (US$183.0 million), an increase in prepaid expenses and other assets of RMB875.3 million (US$137.4 million), an increase of expected credit losses for quality assurance commitment of RMB798.1 million (US$125.2 million) and a provision for loans receivable of RMB374.2 million (US$58.7 million). The gain from investment in loans was primarily due to the interest income from loans held by consolidated trusts. The increase in accounts receivable was primarily due to the increase in loan origination volume in the fourth quarter of 2021. The increase in prepaid expenses and other assets was primarily due to increased efforts in attracting institutionamount of deposits required by institutional funding partners as a result of the increase in outstanding loan balance. The increase of expected credit losses for quality assurance commitment was primarily due to the increase in outstanding loan balance and partially offset by the improvement in delinquency rates. The provision for loans receivable was primarily due to the recognition of the life time credit losses upon initial recognition after our adoption of ASC 326, Measurement of Credit Losses on Financial Instruments, on January 1, 2020. Net cash provided by operating activities was RMB2.2 billion in 2020. In 2020, the difference between our net cash provided by operating activities and our net profit of RMB2.0 billion resulted mainly from a decrease in quality assurance receivable of RMB2.5 billion, a provision for loans receivable of RMB463.2 million, a decrease in prepaid expenses and other assets of RMB353.4 million, a net gain from investment in loans of RMB1.1 billion, and a decrease in payable to platform customers of RMB581.2 million. The decrease in quality assurance receivable was primarily due to the discontinuation of our investment programs in 2020. The provision for loans receivable was primarily due to the recognition of the life time credit losses upon initial recognition after our adoption of ASC 326, Measurement of Credit Losses on Financial Instruments, on January 1, 2020. The decrease in prepaid expenses and other assets was primarily due to decreased amount of deposits required by institutional funding partners. The decrease in quality assurance payable was primarily due to our adoption of ASC 326, Measurement of Credit Losses on Financial Instruments, on January 1, 2020. The gain from investment in loans was primarily due to the interest income from loans held by consolidated trusts. The decrease in payable to platform customers was primarily due to a decrease in outstanding loans facilitated by individual investors on our platform as we ceased facilitating new loans with funding from individual investors in October 2019.
Net cash used in operating activities was RMB215.5 million in 2019. In 2019, the difference between our net cash used in operating activities and our net profit of RMB2.4 billion resulted mainly from an increase in quality assurance receivable of RMB1.6 billion, a gain in investment in loans of RMB1.1 billion, an increase in prepaid expenses and other assets of RMB1.1 billion, which was partially offset by an increase in quality assurance payable of RMB956.8 million. The increase in quality assurance receivable was primarily due to the growth of loans facilitated on our platform that are protected by the quality assurance fund and discontinuation of our investment programs in 2019. The gain in investment in loans was primarily due to the interest income from loans held by consolidated trusts. The increase in prepaid expenses and other assets was primarily due to increased amount of deposits as a result of transitioning to fully funded through institutional funding partners in 2019. The increase in quality assurance payable was primarily due to the growth of loans facilitated on our platform that are protected by the quality assurance fund. Net cash provided by investing activities was RMB2.0 billion (US$313.0 million) in 2021, which was mainly attributable to proceeds from short-term investments in an amount of RMB13.5 billion (US$2.1 billion) from maturity of wealth management products, and proceeds from investment in loans originated and held by us in an amount of RMB7.0 billion (US$1.1 billion), partially offset by cash paid for purchase of short-term investments (mainly wealth management products) in an amount of RMB12.7 billion (US$2.0 billion), and cash paid for investment in loans originated and held by us in an amount of RMB5.8 billion (US$911.6 million). Net cash provided by investing activities was RMB1.0 billion in 2020, which was mainly attributable to proceeds from investment in loans originated and held by us in an amount of RMB12.8 billion, and proceeds from short-term investments in an amount of RMB6.2 billion from maturity of wealth management products, partially offset by cash paid for investment in loans originated and held by us in an amount of RMB9.8 billion, and cash paid for purchase of short-term investments (mainly wealth management products) in an amount of RMB8.0 billion. Net cash used in investing activities was RMB828.2 million in 2019, which was mainly attributable to cash paid for investment in loans originated and held by us in an amount of RMB12.1 billion, and cash paid for purchase of short-term investments (mainly wealth management products) in an amount of RMB3.9 billion, and cash paid for purchase of investments in an amount of RMB803.7 million, partially offset by proceeds from investment in loans originated and held by us in an amount of RMB10.5 billion, and proceeds from short-term investments in an amount of RMB5.5 billion from maturity of wealth management products. Net cash used in financing activities was RMB239.8 million (US$37.6 million) in 2021, which was mainly attributable to cash paid to our institutional funding partners that invested in our consolidated trusts in an amount of RMB1.6 billion (US$247.0 million), dividends payout in amount of RMB317.6 million (US$49.8 million), partially offset by cash received from our institutional funding partners that invested in our consolidated trusts in an amount of RMB1.6 billion (US$258.0 million). Net cash used in financing activities was RMB3.1 billion in 2020, which was mainly attributable to cash paid to our institutional funding partners that invested in our consolidated trusts in an amount of RMB3.0 billion, the repurchase of our ADSs in an amount of RMB380.0 million, dividends payout in amount of RMB263.6 million, and repayment of short-term borrowing in amount of RMB235 million, partially offset by cash received from our institutional funding partners that invested in our consolidated trusts in an amount of RMB766.2 million. Net cash provided by financing activities was RMB1.7 billion in 2019, which was mainly attributable to cash received from our institutional funding partners that invested in our consolidated trusts in an amount of RMB3.4 billion, and cash received from short-term borrowings in an amount of RMB235.0 million, partially offset by cash paid to our institutional funding partners that invested in our consolidated trusts in an amount of RMB1.5 billion, and dividends payout in amount of RMB390.7 million. Material cash requirements Our material cash requirements as of December 31, 2021 and any subsequent interim period primarily include our capital expenditures and operating lease obligations. We made capital expenditures of RMB48.7 million, RMB11.0 million and RMB55.3 million (US$8.7 million) in 2019, 2020 and 2021, respectively. In these periods, our capital expenditures were mainly used for purchases of property, equipment and software. Our capital expenditures for 2022 are expected to be approximately RMB85 million (US$13.3 million), primarily due to the optimizations of server units and IT infrastructure. Our operating lease obligations relate to our leases of office premises. We lease our office premises undernon-cancelable operating lease arrangements. Payment due by December 31, 2021 for our operating lease obligations was RMB36.3 million (US$5.7 million).
We intend to fund our existing and future material cash requirements with our existing cash balance and other financing alternatives. We will continue to make cash commitments, including capital expenditures, to support the growth of our business. We have not entered into any financial guarantees or other commitments to guarantee the payment obligations of any third parties. We do not have retained or contingent interests in assets transferred. We have not entered into contractual arrangements that support the credit, liquidity or market risk for transferred assets. We do not have obligations that arise or could arise from variable interests held in an unconsolidated entity, or obligations related to derivative instruments that are both indexed to and classified in our own equity, or not reflected in the statement of financial position. Holding Company Structure FinVolution Group is a holding company with no material operations of its own. We conduct our operations primarily through our subsidiaries, three consolidated variable interest entities and their subsidiaries in China. As a result, FinVolution Group’s ability to pay dividends depends upon dividends paid by our PRC subsidiaries. If our existing PRC subsidiaries or any newly formed ones incur debt on their own behalf in the future, the instruments governing their debt may restrict their ability to pay dividends to us. In addition, our wholly foreign-owned subsidiaries in China are permitted to pay dividends to us only out of their retained earnings, if any, as determined in accordance with PRC accounting standards and regulations. Under PRC law, each of our subsidiaries and consolidated variable interest entities is required to set aside at least 10% of itsafter-tax profits each year, if any, to fund certain statutory reserve funds until such reserve funds reach 50% of its registered capital. In addition, each of our subsidiaries may allocate a portion of itsafter-tax profits based on PRC accounting standards to enterprise expansion funds and staff bonus and welfare funds at its discretion, and the consolidated variable interest entities may allocate a portion of itsafter-tax profits based on PRC accounting standards to a discretionary surplus fund at its discretion. The statutory reserve funds and the discretionary funds are not distributable as cash dividends. Remittance of dividends by a wholly foreign-owned company out of China is subject to examination by the banks designated by SAFE. Our PRC subsidiaries are not able to pay dividends out of China until they generate accumulated profits and meet the borrowing demandrequirements for statutory reserve funds. In 2020, Shanghai Guangjian, one of our PRC subsidiaries, had paid dividends of RMB79.5 million out of China. | Research and Development, Patents, and Licenses, etc. |
See “Item 4. Information On the Company—B. Business Overview—Technology” and “Item 4. Information On the Company—B. Business Overview—Intellectual Property.” Other than as disclosed elsewhere in this annual report, we are not aware of any trends, uncertainties, demands, commitments or events for the year ended December 31, 2021 that are reasonably likely to have a material and adverse effect on our platform.net revenues, income, profitability, liquidity or capital resources, or that would cause the disclosed financial information to be not necessarily indicative of future results of operations or financial conditions. | Critical Accounting Policies, Judgments and Estimates |
We prepare our consolidated financial statements in accordance with U.S. GAAP, which requires us to make judgments, estimates and assumptions that affect (i) the reported amounts of assets and liabilities, (ii) disclosure of contingent assets and liabilities at the end of each reporting period and (iii) the reported amounts of revenues and expenses during each reporting period. We continually evaluate these estimates and assumptions based on historical experience, knowledge and assessment of current business and other conditions, expectations regarding the future based on available information and reasonable assumptions, which together form a basis for making judgments about matters not readily apparent from other sources. The use of estimates is an integral component of the financial reporting process, though actual results could differ from those estimates. Some of our accounting policies require higher degrees of judgment than others in their application. We consider the policies discussed below to be critical to an understanding of our financial statements as their application places the most significant demands on the judgment of our management. For a detailed discussion of our significant accounting policies and related judgments, please see “Note 2—Summary of Significant Accounting Policies.” You should read the following description of critical accounting estimates in conjunction with our consolidated financial statements and other disclosures included in this annual report. On January 1, 2018, we adopted new revenue guidance ASC Topic 606, “Revenue from Contracts with Customers” (“ASC 606”), using the modified retrospective transition approach under which our prior period amounts are not adjusted and continue to be reported in accordance with historic accounting under ASC Topic 605. Upon adoption, we recognized a cumulative effectNature of approximately RMB176.5 million as an increase to the opening balance of retained earnings. For the year ended December 31, 2018, the adoption of ASC Topic 606 resulted in an increase in operating revenue of RMB511.1 million, primarily due to earlier recognition of revenue related to transaction service fees collectible in monthly installments The transaction service fees collected as part of monthly repayment were considered contingent and were not allocable to different deliverables until the contingency was resolved (i.e. upon cash receipt of transaction service fee) under ASC Topic 605. Under ASC Topic 606, as the borrowers are required to pay the transaction service fees in full in the event of early repayment, the monthly transaction service fee is considered a fixed consideration and was included in the total consideration that was allocable to different performance obligations.
estimate: We operate an online consumer finance platform that matches borrowers with investors (including both individual investors and institutional funding partners).investors. Typically, we provided quality assurance service, (including quality assurance fund and quality assurance commitment), loan facilitation services and post-facilitation services to the borrowers and investors.institutional funding partners. The quality assurance service is within the scope of ASC Topic 460 Guarantees and recorded at fair
value at the inception of the loans. WeFor loan facilitation services and post-facilitation services we provide, we charged one combined transaction service fee, each of which we have assessed and concluded that the loan facilitation and post-facilitation services arethey were distinct and therefore are separate performance obligations. Assumptions: The remaining consideration iscombined transaction price was allocated to loan facilitation and post-facilitation services based on their standalone selling price. As there is no directWe did not have an observable standalone selling price for the loan facilitation andor post-facilitation services because we typicallydid not provide such services on a standalone basis in similar circumstances to similar customers, and because there was no directly observable standalone selling price that was reasonably available for similar services in the market. As a result, we used an expected cost“cost plus a profit marginmargin” approach to determineestimate the standalone selling price. We describeprices. As part of the expected “cost plus margin” model, we made certain assumptions including estimates of the cost of providing the services, plus a reasonable profit margin. When our estimates of the standalone selling prices for loan facilitation service increased/decreased by 1% while holding all other estimates constant, our loan facilitation service revenue would increase/decrease by approximately RMB70 million. Our estimate of the key assumptions related to revenue recognition policies in our consolidated financial statements.
Quality Assurance Payable and Receivable
In certain circumstances, borrowers of our online consumer finance platform may elect to or are required to make contributions todid not change significantly throughout the quality assurance fund. In other certain circumstances, we are required by our institutional funding partners to provide quality assurance commitment in the event of the default of the borrowers referred by us. We record the quality assurance fund obligation and the quality assurance commitment provided to institutional funding partners in accordance with ASC Topic 460, Guarantees. Accordingly, the liabilities are measured at their fair value at inception. Subsequently, the liabilities are measured at the greater of the amount determined based on ASC Topic 460 and the amount determined based on ASC Topic 450. As the risk of the quality assurance commitment and quality assurance fund liability is reduced, it is recognized into the income statement by a systematic and rational amortization method within the “gain from quality assurance” line item of the income statement. For the years ended December 31, 2017, 2018 and 2019, the amount of gains recorded were RMB5.9 million, RMB510.9 million and RMB98.4 million (US$14.1 million), respectively.
A quality assurance receivable is recognized at loan inception at its fair value on aloan-by-loan
basis. At each reporting date, we estimate the future cash flows and assesses whether there is any indicator of impairment to any individual underlying loan of the quality assurance receivable.We describe our quality assurance payable and receivable policies in our consolidated financial statements.periods presented.
Financial Guarantee Derivative
Historically, we set up investor reserve funds for certain investors of certain investment programs. The investor reserve fund is accounted for in accordance with ASC Topic 815, Derivatives and Hedging. Derivative assets and liabilities within the scope of ASC 815 are required to be recorded at fair value at inception andre-measured
at fair value on an ongoing basis in accordance with ASC Topic 820, Fair Value Measurement. We use a discounted cash flow method to determine the fair value of the derivative.We describe our financial guarantee derivative policies in our consolidated financial statements.
We account for various types of share-based awards granted to the employees and directors of our company in accordance with ASC Topic 718, Compensation — Stock Compensation. Under the fair value recognition provision of this guidance, compensation for share-based awards granted, including share options and RSUs, is measured at the grant date, based on the fair value of the awards and is recognized as expense over the requisite service period, which is generally the vesting period of the respective award.
Share-based compensation expense is recorded net of estimated forfeitures in our consolidated income statements. We estimate the forfeiture rate based on historical forfeitures of share-based awards and adjust the rate to reflect changes when necessary.
Determining the fair value of share-based awards requires significant judgment. We estimate the fair value of share options using the binomial option pricing model, which requires inputs such as the fair value of our ordinary shares, expected volatility, risk-free interest rate, exercise multiple, expected dividend yield and expected term.
The fair value of RSUs is determined based on the fair value of our ordinary shares. The market price of our publicly traded ADSs is used as an indicator of fair value for our ordinary shares.
Current income taxes are provided on the basis of net income for financial reporting purposes, adjusted for income and expense items which are not assessable or deductible for income tax purposes, in accordance with the regulations of the relevant tax jurisdictions. We follow the liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based on the temporary differences between the financial statements carrying amounts and tax bases of assets and liabilities by applying enacted statutory tax rates that will be in effect in the period in which the temporary differences are expected to reverse. We record a valuation allowance to offset deferred tax assets if based on the weight of available evidence, it is more likely than not that some portion, or all, of the deferred tax assets will not be realized. The effect on deferred taxes of a change in tax rate is recognized in our consolidated financial statements in the period of change.
In accordance with the provisions of ASC 740, we recognize in our financial statements the benefit of a tax position if the tax position is “more likely than not” to prevail based on the facts and technical merits of the position. Tax positions that meet the “more likely than not” recognition threshold are measured at the largest amount of tax benefit that has a greater than 50% likelihood of being realized upon settlement. We estimate our liability for unrecognized tax benefits which are periodically assessed and may be affected by changing interpretations of laws, rulings by tax authorities, changes and/or developments with respect to tax audits, and expiration of the statute of limitations. The ultimate outcome for a particular tax position may not be determined with certainty prior to the conclusion of a tax audit and, in some cases, appeal or litigation process. The actual benefits ultimately realized may differ from our estimates. As each audit is concluded, adjustments, if any, are recorded in our financial statements in the period in which the audit is concluded. Additionally, in future periods, changes in facts, circumstances and new information may require us to adjust the recognition and measurement estimates with regard to individual tax positions. Changes in recognition and measurement estimates are recognized in the period in which the changes occur. As of December 31, 2017, 2018 and 2019, we did not have any significant unrecognized uncertain tax positions.
Allowance for Credit Losses Holding Company StructureFinVolution Group is a holding company with no material operations of its own. We have the following types of financial assets that are subject to credit losses of borrowers: accounts receivable, quality assurance receivable and loans receivable. We assessed the credit losses of borrowers primarily based on past history on our platform, known and inherent risks in each portfolio of customers, adverse situations that may affect the borrower’s ability to repay, composition of borrowers with different credit levels, current economic conditions and other relevant factors. The credit losses is calculated at portfolio-level since the portfolio is typically of smaller homogenous borrowers group and is collectively evaluated for credit losses. In estimating the probable loss of the each portfolio, we also consider qualitative factors such as current economic conditions and or events in specific industries and geographical areas, including unemployment levels, trends in real estate values, peer comparisons, and other pertinent factors such as regulatory guidance.
For each portfolio of borrowers, the provision is calculated based on delinquency status of the respective financial assets: current, 1 to 89, 90 to 119, 120 to 149, 150 to 179 calendar days past due. The probable incurred loss rate of the specific delinquency status category within each portfolio of borrowers will be applied to the applicable outstanding balances of respective financial assets to determine the provision for credit losses for each reporting period.
Recent Accounting Pronouncements
See note 2 to the consolidated financial statements on pageF-1
for details on recent accounting pronouncements and our adoption of certain accounting rules.To date, inflation in China has not materially impacted our results of operations. According to the National Bureau of Statistics of China, the year-over-year percent changes in the consumer price index for December 2017, 2018 and 2019 were increases of 1.8%, 1.9% and 4.5%, respectively. Although we have not been materially affected by inflation in the past, we can provide no assurance that we will not be affected by higher rates of inflation in China in the future.
B. | Liquidity and Capital Resources
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Cash Flows and Working Capital
To date, we have financedconduct our operations primarily through cash generated by operating activities. As of December 31, 2017 and 2018 and 2019, we had RMB1.9 billion, RMB1.6 billion and RMB2.3 billion (US$333.9 million), respectively, in cash and cash equivalents. In November 2017, we completed our initial public offering in which we issued and sold an aggregate of 17,000,000 ADSs, representing 85,000,000 class A ordinary shares, resulting in net proceeds to us of approximately US$205.0 million. Concurrently with our initial public offering, we sold 19,230,769 ordinary shares to Sun Hung Kai & Co. Limited in a private placement, resulting in net proceeds to us of approximately US$49.5 million. Our cash and cash equivalents primarily consist of cash on hand and short-term bank demand deposits. We believe that our current cash and cash equivalents and our anticipated cash flows from operations will be sufficient to meet our anticipated working capital requirements and capital expenditures for the next 12 months. We may, however, need additional capital in the future to fund our continued operations. If we determine that our cash requirements exceed the amount of cash and cash equivalents we have on hand at the time, we may seek to issue equity or debt securities or obtain credit facilities. The issuance and sale of additional equity would result in further dilution to our shareholders. The incurrence of indebtedness would result in increased fixed obligations and could result in operating covenants that might restrict our operations. We cannot assure you that financing will be available in amounts or on terms acceptable to us, if at all.
Although we consolidate the results of Beijing Paipairongxin, one of oursubsidiaries, three consolidated variable interest entities and itstheir subsidiaries we only have access to the assets or earnings of Beijing Paipairongxin and its subsidiaries through our contractual arrangements with Beijing Paipairongxin and its shareholders. See “Item 4. Information on the Company—C. Organizational Structure.” For restrictions and limitations on liquidity and capital resources asin China. As a result, of our corporate structure, see “—Holding Company Structure.”
Substantially all of our future revenues are likely to continue to be in the form of RMB. Under existing PRC foreign exchange regulations, payments of current account items, including profit distributions, interest payments and trade and service-related foreign exchange transactions, can be made in foreign currencies without prior SAFE approval as long as certain routine procedural requirements are fulfilled. Therefore, our PRC subsidiary is allowedFinVolution Group’s ability to pay dividends in foreign currencies to us without prior SAFE approvaldepends upon dividends paid by following certain routine procedural requirements. However, current PRC regulations permit our PRC subsidiarysubsidiaries. If our existing PRC subsidiaries or any newly formed ones incur debt on their own behalf in the future, the instruments governing their debt may restrict their ability to pay dividends to us. In addition, our wholly foreign-owned subsidiaries in China are permitted to pay dividends to us only out of its accumulated profits,their retained earnings, if any, as determined in accordance with ChinesePRC accounting standards and regulations. OurUnder PRC subsidiarylaw, each of our subsidiaries and consolidated variable interest entities is required to set aside at least 10% of its after-tax profits after making up previous years’ accumulated losses each year, if any, to fund certain statutory reserve funds until the total amount set aside reachessuch reserve funds reach 50% of its registered capital. These reservesIn addition, each of our subsidiaries may allocate a portion of itsafter-tax profits based on PRC accounting standards to enterprise expansion funds and staff bonus and welfare funds at its discretion, and the consolidated variable interest entities may allocate a portion of itsafter-tax profits based on PRC accounting standards to a discretionary surplus fund at its discretion. The statutory reserve funds and the discretionary funds are not distributable as cash dividends. Furthermore, capital account transactions, which include foreign direct investmentRemittance of dividends by a wholly foreign-owned company out of China is subject to examination by the banks designated by SAFE. Our PRC subsidiaries are not able to pay dividends out of China until they generate accumulated profits and loans, must be approved by and/or registered with SAFE and its local branches. meet the requirements for statutory reserve funds. In 2020, Shanghai Guangjian, one of our PRC subsidiaries, had paid dividends of RMB79.5 million out of China. | Research and Development, Patents, and Licenses, etc. |
See “Item 3. Key Information—D. Risk Factors—Risks Related4. Information On the Company—B. Business Overview—Technology” and “Item 4. Information On the Company—B. Business Overview—Intellectual Property.” Other than as disclosed elsewhere in this annual report, we are not aware of any trends, uncertainties, demands, commitments or events for the year ended December 31, 2021 that are reasonably likely to Doing Business in China—Governmental control of currency conversion may limit our ability to utilizehave a material and adverse effect on our net revenues, effectively and affectincome, profitability, liquidity or capital resources, or that would cause the pricedisclosed financial information to be not necessarily indicative of future results of operations or financial conditions. | Critical Accounting Estimates |
We prepare our ADSs.” On January 1, 2018, we adopted ASU2016-18, consolidated financial statements in accordance with U.S. GAAP, which requires us to retrospectively restatemake judgments, estimates and assumptions that affect (i) the statementreported amounts of cash flows to include restricted cashassets and restricted cash equivalents.liabilities, (ii) disclosure of contingent assets and liabilities at the end of each reporting period and (iii) the reported amounts of revenues and expenses during each reporting period. We continually evaluate these estimates and assumptions based on historical experience, knowledge and assessment of current business and other conditions, expectations regarding the future based on available information and reasonable assumptions, which together form a basis for making judgments about matters not readily apparent from other sources. The following table sets forth a summaryuse of estimates is an integral component of the financial reporting process, though actual results could differ from those estimates. Some of our restated cash flows foraccounting policies require higher degrees of judgment than others in their application. We consider the periods presented:policies discussed below to be critical to an understanding of our financial statements as their application places the most significant demands on the judgment of our management. For a detailed discussion of our significant accounting policies and related judgments, please see “Note 2—Summary of Significant Accounting Policies.” You should read the following description of critical accounting estimates in conjunction with our consolidated financial statements and other disclosures included in this annual report. | | | | | | | | | | | | | | | | | | | For the Year Ended December 31, | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Summary Consolidated Cash Flows Data: | | | | | | | | | | | | | | | | | Net cash provided by operating activities | | | | | | | | | | | | ) | | | | ) | Net cash used in investing activities | | | | ) | | | | ) | | | | ) | | | | ) | Net cash provided by financing activities | | | | | | | | | | | | | | | | | Net increase in cash, cash equivalents and restricted cash | | | | | | | | | | | | | | | | | Cash, cash equivalents and restricted cash at beginning of year | | | | | | | | | | | | | | | | | Cash, cash equivalents and restricted cash at end of year | | | | | | | | | | | | | | | | |
Nature of estimate: We operate an online consumer finance platform that matches borrowers with institutional funding investors. Typically, we provided quality assurance service, loan facilitation services and post-facilitation services to the borrowers and institutional funding partners. The quality assurance service is within the scope of ASC Topic 460 Guarantees and recorded at fair
value at the inception of the loans. For loan facilitation services and post-facilitation services we provide, we charged one combined transaction service fee, each of which we have assessed and concluded that they were distinct performance obligations. Net cash usedAssumptions: The combined transaction price was allocated to loan facilitation and post-facilitation services based on their standalone selling price. We did not have an observable standalone selling price for the loan facilitation or post-facilitation services because we did not provide such services on a standalone basis in operating activitiessimilar circumstances to similar customers, and because there was RMB215.5 million (US$31.0 million)no directly observable standalone selling price that was reasonably available for similar services in 2019. In 2019, the difference between our net cash used in operating activities and our net profit of RMB2.4 billion (US$341.1 million) resulted mainly from an increase in quality assurance receivable of RMB1.6 billion (US$227.7 million), a gain in investment in loans of RMB1.1 billion (US$159.0 million), an increase in prepaid expenses and other assets of RMB1.1 billion (US$156.7 million), which was partially offset by an increase in quality assurance payable of RMB956.8 million (US137.4 million). The increases in quality assurance receivable was primarily due to the growth of loans facilitated on our platform that are protected by the quality assurance fund and discontinuation of our investment programs in 2019. The gain in investment in loans was primarily due to the interest income from loans held by consolidated trusts. The increase in prepaid expenses and other assets was primarily due to increased amount of deposits asmarket. As a result, of transitioningwe used an expected “cost plus margin” approach to fully funded through institutional funding partners in 2019. The increases in quality assurance payable was primarily due toestimate the growth of loans facilitated on our platform that are protected by the quality assurance fund.
Net cash provided by operating activities was RMB1.9 billion in 2018. In 2018, the difference between our net cash provided by operating activities and our net profit of RMB2.5 billion resulted mainly from an increase in quality assurance payable of RMB1.8 billion, which was partially offset by an increase in quality assurance receivable of RMB911.6 million, an increase in accounts receivable of RMB746.8 million, an increase in financial guarantee derivative assets and discretionary payment of RMB379.7 million, and a gain in investment in loans of RMB256.1 million. The increases in quality assurance payable and receivable were primarily due to the growth of loans facilitated on our platform that are protected by the quality assurance fund. The increase in accounts receivable was primarily due to the increase in receivables on transaction service fees collected from borrowers as we changed to collecting transaction service fees on a monthly basis in late 2017 from an upfront collection model previously. The increase in financial guarantee derivative assets was primarily due to improvement in default rates in the underlying loansstandalone selling prices. As part of the investment programs that were protected by investor reserve funds, and the maturity of such investment programs. The gain in investment in loans was primarily due to the interest income from loans held by consolidated trusts.
Net cash provided by operating activities was RMB3.4 billion in 2017. In 2017, the difference between our net cash provided by operating activities and our net profit of RMB1.1 billion resulted mainly from an increase in payable to platform customers of RMB692.3 million, an increase in financial guarantee derivative assets and discretionary payment of RMB490.7 million, an increase in quality assurance payable of RMB1,589.1 million, which was partially offset by an increase in quality assurance receivable of RMB866.0 million, an increase in taxes payable of RMB171.9 million, an increase in accrued expenses and other liabilities of RMB108.4 million, share-based compensation of RMB106.2 million, and an increase in deferred revenue of RMB102.2 million, which were partially offset by an increase in prepaid expenses and other assets of RMB70.7 million, and a decrease in deferred tax assets of RMB112.6 million. The increase in financial guarantee derivative assets and discretionary payment was due to an upward adjustment in the expected default rate for underlying loans of certain investment programs that are protected by the investor reserve funds and aone-off
voluntary provision“cost plus margin” model, we made in December 2017 to compensate investors who invested in investment programs that are protected by the investor reserve funds we offered previously for potential difference between the lower limits of estimated rates of returncertain assumptions including estimates of the investment programs they invested in andcost of providing the expected returnsservices, plus a reasonable profit margin. When our estimates of the underlying loans corresponding to those investment programs. The increase in accrued expenses andstandalone selling prices for loan facilitation service increased/decreased by 1% while holding all other liabilities was due toestimates constant, our loan facilitation service revenue would increase/decrease by approximately RMB70 million. Our estimate of the increase in accrued marketing expenses. The share-based compensation waskey assumptions related to employee options granted historically with a performance target contingent upon IPO and cancellation ofrevenue recognition did not change significantly throughout the share based compensation plan of a subsidiary company. The increase in deferred revenue was primarily due to the increase in fees related to post-facilitation services owing to the significant increase in loans facilitated on our platform.Net cash used in investing activities was RMB828.2 million (US$119.0 million) in 2019, which was mainly attributable to cash paid for investment in loans originated and held by us in an amount of RMB12.1 billion (US$1.7 billion), and cash paid for purchase of short-term investments (mainly wealth management products) in an amount of RMB3.9 billion (US$560.5 million), and cash paid for purchase of investments in an amount of RMB803.7 million (US$115.4 million), which were partially offset by proceeds from investment in loans originated and held by us in an amount of RMB10.5 billion (US$1.5 billion), and proceeds from short-term investments in an amount of RMB5.5 billion (US$794.7 million) from maturity of wealth management products.
Net cash used in investing activities was RMB1.4 billion in 2018, which was mainly attributable to cash paid for purchase of short-term investments (mainly wealth management products) in an amount of RMB12.8 billion, and cash paid for investment in loans originated and held by us in an amount of RMB4.3 billion, which were partially offset by proceeds from short-term investments in an amount of RMB13.1 billion from maturity of wealth management products.
Net cash used in investing activities was RMB2.5 billion in 2017, which was mainly attributable to cash paid for purchase of short-term investments (mainly wealth management products) in an amount of RMB8.1 billion, and cash paid for investment in loans originated and held by us in an amount of RMB1.0 billion, which were partially offset by proceeds from short-term investments in an amount of RMB6.5 billion from maturity of wealth management products.periods presented.
Net cash provided by financing activities was RMB1.7 billion (US$251.3 million) in 2019, which was mainly attributable to cash received from our institutional funding partners that invested in our consolidated trusts in an amount of RMB3.4 billion (US$493.7 million), and cash received from short-term borrowings in an amount of RMB235.0 million (US$33.8 million), which was partially offset by cash paid to our institutional funding partners that invested in our consolidated trusts in an amount of RMB1.5 billion (US$213.8 million), and dividends payout in amount of RMB390.7 million (US$56.1 million).
Net cash provided by financing activities was RMB530.1 million in 2018, which was mainly attributable to the RMB1.2 billion cash we received from our institutional funding partners that invested in our consolidated trusts, which was partially offset by proceeds used for the repurchase of our ADSs in an amount of RMB452.3 million.
Net cash provided by financing activities was RMB2.1 billion in 2017, which was mainly attributable to proceeds from issuance of ordinary shares in an amount of RMB1.7 billion in connection with our IPO.
We made capital expenditures of RMB90.9 million, RMB83.6 million and RMB48.7 million (US$7.0 million) in 2017, 2018 and 2019, respectively. In these periods, our capital expenditures were mainly used for purchases of property, equipment and software. Our capital expenditures for 2020 are expected to be approximately RMB32.7 million (US$4.7 million), primarily due to the optimizations of server units and IT infrastructure.
Holding Company Structure FinVolution Group is a holding company with no material operations of its own. We conduct our operations primarily through our subsidiaries, fourthree consolidated variable interest entities and their subsidiaries in China. As a result, FinVolution Group’s ability to pay dividends depends upon dividends paid by our PRC subsidiaries. If our existing PRC subsidiaries or any newly formed ones incur debt on their own behalf in the future, the instruments governing their debt may restrict their ability to pay dividends to us. In addition, our wholly foreign-owned subsidiaries in China are permitted to pay dividends to us only out of their retained earnings, if any, as determined in accordance with PRC accounting standards and regulations. Under PRC law, each of our subsidiaries and consolidated variable interest entities is required to set aside at least 10% of its after-tax profits each year, if any, to fund certain statutory reserve funds until such reserve funds reach 50% of its registered capital. In addition, each of our subsidiaries may allocate a portion of its after-tax profits based on PRC accounting standards to enterprise expansion funds and staff bonus and welfare funds at its discretion, and ourthe consolidated variable interest entities may allocate a portion of its after-tax profits based on PRC accounting standards to a discretionary surplus fund at its discretion. The statutory reserve funds and the discretionary funds are not distributable as cash dividends. Remittance of dividends by a wholly foreign-owned company out of China is subject to examination by the banks designated by SAFE. Our PRC subsidiaries haveare not paidable to pay dividends out of China and will not be able to do so until they generate accumulated profits and meet the requirements for statutory reserve funds. In 2020, Shanghai Guangjian, one of our PRC subsidiaries, had paid dividends of RMB79.5 million out of China.
| Research and Development, Patents, and Licenses, etc. |
See “Item 4. Information On the Company—B. Business Overview—Technology” and “Item 4. Information On the Company—B. Business Overview—Intellectual Property.” Other than as disclosed elsewhere in this annual report, we are not aware of any trends, uncertainties, demands, commitments or events for the year ended December 31, 20192021 that are reasonably likely to have a material and adverse effect on our net revenues, income, profitability, liquidity or capital resources, or that would cause the disclosed financial information to be not necessarily indicative of future results of operations or financial conditions. | Off-Balance Sheet ArrangementsCritical Accounting Estimates
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For the loans funded by our institutional funding partners, we provide cash deposit to certain institutional funding partners with our own funds at an amount equal to a certain percentage of their total investment and, in some cases, are required to replenish such deposit from time to time to compensate such investors’ potential loss due to potential loan delinquency. In addition, we are obligated under our agreements with institutional funding partners to repay the full overdue amount to institutional funding partners if a borrower defaults. Under each of these arrangements, we bear credit risks of the loans we facilitate and record quality assurance commitment liability accordingly. See “Item 4. Information on the Company—B. Business Overview—Investor Protection—Quality Assurance Commitment for Institutional Funding Partners” and “Item 5. Operating and Financial Review and Prospects—A. Operating Results—Critical Accounting Policies, Judgments and Estimates—Quality assurance payable and receivable.”
We have not entered into any derivative contracts that are indexed to our shares and classified as shareholder’s equity or that are not reflected inprepare our consolidated financial statements. Furthermore, we dostatements in accordance with U.S. GAAP, which requires us to make judgments, estimates and assumptions that affect (i) the reported amounts of assets and liabilities, (ii) disclosure of contingent assets and liabilities at the end of each reporting period and (iii) the reported amounts of revenues and expenses during each reporting period. We continually evaluate these estimates and assumptions based on historical experience, knowledge and assessment of current business and other conditions, expectations regarding the future based on available information and reasonable assumptions, which together form a basis for making judgments about matters not have any retained or contingent interestreadily apparent from other sources. The use of estimates is an integral component of the financial reporting process, though actual results could differ from those estimates. Some of our accounting policies require higher degrees of judgment than others in assets transferredtheir application. We consider the policies discussed below to be critical to an unconsolidated entity that servesunderstanding of our financial statements as credit, liquidity or market risk support to such entity. We do not have any variable interesttheir application places the most significant demands on the judgment of our management. For a detailed discussion of our significant accounting policies and related judgments, please see “Note 2—Summary of Significant Accounting Policies.” You should read the following description of critical accounting estimates in any unconsolidated entity that provides financing, liquidity, market risk or credit support to us or engages in leasing, hedging or product development servicesconjunction with us. F. | Tabular Disclosure of Contractual Obligations
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The following table sets forth our contractual obligations as of December 31, 2019:
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Our operating lease obligations relate to our leases of office premises. We lease our office premises undernon-cancelable
operating lease arrangements. Rental expenses under operating leases for 2018 and 2019 were RMB62.1 million and RMB57.9 million (US$8.3 million).Other than those shown above, we did not have any significant capital and other commitments, or long-term obligations as of December 31, 2019. See note 5 to the consolidated financial statements on page F-52 for details of a guarantee we granted to a third party.
See “Forward-Looking Statements” on page 3 ofand other disclosures included in this annual report.
124Nature of estimate: We operate an online consumer finance platform that matches borrowers with institutional funding investors. Typically, we provided quality assurance service, loan facilitation services and post-facilitation services to the borrowers and institutional funding partners. The quality assurance service is within the scope of ASC Topic 460 Guarantees and recorded at fair
value at the inception of the loans. For loan facilitation services and post-facilitation services we provide, we charged one combined transaction service fee, each of which we have assessed and concluded that they were distinct performance obligations. Assumptions: The combined transaction price was allocated to loan facilitation and post-facilitation services based on their standalone selling price. We did not have an observable standalone selling price for the loan facilitation or post-facilitation services because we did not provide such services on a standalone basis in similar circumstances to similar customers, and because there was no directly observable standalone selling price that was reasonably available for similar services in the market. As a result, we used an expected “cost plus margin” approach to estimate the standalone selling prices. As part of the expected “cost plus margin” model, we made certain assumptions including estimates of the cost of providing the services, plus a reasonable profit margin. When our estimates of the standalone selling prices for loan facilitation service increased/decreased by 1% while holding all other estimates constant, our loan facilitation service revenue would increase/decrease by approximately RMB70 million. Our estimate of the key assumptions related to revenue recognition did not change significantly throughout the periods presented. Allowance for Credit Losses We have the following types of financial assets and liabilities that are subject to credit losses of borrowers: accounts receivable and contract assets, quality assurance receivable, loans receivable and expected credit losses for quality assurance commitment. Nature of estimate: Measurement of credit losses on financial instruments, which requires us to record the full amount of expected credit losses for the life of a financial asset at the time it is originated or acquired and adjusted for changes in expected lifetime credit losses subsequently, which requires earlier recognition of credit losses. Assumptions: The credit losses related to these financial assets and liabilities are estimated mainly based on historical default experience, known or inherit risks in the portfolio, current economic conditions, and macroeconomic forecasts as well as other factors surrounding the credit risk of borrowers. The estimate of expected credit losses is sensitive to our assumptions in these factors. When change in one of our estimates or a combined effect of changes of multiple estimates, which results in a 1% increase/decrease in our default rate while holding all other estimates constant, there would be approximately RMB1,146 million pre-tax impact to our consolidated results of operations. Our estimate of the key assumptions related to credit losses did not change significantly throughout the periods presented. | DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES |
| Directors and Senior Management |
The following table sets forth information regarding our directors and executive officers as of the date of this annual report. | | | | | | | Directors and Executive Officers | | | | | | | | | 43 | | | Chairman of the Board, Chief Innovation Officer | | | | 37 | | | Vice Chairman of the Board, Chief Strategy OfficerPresident | Jun Zhang | | | 44 | | | Director |
| | | | | | | | | | 44 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 48 | | | Director | | | | 65 | | | Independent Director | | | | 59 | | | Independent Director | | | | 46 | | | Chief Executive Officer | | | | 41 | | | Chief Financial Officer | | | | 42 | | | Chief Technology Officer and Chief Product Officer | | | | | | | Chief Risk Officer and Chief Data Officer
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is one of our four co-founders and has been serving as our director since April 2009, chief innovation officer since March 2019 and chairman of our board of directors since March 2020. Mr. Gu served as our strategy adviser from December 2016 to March 2019, chief strategy officer from August 2014 to December 2016, chief technology officer from January 2011 to August 2014 and chief executive officer from 2007 to 2011. Prior to founding Paipaidai,our company, Mr. Gu was the founder and the chief executive officer of Shanghai Jufei Internet Technology Co., Ltd. (Podlook), a startup running podcast aggregation business, from 2005 to 2007. Prior to founding Podlook, Mr. Gu served as a technical lead of Microsoft Corporation from 2000 to 2005. Mr. Gu received his bachelor’s degree in communication science and engineering from Shanghai Jiaotong University in China. is one of our four co-founders and has been serving as our president since May 2020, vice chairman of the board since September 2018, aand director since March 2015, and2015. Mr. Li also served as our chief strategy officer sincefrom July 2017. Mr. Li also served as2017 to April 2020, our chief operating officer from April 2015 to July 2017 and our chief risk officer from January 2011 to April 2015. Prior to founding Paipaidai,our company, Mr. Li served as a risk manager at China Minsheng Banking Corporation Limited from 2006 to 2011. Mr. Li received his bachelor’s degree in civil engineering from Shanghai Jiaotong University in China and FMBA degree from China Europe International Business School in China. is one of our fourco-founders
and has been serving as our president since January 2011 and director since September 2011. Prior to founding Paipaidai, Mr. Hu worked in the legal industry as a lawyer and a senior partner at several PRC law firms from 2001 to 2009. From 2000 to 2001, Mr. Hu served as a loan officer in Shanghai Branch of Industrial and Commercial Bank of China Limited. Mr. Hu received his bachelor’s degree in economics from Shanghai Jiaotong University in China and master’s degree in economics from Fudan University in China.is one of our four co-founders and has been serving as our director since September 2011 and our advisor since March 2020. Mr. Zhang was our chairman of our board of directors from December 2016 to March 2020, co-chief executive officer from September 2018 to March 2020 and chief executive officer from January 2011 to September 2018. Mr. Zhang served as the operation manager at Wicresoft, a provider of “Internet +” transition service jointly founded by Microsoft Corporation and Shanghai Alliance Investment Limited, from October 2008 to July 2010. Prior to that, Mr. Zhang served as a technical lead of Microsoft Global Technical Engineering Center since 2001. Prior to that, Mr. Zhang worked at Shanghai Online E-Biz Co., Ltd. as a coder and programmer from 2000 to 2001. Mr. Zhang received his bachelor’s degree in communication science and engineering and master’s degree in industrial engineering from Shanghai Jiaotong University in China. is one of our fourco-founders and has been serving as our director since September 2011. Mr. Hu served as our president from January 2011 to May 2020. Prior to founding our company, Mr. Hu worked in the legal industry as a lawyer and a senior partner at several PRC law firms from 2001 to 2009. From 2000 to 2001, Mr. Hu served as a loan officer in Shanghai Branch of Industrial and Commercial Bank of China Limited. Mr. Hu received his bachelor’s degree in economics from Shanghai Jiaotong University in China and master’s degree in economics from Fudan University in China.
Mr.Mr. Ronald Cao Simon Tak Leung Ho
has been serving as our director since February 2014.November 2020. Mr. Cao isHo served as our chief financial officer from September 2016 to November 2020. Mr. Ho currently serves as the founder and managing partnerchief financial officer of Sky9 Capital, a China-focused technology venture capital firm established in 2016. Mr. Cao alsoco-founded
Lightspeed China Partners and has been a managing partners for its Fund I and II since 2011.Tianxia Technology Limited. Prior to that,joining us, Mr. CaoHo served as thevarious positions at Citigroup Global Markets Asia Limited from 2008 to 2016 including managing director and China chief representativehead of Lightspeed Venture Partners and as managing director of KLM Capital.Asian financials research. Mr. Cao currently serves on the boards of a number of privately-owned portfolio companies and was selected as a Young Global Leader by the World Economic Forum in 2013. Mr. CaoHo received his bachelor of science degree and master of engineeringbachelor’s degree in electrical engineering and computer science from Massachusetts Institute of Technology.Northwestern University, Illinois. Mr. Cao has been named by Forbes China as one of China’s top venture capitalist over multiple years.Ho is also a Chartered Financial Analyst.has been serving as our independent director since November 2017. Mr. Lai currently serves as the chief financial officer of Kneron, a leading provider of full stack edge AI solutions company. Mr. Lai also serves as an independent director of several other NYSE-listed companies, including Zepp Corporation (NYSE: ZEPP). Mr. Lai served as the chief financial officer of China Online Education Group, a leading online education platform in China listed on the NYSE, from June 2015 to December 2018. Prior to joining China Online Education Group in 2015, Mr. Lai served as the chief financial officer for several companies, including Chukong Technologies Corp., a leading mobile entertainment platform company in China, from 2013 to 2015, Gamewave Corporation, a leading webgame company in China, from 2011 to 2013, Daqo New Energy Corp., an NYSE-listed company and a leading polysilicon manufacturer based in China, from 2009 to 2011, Linktone Ltd., a NASDAQ-listed company and a leading provider of wireless interactive entertainment services to consumers in China, from 2008 to 2009 and Palm Commerce Holdings, a leading information technology solution provider for the China lottery industry, from 2006 to 2008. Prior to that, Mr. Lai served as an associate vice president of investor relations at Semiconductor Manufacturing International Corporation, a company listed on the NYSE and the Main Board of the Hong Kong Stock Exchange, from 2002 to 2006, and as a controller and director of financial planning at AMX Corporation from 1997 to 2001. Mr. Lai received his MBA from the University of Texas at Dallas and his bachelor’s degree in statistics from the National Cheng Kung University in Taiwan. Mr. Lai is a certified public accountant licensed in the State of Texas.
has been serving as our independent director since November 2017. Mr. Xiang currently serves as an independent director of multiple public companies listed on the Hong Kong Stock Exchange, including Sinolink Worldwide Holdings Limited and Longfor Properties Co. Ltd. Mr. Xiang is the founding dean of the Cheung Kong Graduate School of Business and has been a professor there since 2002. Prior to that, Mr. Xiang was a professor, a PhD advisor and the director of EMBA at Guanghua School of Management, Peking University, from 1999 to 2001. He has also taught at Chinese University of Hong Kong, China Europe International Business School, Hong Kong University of Science and Technology and the University of Calgary. Mr. Xiang received his bachelor’s degree in mechanical engineering from Xi’an Jiaotong University and a PhD degree in finance and accounting from the University of Alberta. has been serving as our chief executive officer since March 2020. Mr. Zhang also served as our co-chief executive officer from September 2018 to March 2020, chief operating officer from July 2017 to September 2018 and chief risk officer from April 2015 to July 2017. Prior to joining us, Mr. Zhang held various positions including analyst, senior analyst, manager, senior manager, head of yield management, and senior director at Capital One Financial Services, a diversified bank that offers a broad array of financial products and services, from 2003 to 2015. Mr. Zhang received his bachelor’s degree in computer science from Tsinghua University, master’s degree in computer science from Chinese Academy of Science, master’s degree in computer science from Virginia Tech, and MBA degree from Duke University, The Fuqua School of Business. has been serving as our chief financial officer since September 2016.December 2020. Mr. Xu served as our senior vice president for finance and head of financial institutions department since March 2018 to November 2020. Mr. Xu served as the vice president for finance from June 2016 to March 2018. Mr. Xu joined us as our financial controller in June 2015. Prior to joining us, Mr. HoXu served various positions at Citigroup Global Markets Asia Limitedas the head of financial management department of Nanyang Commercial Bank (China) Co., Ltd. from 2008 to 2016 including managing director and head of Asian financials research.2015. Mr. HoXu was an audit manager at PricewaterhouseCoopers Zhong Tian LLP from 2003 to 2008. Mr. Xu received his bachelor of engineeringbachelor’s degree in international trade and finance from Shanghai Jiaotong University in and FMBA degree from Northwestern University, Illinois.China Europe International Business School. Mr. HoXu is also a Chartered Financial Analyst.member of Chinese Institute of Certified Public Accountants.has been serving as our chief technology officer since 2019 and our chief product officer since June 2015. Prior to joining us, Mr. Wang served as the vice president of product at Opera Software ASA, a Norwegian software company, from 2013 to 2015. Mr. Wang worked at Baidu.com as a product head of Baidu mobile browser from 2012 to 2013. Mr. Wang served as the product director at TeleNav, a company providing location-based services including navigation, from 2009 to 2012. Prior to that, Mr. Wang served as a senior product manager at MiTAC Research (Shanghai) Ltd., an electronics company, from 2002 to 2009. Mr. Wang received his bachelor’s degree in communication engineering from Jiangsu University, in China and his master’s degree in software engineering from Fudan University in China.
has been serving as our chief data officer since February 2017 and chief risk officer since July 2017. Mr. Gu joined us in April 2014 and served various positions before serving as our chief data officer. Prior to joining us, Mr. Gu worked at Opera Solutions, a company providingbig-data
analytics and data services to clients in the financial sector, as an analytics manager from January 2010 to April 2014. Mr. Gu received his bachelor’s degree in computer science from Grinnell College, Iowa and PhD degree in computation and neural systems from California Institute of Technology.has been serving as our senior vice president for finance since March 2018. Mr. Xu served as the vice president for finance from June 2016 to March 2018. Mr. Xu joined us as our financial controller in June 2015. Prior to joining us, Mr. Xu served as the head of financial management department of Nanyang Commercial Bank (China) Co., Ltd. from 2008 to 2015. Mr. Xu was an audit manager at PricewaterhouseCoopers Zhong Tian LLP from 2003 to 2008. Mr. Xu received his bachelor’s degree in international trade and finance from Shanghai Jiaotong University in China and FMBAEMBA degree from China Europe International Business School. Mr. Xu is also a member of Chinese Institute of Certified Public Accountants.For the fiscal year ended December 31, 2019,2021, we paid an aggregate of approximately RMB23.5RMB21.8 million (US$3.4 million) in cash to our directors and officers. We have not set aside or accrued any amount to provide pension, retirement or other similar benefits to our executive officers and directors. Our PRC subsidiaries and ourthe consolidated variable interest entities are required by law to make contributions equal to certain percentages of each employee’s salary for his or her pension insurance, medical insurance, unemployment insurance and other statutory benefits and a housing provident fund.
Employment Agreements and Indemnification Agreements We have entered into employment agreements with each of our executive officers. Under these agreements, each of our executive officers is employed for a specified time period. We may terminate employment for cause, at any time, without advance notice or remuneration, for certain acts of the executive officer, such as conviction or plea of guilty to a felony or any crime involving moral turpitude, negligent or dishonest acts to our detriment, or misconduct or a failure to perform agreed duties. We may also terminate an executive officer’s employment without cause upon three-month advance written notice. In such case of termination by us, we will provide severance payments to the executive officer as expressly required by applicable law of the jurisdiction where the executive officer is based. The executive officer may resign at any time with a three-month advance written notice. Each executive officer has agreed to hold, both during and after the termination or expiry of his or her employment agreement, in strict confidence and not to use, except as required in the performance of his or her duties in connection with the employment or pursuant to applicable law, any of our confidential information or trade secrets, any confidential information or trade secrets of our clients or prospective clients, or the confidential or proprietary information of any third party received by us and for which we have confidential obligations. The executive officers have also agreed to disclose in confidence to us all inventions, designs and trade secrets which they conceive, develop or reduce to practice during the executive officer’s employment with us and to assign all right, title and interest in them to us, and assist us in obtaining and enforcing patents, copyrights and other legal rights for these inventions, designs and trade secrets. In addition, each executive officer has agreed to be bound by non-competition and non-solicitation restrictions during the term of his or her employment and typically for one year following the last date of employment. Specifically, each executive officer has agreed not to (i) approach our suppliers, clients, customers or contacts or other persons or entities introduced to the executive officer in his or her capacity as a representative of us for the purpose of doing business with such persons or entities that will harm our business relationships with these persons or entities; (ii) assume employment with or provide services to any of our competitors, or engage, whether as principal, partner, licensor or otherwise, any of our competitors, without our express consent; or (iii) seek directly or indirectly, to solicit the services of any of our employees who is employed by us on or after the date of the executive officer’s termination, or in the year preceding such termination, without our express consent. We have entered into indemnification agreements with each of our directors and executive officers. Under these agreements, we may agree to indemnify our directors and executive officers against certain liabilities and expenses incurred by such persons in connection with claims made by reason of their being a director or officer of our company.
Share Incentive PlanPlans In June 2013, our board of directors approved our stock option plan, as amended, or the 2013 Plan, to provide incentives to employees, directors and consultants and promote the success of our business. The maximum number of ordinary shares that may be issued under the 2013 Plan is 221,917,800. As of the completion of our initial public offering, options to purchase 134,455,800 Class A ordinary shares had been granted and outstanding but no ordinary shares underlying those options are issued and outstanding due to the exercisability restriction before the initial public offering of our ordinary shares. As of March 31, 2020,2022, options to purchase 128,947,730127,415,885 Class A ordinary shares were granted (excluding those cancelled, forfeited or expired) under the 2013 Plan and 104,272,265126,415,885 Class A ordinary shares underlying those options were issued. The following paragraphs describe the principal terms of the 2013 Plan. . The 2013 Plan permits the awards of options. Plan Administrationadministration. . The 2013 Plan will be administered by our board of directors or by the compensation committee, which will be authorized by our board. The plan administrator has the power and authority to determine the persons who are eligible to receive awards, the number of awards, as well as other terms and conditions of awards.
Award Agreementagreement. . Any award granted under the 2013 Plan is evidenced by an award agreement that sets forth terms, conditions and limitations for such award, which may include the number of options awarded, the exercise price, the provisions applicable in the event of the grantee’s employment or service terminates, among other provisions. The plan administrator may amend the terms of any award, prospectively or retroactively; provided that no such amendment shall impair the rights of any participant without his or her consent. . We may grant awards to directors, officers, employees and consultants of our company or any of our subsidiaries. . Except as otherwise approved by the plan administrator and subject to forfeiture and arrangement on termination of employment or service, 25% of the shares subject to the option shall become vested on the first anniversary of the vesting commencement date, with the remaining 75% to vest annually thereafter in three equal installments. If a change of control event occurs, such participant’s options will be immediately vested and exercisable. Exercise of Options options. Vested options will become exercisable after an initial public offering of our ordinary shares, subject to other terms and conditions provided in the relevant award agreements. Once all the preconditions are met, a participant may exercise options in whole or in part by giving written notice of exercise to us specifying information such as the number of shares to be purchased, as well as making full payment of the aggregate exercise price of the shares so purchased. . The plan administrator will determine the term of each option and provide it in the relevant award agreement, but no option shall be exercisable more than five or six years after the grant date, as the case may be. Transfer Restrictionsrestrictions. . Except under the laws of descent and distribution or otherwise permitted by the plan administrator, the participant will not be permitted to sell, transfer, pledge or assign any option. In principle, all options shall be exercisable only by the participants. However, a participant may also transfer one or more options to a trust controlled by him or her for estate planning purposes. Termination and amendment of the 2013 PlanPlan. . Our board of directors may amend, alter or discontinue the 2013 Plan, but no amendment, alteration or discontinuation shall be made if such amendment, alteration or discontinuation would impair the rights of a participant under any award without such participant’s consent.
In October 2017, we adopted our 2017 Share Incentive Plan, or the 2017 Plan, which allows us to offer a variety of share-based incentive awards to employees, officers, directors and individual consultants who render services to us. The plan permits the grant of three types of awards: options, restricted shares and restricted share units. The maximum number of our shares that may be issued pursuant to all awards under the 2017 Plan is 1,000,000,000 ordinary shares after giving effect to the share split effected by us in October 2017. As of March 31, 2020,2022, options to purchase 6,455,0006,885,045 Class A ordinary shares had been granted (excluding those cancelled, forfeited or expired) under the 2017 Plan and 687,5003,333,515 Class A ordinary shares underlying those options were issued and outstanding. As of March 31, 2020, 16,023,3452022, 93,816,715 restricted share units had been granted (excluding those cancelled, forfeited or expired) and 4,396,68523,313,910 Class A ordinary shares underlying these restricted share units were issued. The following paragraphs summarize the terms of the 2017 Plan: Plan Administrationadministration. . Our board of directors, or a committee designated by our board of directors, will administer the plan. The committee or the full board of directors, as appropriate, will determine the provisions and terms and conditions of each option grant. Award Agreementsagreements. . Options and other awards granted under the plan are evidenced by an award agreement that sets forth the terms, conditions and limitations for each grant, which may include the term of the award and the provisions applicable in the event of the grantee’s employment or service terminates. The exercise price of granted options may be amended or adjusted in the absolute discretion of our board of directors, or a committee designated by our board of directors, without the approval of our shareholders or the recipients of the options. .
We may grant awards to employees, directors and consultants of our company or any of our affiliates, which include our parent company, subsidiaries and any entities in which our parent company or a subsidiary of our company holds a substantial ownership interest. Vesting Scheduleschedule. . In general, the plan administrator determines the vesting schedule, which is specified in the relevant award agreement. Acceleration of Awardsawards upon Changechange in Controlcontrol. . If a corporate transaction occurs, the plan administrator may, in its sole discretion, provide for (i) all awards outstanding to terminate at a specific time in the future and give each participant the right to exercise the vested portion of such awards during a specific period of time, or (ii) the purchase of any award for an amount of cash equal to the amount that could have been attained upon the exercise of such award, or (iii) the replacement of such award with other rights or property selected by the plan administrator in its sole discretion, or (iv) payment of award in cash based on the value of ordinary shares on the date of the corporate transaction plus reasonable interest. Term of the Optionsoptions. . The term of each option grant shall be stated in the award agreement, provided that the term shall not exceed ten years from the date of the grant. Transfer Restrictionsrestrictions. . Subject to certain exceptions, awards may not be transferred by the recipient, except as otherwise provided by applicable laws or the award agreement. Termination of the Planplan. . Unless terminated earlier, the plan will terminate automatically in 2027. Our board of directors has the authority to amend or terminate the plan subject to shareholder approval to the extent necessary to comply with applicable law. However, no such action may impair the rights of any award recipient unless agreed by the recipient.
The following table summarizes, as of March 31, 2020,2022, the options granted (excluding those cancelled, forfeited or expired) under the 2013 Plan and 2017 Plan to our directors, executive officers and other grantees. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 0.126 | | March 21, 2016 | | | | | | | | | | | | | | | 0.007 | | January 29, 2014 | | | | | | | | | | | | | | | 0.030 | | April 1, 2015 | | | | | | | | | | | | | | | 0.126 | | March 21, 2016 | | | | | | | | | | | | | | | 1.400 | | February 1, 2018 | | | | | | | | | | | | * | | 0.654 | | January 28, 2019 | | January 27, 2024 | | | * | | 0.007 | | January 29, 2014 | | | | | * | | 0.030 | | April 1, 2015 | | March 31, 2020 | | | * | | 0.126 | | March 21, 2016 | | March 20, 2021 | | | * | | 0.320 | | February 1, 2017 | | January 31, 2022 | | | * | | 1.400 | | February 1, 2018 | | January 31, 2023 | | | | | | 0.007 | | January 29, 2014 | | | | | | | | | | | | | | | 0.126 | | March 21, 2016 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 0.126 | | September 7, 2016 | | | | | | | | | 2022 | | | | | | 1.400 | | February 1, 2018 | | January 31, 2023 | | | * | | 0.330 | | April 6, 2020 | | April 6, 2022 | | | | | | 0.028 | | May 24, 2015 | | | | | | | | | | | | | | | 0.126 | | March 21, 2016 | | | | | | | | | | | | * | | 0.320 | | February 1, 2017 | | January 31, 2022 | | | * | | 0.030 | | May 5, 2015 | | | | | * | | 0.126 | | March 21, 2016 | | March 20, 2021 | | | * | | 0.320 | | February 1, 2017 | | January 31, 2022 | | | * | | 0.330 | | April 6, 2020 | | April 5, 2025 | | | | | | 0.030 | | June 15, 2015 | | | | | | | | | | | | | | | 0.126 | | March 21, 2016 | | | | | | | | | | | | | | | 0.320 | | February 1, 2017 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Other grantees as a group | | 62,344,020 | | From 0.0001
| | | | | | | | From July 1, 2012 to January 28, 2019
| | | | From June 30, 2018
to January 27, 2024April 5, 2025 | |
* | Less than 1% of our total outstanding shares. |
The following table summarizes, as of March 31, 2020,2022, the restrict share units granted under the 2017 Plan to our directors and executive officers and other grantees. | | | | | | | | | | | | | | | Underlying Restricted Share
| | | | | | | | | * | | October 6, 2020 | | October 5, 2025 | | | * | | May 24, 2021 | | May 23, 2026 | | | * | | May 24, 2021 | | May 23, 2026 | | | | | | February 1, 2018 | | | | | | | | | | * | | January 28, 2019 | | January 27, 2024 | | | * | | April 6, 2020 | | April 5, 2025 | | | * | | October 6, 2020 | | October 5, 2025 | | | * | | | | January 31, 2023 | | | * | | January 28, 2019 | | January 27, 2024 | | | * | | April 6, 2020 | | April 5, 2025 | | | * | | October 6, 2020 | | October 5, 2025 | | | | | | February 1, 2018 | | | | | | | | | | | | | January 28, 2019 | | | | | | | | | | | | | | | | | | | | | | | | | | April 6, 2020 | | | | | | | | | | | | | | | | | | | | April 5, 2025 | | | | | | October 6, 2020 | | | | | | | October 5, 2025 | Other grantees as a group | | | | | 66,310,630 | | to December 5, 2019February 22, 2022 | | | | to December 4, 2024February 21, 2027 | |
* | Less than 1% of our total outstanding shares. |
Our board of directors consists of seven directors. A director is not required to hold any shares in our company to qualify to serve as a director. A director may vote with respect to any contract, proposed contract or arrangement notwithstanding that he may be interested therein, and if he does so his vote shall be counted and he may be counted in the quorum at any meeting of our directors at which any such contract or proposed contract or arrangement is considered, provided (a) such director, if his interest (whether direct or indirect) in such contract or arrangement is material, has declared the nature of his interest at the earliest meeting of the board at which it is practicable for him to do so, either specifically or by way of a general notice and (b) if such contract or arrangement is a transaction with a related party, such transaction has been approved by the audit committee. The directors may exercise all the powers of the company to borrow money, to mortgage or charge its undertaking, property and uncalled capital, and to issue debentures or other securities whenever money is borrowed or as security for any debt, liability or obligation of the company or of any third party. None of our non-executive directors has a service contract with us that provides for benefits upon termination of service. Committees of the Board of Directors We have established three committees under the board of directors: an audit committee, a compensation committee and a nominating and corporate governance committee. We have adopted a charter for each of the three committees. Each committee’s members and functions are described below. Audit CommitteeCommittee. . Our audit committee consists of Jimmy Y. Lai and Bing Xiang. Jimmy Y. Lai is the chairman of our audit committee. We have determined that both Jimmy Y. Lai and Bing Xiang satisfy the “independence” requirements of Section 303A of the Corporate Governance Rules of the New York Stock Exchange and Rule 10A-3 under the Securities Exchange Act of 1934. We rely on the exemption provided by Rule 10A-3(b)(1)(iv)(A) under the Securities Exchange Act of 1934, which allows a minority of the members of our audit committee not to be independent for one year from November 9, 2017, the date of effectiveness of our registration statement on Form F-1. In addition, we have determined that Jimmy Y. Lai qualifies as an “audit committee financial expert.” The audit committee oversees our accounting and financial reporting processes and the audits of the financial statements of our company. The audit committee is responsible for, among other things: appointing the independent auditors and pre-approving
all auditing and non-auditing services permitted to be performed by the independent auditors; reviewing with the independent auditors any audit problems or difficulties and management’s response; discussing the annual audited financial statements with management and the independent auditors; reviewing the adequacy and effectiveness of our accounting and internal control policies and procedures and any steps taken to monitor and control major financial risk exposures; reviewing and approving all proposed related party transactions; meeting separately and periodically with management and the independent auditors; and monitoring compliance with our code of business conduct and ethics, including reviewing the adequacy and effectiveness of our procedures to ensure proper compliance. Compensation CommitteeCommittee. . Our compensation committee consists of Jimmy Y. Lai and Bing Xiang. Jimmy Y. Lai is the chairman of our compensation committee. We have determined that Jimmy Y. Lai and Bing Xiang satisfy the “independence” requirements of Section 303A of the Corporate Governance Rules of the New York Stock Exchange. The compensation committee assists the board in reviewing and approving the compensation structure, including all forms of compensation, relating to our directors and executive officers. Our chief executive officer may not be present at any committee meeting during which his compensation is deliberated. The compensation committee is responsible for, among other things: reviewing and approving, or recommending to the board for its approval, the compensation for our chief executive officer and other executive officers; reviewing and recommending to the board for determination with respect to the compensation of our non-employee directors; reviewing periodically and approving any incentive compensation or equity plans, programs or similar arrangements; and
selecting compensation consultant, legal counsel or other adviser only after taking into consideration all factors relevant to that person’s independence from management. Nominating and Corporate Governance CommitteeCommittee. . Our nominating and corporate governance committee consists of Jimmy Y. Lai and Bing Xiang. Jimmy Y. Lai is the chairperson of our nominating and corporate governance committee. We have determined that Jimmy Y. Lai and Bing Xiang satisfy the “independence” requirements of Section 303A of the Corporate Governance Rules of the New York Stock Exchange. The nominating and corporate governance committee assists the board of directors in selecting individuals qualified to become our directors and in determining the composition of the board and its committees. The nominating and corporate governance committee is responsible for, among other things: selecting and recommending nominees for election by the shareholders or appointment by the board; reviewing annually with the board the current composition of the board with regards to characteristics such as independence, knowledge, skills, experience and diversity; making recommendations on the frequency and structure of board meetings and monitoring the functioning of the committees of the board; and advising the board periodically with regards to significant developments in the law and practice of corporate governance as well as our compliance with applicable laws and regulations, and making recommendations to the board on all matters of corporate governance and on any remedial action to be taken.
Under Cayman Islands law, our directors owe fiduciary duties to our company, including a duty of loyalty, a duty to act honestly and a duty to act in what they consider in good faith to be in our best interests. Our directors must also exercise their powers only for a proper purpose. Our directors also have a duty to exercise the skill they actually possess and such care and diligence that a reasonably prudent person would exercise in comparable circumstances. In fulfilling their duty of care to us, our directors must ensure compliance with our memorandum and articles of association, as amended and restated from time to time, and the class rights vested thereunder in the holders of the shares. Our company has the right to seek damages if a duty owed by our directors is breached. A shareholder may in certain limited exceptional circumstances have the right to seek damages in our name if a duty owed by the directors is breached. Our board of directors has all the powers necessary for managing, and for directing and supervising, our business affairs. The functions and powers of our board of directors include, among others: convening shareholders’ annual and extraordinary general meetings; declaring dividends and distributions; appointing officers and determining the term of office of the officers; exercising the borrowing powers of our company and mortgaging the property of our company; and approving the transfer of shares in our company, including the registration of such shares in our register of members. Terms of Directors and Officers Our directors may be electedappointed by a resolution of our board of directors, or by a special resolution of our shareholders. Our directors are not subject to a term of office (unless this is expressly set out in the director’s appointment) and hold office until such time as they are removed from office by special resolution of the shareholders. A director will cease to be a director if, among other things, the director (i) becomes bankrupt or makes any arrangement or composition with his creditors; (ii) dies or is found by our company to be or becomes of unsound mind, (iii) resigns his office by notice in writing to the company, or (iv) without special leave of absence from our board, is absent from three consecutive board meetings and our directors resolve that his office be vacated.vacated, or (v) is removed from office pursuant to our currently effective articles of association. Our officers are electedappointed by and serve at the discretion of the board of directors.
We had 3,8834,259 employees as of December 31, 2019.2021. As of December 31, 2019, 1,9482021, 1,613 of our employees were located in Shanghai 410while the remaining employees were located in Wuxi, 809 in Hefei, 35 in Beijing, 477 in Changsha, 192 in Zhengzhou, and 12 in Indonesia.other regions. The following table sets forth the numbers of our employees categorized by function as of December 31, 2019.2021. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | % | | | | | | | | | % | | | | | | | | | % | | | | | | | | | % | General and Administration | | | | | | | | % | | | | | | | | | % | | | | | | | | | | Total number of employees | | | | | | | | % | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 831 | | | | 19.5 | % | | | | 862 | | | | 20.2 | % | | | | 663 | | | | 15.6 | % | | | | 1,593 | | | | 37.4 | % | General and Administration | | | 310 | | | | 7.3 | % | | | | | | | | | | Total number of employees | | | | | | | 100.0 | % | | | | | | | | | |
As required by laws and regulations in China, we participate in various employee social security plans that are organized by municipal and provincial governments, including, among other things, housing, pension, medical insurance and unemployment insurance. We are required under PRC law to make contributions to employee benefit plans at specified percentages of the salaries, bonuses and certain allowances of our employees, up to a maximum amount specified by the local government from time to time. We typically enter into standard employment, confidentiality and non-compete agreements with our senior management and core personnel. These contracts include a standard non-compete covenant that prohibits the employee from competing with us, directly or indirectly, during his or her employment and for two years after the termination of his or her employment, provided that we pay compensation equal to 30% of the employee’s salary during the restriction period. We believe that we maintain a good working relationship with our employees, and we have not experienced any labor disputes. None of our employees are represented by labor unions. Except as specifically noted, the following table sets forth information with respect to the beneficial ownership of our ordinary shares as of March 31, 20202022 by: each of our directors and executive officers; and each of our principal shareholders who beneficially own more than 5% of our total outstanding ordinary shares. We have adopted a dual class ordinary share structure. The calculations in the table below are based on 1,528,723,7591,426,018,249 outstanding ordinary shares (consisting of 942,723,759846,818,249 Class A ordinary shares and 586,000,000579,200,000 Class B ordinary shares) as of March 31, 2020.2022.
Beneficial ownership is determined in accordance with the rules and regulations of the SEC. In computing the number of shares beneficially owned by a person and the percentage ownership of that person, we have included shares that the person has the right to acquire within 60 days. These shares, however, are not included in the computation of the percentage ownership of any other person. | | | | | | | | | | | | | | | | | | | Ordinary Shares Beneficially Owned as of March 31, 2020 | | | | | | | | | | | | | | | Directors and Executive Officers**: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | % | | | | % | | | | | | | | | | | | | % | | | | % | | | | | | | | | | | | | % | | | | % | | | | | | | | | | | | | % | | | | % | | | | | | | | | | | | | % | | | | % | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | All directors and executive officers as a group | | | | | | | | | | | | % | | | | % | Principal and Selling Shareholders: | | | | | | | | | | | | | | | | | PPD Investment Limited (6) | | | | | | | | | | | | % | | | | % | Seahawk China Dynamic Fund (7) | | | | | | | | | | | | % | | | | % | Lightspeed China Partner I, L.P. and its affiliate (8) | | | | | | | | | | | | % | | | | % | Metallica Holding Limited (9) | | | | | | | | | | | | % | | | | % | Sequoia Capital 2010 CV Holdco, Ltd. (10) | | | | | | | | | | | | % | | | | % | SIG China Investments Master Fund III, LLLP (11) | | | | | | | | | | | | % | | | | % | Emma & Oliver Holding Limited (12) | | | | | | | | | | | | % | | | | % |
| | | | | | | | | | | | | | | | | | | Ordinary Shares Beneficially Owned as of March 31, 2022 | | | | | | | | | | Percentage of total ordinary shares† | | | Percentage of aggregate voting power | | Directors and Executive Officers** : | | | | | | | | | | | | | | | | | | | | 24,400,480 | | | | 394,818,900 | | | | 29.4 | % | | | 63.7 | % | | | | 7,865,650 | | | | 27,987,900 | | | | 2.5 | % | | | 4.6 | % | | | | 10,350,000 | | | | 75,209,800 | | | | 6.0 | % | | | 12.2 | % | | | | 8,225,000 | | | | 54,883,400 | | | | 4.4 | % | | | 8.9 | % | | | | | * | | | — | | | | | * | | | | * | | | | | * | | | — | | | | | * | | | | * | | | | | * | | | — | | | | | * | | | | * | | | | | * | | | — | | | | | * | | | | * | | | | | * | | | — | | | | | * | | | | * | | | | | * | | | — | | | | | * | | | | * | All directors and executive officers as a group | | | 75,857,845 | | | | 552,900,000 | | | | 44.0 | % | | | 89.5 | % | | | | | | | | | | | | | | | | | | PPD Investment Limited (5) | | | 24,400,480 | | | | 394,818,900 | | | | 29.4 | % | | | 63.7 | % | Seahawk China Dynamic Fund (6) | | | 108,340,885 | | | | — | | | | 7.6 | % | | | 0.9 | % | Metallica Holding Limited (7) | | | 10,350,000 | | | | 75,209,800 | | | | 6.0 | % | | | 12.2 | % |
* | Less than 1% of our total outstanding shares. |
** | Except for Ronald Cao, Jimmy Y. Lai, and Bing Xiang, the business address for our directors and executive officers is Building G1, No. 999 Dangui Road, Pudong New District, Shanghai 201203, People’s Republic of China. The business address of Ronald Cao is 1133 Changning Road, Suite 1807, Office Tower 1, Raffles City Changning, Shanghai, China. The business address of Jimmy Y. Lai is 4521 Turnberry Ct. Plano, Texas, 75024, USA. The business address of Bing Xiang is Floor 20th, Tower East II, Dongfang Square, Dongcheng District, Beijing, China. |
† | For each person and group included in this column, percentage ownership is calculated by dividing the number of shares beneficially owned by such person or group by the sum of the total number of shares outstanding and the number of shares such person or group has the right to acquire upon exercise of option, warrant or other right within 60 days after March 31, 2020. The total number of ordinary shares outstanding as of March 31, 2020 is 1,528,723,759, consisting of (i) 942,723,759 Class A ordinary shares, and (ii) 586,000,000 Class B ordinary shares.2022. |
†† | For each person and group included in this column, percentage of voting power is calculated by dividing the voting power beneficially owned by such person or group by the voting power of all of our Class A and Class B ordinary shares as a single class. Each holder of Class A ordinary shares is entitled to one vote per share and each holder of our Class B ordinary shares is entitled to twenty votes per share on all matters submitted to them for vote. Our Class B ordinary shares are convertible at any time by the holder thereof into Class A ordinary shares on a basis. |
(1) | Represents (i) 394,818,900 Class B ordinary shares directly held by PPD Investment Limited, a company incorporated in the British Virgin Islands, and (ii) 2,027,6954,880,096 ADSs, representing 10,138,47524,400,480 Class A ordinary shares, directly held by PPD Investment Limited. Mr. Shaofeng Gu is the sole shareholder and the sole director of PPD Investment Limited. The registered office address of PPD Investment Limited is Geneva Place, Waterfront Drive, P.O. Box 3469, Road Town, Tortola, British Virgin Islands. |
(2) | Represents (i) 27,987,900 Class B ordinary shares directly held by Happyariel Holding Limited, a company incorporated in the British Virgin Islands, (ii) 1,728,1301,308,130 ADSs, representing 8,640,6506,540,650 Class A ordinary shares directly held by Happyariel Holding Limited, and (iii) 975,0001,325,000 Class A ordinary shares that Mr. TiezhangTiezheng Li may purchase upon exercise of options within 60 days after March 31, 2020.2022. Mr. Tiezheng Li is the sole shareholder and the sole director of Happyariel Holding Limited. The registered office address of Happyariel Holding Limited is Geneva Place, Waterfront Drive, P.O. Box 3469, Road Town, Tortola, British Virgin Islands. |
(3) | Represents (i) 59,883,40075,209,800 Class B ordinary shares directly held by Metallica Holding Limited, a company incorporated in the British Virgin Islands, and (ii) 2,070,000 ADSs, representing 10,350,000 Class A ordinary shares, directly held by Metallica Holding Limited. Mr. Jun Zhang is the sole shareholder and the sole director of Metallica Holding Limited. The registered office address of Metallica Holding Limited is Geneva Place, Waterfront Drive, P.O. Box 3469, Road Town, Tortola, British Virgin Islands |
(4) | Represents (i) 54,883,400 Class B ordinary shares directly held by Emma & Oliver Holding Limited, a company incorporated in the British Virgin Islands, and (ii) 900,0001,645,000 ADSs, representing 4,500,0008,225,000 Class A ordinary shares, directly held by Emma & Oliver Holding Limited. Mr. Honghui Hu is the sole shareholder and the sole director of Emma & Oliver Holding Limited. The registered office address of Emma & Oliver Holding Limited is Geneva Place, Waterfront Drive, P.O. Box 3469, Road Town, Tortola, British Virgin Islands. |
(4) | Represents (i) 77,009,800 Class B ordinary shares directly held by Metallica Holding Limited, a company incorporated in the British Virgin Islands, (ii) 1,550,000 ADSs, representing 7,750,000 Class A ordinary shares, directly held by Metallica Holding Limited, (iii) 663,200 ADSs, representing 3,316,000 Class A ordinary shares directly held by Mr. Jun Zhang, (iv) 2,250,000 Class A ordinary shares that Metallica Holding Limited may purchase upon exercise of options within 60 days after March 31, 2020, and (v) 300,000 Class A ordinary shares that Mr. Jun Zhang may purchase upon exercise of options within 60 days after March 31, 2020. Mr. Jun Zhang is the sole shareholder and the sole director of Metallica Holding Limited. The registered office address of Metallica Holding Limited is Geneva Place, Waterfront Drive, P.O. Box 3469, Road Town, Tortola, British Virgin Islands. |
(5) | Represents (i) 89,218,150 Class A ordinary shares directly held by Lightspeed China Partner I, L.P. and (ii) 12,200,720 Class A ordinary shares directly held by Lightspeed China PartnerI-A,
L.P. Lightspeed China Partner I, L.P. and Lightspeed China PartnerI-A,
L.P. are Cayman Island limited partnerships. Lightspeed China Partners I GP, LLC, a Cayman limited liability company, is the general partner of both Lightspeed China Partner I, L.P. and Lightspeed China PartnerI-A,
L.P. Ronald Cao and James Qun Mi each owns 50% of the ownership of Lightspeed China Partners I GP, LLC. Both Ronald Cao and James Qun Mi disclaim beneficial ownership of their shares held by Lightspeed funds, except to the extent of their pecuniary interest therein. The registered office address of Lightspeed China Partner I, L.P. and Lightspeed China PartnerI-A,
L.P. is P.O. Box 309, Ugland House, Grand Cayman,KY1-1104,
Cayman Islands. |
(6) | Represents (i) 394,818,900 Class B ordinary shares directly held by PPD Investment Limited, a company incorporated in the British Virgin Islands, and (ii) 2,027,6954,880,096 ADSs, representing 10,138,47524,400,480 Class A ordinary shares, directly held by PPD Investment Limited. Mr. Shaofeng Gu is the sole shareholder and the sole director of PPD Investment Limited. Mr. Shaofeng Gu is the sole shareholder and the sole director of PPD Investment Limited. The registered office address of PPD Investment Limited is Geneva Place, Waterfront Drive, P.O. Box 3469, Road Town, Tortola, British Virgin Islands. |
(7)(6) | Represents 21,208,57021,668,177 ADSs, representing 106,042,850108,340,885 Class A ordinary shares directly held by Seahawk China Dynamic Fund.Fund, as reported in a Schedule 13G/A filed by Seahawk China Dynamic Fund and Gold Dragon Worldwide Asset Management Limited on March 2, 2022. Gold Dragon Worldwide Asset Management Limited is the investment manager for Seahawk China Dynamic Fun pursuant to an investment management agreement and, as such, has discretionary authority to vote and dispose of the 106,042,850108,340,885 Class A ordinary shares. The registered office of the Seahawk China Dynamic Fund is 89 Nexus Way, Camana Bay, Grand Cayman, KY1-9009, Cayman Islands. The business address of Gold Dragon Worldwide Asset Management Limited is Unit 4004-05, 40/F, COSCO Tower, 183 Queen’s Road, Central, Hong Kong. |
(8)(7) | Represents (i) 89,218,150 Class A ordinary shares directly held by Lightspeed China Partner I, L.P. and (ii) 12,200,720 Class A ordinary shares directly held by Lightspeed China PartnerI-A,
L.P. Lightspeed China Partner I, L.P. and Lightspeed China PartnerI-A,
L.P. are Cayman Island limited partnerships. Lightspeed China Partners I GP, LLC, a Cayman limited liability company, is the general partner of both Lightspeed China Partner I, L.P. and Lightspeed China PartnerI-A,
L.P. Ronald Cao and James Qun Mi each owns 50% of the ownership of Lightspeed China Partners I GP, LLC. Both Ronald Cao and James Qun Mi disclaim beneficial ownership of their shares held by Lightspeed funds, except to the extent of their pecuniary interest therein. The registered office address of Lightspeed China Partner I, L.P. and Lightspeed China PartnerI-A,
L.P. is P.O. Box 309, Ugland House, Grand Cayman,KY1-1104,
Cayman Islands. |
(9) | Represents (i) 77,009,80075,209,800 Class B ordinary shares directly held by Metallica Holding Limited, a company incorporated in the British Virgin Islands, and (ii) 2,250,000 Class A ordinary shares that Metallica Holding Limited may purchase upon exercise of options within 60 days after March 31, 2020, (iii) 1,550,0002,070,000 ADSs, representing 7,750,00010,350,000 Class A ordinary shares, directly held by Metallica Holding Limited. Mr. Jun Zhang is the sole shareholder and the sole director of Metallica Holding Limited. The registered office address of Metallica Holding Limited is Geneva Place, Waterfront Drive, P.O. Box 3469, Road Town, Tortola, British Virgin Islands.Islands |
(10) | Represents 17,386,364 ADSs, representing 86,931,820 Class A ordinary shares directly held by Sequoia Capital 2010 CV Holdco, Ltd., a Cayman Islands limited liability company. Sequoia Capital 2010 CV Holdco, Ltd. is wholly owned by Sequoia Capital China Venture 2010 Fund, L.P. The general partner of Sequoia Capital China Venture 2010 Fund, L.P. is SC China Venture 2010 Management, L.P., the general partner of which is SC China Holding Limited, a company incorporated in the Cayman Islands. SC China Holding Limited is wholly owned by SNP China Enterprises Limited, a company wholly owned by Mr. Neil Nanpeng Shen. The address of Sequoia Capital 2010 CV Holdco, Ltd. is Cricket Square, Hutchins Drive, PO Box 2681, Grand Cayman,KY1-1111,
Cayman Islands. |
(11) | Represents 80,471,100 Class A ordinary shares directly held by SIG China Investments Master Fund III, LLLP, a Delaware limited liability partnership. SIG Asia Investment, LLLP, a Delaware limited liability limited partnership, is the investment manager for SIG China Investments Master Fund III, LLLP pursuant to an investment management agreement and, as such, has discretionary authority to vote and dispose of the 80,471,100 Class A ordinary shares. In addition, Heights Capital Management, Inc., a Delaware corporation, is the investment manager for SIG Asia Investment, LLLP pursuant to an investment management agreement and, as such, has discretionary authority to vote and dispose of the 80,471,100 Class A ordinary shares. Arthur Dantchik, in his capacity as the president of SIG Asia Investment, LLLP, and vice president of Heights Capital Management, Inc. may also be deemed to have investment discretion over the shares held by SIG China Investments Master Fund III, LLLP. Mr. Dantchik disclaims any such investment discretion or beneficiary ownership with respect to these shares. The registered office address of SIG China Investments Master Fund III, LLLP is One Commerce Center, 1201 N. Orange Street, Suite 715 in the City of Wilmington, State of Delaware, USA. |
(12) | Represents (i) 59,883,400 Class B ordinary shares directly held by Emma & Oliver Holding Limited, a company incorporated in the British Virgin Islands, and (ii) 900,000 ADSs, representing 4,500,000 Class A ordinary shares, directly held by Emma & Oliver Holding Limited. Mr. Honghui Hu is the sole shareholder and the sole director of Emma & Oliver Holding Limited. The registered office address of Emma & Oliver Holding Limited is Geneva Place, Waterfront Drive, P.O. Box 3469, Road Town, Tortola, British Virgin Islands. |
As of March 31, 2020, a total of 80,471,100 Class A ordinary shares are held of record by one of our shareholders in the United States, representing approximately 5.3% of our total outstanding shares. None2022, none of our outstanding Class A or Class B ordinary shares arewere held by record holders in the United States. We are not aware of any arrangement that may, at a subsequent date, result in a change of control of our company. | MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS |
Please refer to “Item 6. Directors, Senior Management and Employees—E. Share Ownership.”
| Related Party Transactions |
PRC laws and regulations currently restrict foreign ownership and investment in value-added telecommunications services in China. As a result, we operate our relevant business through Beijing Paipairongxin, Shanghai Zihe, Shanghai Nianqiao, and Shanghai Ledao, ourthe consolidated variable interest entities, and their subsidiaries based on series of contractual arrangements. For a description of these contractual arrangements, see “Item 4. Information on the Company—C. Organizational Structure.” We entered into our second amended and restated shareholders’ agreement on February 9, 2015 with our then shareholders, which provided for certain shareholders’ rights, including registration rights. Upon the completion of our initial public offering, all the shareholders’ rights under the shareholders agreement automatically terminated, except the registration rights. Set forth below is a description of those registration rights: Demand FormF-3 Registration RightsRights.. At any time after the earlier of (i) February 8, 2020 or (ii) the date that is twelve months after the completion of our initial public offering, holders of 20% or more of the ordinary shares issued upon the conversion of the preferred shares have the right to request us effect a registration for at least 20% of their shares or any lesser percentage if the anticipated gross proceeds from the offering exceed US$5.0 million. Except for certain circumstanced where we are entitled to defer a filing, upon receiving a notice of demand registration, we should promptly give a written notice to all other than preferred shareholders and make best efforts to register the shares requested to be registered. We shall not be obligated to effect more than two demand registrations that have been declared and ordered effective.Form F-3 Registration Rights
. Any holders of ordinary shares issued upon the conversion of preferred shares may request us to file an unlimited number of registration statements on Form F-3 so long as such registration offerings are in excess of US$0.5 million. Within 60 days of receiving such request, we shall effect the registration of the securities on Form F-3. We shall not be obligated to effect more than two registrations that have been declared and ordered effective within any twelve-month period. Piggyback Registration Rights. If we propose to file a registration statement for a public offering of our securities, we must afford holders of ordinary shares issued upon the conversion of preferred shares an opportunity to participate in that offering. We have the right to terminate or withdraw any registration initiated by us under the piggyback registration rights prior to the effectiveness of such registration. In case of an underwritten offering, the underwriters have the right to exclude up to 75% of the shares requested to be registered by the holders of piggyback registration rights, subject to certain preconditions. Employment Agreements and Indemnification Agreements See “Item 6. Directors, Senior Management and Employees—B. Compensation—Employment Agreements and Indemnification Agreements.” Share Incentive PlanPlans See “Item 6. Directors, Senior Management and Employees—B. Compensation—Share Incentive Plan.Plans.” Transactions with PPcredit We use data collection services from PPcredit, a company controlled by our founders, based on arm’s length transaction terms and conditions. In 2020, we and PPcredit agreed to extend the term of the original service agreement for another year. In 2018, 2019 and 2019,2020, we incurred RMB109.7 million, and RMB43.5 million and RMB10.1 million (US$6.21.5 million) expenses for such services. In April As of December 31, 2019, 2020 and November 2016, Shanghai PPDai extended aone-year
non-interest
bearing loan of RMB6.02021, the amount due to PPcredit was RMB4.3 million, RMB2.0 million and RMB5.0RMB2.3 million respectively, to PPcredit for general corporate purposes, respectively. The loan was settled in January 2017.
In 2018, we entered into an agreement with PPcredit to provide PPcredit with human resources and accounting services based on arm’s length transaction terms and conditions at a consideration of RMB3.3 million. As of December 31, 2019, we had received2020 and 2021, the full amount of the payment.due from PPcredit was nil, nil and nil. | Interests of Experts and Counsel |
| Consolidated Statements and Other Financial Information |
Consolidated Financial Statements We have appended consolidated financial statements filed as part of this annual report.
We may from time to time be subject to various legal or administrative claims and proceedings arising in the ordinary course of business. Starting in September 2018, our company and certain of our current and former officers and directors, the underwriters of our company’s initial public offering in November 2017, and our agent for the service of process in the U.S. have been named as defendants in putative securities class actions captioned Yizhong Huang v. PPDAI Group Inc., et al. , Case No. 654482/2018 (New York County of the Supreme Court of the State of New York, filed on September 10, 2018) (the “Huang Case”); Ravindra Vora v. PPDAI Group Inc., et al., , Case No. 654777/2018 (New York County of the Supreme Court of the State of New York, filed on September 27, 2018) (the “Vora Case”); Lai v. PPDAI Group Inc., et al. Case No. 1:2018-cv-06716 (U.S. (U.S. District Court for the Eastern District of New York, filed on November 26, 2018) (the “Lai Case”); and Goyal v. PPDAI Group Inc., et al. Case No. 2:2019-cv-00168 (U.S. (U.S. District Court for the Eastern District of New York, filed on January 9, 2019) (the “Goyal Case”). These actions allege that defendants made misstatements and omissions in connection with our initial public offering in November 2017 in violation of the Securities Act of 1933. The Lai Case also advances claims under the Securities Exchange Act of 1934. On October 16, 2018, the Supreme Court of the State of New York consolidated the two state court lawsuits (the Huang Case and the Vora Case) under the caption In re PPDAI Group Securities Litigation, , No. 654482/2018 (the “New York State Action”). On December 17, 2018, the plaintiffs in the New York State Action filed a consolidated amended complaint, which the Company and certain other defendants moved to dismiss. On July 31, 2019, Company and certain other defendants filed a motion to dismiss the New York State Action. On February 26, 2020, the Court in the New York State Action granted in part and denied in part thedefendants’ motion to dismiss. The Company and certain other defendants have appealed the partial denial of their motion, and that appeal is in the process of being briefed.motion. On February 21, 2019, the U.S. District Court for the Eastern District of New York consolidated the two federal court lawsuits (the Lai Case and the Goyal Case) under the caption In re PPDAI Group Inc. Securities Litigation, , No. (the “Federal Court Action”) , appointed lead plaintiffs of the Federal Court Action, and approved a scheduling stipulation for the filing of the plaintiffs’ amended complaint and the defendants’ responsive pleadings. . On April 22, 2019, plaintiffs in the Federal Court Action filed a second amended complaint. Defendants filed a motion to dismiss the Federal Court Action, which was fully briefed as of January 17, 2020. On December 9, 2020, the parties notified both courts that they reached an agreement in principle to settle both lawsuits. On June 11, 2021, the lead plaintiffs in both actions filed an unopposed motion with the Federal Court for preliminary approval of a global settlement of both the Federal Court Action and remains pending. Both the New York State Action for a settlement amount of US$9 million in total, among which our company borne US$1.35 million and the insurers were responsible for the remaining US$7.65 million. The Federal Court granted that motion and, on December 16, 2021, held a settlement fairness hearing. On January 21, 2022, the Federal Court Action otherwise remain in their preliminary stages.approved the settlement and issued final judgment, ending the Federal Court Action. On February 11, 2022, the parties submitted a stipulation of dismissal for the New York State Action. On April 5, 2022, the New York State Courtso-ordered the stipulation of dismissal.Litigation or any other legal or administrative proceeding, regardless of the outcome, is likely to result in substantial cost and diversion of our resources, including our management’s time and attention. Our board of directors declared dividends in March 2019, March 2020, March 2021 and March 2020. We may continue2022. In addition, in March 2022, our board of directors approved an annual cash dividend policy, pursuant to which we will declare and pay dividendsdistribute a recurring cash dividend at an amount of no less than 10% of our net income after tax in the future if our operating conditions allow.previous fiscal year in the future. Our board of directors has discretion on whether to distribute dividends, subject to certain restrictions under Cayman Islands law, namely that our company may only pay dividends out of profits or share premium account, and provided always that in no circumstances may a dividend be paid if this would result in our company being unable to pay its debts as they fall due in the ordinary course of business. In addition, our shareholders may by ordinary resolution declare a dividend, but no dividend may exceed the amount recommended by our board of directors. Even if our board of directors decides to pay dividends, the form, frequency and amount will depend upon our future operations and earnings, capital requirements and surplus, general financial condition, contractual restrictions and other factors that the board of directors may deem relevant.
We are a holding company incorporated in the Cayman Islands. We may rely on dividends from our subsidiaries in China for our cash requirements, including any payment of dividends to our shareholders. PRC regulations may restrict the ability of our PRC subsidiaries to pay dividends to us. See “Item 4. Information on the Company—B. Business Overview—Regulation—Regulations Relating to Dividend Distribution” and “Item 10. Additional Information—Taxation—People’s Republic of China Taxation.” If we pay any dividends, we will pay our ADS holders to the same extent as holders of our ordinary shares, subject to the terms of the deposit agreement, including the fees and expenses payable thereunder. See “Item 12. Description of Securities Other Than Equity Securities—Description of American Depositary Shares.” Cash dividends on our ordinary shares, if any, will be paid in U.S. dollars. Except as disclosed elsewhere in this annual report, we have not experienced any significant changes since the date of our audited consolidated financial statements included in this annual report. | Offer and Listing Details |
Our ADSs, each representing five of our Class A ordinary shares, have been listed on the NYSE since November 10, 2017. Our ADSs trade under the symbol “FINV.” Our ADSs have been listed on the NYSE since November 10, 2017 under the symbol “PPDF.” We changed our symbol from “PPDF” to “FINV” in November 2019. | Memorandum and Articles of Association |
We are a Cayman Islands exempted company with limited liability and our corporate affairs are governed by our memorandum and articles of association, as amended from time to time and the Companies Law (2020 Revision)Act (As Revised) of the Cayman Islands, which we refer to as the Companies LawAct below, and the common law of the Cayman Islands.
The following are summaries of material provisions of our currently effective memorandum and articles of association and of the Companies Law,Act, insofar as they relate to the material terms of our ordinary shares. Objects of Our CompanyCompany. . Under our currently effective memorandum and articles of association, the objects of our company are unrestricted and we have the full power and authority to carry out any object not prohibited by the law of the Cayman Islands. . Our ordinary shares are issued in registered form and are issued when registered in our register of members. Our shareholders who are non-residents of the Cayman Islands may freely hold and vote their shares. . The holders of our ordinary shares are entitled to such dividends as may be declared by our board of directors. In addition, our shareholders may by an ordinary resolution declare a dividend, but no dividend may exceed the amount recommended by our directors. Under Cayman Islands law, our company may declare and pay a dividend only out of funds legally available therefor, namely out of either profit or our share premium account, provided that in no circumstances may we pay a dividend if this would result in our company being unable to pay its debts as they fall due in the ordinary course of business. . In respect of all matters subject to a shareholders’ vote, each holder of Class A ordinary share is entitled to one vote for each Class A ordinary share registered in his or her name on our register of members, and each holder of Class B ordinary share is entitled to twenty votes for each Class B ordinary share registered in his or her name on our register of members. Holders of Class A ordinary shares and Class B ordinary shares shall, at all times, vote together on all resolutions submitted to a vote of the members. Voting at any shareholders’ meeting is by show of hands unless a poll is demanded. A poll may be demanded by the chairman of such meeting or any shareholders present in person or by proxy. A quorum required for a meeting of shareholders consists of one or more shareholders present and holding shares which represent, in aggregate, not less than one-third of the votes attaching to the issued and outstanding voting shares in our company. Shareholders may be present in person or by proxy or, if the shareholder is a legal entity, by its duly authorized representative. Shareholders’ meetings may be convened by the chairman of our board of directors or a majority of our directors or upon a request to the directors by shareholders holding shares which represent, in aggregate, no less than one-third of the votes attaching to the issued and outstanding shares that as at the date of the deposit of the shareholder’s requisition carry the right to vote at general meetings of our company. Advance notice of at least seven days is required for the convening of our annual general shareholders’ meeting and any other general shareholders’ meeting. An ordinary resolution to be passed at a meeting by the shareholders requires the affirmative vote of a simple majority of the votes attached to the ordinary shares cast by those shareholders entitled to vote who are present in person or by proxy at a general meeting, while a special resolution requires the affirmative vote of no less than two-thirds of the votes attached to the ordinary shares cast by those shareholders entitled to vote who are present in person or by proxy at a general meeting. Both ordinary resolutions and special resolutions may also be passed by a unanimous written resolution signed by all the shareholders of our company, as permitted by the Companies LawAct and our amended and restated memorandum and articles of association. A special resolution will be required for important matters such as a change of name or making changes to our amended and restated memorandum and articles of association. Holders of the ordinary shares may, among other things, divide or combine their shares by ordinary resolution. . Each Class B ordinary share is convertible into one Class A ordinary share at any time by the holder thereof. Class A ordinary shares are not convertible into Class B ordinary shares under any circumstances. Upon any sale, transfer, assignment or disposition of any Class B ordinary share by a shareholder to any person who is not an affiliate of such shareholder, or upon a change of ultimate beneficial ownership of any Class B ordinary share to any person who is not an affiliate of the registered shareholder of such share, such Class B ordinary shares shall be automatically and immediately converted into the equivalent number of Class A ordinary shares. Transfer of Ordinary SharesShares. . Subject to the restrictions set out below, any of our shareholders may transfer all or any of his or her ordinary shares by an instrument of transfer in the usual or common form or any other form approved by our board of directors.
Our board of directors may, in its absolute discretion, decline to register any transfer of any ordinary share which is not fully paid up or on which we have a lien. Our board of directors may also decline to register any transfer of any ordinary share unless: the instrument of transfer is lodged with us, accompanied by the certificate for the ordinary shares to which it relates and such other evidence as our board of directors may reasonably require to show the right of the transferor to make the transfer; the instrument of transfer is in respect of only one class of shares; the instrument of transfer is properly stamped, if required; in the case of a transfer to joint holders, the number of joint holders to whom the ordinary share is to be transferred does not exceed four; and a fee of such maximum sum as the NYSE may determine to be payable or such lesser sum as our directors may from time to time require is paid to us in respect thereof. If our directors refuse to register a transfer they shall, within three months after the date on which the instrument of transfer was lodged, send to each of the transferor and the transferee notice of such refusal. The registration of transfers may, after compliance with any notice required of the NYSE, be suspended and the register closed at such times and for such periods as our board of directors may from time to time determine, provided, however, that the registration of transfers shall not be suspended nor the register closed for more than 30 days in any year as our board may determine. . On a winding up of our company, if the assets available for distribution among our shareholders shall be more than sufficient to repay the whole of the share capital at the commencement of the winding up, the surplus will be distributed among our shareholders in proportion to the par value of the shares held by them at the commencement of the winding up, subject to a deduction from those shares in respect of which there are monies due, of all monies payable to our company for unpaid calls or otherwise. If our assets available for distribution are insufficient to repay all of the paid-up capital, the assets will be distributed so that the losses are borne by our shareholders in proportion to the par value of the shares held by them. We are a “limited liability” company registered under the Companies Law,Act, and under the Companies Law,Act, the liability of our members is limited to the amount, if any, unpaid on the shares respectively held by them. Our memorandum of association contains a declaration that the liability of our members is so limited. Calls on Shares and Forfeiture of Shares . Our board of directors may from time to time make calls upon shareholders for any amounts unpaid on their shares in a notice served to such shareholders at least 14 days prior to the specified time and place of payment. The shares that have been called upon and remain unpaid are subject to forfeiture. Redemption, Repurchase and Surrender of Ordinary Shares . We may issue shares on terms that such shares are subject to redemption, at our option or at the option of the holders thereof, on such terms and in such manner as may be determined, before the issue of such shares, by our board of directors or by a special resolution of our shareholders. Our company may also repurchase any of our shares provided that the manner and terms of such purchase have been approved by our board of directors or by ordinary resolution of our shareholders, or are otherwise authorized by our memorandum and articles of association. Under the Companies Law,Act, the redemption or repurchase of any share may be paid out of our company’s profits or out of the proceeds of a fresh issue of shares made for the purpose of such redemption or repurchase, or out of capital (including share premium account and capital redemption reserve) if the company can, immediately following such payment, pay its debts as they fall due in the ordinary course of business. In addition, under the Companies LawAct no such share may be redeemed or repurchased (a) unless it is fully paid up, (b) if such redemption or repurchase would result in there being no shares outstanding, or (c) if the company has commenced liquidation. In addition, our company may accept the surrender of any fully paid share for no consideration.
Variations of Rights of Shares . The rights conferred upon the holders of the shares of any class issued with preferred or other rights shall not, unless otherwise expressly provided by the terms of issue of the shares of that class, be deemed to be varied by the creation or issue of further shares ranking with such existing class of shares.
Issuance of Additional Shares . Our currently effective memorandum and articles of association authorizes our board of directors to issue additional ordinary shares from time to time as our board of directors shall determine, to the extent of available authorized but unissued shares. Our currently effective memorandum and articles of association also authorizes our board of directors to establish from time to time one or more series of preferred shares and to determine, with respect to any series of preferred shares, the terms and rights of that series, including: the designation of the series; the number of shares of the series; the dividend rights, dividend rates, conversion rights, voting rights; and the rights and terms of redemption and liquidation preferences. Our board of directors may issue preferred shares without action by our shareholders to the extent authorized but unissued. Issuance of these shares may dilute the voting power of holders of ordinary shares. Inspection of Books and Records . Holders of our ordinary shares will have no general right under Cayman Islands law to inspect or obtain copies of our list of shareholders or our corporate records (other than the memorandum and articles of association and any special resolutions passed by such companies, and the registers of mortgages and charges of such companies). However, we will provide our shareholders with annual audited financial statements. . Some provisions of our amended and restated memorandum and articles of association may discourage, delay or prevent a change of control of our company or management that shareholders may consider favorable, including provisions that: authorize our board of directors to issue preferred shares in one or more series and to designate the price, rights, preferences, privileges and restrictions of such preferred shares without any further vote or action by our shareholders; and limit the ability of shareholders to requisition and convene general meetings of shareholders. However, under Cayman Islands law, our directors may only exercise the rights and powers granted to them under our amended and restated memorandum and articles of association for a proper purpose and for what they believe in good faith to be in the best interests of our company. General Meetings of Shareholders and Shareholder Proposals . Our shareholders’ general meetings may be held in such place within or outside the Cayman Islands as our board of directors considers appropriate. As a Cayman Islands exempted company, we are not obliged by the Companies LawAct to call shareholders’ annual general meetings. Our currently effective memorandum and articles of association provide that we may (but are not obliged to) in each year hold a general meeting as our annual general meeting. Shareholders’ annual general meetings and any other general meetings of our shareholders may be convened by a majority of our board of directors or our chairman. Advance notice of at least seven days is required for the convening of our annual general shareholders’ meeting and any other general meeting of our shareholders. A quorum required for a general meeting of shareholders consists of at least one shareholder present or by proxy, representing not less than one-third of the votes attaching to the issued and outstanding shares in our company entitled to vote at general meetings.
Cayman Islands law provides shareholders with only limited rights to requisition a general meeting, and does not provide shareholders with any right to put any proposal before a general meeting. However, these rights may be provided in a company’s articles of association. Our currently effective memorandum and articles of association allow our shareholders holding shares representing in aggregate not less than one-third of the votes attaching to the issued and outstanding shares of our company entitled to vote at general meetings, to requisition an extraordinary general meeting of our shareholders, in which case our directors are obliged to call such meeting and to put the resolutions so requisitioned to a vote at such meeting; however, our currently effective memorandum and articles of association do not provide our shareholders with any right to put any proposals before annual general meetings or extraordinary general meetings not called by such shareholders.
Appointment and Removal of Directors . Unless otherwise determined by our company in general meeting, our articles provide that our board will consist of not less than three directors. There are no provisions relating to retirement of directors upon reaching any age limit. The directors have the power to appoint any person as a director either to fill a casual vacancy on the board or as an addition to the existing board. Our shareholders may also appoint any person to be a director by way of special resolution. A director may be removed with or without cause by special resolution. In addition, the office of any director shall be vacated if the director (i) becomes bankrupt or makes any arrangement or composition with his creditors, (ii) dies or is found to be or becomes of unsound mind, (iii) resigns his office by notice in writing to our company, or (iv) without special leave of absence from our board, is absent from three consecutive board meetings and our board resolves that his office be vacated. Proceedings of Board of Directors . Our currently effective memorandum and articles of association provide that our business is to be managed and conducted by our board of directors. The quorum necessary for board meetings may be fixed by the board and, unless so fixed at another number, will be a majority of the directors. Our currently effective memorandum and articles of association provide that the board may from exercise all the powers of our company to borrow money, to mortgage or charge all or any part of the undertaking, property and uncalled capital of our company and to issue debentures and other securities whenever money is borrowed, or as security for any debt, liability or obligation of our company or of any third party. . Our shareholders may from time to time by ordinary resolution: increase our share capital by such sum, to be divided into shares of such classes and amount, as the resolution shall prescribe; consolidate and divide all or any of our share capital into shares of a larger amount than our existing shares; sub-divide our existing shares, or any of them into shares of a smaller amount, provided that in the subdivision the proportion between the amount paid and the amount, if any, unpaid on each reduced share shall be the same as it was in case of the share from which the reduced share is derived; or cancel any shares which, at the date of the passing of the resolution, have not been taken or agreed to be taken by any person and diminish the amount of our share capital by the amount of the shares so canceled.
Our shareholders may by special resolution, subject to confirmation by the Grand Court of the Cayman Islands on an application by our company for an order confirming such reduction, reduce our share capital or any capital redemption reserve in any manner permitted by law. . We are an exempted company with limited liability under the Companies Law.Act. The Companies LawAct distinguishes between ordinary resident companies and exempted companies. Any company that is registered in the Cayman Islands but conducts business mainly outside of the Cayman Islands may apply to be registered as an exempted company. The requirements for an exempted company are essentially the same as for an ordinary company except that an exempted company: does not have to file an annual return of its shareholders with the Registrar of Companies; is not required to open its register of members for inspection;
does not have to hold an annual general meeting; may issue negotiable or bearer shares or shares with no par value; may obtain an undertaking against the imposition of any future taxation (such undertakings are usually given for 20 years in the first instance); may register by way of continuation in another jurisdiction and be deregistered in the Cayman Islands; may register as a limited duration company; and may register as a segregated portfolio company. “Limited liability” means that the liability of each shareholder is limited to the amount unpaid by the shareholder on that shareholder’s shares of the company (except in exceptional circumstances, such as involving fraud, the establishment of an agency relationship or an illegal or improper purpose or other circumstances in which a court may be prepared to pierce or lift the corporate veil). . Under Cayman Islands law, we must keep a register of members and there should be entered therein: the names and addresses of the members, a statement of the shares held by each member, and of the amount paid or agreed to be considered as paid, on the shares of each member, and confirmation on whether shares held by each member carries voting rights under our articles of association, and if so, whether such voting rights are conditional; the date on which the name of any person was entered on the register as a member; and the date on which any person ceased to be a member. Under Cayman Islands law, the register of members of our company is prima facie evidence of the matters set out therein (i.e. the register of members will raise a presumption of fact on the matters referred to above unless rebutted) and a member registered in the register of members should be deemed as a matter of Cayman Islands law to have legal title to the shares as set against its name in the register of members. The shareholders recorded in the register of members are deemed to have legal title to the shares set against their name in the register of members. If the name of any person is incorrectly entered in or omitted from our register of members, or if there is any default or unnecessary delay in entering on the register the fact of any person having ceased to be a member of our company, the person or member aggrieved (or any member of our company or our company itself) may apply to the Grand Court of the Cayman Islands for an order that the register be rectified, and the Court may either refuse such application or it may, if satisfied of the justice of the case, make an order for the rectification of the register.
We have not entered into any material contracts other than in the ordinary course of business and other than those described in “Item 4. Information on the Company,” “Item 7. Major Shareholders and Related Party Transactions—B. Related Party Transactions,” or elsewhere in this annual report on Form 20-F. See “Item 4. Information on the Company—B. Business Overview—Regulation—Regulations Relating to Foreign Exchange.” The following summary of the material Cayman Islands, PRC and United States federal income tax consequences of an investment in our ADSs or ordinary shares is based upon laws and relevant interpretations thereof in effect as of the date of this annual report, all of which are subject to change. This summary does not deal with all possible tax consequences relating to an investment in our ADSs or ordinary shares, such as the tax consequences under U.S. state and local tax laws or under the tax laws of jurisdictions other than the Cayman Islands, the People’s Republic of China and the United States.
The Cayman Islands currently levies no taxes on individuals or corporations based upon profits, income, gains or appreciation and there is no taxation in the nature of inheritance tax or estate duty. There are no other taxes likely to be material to us levied by the government of the Cayman Islands except for stamp duties which may be applicable on instruments executed in, or, after execution, brought within the jurisdiction of the Cayman Islands. The Cayman Islands is not party to any double tax treaties that are applicable to any payments made to or by our company. There are no exchange control regulations or currency restrictions in the Cayman Islands. Payments of dividends and capital in respect of the ADSs and ordinary shares will not be subject to taxation in the Cayman Islands and no withholding will be required on the payment of a dividend or capital to any holder of the Shares, nor will gains derived from the disposal of the shares be subject to Cayman Islands income or corporation tax.corporation. People’s Republic of China Taxation Under the PRC Enterprise Income Tax Law and its implementation rules, an enterprise established outside of the PRC with a “de facto management body” within the PRC is considered a resident enterprise and will be subject to the enterprise income tax at the rate of 25% on its global income. The implementation rules define the term “de facto management body” as the body that exercises full and substantial control over and overall management of the business, productions, personnel, accounts and properties of an enterprise. In April 2009, the State Administration of Taxation issued a circular, known as Circular 82, which provides certain specific criteria for determining whether the “de facto management body” of a PRC-controlled enterprise that is incorporated offshore is located in China. Although this circular only applies to offshore enterprises controlled by PRC enterprises or PRC enterprise groups, not those controlled by PRC individuals or foreigners, the criteria set forth in the circular may reflect the State Administration of Taxation’s general position on how the “de facto management body” test should be applied in determining the tax resident status of all offshore enterprises. According to Circular 82, an offshore incorporated enterprise controlled by a PRC enterprise or a PRC enterprise group will be regarded as a PRC tax resident by virtue of having its “de facto management body” in China only if all of the following conditions are met: (i) the primary location of the operational management is in the PRC; (ii) decisions relating to the enterprise’s financial and human resource matters are made or are subject to approval by organizations or personnel in the PRC; (iii) the enterprise’s primary assets, accounting books and records, company seals, and board and shareholder resolutions, are located or maintained in the PRC; and (iv) at least 50% of voting board members or senior executives habitually reside in the PRC.
We do not believe that FinVolution Group meets all of the conditions above. FinVolution Group is a company incorporated outside the PRC. As a holding company, its key assets are its ownership interests in its subsidiaries, and its key assets are located, and its records (including the resolutions of its board of directors and the resolutions of its shareholders) are maintained, outside the PRC. For the same reasons, we believe our other entities outside of China are not PRC resident enterprises either. However, the tax resident status of an enterprise is subject to determination by the PRC tax authorities and uncertainties remain with respect to the interpretation of the term “de facto management body.” There can be no assurance that the PRC government will ultimately take a view that is consistent with ours. However, if the PRC tax authorities determine that FinVolution Group is a PRC resident enterprise for enterprise income tax purposes, we may be required to withhold a 10% withholding tax from dividends we pay to our shareholders that are non-resident enterprises, including the holders of our ADSs. Such 10% tax rate could be reduced by applicable tax treaties or similar arrangements between China and the jurisdiction of our shareholders. For example, for shareholders eligible for the benefits of the tax treaty between China and Hong Kong, the tax rate is reduced to 5% for dividends if relevant conditions are met. In addition, non-resident enterprise shareholders (including our ADS holders) may be subject to a 10% PRC tax on gains realized on the sale or other disposition of ADSs or ordinary shares, if such income is treated as sourced from within the PRC. It is unclear whether our non-PRC individual shareholders (including our ADS holders) would be subject to any PRC tax on dividends or gains obtained by such non-PRC individual shareholders in the event we are determined to be a PRC resident enterprise. If any PRC tax were to apply to such dividends or gains, it would generally apply at a rate of 20% unless a reduced rate is available under an applicable tax treaty. However, it is also unclear whether non-PRC shareholders of FinVolution Group would be able to claim the benefits of any tax treaties between their country of tax residence and the PRC in the event that FinVolution Group is treated as a PRC resident enterprise.
Provided that our Cayman Islands holding company, FinVolution Group, is not deemed to be a PRC resident enterprise, holders of our ADSs and ordinary shares who are not PRC residents will not be subject to PRC income tax on dividends distributed by us or gains realized from the sale or other disposition of our shares or ADSs. However, under SAT Circular 698 and SAT Public Notice 7, where a non-resident enterprise conducts an “indirect transfer” by transferring taxable assets, including, in particular, equity interests in a PRC resident enterprise, indirectly by disposing of the equity interests of an overseas holding company, the non-resident enterprise, being the transferor, or the transferee or the PRC entity which directly owned such taxable assets may report to the relevant tax authority such indirect transfer. Using a “substance over form” principle, the PRC tax authority may disregard the existence of the overseas holding company if it lacks a reasonable commercial purpose and was established for the purpose of reducing, avoiding or deferring PRC tax. As a result, gains derived from such indirect transfer may be subject to PRC enterprise income tax, and the transferor obligated to withhold the applicable taxes, currently at a rate of 10% for the transfer of equity interests in a PRC resident enterprise. We and our non-PRC resident investors may be at risk of being required to file a return and being taxed under SAT Circular 698 and SAT Public Notice 7, and we may be required to expend valuable resources to comply with SAT Circular 698 and SAT Public Notice 7, or to establish that we should not be taxed under these circulars. See “Item 3. Key Information—D. Risk Factors—Risks Related to Doing Business in China—We face uncertainty with respect to indirect transfers of equity interests in PRC resident enterprises by their non-PRC holding companies.” United States Federal Income Tax Considerations The following discussion is a summary of United States federal income tax considerations generally applicable to the ownership and disposition of our ADSs or ordinary shares by a U.S. holder (as defined below) that acquires our ADSs and holds our ADSs or ordinary shares as “capital assets” (generally, property held for investment) under the United States Internal Revenue Code of 1986, as amended (the “Code”). This discussion is based upon existing United States federal income tax law, which is subject to differing interpretations and may be changed, possibly with retroactive effect. No ruling has been sought from the Internal Revenue Service (the “IRS”) with respect to any United States federal income tax consequences described below, and thereThere can be no assurance that the IRS or a court will not take a contrary position. This discussion does not address all aspects of United States federal income taxation that may be important to particular investors in light of their individual circumstances, including investors subject to special tax rules (for example, certain financial institutions, insurance companies, broker-dealers, traders in securities that have elected the method of accounting for their securities, partnerships and their partners, regulated investment companies, real estate investment trusts, and tax-exempt organizations (including private foundations)), investors who are not U.S. holders, investors who own (directly, indirectly, or constructively) 10% or more of our stock (by vote or value), investors that will hold their ADSs or ordinary shares as part of a straddle, hedge, conversion, constructive sale, or other integrated transaction for United States federal income tax purposes, investors required to accelerate the recognition of any item of gross income with respect to our ADSs or ordinary shares as a result of such income being recognized on an applicable financial statement or investors that have a functional currency other than the United States dollar, all of whom may be subject to tax rules that differ significantly from those summarized below. In addition, this discussion does not discuss any non-United States, alternative minimum tax, state, or local tax or any non-income tax (such as the U.S. federal gift or estate tax) considerations, or the Medicare tax on net investment income. Each U.S. holder is urged to consult its tax advisor regarding the United States federal, state, local, and non-United States income and other tax considerations of an investment in our ADSs or ordinary shares.
For purposes of this discussion, a “U.S. holder” is a beneficial owner of our ADSs or ordinary shares that is, for United States federal income tax purposes, (i) an individual who is a citizen or resident of the United States, (ii) a corporation (or other entity treated as a corporation for United States federal income tax purposes) created in, or organized under the laws of, the United States or any state thereof or the District of Columbia, (iii) an estate the income of which is subject to United States federal income taxation regardless of its source, or (iv) a trust (A) the administration of which is subject to the primary supervision of a United States court and which has one or more United States persons who have the authority to control all substantial decisions of the trust or (B) that has otherwise elected to be treated as a United States person under applicable United States Treasury regulations. If a partnership (or other entity or arrangement treated as a partnership for United States federal income tax purposes) is a beneficial owner of our ADSs or ordinary shares, the tax treatment of a partner in the partnership will generally depend upon the status of the partner and the activities of the partnership. Partnerships holding our ADSs or ordinary shares and partners in such partnerships are urged to consult their tax advisors as to the particular United States federal income tax consequences of an investment in our ADSs or ordinary shares.
For United States federal income tax purposes, a U.S. holder of ADSs will generally be treated as the beneficial owner of the underlying shares represented by the ADSs. The remainder of this discussion assumes that a U.S. holder of our ADSs will be treated as the beneficial owner of the underlying shares represented by the ADSs. Accordingly, deposits or withdrawals of ordinary shares for ADSs will generally not be subject to United States federal income tax. Passive Foreign Investment Company Considerations A non-United States corporation, such as our company, will be a “passive foreign investment company,” or “PFIC,” for United States federal income tax purposes, if, in any particular taxable year, either (i) 75% or more of its gross income for such year consists of certain types of “passive” income or (ii) 50% or more of the value of its assets (generally determined on the basis of a quarterly average) during such year produce or are held for the production of passive income. Cash is categorized as a passive asset and the company’s goodwill and other unbooked intangibles associated with active business activities may generally be classified as active assets. Passive income generally includes, among other things, dividends, interest, rents, royalties, and gains from the disposition of passive assets. We will be treated as owning a proportionate share of the assets and earning a proportionate share of the income of any other corporation in which we own, directly or indirectly, at least 25% (by value) of the stock. Although the law in this regard is unclear, we intend to treat ourthe consolidated variable interest entities (including their subsidiaries) as being owned by us for United States federal income tax purposes, and we treat them that way, not only because we exercise effective control over the operation of such entities but also because we are entitled to substantially all of their economic benefits, and, as a result, we consolidate their results of operations in our consolidated financial statements. Assuming Based upon the nature and composition of our income and assets, and the market price of our ADSs, we believe that we are the owner of our variable interest entities (including their subsidiaries)were likely a PFIC for United States federal income tax purposes we do not believe that we were a PFIC for the taxable year ended December 31, 20192021, and do not anticipate becoming a PFIC in future taxable years. While we do not believe that we werewill likely be a PFIC for the taxable year ended December 31, 2019 and do not anticipate becoming a PFIC in the foreseeable future, no assurance can be given with respect to our PFIC status for the current taxable year or any future taxable years because the determination of whether we are or will become a PFIC will depend in part upon the value of our goodwill and other unbooked intangibles (which will depend uponunless the market price of our ADSs fromtime-to-time,
which may be volatile). In estimatingincreases and/or we invest a substantial amount of the value of our goodwillcash and other unbooked intangibles,passive assets we have taken into account our market capitalization. Among other matters, if our market capitalization subsequently declines, we may behold in assets that produce or become a PFICare held for the current or future taxable years. It is also possible that the IRS may challenge our classificationproduction of certain income and assets asnon-passive,
which may result in our company being a PFIC for the taxable year ended December 31, 2019 or becoming a PFIC for the current or one or more future taxable years.
The determination of whether we will be or become a PFIC will also depend, in part, on the composition of our income and assets, which may be affected by how, and how quickly, we use our liquid assets. If we determine not to deploy significant amounts of cash for active purposes or if we were treated as not owning our variable interest entities for United States federal income tax purposes, our risk of being classified as a PFIC may substantially increase. Because our PFIC status for any taxable year is a factual determination that can be made only after the close of a taxable year, there can be no assurance that we will not be a PFIC for the current taxable year or any future taxable year.income. If we are a PFIC for any year during which a U.S. holder holds our ADSs or ordinary shares, we generally will continue to be treated as a PFIC for all succeeding years during which such U.S. holder holds our ADSs or ordinary shares.
The discussion below under “Dividends” and “Sale or Other Disposition of ADSs or Ordinary Shares” is written on the basis that we will not be or become a PFIC for United States federal income tax purposes. The United States federal income tax rules that apply if we are a PFIC for the current taxable year or any subsequent taxable year are generally discussed below under “Passive Foreign Investment Company Rules.”
Subject to the PFIC rules discussed below, any cash distributions (including the amount of any tax withheld) paid on our ADSs or ordinary shares out of our current or accumulated earnings and profits, as determined under United States federal income tax principles, will generally be includible in the gross income of a U.S. holder as dividend income on the day actually or constructively received by the U.S. holder, in the case of ordinary shares, or by the depositary, in the case of ADSs. Because we do not intend to determine our earnings and profits on the basis of United States federal income tax principles, any distribution paid will generally be reported as a dividend for United States federal income tax purposes. A non-corporate recipient of dividend income from a “qualified foreign corporation” will generally be subject to tax at a reduced United States federal tax rate rather than the marginal tax rates generally applicable to ordinary income provided that certain holding period and other requirements are met. A non-United States corporation (other than a corporation that is a PFIC for the taxable year in which the dividend is paid or the preceding taxable year) will generally be considered to be a qualified foreign corporation (a) if it is eligible for the benefits of a comprehensive tax treaty with the United States which the Secretary of Treasury of the United States determines is satisfactory for purposes of this provision and which includes an exchange of information program, or (b) with respect to any dividend it pays on stock (or ADSs in respect of such stock) which is readily tradable on an established securities market in the United States. BecauseOur ADSs (but not our ADSsordinary shares) are listed on the NYSE we expect our ADSs will beand is considered to be readily tradable on an established securities market in the United States and that we will be a qualified foreign corporation with respect to dividends paid on the ADSs.States. Since we do not expect that our ordinary shares will be listed on established securities markets, we do not believe that dividends that we pay on our ordinary shares that are not backed by ADSs currently meet the conditions required for the reduced tax rate. There can be no assurance that our ADSs will continue to be considered readily tradable on an established securities market in later years. In the event we are deemed to be a resident enterprise under the PRC Enterprise Income Tax Law, we may be eligible for the benefits of the United States-PRC income tax treaty (which the U.S. Treasury Department has determined is satisfactory for this purpose) and in that case we would be treated as a qualified foreign corporation with respect to dividends paid on our ordinary shares or ADSs. Each non-corporate U.S. holder is advised to consult its tax advisors regarding the availability of the reduced tax rate applicable to qualified dividend income for any dividends we pay with respect to our ADSs or ordinary shares. Dividends received on the ADSs or ordinary shares will not be eligible for the dividends received deduction allowed to corporations.
Dividends will generally be treated as income from foreign sources for United States foreign tax credit purposes and will generally constitute passive category income. In the event that we are deemed to be a PRC “resident enterprise” under the Enterprise Income Tax Law, a U.S. holder may be subject to PRC withholding taxes on dividends paid on our ADSs or ordinary shares. See “Item 10. Additional Information—E. Taxation—People’s Republic of China Taxation.” In that case, a U.S. holder may be eligible, subject to a number of complex limitations, to claim a foreign tax credit in respect of any foreign withholding taxes imposed on dividends received on ADSs or ordinary shares. A U.S. holder who does not elect to claim a foreign tax credit for foreign tax withheld may instead claim a deduction, for United States federal income tax purposes, in respect of such withholdings, but only for a year in which such U.S. holder elects to do so for all creditable foreign income taxes. The rules governing the foreign tax credit are complex. U.S. holders are advised to consult their tax advisors regarding the availability of the foreign tax credit under their particular circumstances. As mentioned above, we believe that we were likely a PFIC for the taxable year ended December 31, 2021, and we will likely be classified as a PFIC for our current taxable year. U.S. holders are urged to consult their tax advisors regarding the availability of the reduced tax rate on dividends with respect to the ADSs or Class A ordinary shares in their particular circumstances. Sale or Other Disposition of ADSs or Ordinary Shares Subject to the PFIC rules discussed below, a U.S. holder will generally recognize capital gain or loss upon the sale or other disposition of ADSs or ordinary shares in an amount equal to the difference between the amount realized upon the disposition and the U.S. holder’s adjusted tax basis in such ADSs or ordinary shares. Any capital gain or loss will be long-term if the ADSs or ordinary shares have been held for more than one year and will generally be United States source gain or loss for United States foreign tax credit purposes. Long-term capital gain of non-corporate U.S. holders is generally eligible for a reduced rate of taxation. The deductibility of a capital loss may be subject to limitations. In the event that we are treated as a PRC “resident enterprise” under the Enterprise Income Tax Law and gain from the disposition of the ADSs or ordinary shares is subject to tax in the PRC, a U.S. holder that is eligible for the benefits of the income tax treaty between the United States and the PRC may elect to treat the gain as PRC source income. Pursuant to recently issued United States Treasury Regulations, however, if a U.S. Holder is not eligible for the benefits of the Treaty or does not elect to apply the Treaty, then such holder may not be able to claim a foreign tax credit arising from any PRC tax imposed on the disposition of ADSs or ordinary shares. The rules regarding foreign tax credits and deduction of foreign taxes are complex. U.S. Holders should consult their tax advisors regarding the availability of a foreign tax credit or deduction in light of their particular circumstances, including their eligibility for benefits under the Treaty and the potential impact of the recently issued United States Treasury Regulations.As mentioned above, we believe that we were likely a PFIC for the taxable year ended December 31, 2021, and we will likely be classified as a PFIC for our current taxable year. U.S. holders are advisedurged to consult their tax advisors regarding the tax consequences if a foreign tax is imposed on aconsiderations of the sale or other disposition of ourthe ADSs or Class A ordinary shares including the availability of the foreign tax credit underin their particular circumstances and the election to treat any gain as PRC source.circumstances. Passive Foreign Investment Company Rules As mentioned above, we believe that we were likely a PFIC for the taxable year ended December 31, 2021, and we will likely be classified as a PFIC for our current taxable year. If we are a PFIC for any taxable year during which a U.S. holder holds our ADSs or ordinary shares, and unless the U.S. holder makes a election (as described below), the U.S. holder will generally be subject to special tax rules that have a penalizing effect, regardless of whether we remain a PFIC, for subsequent taxable years, on (i) any excess distribution that we make to the U.S. holder (which generally means any distribution paid during a taxable year to a U.S. holder that is greater than 125% of the average annual distributions paid in the three preceding taxable years or, if shorter, the U.S. holder’s holding period for the ADSs or ordinary shares), and (ii) any gain realized on the sale or other disposition, including, under certain circumstances, a pledge, of ADSs or ordinary shares. Under the PFIC rules: such excess distribution and/or gain will be allocated ratably over the U.S. holder’s holding period for the ADSs or ordinary shares;
such amount allocated to the current taxable year and any taxable years in the U.S. holder’s holding period prior to the first taxable year in which we are a PFIC, or pre-PFIC year, will be taxable as ordinary income; such amount allocated to each prior taxable year, other than a pre-PFIC year, year, will be subject to tax at the highest tax rate in effect for that year; and an interest charge generally applicable to underpayments of tax will be imposed on the tax attributable to each prior taxable year, other than a pre-PFIC year. If we are a PFIC for any taxable year during which a U.S. holder holds our ADSs or ordinary shares and any of our non-United States subsidiaries is also a PFIC, such U.S. holder would be treated as owning a proportionate amount (by value) of the shares of the lower-tier PFIC for purposes of the application of these rules. U.S. holders are advised to consult their tax advisors regarding the application of the PFIC rules to any of our subsidiaries.
As an alternative to the foregoing rules, a U.S. holder of “marketable stock” in a PFIC may make a election with respect to our ADSs,such stock, provided that the ADSs aresuch stock is regularly traded on a qualified exchange or other market, as defined in the NYSE.applicable United States Treasury regulations. For those purposes, our ADSs, but not our ordinary shares, are listed on the NYSE, which is a qualified exchange. We anticipate that our ADSs should qualify as being regularly traded, but no assurances may be given in this regard. Because a mark-to-market election election cannot technically be made for any lower-tier PFICs that a PFIC may own, a U.S. holder who makes a election with respect to our ADSs will generally continue to be subject to the foregoing rules with respect to such U.S. holder’s indirect interest in any investments held by us that are treated as an equity interest in a PFIC for United States federal income tax purposes. If a election is made with respect to our ADSs, the U.S. holder will generally (i) include as ordinary income for each taxable year that we are a PFIC the excess, if any, of the fair market value of ADSs held at the end of the taxable year over the adjusted tax basis of such ADSs and (ii) deduct as an ordinary loss the excess, if any, of the adjusted tax basis of the ADSs over the fair market value of such ADSs held at the end of the taxable year, but only to the extent of the net amount previously included in income as a result of the election. The U.S. holder’s adjusted tax basis in the ADSs would be adjusted to reflect any income or loss resulting from the election. If a U.S. holder makes an effective election, in each year that we are a PFIC any gain recognized upon the sale or other disposition of the ADSs will be treated as ordinary income and loss will be treated as ordinary loss, but only to the extent of the net amount previously included in income as a result of the election. If a U.S. holder makes a election it will be effective for the taxable year for which the election is made and all subsequent taxable years unless the ADSs are no longer regularly traded on a qualified exchange or the IRS consents to the revocation of the election. It should also be noted that only the ADSs, and not the ordinary shares, are listed on the NYSE. Consequently, if a U.S. holder holds ordinary shares that are not represented by ADSs, such holder generally will not be eligible to make a election if we are or were to become a PFIC. If a U.S. holder makes a election in respect of a PFIC and such corporation ceases to be a PFIC, the U.S. holder will not be required to take into account the gain or loss described above during any period that such corporation is not a PFIC.
We do not intend to provide information necessary for U.S. holders to make qualified electing fund elections, which, if available, would result in tax treatment different from (and generally less adverse than) the general tax treatment for PFICs described above. As discussed above under “Dividends,” dividends that we pay on our ADSs or ordinary shares will not be eligible for the reduced tax rate that applies to qualified dividend income if we are a PFIC for the taxable year in which the dividend is paid or the preceding taxable year. In addition, ifIf a U.S. holder owns our ADSs or ordinary shares during any taxable year that we are a PFIC, such holder would generally be required to file an annual IRS Form 8621. Each U.S. holder is advised to consult its tax advisors regarding the potential tax consequences to such holder if we are or become a PFIC, including the possibility of making a election. | Dividends and Paying Agents |
We are subject to periodic reporting and other informational requirements of the Exchange Act as applicable to foreign private issuers, and are required to file reports and other information with the SEC. Specifically, we are required to file annually an annual report on Form 20-F within four months after the end of each fiscal year, which is December 31. All information filed with the SEC can be obtained over the internet at the SEC’s website at www.sec.gov or inspected and copied at the public reference facilities maintained by the SEC at 100 F Street, N.E., Washington, D.C. 20549. You can request copies of documents, upon payment of a duplicating fee, by writing to the SEC.www.sec.gov. As a foreign private issuer, we are exempt from the rules under the Exchange Act prescribing the furnishing and content of quarterly reports and proxy statements, and officers, directors and principal shareholders are exempt from the reporting and short-swing profit recovery provisions contained in Section 16 of the Exchange Act.
We will furnish Citibank, N.A., the depositary of our ADSs, with our annual reports, which will include a review of operations and annual audited consolidated financial statements prepared in conformity with U.S. GAAP, and all notices of shareholders’ meetings and other reports and communications that are made generally available to our shareholders. The depositary will make such notices, reports and communications available to holders of ADSs and, upon our request, will mail to all record holders of ADSs the information contained in any notice of a shareholders’ meeting received by the depositary from us. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
All of our revenues and substantially all of our expenses are denominated in Renminbi. Our exposure to foreign exchange risk primarily relates to cash and cash equivalent denominated in U.S. dollars. As of the date of this annual report, we have no foreign exchange derivative contracts outstanding. Although our exposure to foreign exchange risks should be limited in general, the value of your investment in our ADSs will be affected by the exchange rate between U.S. dollar and RMB because the value of our business is effectively denominated in RMB, while our ADSs will be traded in U.S. dollars. The conversion of Renminbi into foreign currencies, including U.S. dollars, is based on rates set by the People’s Bank of China.PBOC. The Renminbi has fluctuated against the U.S. dollar, at times significantly and unpredictably. It is difficult to predict how market forces or PRC or U.S. government policy may impact the exchange rate between Renminbi and the U.S. dollar in the future. To the extent that we need to convert U.S. dollars into Renminbi for our operations, appreciation of the Renminbi against the U.S. dollar would have an adverse effect on the RMB amount we receive from the conversion. Conversely, if we decide to convert Renminbi into U.S. dollars for the purpose of making payments for dividends on our ordinary shares or ADSs or for other business purposes, appreciation of the U.S. dollar against the Renminbi would have a negative effect on the U.S. dollar amounts available to us.
We have not been exposed to material risks due to changes in market interest rates, and we have not used any derivative financial instruments to manage our interest risk exposure. The fluctuation of interest rates may affect the demand for loan services on our platform. For example, a decrease in interest rates may cause potential borrowers to seek lower-priced loans from other channels. A high interest rate environment will likely increase the funding costs for our institutional funding partners, which may lead to a higher rate of return required by such institutional funding partners and thereby dampen their desire to invest on our platform. We do not expect that the fluctuation of interest rates will have a material impact on our financial condition. However, we cannot provide assurance that we will not be exposed to material risks due to changes in market interest rate in the future. See “Item 3. Key Information—D. Risk Factors—Risks Related to Our Business—Fluctuations in interest rates could negatively affect transaction volume facilitated through our platform.” We may invest our cash in interest-earning instruments. Investments in both fixed rate and floating rate interest earning instruments carry a degree of interest rate risk. Fixed rate securities may have their fair market value adversely impacted due to a rise in interest rates, while floating rate securities may produce less income than expected if interest rates fall. | DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES |
| American Depositary Shares |
Fees and Charges Our ADS holders May Have to Pay As an ADS holder, you will be required to pay the following fees under the terms of the deposit agreement: | | | | | | | | | | | | | | | Issuance of ADSs (e.g., an issuance of ADS upon a deposit of Class A ordinary shares, upon a change in the A ordinary share(s) ratio, or for any other reason), excluding ADS issuances as a result of distributions of Class A ordinary shares | | Up to U.S. 5¢ per ADS issued | | | | | | | | Cancelation of ADSs (e.g., a cancelation of ADSs for delivery of deposited property, upon a change in the A ordinary share(s) ratio, or for any other reason) | | Up to U.S. 5¢ per ADS canceled | | | | | | | | Distribution of cash dividends or other cash distributions (e.g., upon a sale of rights and other entitlements) | | Up to U.S. 5¢ per ADS held | | | | | | | | Distribution of ADSs pursuant to (i) stock dividends or other free stock distributions, or (ii) exercise of rights to purchase additional ADSs | | Up to U.S. 5¢ per ADS held | | | | | | | | Distribution of securities other than ADSs or rights to purchase additional ADSs (e.g., upon a spin-off) | | Up to U.S. 5¢ per ADS held | | | | | | | | | | Up to U.S. 5¢ per ADS held on the applicable record date(s) established by the depositary bank |
As an ADS holder you will also be responsible to pay certain charges such as: taxes (including applicable interest and penalties) and other governmental charges; the registration fees as may from time to time be in effect for the registration of Class A ordinary shares on the share register and applicable to transfers of Class A ordinary shares to or from the name of the custodian, the depositary bank or any nominees upon the making of deposits and withdrawals, respectively; certain cable, telex and facsimile transmission and delivery expenses; the expenses and charges incurred by the depositary bank in the conversion of foreign currency; the fees and expenses incurred by the depositary bank in connection with compliance with exchange control regulations and other regulatory requirements applicable to Class A ordinary shares, ADSs and ADRs; and the fees and expenses incurred by the depositary bank, the custodian, or any nominee in connection with the servicing or delivery of deposited property.
ADS fees and charges payable upon (i) the issuance of ADSs, and (ii) the cancelation of ADSs are charged to the person to whom the ADSs are issued (in the case of ADS issuances) and to the person whose ADSs are canceled (in the case of ADS cancellations). In the case of ADSs issued by the depositary bank into DTC, the ADS issuance and cancelation fees and charges may be deducted from distributions made through DTC, and may be charged to the DTC participant(s) receiving the ADSs being issued or the DTC participant(s) holding the ADSs being canceled, as the case may be, on behalf of the beneficial owner(s) and will be charged by the DTC participant(s) to the account of the applicable beneficial owner(s) in accordance with the procedures and practices of the DTC participants as in effect at the time. ADS fees and charges in respect of distributions and the ADS service fee are charged to the holders as of the applicable ADS record date. In the case of distributions of cash, the amount of the applicable ADS fees and charges is deducted from the funds being distributed. In the case of (i) distributions other than cash and (ii) the ADS service fee, holders as of the ADS record date will be invoiced for the amount of the ADS fees and charges and such ADS fees and charges may be deducted from distributions made to holders of ADSs. For ADSs held through DTC, the ADS fees and charges for distributions other than cash and the ADS service fee may be deducted from distributions made through DTC, and may be charged to the DTC participants in accordance with the procedures and practices prescribed by DTC and the DTC participants in turn charge the amount of such ADS fees and charges to the beneficial owners for whom they hold ADSs. In the event of refusal to pay the depositary bank fees, the depositary bank may, under the terms of the deposit agreement, refuse the requested service until payment is received or may set off the amount of the depositary bank fees from any distribution to be made to the ADS holder. Certain of the depositary fees and charges (such as the ADS services fee) may become payable shortly after the closing of the ADS offering. Note that the fees and charges you may be required to pay may vary over time and may be changed by us and by the depositary bank. You will receive prior notice of such changes. The depositary bank may reimburse us for certain expenses incurred by us in respect of the ADR program, by making available a portion of the ADS fees charged in respect of the ADR program or otherwise, upon such terms and conditions as we and the depositary bank agree from time to time. Fees and Other Payments Made by the Depositary to Us The depositary bank may reimburse us for certain expenses incurred by us in respect of the ADR program, by making available a portion of the ADS fees charged in respect of the ADR program or otherwise, upon such terms and conditions as we and the depositary bank agree from time to time. For the year ended December 31, 2019,2021, we did not receive anyreceived US$6.6 million (RMB1.0 million) reimbursement from the depositary.
| DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES |
| MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS |
Material Modifications to the Rights of Security Holders See “Item 10. Additional Information—B. Memorandum and Articles of Association—Ordinary Shares” for a description of the rights of securities holders, which remain unchanged. The following “Use of Proceeds” information relates to the registration statement on Form F-1, as amended (File No. 333-220954) in relation to our initial public offering, which was declared effective by the SEC on November 9, 2017. In November 2017, we completed our initial public offering in which we issued and sold an aggregate of 17,000,000 ADSs, representing 85,000,000 Class A ordinary shares, resulting in net proceeds to us of approximately US$202.8 million, after deducting underwriting discounts and commissions and estimated offering expenses payable by us. Concurrently with our initial public offering, we sold 19,230,769 Class A ordinary shares to a wholly owned subsidiary of Sun Hung Kai & Co. Limited via a private placement, resulting in net proceeds to us of approximately US$49.5 million. Credit Suisse Securities (USA) LLC and Citigroup Global Markets Inc. were the representatives of the underwriters for our initial public offering. For the period from November 9, 2017, the date that the registration statement on Form F-1 was declared effective by the SEC, to December 31, 2017, the total expenses incurred for our company’s account in connection with our initial public offering was approximately US$4.7 million, which included US$2.8 million in underwriting discounts and commissions for the initial public offering and approximately US$1.9 million in other costs and expenses for our initial public offering. None of the transaction expenses included payments to directors or officers of our company or their associates, persons owning more than 10% or more of our equity securities or our affiliates. None of the net proceeds from the initial public offering were paid, directly or indirectly, to any of our directors or officers or their associates, persons owning 10% or more of our equity securities or our affiliates. For the period from November 9, 2017, the date that the registration statement on Form F-1 was declared effective by the SEC, to December 31, 2019,2021, we fully used theour net proceeds from our initial public offering for as follows: Approximately US$74.1 million for shares repurchases; Approximately US$58.483.2 million for dividend distribution; Approximately US$20.0 million for the acquisition of, and/or investment in, technologies, solutions and/or businesses that complement our business; and Approximately US$75.0 million for general corporate purposes. We still intend to use the remainder of the proceeds from our initial public offering and the concurrent private placement as disclosed in our registration statements on FormF-1.
We may also use part of the proceeds to repurchase our ADSs.Disclosure Controls and Procedures Our management, with the participation of our chief executive officer and chief financial officer, has performed an evaluation of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) as of the end of the period covered by this report, as required by Rule 13a-15(b) under the Exchange Act.
Based upon that evaluation, our management, with the participation of our chief executive officer and chief financial officer, has concluded that, as of December 31, 2019,2021, our disclosure controls and procedures were effective in ensuring that the information required to be disclosed by us in the reports that we filed and furnished under the Exchange Act was recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms, and that the information required to be disclosed by us in the reports that we filed or submitted under the Exchange Act was accumulated and communicated to our management, including our chief executive officer and chief financial officer, to allow timely decisions regarding required disclosure. Management’s Annual Report on Internal Control over Financial Reporting Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rule 13a-15(f) under the Exchange Act. Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of financial statements for external purposes in accordance with Generally Accepted Accounting Principles in the United States of America (“US GAAP”) and includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of our company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of consolidated financial statements in accordance with GAAP, and that receipts and expenditures of our company are being made only in accordance with authorizations of our management and directors; and (iii) provide reasonable assurance regarding prevention or timely detection of the unauthorized acquisition, use or disposition of our company’s assets that could have a material effect on the consolidated financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risks that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. As required by Section 404 of the Sarbanes-Oxley Act of 2002 and related rules as promulgated by the Securities and Exchange Commission, our management including our Chief Executive Officer and Chief Financial Officer assessed the effectiveness of internal control over financial reporting as of December 31, 20192021 using the criteria set forth in the report “Internal Control—Integrated Framework (2013)” published by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, management concluded that our internal control over financial reporting was effective as of December 31, 2019. Remediation of Material Weaknesses in Internal Control over Financial Reporting
As of December 31, 2016, 2017 and 2018, we and our independent registered public accounting firm identified one material weakness in our internal control over financial reporting. The material weakness that had been identified related to our lack of sufficient and competent financial reporting and accounting personnel with appropriate knowledge of U.S. GAAP and SEC reporting requirements to formalize key controls over financial reporting and to prepare our consolidated financial statements and related disclosures in accordance with U.S. GAAP and SEC financial reporting requirements. The material weakness, if not timely remedied, may lead to significant misstatements in our consolidated financial statements in the future.
As defined in the standards established by the U.S. Public Company Accounting Oversight Board, a “material weakness” is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis.
We have implemented a number of measures to address the material weakness that was identified. In 2018, we engaged an internal control advisor to assist in documenting our processes and internal controls and benchmarking against industry best practices. As a result of the work performed by the control advisor, we implemented more controls around business processes and financial reporting. During 2019, we hired additional qualified financial and accounting staff with working experience of U.S. GAAP and SEC reporting requirements and continued to provide training to our existing staff. We further formalized procedures and controls around our financial reporting process, including preparing and maintaining documentations of accounting treatments and policies for new business models and changes in business processes and timely updating our accounting manual. We have also established formal programs to provide ongoing training for our financial reporting and accounting personnel. As of December 31, 2019, based on an assessment performed by our management on the performance of the above mentioned remediation measures, we determined that the material weakness previously identified in our internal control over financial reporting had been remediated.
Our independent registered public accounting firm, PricewaterhouseCoopers Zhong Tian LLP, has audited the effectiveness of our company’s internal control over financial reporting as of December 31, 2019, as stated in its report, which appears on pageF-2
of this annual report on Form20-F.2021.
Attestation Report of the Independent Registered Public Accounting Firm PricewaterhouseCoopers Zhong Tian LLP has audited the effectiveness of our internal control over financial reporting as of December 31, 20192021 as stated in its report, which appears on page F-2 of this annual report on Form 20-F. Changes in Internal Control over Financial Reporting Other than as described above, thereThere were no changes in our internal controls over financial reporting that occurred during the period covered by this annual report on Form 20-F that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. | ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT
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Our board of directors has determined that Mr. Jimmy Y. Lai, an independent director (under the standards set forth under Section 303A of the Corporate Governance Rules of the New York Stock Exchange and Rule 10A-3 under the Exchange Act) and a member of our audit committee, is an “audit committee financial expert.”
Our board of directors adopted a code of business conduct and ethics that applies to our directors, officers and employees in October 2017. We have posted a copy of our code of business conduct and ethics on our website at http://ir.ppdai.com/ir.finvgroup.com/. | ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES
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The following table sets forth the aggregate fees by categories specified below in connection with certain professional services rendered by PricewaterhouseCoopers Zhong Tian LLP, our principal external auditors, for the periods indicated. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 8,800 | | | | 1,349 | | | | 9,800 | | | | 1,538 | | | | | — | | | | — | | | | — | | | | — | | | | | — | | | | — | | | | 403.7 | | | | 63.4 | | | | | 378 | | | | 58 | | | | 328 | | | | 51 | |
* | The US$ amounts are translated from corresponding RMB amounts using a rate of RMB6.9618RMB6.3726 = US$1.00, the noon buying rate on December 31, 201930, 2021 set forth in the H.10 statistical release of the U.S. Federal Reserve Board. |
(1) | “Audit fees” means the aggregate fees billed for each of the last two fiscal years for professional services rendered by the principal accountant for the audit of the registrant’s annual financial statements or services that are normally provided by the accountant in connection with statutory and regulatory filings or engagements for those fiscal years. |
(2) | “Audit-related fees” means the aggregate fees billed in each of the last two fiscal years for assurance and related services by the principal accountant that are reasonably related to the performance of the audit or review of the registrant’s financial statements and are not reported under footnote (1) above. |
(3) | “Tax fees” means the aggregate fees billed in each of the last two fiscal years for professional services rendered by the principal accountant for tax compliance, tax advice, and tax planning. |
(4) | “All other fees” means the aggregate fees billed in each of the last two fiscal years for products and services provided by the principal accountant, other than the services reported in footnotes (1) through (3). |
The policy of our audit committee is to pre-approve all audit and non-audit services provided by PricewaterhouseCoopers Zhong Tian LLP, including audit services, audit-related services, tax services and other services as described above, other than those for services which are approved by the audit committee prior to the completion of the audit. |
ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES
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| ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS
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On March 21, 2018,August 24, 2020, our board of directors authorizedof approved a share repurchase program, wherebyunder which we may repurchase our company was authorized to repurchase its own Class A ordinary shares in the form of ADSs with an aggregate value of up to US$60 million during the next twelve-month perioduntil December 31, 2021 (the “Share“2020 Share Repurchase Program”). TheThis share repurchases may be effectedrepurchase program was publicly announced on the open market at prevailing market prices, depending on a number of factors, including, but not limited to, share price, trading volume and general market conditions, along with our company’s working capital requirements, general business conditions, as well as other factors. The share repurchases will be carried out in a manner in compliance with Rule10b-18
and/or Rule10b5-1
under the U.S. Securities Exchange Act of 1934, as amended, so as to qualify for the safe harbor provided therein.August 25, 2020. On August 21, 2018,November 17, 2021, our board of directors approved an expansionextension of the 2020 Share Repurchase Program wherebyfor another twelve months from January 1, 2022 through December 31, 2022.As of March 31, 2022, we had repurchased a total of approximately 12.4 million ADSs under the maximum aggregate value2020 Share Repurchase Program. The table below is a summary of the Class A ordinary shares repurchased by us from January 1, 2021 to March 31, 2022. All shares were repurchased in the form of ADSs that can be repurchased underopen market pursuant to the 2020 Share Repurchase Program increased from US$60 million to US$120 million. Our boardannounced on August 25, 2020.
The following table summarizes the details of the repurchases made in accordance with the Share Repurchase Program as of April 15, 2020. | | | | | | | | | | | | | | | | | | | Total number of ADSs purchased | | | | | | | | | Approximate dollar value of ADSs that may yet be purchased under the plan | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | Total number of ADSs purchased | | | Average price paid per ADS | | | Total number of ADSs purchased as part of the publicly announced plan | | | Approximate dollar value of ADSs that may yet be purchased under the plan | | January 1, 2021 – January 31, 2021 | | | 813,200 | | | | 2.93 | | | | 9,750,736 | | | | 39,523,206 | | February 1, 2021 – February 28, 2021 | | | | | | | | | | | 9,750,736 | | | | 39,523,206 | | March 1, 2021 – March 31, 2021 | | | | | | | | | | | 9,750,736 | | | | 39,523,206 | | April 1, 2021 – April 30, 2021 | | | | | | | | | | | 9,750,736 | | | | 39,523,206 | | May 1, 2021 – May 31, 2021 | | | | | | | | | | | 9,750,736 | | | | 39,523,206 | | June 1, 2021 – June 30, 2021 | | | | | | | | | | | 9,750,736 | | | | 39,523,206 | | July 1, 2021 – July 31, 2021 | | | | | | | | | | | 9,750,736 | | | | 39,523,206 | | August 1, 2021 – August 31, 2021 | | | | | | | | | | | 9,750,736 | | | | 39,523,206 | | September 1, 2021 – September 30, 2021 | | | | | | | | | | | 9,750,736 | | | | 39,523,206 | | October 1, 2021 – October 31, 2021 | | | | | | | | | | | 9,750,736 | | | | 39,523,206 | | November 1, 2021 – November 30, 2021 | | | | | | | | | | | 9,750,736 | | | | 39,523,206 | | December 1, 2021 – December 31, 2021 | | | 21,000 | | | | 4.72 | | | | 9,771,736 | | | | 39,424,099 | | January 1, 2022 – January 31, 2022 | | | 678,800 | | | | 4.36 | | | | 10,450,536 | | | | 36,465,095 | | February 1, 2022 – February 28, 2022 | | | 780,200 | | | | 4.23 | | | | 11,230,736 | | | | 33,165,032 | | March 1, 2022 – March 31, 2022 | | | 1,131,900 | | | | 3.78 | | | | 12,362,636 | | | | 28,889,619 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| ITEM 16F. CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT
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| ITEM 16G. CORPORATE GOVERNANCE
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Section 303A.12(a) of the NYSE Listed Company Manual requires each listed company’s chief executive officer to certify to the NYSE each year that he or she is not aware of any violation by the company of NYSE corporate governance listing standards. We are a Cayman Islands exempted company, and our chief executive officer is not required under applicable Cayman Islands law to make such a certification. Pursuant to the exceptions granted to foreign private issuers under Section 303A.00 of the NYSE Listed Company Manual, we have followed our home country practice in this regard and have not in the past submitted the certification set forth in Section 303A.12(a) of the NYSE Listed Company Manual. Section 303A.01 of the NYSE Listed Company Manual requires a listed company to have a majority of independent directors. Section 303A.07(a) of the NYSE Listed Company Manual requires a listed company to have an audit committee composed a minimum of three members. Section 303A.05(a) of the NYSE Listed Company Manual requires a listed company to have a compensation committee composed entirely of independent directors. We are a Cayman Islands exempted company, and there are no requirements under applicable Cayman Islands law that correspond to these sections of the NYSE Listed Company Manual. Pursuant to the exceptions granted to foreign private issuers under Section 303A.00 of the NYSE Listed Company Manual, we have followed our home country practice and are exempted from the requirements of Sections 303A.01, 303A.07(a) and 303A.05(a) of the NYSE Listed Company Manual. 156Section 302.00 of the NYSE Listed Company Manual requires a listed company to hold an annual meeting during each fiscal year. We are a Cayman Islands exempted company, and we are not required under applicable Cayman Islands law to hold an annual meeting during each fiscal year. Pursuant to the exceptions granted to foreign private issuers under Section 303A.00 of the NYSE Listed Company Manual, we have followed our home country practice and are exempted from the requirements of Section 302.00 of the NYSE Listed Company Manual.
Other than the requirements discussed above, there are no significant differences between our corporate governance practices and those followed by domestic listed companies as required under the NYSE Listed Company Manual. Since we have chosen to follow our home country practice, our shareholders may be afforded less protection than they otherwise would enjoy under the NYSE corporate governance listing standards applicable to U.S. domestic issuers. See “Item 3. Key Information—D. Risk Factors—Risks Related to Our ADSs—As a company incorporated in the Cayman Islands, we are permitted to adopt certain home country practices in relation to corporate governance matters that differ significantly from the NYSE corporate governance listing standards; these practices may afford less protection to shareholders than they would enjoy if we complied fully with the NYSE corporate governance listing standards.” | ITEM 16H. MINE SAFETY DISCLOSURE
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| DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS |
We have elected to provide financial statements pursuant to Item 18. The consolidated financial statements of FinVolution Group, its subsidiaries and itsthe consolidated variable interest entities are included at the end of this annual report.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 11.1 | | | | | | | | | | | | 12.1* | | | | | | | | | | | | 12.2* | | | | | | | | | | | | 13.1** | | | | | | | | | | | | 13.2** | | | | | | | | | | | | 15.1* | | | | | | | | | | | | 15.2* | | Consent of Hui Ye Law Firm | | | 15.3* | | Consent of Maples and Calder (Hong Kong) LLP | | | 101.INS* | | | | | | | | | | | | | Inline XBRL Instance Document—this instance document does not appear in the Interactive Data File because its XBRL tags are not embedded within the Inline XBRL document | | | 101.SCH* | | | | | | | | | Inline XBRL Taxonomy Extension Schema Document | | | 101.CAL* | | | | | | | | | Inline XBRL Taxonomy Extension Calculation Linkbase Document | | | 101.DEF* | | | | | | | | | Inline XBRL Taxonomy Extension Definition Linkbase Document | | | 101.LAB* | | | | | | | | | Inline XBRL Taxonomy Extension Label Linkbase Document | | | 101.PRE* | | | | | | | | | Inline XBRL Taxonomy Extension Presentation Linkbase Document | | | 104 | | | | | | | | | Cover Page Interactive Data File (embedded within the Inline XBRL document) |
The registrant hereby certifies that it meets all of the requirements for filing its annual report on Form 20-F and that it has duly caused and authorized the undersigned to sign this annual report on its behalf.behalf .Date: April 30, 202029, 2022
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm To the Board of Directors and Shareholders of FinVolution Group Opinions on the Financial Statements and Internal Control over Financial Reporting We have audited the accompanying consolidated balance sheets of FinVolution Group (the “Company”) and its subsidiaries (the “Company”) as of December 31, 20192021 and 2018,2020, and the related consolidated statements of comprehensive income, of changes in shareholders’ equity and of cash flows for each of the three years in the period ended December 31, 2019,2021, including the related notes (collectively referred to as the “consolidated financial statements”). We also have audited the Company’s internal control over financial reporting as of December 31, 2019,2021, based on criteria established in Internal Control—Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 20192021 and 2018,2020, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 20192021 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2019,2021, based on criteria established in Internal Control—Control - Integrated Framework (2013) issued by the COSO. Change in Accounting Principle As discussed in Note 2 to the consolidated financial statements, the Company changed the manner in which it accounts for revenues from contracts with customerscredit losses on certain financial assets and guarantee liabilities in 2018.2020. The Company’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s Annual Report on Internal Control over Financial Reporting appearing under Item 15. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions. Definition and Limitations of Internal Control over Financial Reporting A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that (i) relate to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Revenue Recognition—Recognition - Estimates of Standalone Selling Price for Loan Facilitation and Post Facilitation Services As described in Note 2 (u)2(u) to the consolidated financial statements, the loan facilitation service revenue and post facilitation service revenue recognized for the yearsyear ended December 31, 2019 was RMB3,310.92021 were RMB3,794.2 million and RMB1,200.4RMB1,309.6 million, respectively. The Company chargescharged one combined transaction service fee for its promises to transfer services to customers, which are not sold on a standalone basis. Such services includedelivery of loan facilitation services and post-facilitation services, each of which arewere distinct performance obligations. The combined transaction price iswas allocated to these two performance obligations using an estimate of their relative standalone selling price. Management doesdid not have an observable standalone selling price for the loan facilitation or post-facilitation services because it doesdid not provide such services on a standalone basis in the similar circumstances to similar customers, and because there iswas no directdirectly observable standalone selling price that iswas reasonably available for similar services in the market. As a result, the estimation of standalone selling prices involvesinvolved significant judgement. Management used an expected cost“cost plus marginmargin” approach to estimate the standalone selling prices of the services asand then allocated the basis of revenue.combined revenue received from customers to each performance obligation, based on the relative estimated standalone selling prices. When estimating the selling prices,amount to allocate, management makesmade certain assumptions mainly including estimates of the cost of providing the services plus a reasonable profit margin.services. The principal considerationconsiderations for our determination that performing procedures relating to the estimation of standalone selling prices related tofor loan facilitation and post-facilitation services iswas a critical audit matter iswas there was significant judgment by management in estimating the standalone selling price,prices, which in turn led to a high degree of auditor judgment, subjectivity, and audit effort in performing procedures and evaluating audit evidence relating to estimates of standalone selling price made by management, including estimates of the cost of providing the services plus a reasonable margin.services. Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to management’s revenue recognition process, including controls over the Company’s model, significant assumptions and data used to estimate the standalone selling prices for loan facilitation and post-facilitation services. TheThese procedures also included, among others, testing management’s process for estimating the standalone selling price;price, which involved (i) reading service agreements between the Company and its customers to identify the nature of services provided as part of loan facilitation and post-facilitation services; (ii) evaluating the appropriateness of management’s expected cost“cost plus marginmargin” method of estimating standalone selling price; (iii) evaluating the reasonableness of estimates of the cost of providing the services; and (iv) testing the completeness, accuracy and relevance of underlying data used to develop management’s estimate; and evaluating the significant assumptions used by management, including estimates of the cost of providing the services plus a reasonable profit margin.estimate. Evaluating the estimates of cost of providing the services involved (i) testing the allocation of expenses, which arewere driven by the roles and responsibility of each department;department and (ii) testing the completeness, accuracy, relevance, and classification of all types of expenses. Evaluating whether the profit margin assumption used by management was reasonable involved comparing management’s assumed profit margin to the actual profit margin earned for similar services by third party peer companies. Quality Assurance Payable—Estimate
Measurement of expected credit losses for certain financial assets and guarantee liabilities As described in Note 2 (s)Notes 2(t), 3 and 7 to the consolidated financial statements, the quality assurance payable balance was RMB4,776.2 millionCompany had the following accounts associated with expected credit losses measurement as of December 31, 2019. 2021: | | | • Accounts receivable and contract assets | | RMB1,890.8 million, net of credit loss allowance of RMB250.7 million | | | • Quality assurance receivable | | RMB931.8 million, net of credit loss allowance of RMB239.5 million | | | | | RMB1,982.3 million, net of credit loss allowance of RMB427.9 million | | | • Expected credit losses for quality assurance commitment | | RMB3,188.6 million |
The Company provides quality assurancedetermined the amounts of the provisions and liabilities relating to investors of its online consumer finance platformthe above accounts using an expected credit loss methodology that was based on (i) historical default experience; (ii) known and institutional funding partnersinherit risks in the formportfolio; (iii) current economic conditions; and (iv) future macroeconomic forecasts as well as other factors surrounding the credit risk of various quality assurance programsborrowers. When forecasting macroeconomic factors, management primarily considered gross domestic product, consumer price index and inother pertinent factors such as money supply wherein M1 money supply was determined to be the case of certain institutional funding partners, direct guarantee. The quality assurance obligations is measured atmost relevant to the higher of ASC Topic 450 and ASC Topic 460 component, among which the ASC Topic 450 component is a contingent liability determined based on probable default rates. This liability represents the obligation to make future payouts and is measured using the guidance in ASC Topic 450, Contingencies. The ASC Topic 450 contingent component is determined on a loan by loan basis, but considers the actual and expected performance of the related pooled loan portfolio when measuring the contingent liability.Company’s business. The principal considerationconsiderations for our determination that performing procedures relating to measurement of the contingent liability component of the quality assurance payableexpected credit losses is a critical audit matter iswere (i) there was significant judgment and estimation by management in estimatingdetermining the probable default rate,modeling techniques utilized in their expected credit losses methodology and in determining the underlying estimates, which in turn led to a high degree of auditor judgment, subjectivity, and audit effort in performing procedures and evaluating audit evidence relating to estimates ofused in the expected performance ofcredit loss methodology and (ii) the pooled loan portfolio made by management. audit effort involved professionals with specialized skill and knowledge.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to management’s estimate of the expected performance of the pooled loan portfolio,credit losses, including controls over the Company’s model,models, significant assumptions, and underlying data. The procedures also included, among other things, testing management’s process for developing the estimate of expected performance of the pool;credit losses, which involved (i) evaluating the appropriateness of management’s methodology to determine the probable default rate including how loan portfolios are pooled; (ii) testing the completeness, accuracy and relevance of underlying data used in the measurement;estimate; and evaluating the significant assumptions used by management, including the probable default rate. Evaluating management’s assumptions related to the probable default rate included verifying the calculation of actual default rate and;(iii) evaluating the reasonableness of management’s forward-looking adjustments made onto historical default experience. These procedures also included the actual default rateuse of professionals with specialized skill and knowledge to reflect management’s bestassist in evaluating the appropriateness of certain models, methodologies and inputs used in developing the estimate of future performance. Verifying the calculation of actual default rate involved testing the aggregation of historical loan performance data; testing the completeness and accuracy of underlying loan performance data and testing the calculation of actual default rate. Evaluating the reasonableness of adjustments made on the actual default rate involved considering changes in market condition such as macroeconomics and regulatory environment. expected credit losses./s/ PricewaterhouseCoopers Zhong Tian LLP Shanghai, the People’s Republic of China We have served as the Company’s auditor since 2016.
CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 20182020 AND 2019 (All amounts in thousands, except share data, or otherwise noted)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Cash and cash equivalents | | | | | | | | | | | | | | | | | Restricted cash (including restricted cash of the consolidated trusts of RMB 303,667 and RMB799,646 as of December 31, 2018 and 2019, respectively) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Accounts receivable, net of provision for doubtful accounts of RMB 50,544 and RMB145,699 as of December 31, 2018 and 2019, respectively) | | | | | | | | | | | | | | | | | Quality assurance receivable | | | | | | | | | | | | | | | | | Property, equipment and software, net | | | | | | | | | | | | | | | | | Right of use assets, net | | | 18 | | | | — | | | | 95,786 | | | | 13,759 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Loans receivable, net of provision for loan losses of RMB 74,381 and RMB 316,124 as of December 31, 2018 and 2019, respectively (including loans receivable, net of provision for loan losses of the consolidated trusts of RMB2,290,082 and RMB4,618,856 as of December 31, 2018 and 2019 , respectively) | | | | | | | | | | | | | | | | | Financial guarantee derivative assets | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Prepaid expenses and other assets | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Liabilities and Shareholders’ Equity: | | | | | | | | | | | | | | | | | Payable to platform customers (including payable to platform customers of the consolidated variable interest entity (“VIE”) and VIE’s subsidiaries without recourse to the Company and RMB684,630 as of December 31, 2018 and 2019, respectively) | | | | | | | | | | | | | | | | | Quality assurance payable (including quality assurance payable of the consolidated VIE and VIE’s subsidiaries without recourse to the Company of RMB 3,819,379 and RMB4,776,153 as of December 31, 2018 and 2019, respectively) | | | | | | | | | | | | | | | | | Payroll and welfare payable (including payroll and welfare payable of the consolidated VIE and VIE’s subsidiaries without recourse to the Company of RMB 129,809 and RMB115,540 as of December 31, 2018 and 2019, respectively) | | | | | | | | | | | | | | | | | Taxes payable (including taxes payable of the consolidated VIE and VIE’s subsidiaries without recourse to the Company of RMB 208,585 and RMB32,468 as of December 31, 2018 and 2019, respectively) | | | | | | | | | | | | | | | | | Short-term borrowings (including short-term borrowings of the consolidated VIE and VIE’s subsidiaries without recourse to the Company of NaN and RMB85,000 as of December 31, 2018 and 2019, respectively ) | | | | | | | | | | | | | | | | | Funds payable to investors of consolidated trusts (including funds payable to investors of consolidated trusts of RMB 1,505,909 and RMB3,660,483 as of December 31, 2018 and 2019 respectively) | | | | | | | | | | | | | | | | | Contract liabilities (including contract liabilities of the consolidated VIE and VIE’s subsidiaries without recourse to the Company of RMB 158,061 and RMB50,166 as of December 31, 2018 and 2019, respectively) | | | | | | | | | | | | | | | | |
The accompanying notes form an integral part of these consolidated financial statements.
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 2018 AND 2019 (Continued)2021
(All amounts in thousands, except share data, or otherwise noted) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Liabilities and Shareholders’ Equity (Continued) | | | | | | | | | | | | | | | | | Amounts due to related party (including amounts due to related party of the consolidated VIE and VIE’s subsidiaries without recourse to the Company of NaN and RMB4,309 as of December 31, 2018 and 2019, respectively) | | | | | | | | | | | | | | | | | Leasing liabilities (including leasing liabilities of the consolidated VIE and VIE’s subsidiaries without recourse to the Company of and RMB84,284 as of December 31, 2018 and 2019, respectively) | | | | | | | | | | | | | | | | | Deferred tax liabilities (including deferred tax liabilities of the consolidated VIE and VIE’s subsidiaries without recourse to the Company of RMB47,117 as of December 31, 2018 and 2019, respectively) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Accrued expenses and other liabilities (including accrued expenses and other liabilities of the consolidated VIE and VIE’s subsidiaries without recourse to the Company of RMB 190,406 and RMB237,802 as of December 31, 2018 and 2019, respectively) | | | | | | | | | | | 287,625 | | | | 41,315 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Commitments and contingencies | | | | | | | | | | | | | | | | | FinVolution Group Shareholders’ equity : | | | | | | | | | | | | | | | | | Class A ordinary shares (US$ par value; shares authorized as of December 31, 2018 and 2019; 874,071,169 and 964,071,169 issued as of December 31, 2018 and 2019; 827,770,169 and 943,436,904 outstanding as of December 31, 2018 and 2019) | | | | | | | | | | | | | | | | | Class B ordinary shares (US$ par value; shares authorized as of December 31, 2018 and 2019; and issued and outstanding as of December 31, 2018 and 2019) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Treasury stock ( 46,301,000 and 20,634,265 shares as of December 31, 2018 and 2019, respectively) | | | | | | | | ) | | | | ) | | | | ) | | | | | | | | | | | | | | | | | | Accumulated other comprehensive income | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total FinVolution Group shareholders’ equity | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total shareholders’ equity | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total liabilities and shareholders’ equity | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Cash and cash equivalents | | 2(i) | | | 2,632,174 | | | | 4,418,127 | | | | 693,301 | | | | 2(j) | | | 3,484,227 | | | | 4,073,414 | | | | 639,208 | | | | 2(k) | | | 1,970,958 | | | | 1,204,901 | | | | 189,075 | | Accounts receivable and contract assets, net of credit loss allowance for accounts receivable and contract assets of RMB 188,725 and RMB250,696 as of December 31, 2020 and 2021, respectively | | 7 | | | 863,906 | | | | 1,890,846 | | | | 296,715 | | Quality assurance receivable, net of credit loss allowance for quality assurance receivable of RMB223,514 and RMB239,506 as of December 31, 2020 and 2021, respectively | | 2(t) | | | 1,121,554 | | | | 931,798 | | | | 146,219 | | Property, equipment and software, net | �� | 5 | | | 93,876 | | | | 112,397 | | | | 17,638 | | | | | | | 54,968 | | | | 49,138 | | | | 7,711 | | | | 6 | | | 98,947 | | | | 98,947 | | | | 15,527 | | | | | | | 50,411 | | | | 50,411 | | | | 7,911 | | Loans receivable, net of credit loss allowance for loans receivable of RMB382,012 and RMB427,873 as of December 31, 2020 and 2021, respectively | | 3 | | | 2,354,882 | | | | 1,982,276 | | | | 311,062 | | | | 2(m) | | | 950,515 | | | | 971,117 | | | | 152,389 | | | | 11 | | | 155,758 | | | | 455,741 | | | | 71,516 | | Prepaid expenses and other assets | | 4 | | | 1,050,009 | | | | 1,899,438 | | | | 298,063 | | | | | | | | | | | | | | | | | | | | | | 14,882,185 | | | | 18,138,551 | | | | 2,846,335 | | | | | | | | | | | | | | | | | Liabilities and Shareholders’ Equity: | | | | | | | | | | | | | | | Payable to platform customers (including payable to platform customers of the consolidated variable interest entity (“VIE”) and VIE’s subsidiaries including consolidated trusts without recourse to the Company of RMB103,453 and RMB81,150 as of December 31, 2020 and 2021, respectively) | | | | | 103,453 | | | | 81,150 | | | | 12,734 | | Deferred guarantee income (including deferred guarantee income of the consolidated VIE and VIE’s subsidiaries including consolidated trusts without recourse to the Company of RMB1,259,396 and RMB1,089,503 as of December 31, 2020 and 2021, respectively) | | 2(t) | | | 1,259,396 | | | | 1,089,503 | | | | 170,967 | | Expected credit losses for quality assurance commitment (including expected credit losses for quality assurance commitment of the consolidated VIE and VIE’s subsidiaries including consolidated trusts without recourse to the Company of RMB2,390,501 and RMB3,188,561 as of December 31, 2020 and 2021, respectively) | | 2(t) | | | 2,390,501 | | | | 3,188,561 | | | | 500,355 | | Payroll and welfare payable (including payroll and welfare payable of the consolidated VIE and VIE’s subsidiaries including consolidated trusts without recourse to the Company of RMB132,955 and RMB146,697 as of December 31, 2020 and 2021, respectively) | | 8 | | | 220,989 | | | | 252,918 | | | | 39,688 | | Taxes payable (including taxes payable of the consolidated VIE and VIE’s subsidiaries including consolidated trusts without recourse to the Company of RMB53,552 and RMB57,237 as of December 31, 2020 and 2021, respectively) | | | | | 154,398 | | | | 200,648 | | | | 31,486 | | Funds payable to investors of consolidated trusts (including funds payable to investors of consolidated trusts of the consolidated VIE and VIE’s subsidiaries including consolidated trusts without recourse to the Company of RMB1,661,841 and RMB1,795,640 as of December 31, 2020 and 2021, respectively) | | 3 | | | 1,661,841 | | | | 1,795,640 | | | | 281,775 | | Contract liabilities (including contract liabilities of the consolidated VIE and VIE’s subsidiaries including consolidated trusts without recourse to the Company of NaN and RMB6,826 as of December 31, 2020 and 2021, respectively)
| | 2(u) | | | 3,447 | | | | 8,436 | | | | 1,324 | |
The accompanying notes form an integral part of these consolidated financial statements.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME BALANCE SHEETSFOR THE YEARS ENDEDAS OF DECEMBER 31, 2017, 20182020 AND 20192021 (Continued)
(All amounts in thousands, except share data, or otherwise noted) | | | | | | | | | | | | | | | | | | | | | | | | For the Years Ended December 31, | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Loan facilitation service fees | | | | | | | | | | | | | | | | | | | | | Post-facilitation service fees | | | | | | | | | | | | | | | | | | | | | Net interest income | | | | | | | 31,377 | | | | 256,108 | | | | 1,106,669 | | | | 158,963 | | | | | | | | | | | | | | | | | | | | | | | Changes in expected discretionary payment to IRF investors | | | | | | | | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Origination and servicing expenses | | | | | | | | ) | | | | ) | | | | ) | | | | ) | Origination and servicing expenses-related party | | | | | | | | ) | | | | ) | | | | ) | | | | ) | Sales and marketing expenses | | | | | | | | ) | | | | ) | | | | ) | | | | ) | General and administrative expenses | | | | | | | | ) | | | | ) | | | | ) | | | | ) | Research and development expenses | | | | | | | (164,869 | | | | (317,965 | ) | | | (390,585 | ) | | | (56,104 | | Provision for loans receivable | | | 4 | | | | | ) | | | | ) | | | | ) | | | | ) | Provision for accounts receivable | | | | | | | — | | | | (106,652 | | | | | | | | (37,617 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | ) | | | | ) | | | | ) | | | | ) | | | | | | | | | | | | | | | | | | | | | | Gain from quality assurance | | | | | | | | | | | | | | | 98,405 | | | | 14,135 | | Realized gain (loss) from financial guarantee derivatives | | | | | | | | | | | | ) | | | | | | | | | Fair value change of financial guarantee derivatives | | | | | | | | ) | | | | | | | | ) | | | | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Profit before income tax expenses | | | | | | | | | | | | | | | | | | | | | | | | | | | | | ) | | | | ) | | | | ) | | | | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Less: Net profit (loss) attributable to non-controlling interest shareholders | | | | | | | | ) | | | | | | | | | | | | | Net profit attributable to FinVolution Group | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Accretion on Series A convertible redeemable preferred shares to redemption value | | | 14 | | | | | ) | | | | | | | | | | | | | Accretion on Series B convertible redeemable preferred shares to redemption value | | | 14 | | | | | ) | | | | | | | | | | | | | Accretion on Series C convertible redeemable preferred shares to redemption value | | | 14 | | | | | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Net profit (loss) attributable to FinVolution Group’s ordinary shareholders | | | | | | | | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
FOR THE YEARS ENDED DECEMBER 31, 2017, 2018 AND 2019 (Continued)
(All amounts in thousands, except share data, or otherwise noted)
| | | | | | | | | | | | | | | | | | | | | | | | | | For the Years Ended December 31, | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Foreign currency translation adjustment, net of nil tax | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total comprehensive income | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total comprehensive income (loss) attributable to non-controlling interests shareholders | | | | | | | | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total comprehensive income attributable to FinVolution Group | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Weighted average number of ordinary shares used in computing net income (loss) per share | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 1,552,423,060 | | Net income (loss) per share - Basic | | | | | | | | ) | | | | | | | | | | | | | Net income (loss) per share - Diluted | | | | | | | | ) | | | | | | | | | | | | | Net income (loss) per ADS - Basic | | | | | | | | ) | | | | | | | | | | | | | Net income (loss) per ADS - Diluted | | | | | | | | ) | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Liabilities and Shareholders’ Equity (Continued) | | | | | | | | | | | | | | | Amounts due to related party (including amounts due to related party of the consolidated VIE and VIE’s subsidiaries including consolidated trusts without recourse to the Company of RMB1,984 and as of December 31, 2020 and 2021, respectively) | | 10 | | | 1,984 | | | | 2,265 | | | | 355 | | Leasing liabilities (including leasing liabilities of the consolidated VIE and VIE’s subsidiaries including consolidated trusts without recourse to the Company of RMB42,775 and RMB33,184 as of December 31, 2020 and 2021, respectively) | | | | | 43,296 | | | | 33,356 | | | | 5,234 | | Deferred tax liabilities (including deferred tax liabilities of the consolidated VIE and VIE’s subsidiaries including consolidated trusts without recourse to the Company of RMB67,217 and RMB45,656 as of December 31, 2020 and 2021, respectively)
| | 11 | | | 103,548 | | | | 137,632 | | | | 21,597 | | Accrued expenses and other liabilities (including accrued expenses and other liabilities of the consolidated VIE and VIE’s subsidiaries including consolidated trusts without recourse to the Company of RMB472,446 and RMB598,570 as of December 31, 2020 and 2021, respectively) | | 9 | | | 509,002 | | | | 638,832 | | | | 100,247 | | | | | | | | | | | | | | | | | | | | | | 6,451,855 | | | | 7,428,941 | | | | 1,165,762 | | | | | | | | | | | | | | | | | Commitments and contingencies | | 16
| | | 0 | | | | 0 | | | | 0 | | FinVolution Group shareholders’ equity: | | | | | | | | | | | | | | | Class A ordinary shares (US$0.00001 par value; 10,000,000,000 shares authorized as of December 31, 2020 and 2021; 969,071,169 and 970,871,169 issued as of December 31, 2020 and 2021; 824,164,599 and 854,591,404 outstanding as of December 31, 2020 and 2021) | | 12 | | | 64 | | | | 64 | | | | 10 | | Class B ordinary shares (US$0.00001 par value; 10,000,000,000 shares authorized as of December 31, 2020 and 2021; 581,000,000 and 579,200,000 issued and outstanding as of December 31, 2020 and 2021) | | 12 | | | 39 | | | | 39 | | | | 6 | | | | | | | 5,659,990 | | | | 5,694,733 | | | | 893,628 | | Treasury stock (144,906,570 and 116,279,765 shares as of December 31, 2020 and 2021, respectively) | | 12 | | | (401,621 | ) | | | (324,171 | ) | | | (50,870 | ) | | | 2(ag) | | | 458,058 | | | | 610,403 | | | | 95,786 | | Accumulated other comprehensive income | | | | | (5,142 | ) | | | (16,769 | ) | | | (2,630 | ) | | | | | | 2,651,918 | | | | 4,690,951 | | | | 736,113 | | | | | | | | | | | | | | | | | Total FinVolution Group shareholders’ equity | | | | | 8,363,306 | | | | 10,655,250 | | | | 1,672,043 | | | | | | | | | | | | | | | | | | | | | | 67,024 | | | | 54,360 | | | | 8,530 | | Total shareholders’ equity | | | | | 8,430,330 | | | | 10,709,610 | | | | 1,680,573 | | | | | | | | | | | | | | | | | Total liabilities and shareholders’ equity | | | | | 14,882,185 | | | | 18,138,551 | | | | 2,846,335 | | | | | | | | | | | | | | | | |
The accompanying notes form an integral part of these consolidated financial statements.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITYCOMPREHENSIVE INCOME FOR THE YEARS ENDED DECEMBER 31, 2017, 20182019, 2020 AND 20192021 (All amounts in thousands, except share data, or otherwise noted) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Accumulated other comprehensive income (loss) | | | | | | earnings ( a ccumulated deficit) | | | | | | shareholders’ equity (deficit) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Balance as of December 31, 2016 | | | | | | | | | | | | | | | | | | | | | | | | | | | | ) | | | | | | | | ) | | | | | | | | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Issuance of ordinary shares upon Initial Public Offering (“IPO”) and Concurrent Private Placement (“CPP”), net of expense | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Accretions to preferred shares redemption value | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | ) | | | | | | | | ) | Conversion of series A preferred shares to ordinary shares | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Conversion of series B preferred shares to ordinary shares | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Conversion of series C preferred shares to ordinary shares | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Cancellation of Share-based compensation plan of a subsidiary | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | ) | | | | | Foreign currency translation adjustment | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Appropriation to statutory reserve | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Balance as of December 31, 2017 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | For the years ended December 31, | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Loan facilitation service fees | | 2(u) | | | 3,310,875 | | | | 1,908,851 | | | | 3,794,182 | | | | 595,390 | | Post-facilitation service fees | | 2(u) | | | 1,200,373 | | | | 672,981 | | | | 1,309,565 | | | | 205,499 | | | | 2(t) | | | — | | | | 3,386,032 | | | | 2,593,512 | | | | 406,979 | | | | 2(o) | | | 1,106,669 | | | | 1,113,337 | | | | 1,216,170 | | | | 190,844 | | | | 2(u) | | | 344,840 | | | | 481,886 | | | | 556,699 | | | | 87,358 | | | | | | | | | | | | | | | | | | | | | | | | | | 5,962,757 | | | | 7,563,087 | | | | 9,470,128 | | | | 1,486,070 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Origination, servicing expenses and other cost of revenue | | 2(v) | | | (1,164,716 | ) | | | (1,315,496 | ) | | | (1,834,453 | ) | | | (287,866 | ) | Origination, servicing expenses and other cost of revenue-related party | | 2(v) | | | (43,494 | ) | | | (10,104 | ) | | | (7,503 | ) | | | (1,177 | ) | Sales and marketing expenses | | 2(w) | | | (720,333 | ) | | | (482,859 | ) | | | (1,584,233 | ) | | | (248,601 | ) | General and administrative expenses | | 2(x) | | | (435,816 | ) | | | (461,116 | ) | | | (518,245 | ) | | | (81,324 | ) | Research and development expenses | | 2(y) | | | (390,585 | ) | | | (370,175 | ) | | | (434,850 | ) | | | (68,237 | ) | Credit losses for quality assurance commitment | | 2(t) | | | — | | | | (2,007,968 | ) | | | (1,963,609 | ) | | | (308,133 | ) | Provision for loans receivable | | 3 | | | (299,504 | ) | | | (463,175 | ) | | | (374,243 | ) | | | (58,727 | ) | Provision for accounts receivable and contract assets | | 7 | | | (261,882 | ) | | | (144,661 | ) | | | (139,226 | ) | | | (21,848 | ) | | | | | | | | | | | | | | | | | | | | | | | | | (3,316,330 | ) | | | (5,255,554 | ) | | | (6,856,362 | ) | | | (1,075,913 | ) | | | | | | | | | | | | | | | | | | | | Gain from quality assurance | | 2(t) | | | 98,405 | | | | — | | | | — | | | | — | | Realized gain from financial guarantee derivatives | |
| | | 31,444 | | | | — | | | | — | | | | — | | Fair value change of financial guarantee derivatives | |
| | | (56,287 | ) | | | — | | | | — | | | | — | | | | 2(k), 2(ab) | | | 136,491 | | | | 116,469 | | | | 122,368 | | | | 19,202 | | | | | | | | | | | | | | | | | | | | | Profit before income tax expenses | | | | | 2,856,480 | | | | 2,424,002 | | | | 2,736,134 | | | | 429,359 | | | | 11 | | | (481,962 | ) | | | (455,421 | ) | | | (240,818 | ) | | | (37,790 | ) | | | | | | | | | | | | | | | | | | | | | | | | | 2,374,518 | | | | 1,968,581 | | | | 2,495,316 | | | | 391,569 | | Net loss (profit) attributable to non-controlling interest shareholders | | | | | (1,668 | ) | | | 4,119 | | | | 13,631 | | | | 2,139 | | | | | | | | | | | | | | | | | | | | | Net profit attributable to FinVolution Group’s ordinary shareholders | | | | | 2,372,850 | | | | 1,972,700 | | | | 2,508,947 | | | | 393,708 | | | | | | | | | | | | | | | | | | | | |
F-8 CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITYCOMPREHENSIVE INCOME FOR THE YEARS ENDED DECEMBER 31, 2017, 20182019, 2020 AND 20192021 (Continued) (All amounts in thousands, except share data, or otherwise noted) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Accumulated other comprehensive income | | | | | | earnings ( a ccumulated deficit) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Balance as of December 31, 2017 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Issuance of ordinary shares for share-based compensation plans | | | | | | | | | | | | | | | | | | | | ) | | | | ) | | | | | | | | | | | | | | | | | | | | | Repurchase of ordinary shares | | | | | | | | | | | | | | | | | | | | ) | | | | ) | | | | | | | | | | | | | | | | | | | | ) | Cumulative effect of accounting change | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Exercise of share-based compensation plans | | | | | | | | | | | | | | | | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Foreign currency translation adjustment | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Capital injection from non-controlling interest | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Appropriation to statutory reserve | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Balance as of December 31, 2018 | | | | | | | | | | | | | | | | | | | | ) | | | | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2017, 2018 AND 2019 (Continued)
(All amounts in thousands, except share data, or otherwise noted)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Accumulated other comprehensive income | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Balance as of December 31, 2018 | | | | | | | | | | | | | | | | | | | | ) | | | | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Issuance of ordinary shares for share-based compensation plans | | | | | | | | | | | | | | | | | | | | ) | | | | ) | | | | | | | | | | | | | | | | | | | — | | Repurchase of ordinary shares | | | | | | | | | | | | | | | | | | | | ) | | | | ) | | | | | | | | | | | | | | | | | | | | ) | | | | | | | | | | | | | | | | | | | | — | | | | — | | | | | | | | | | | | | | | | | | | | | | Exercise of share-based compensation plans | | | | | | | | | | | | | | | | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Dividends paid to shareholders | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | (390,715 | | | | | | | | (390,715 | | Foreign currency translation adjustment | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | — | | | | — | | | | | | Appropriation to statutory reserve | | | | | | | | | | | | | | | | | | | | | | | | | | | — | | | | | | | | | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Balance as of December 31, 2019 | | | | | | | | | | | | | | | | | | | | ) | | | | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | For the years ended December 31, | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 2,374,518 | | | | 1,968,581 | | | | 2,495,316 | | | | 391,569 | | Foreign currency translation adjustment, net of nil tax | | | | | 12,110 | | | | (75,462 | ) | | | (11,627 | ) | | | (1,825 | ) | | | | | | | | | | | | | | | | | | | | Total comprehensive income | | | | | 2,386,628 | | | | 1,893,119 | | | | 2,483,689 | | | | 389,744 | | | | | | | | | | | | | | | | | | | | | Total comprehensive loss (income) attributable to non-controlling interest shareholders | | | | | (1,668 | ) | | | 4,119 | | | | 13,631 | | | | 2,139 | | | | | | | | | | | | | | | | | | | | | Total comprehensive income attributable to FinVolution Group’s ordinary shareholders | | | | | 2,384,960 | | | | 1,897,238 | | | | 2,497,320 | | | | 391,883 | | | | | | | | | | | | | | | | | | | | | Weighted average number of ordinary shares used in computing net profit per share | | | | | | | | | | | | | | | | | | | | | | | | 1,525,814,189 | | | | 1,477,162,991 | | | | 1,420,870,790 | | | | 1,420,870,790 | | | | | | | 1,552,423,060 | | | | 1,491,325,420 | | | | 1,482,501,832 | | | | 1,482,501,832 | | | | | | | | Net profit per share attributable to FinVolution Group’s ordinary shareholders | | | | | | | | | | | | | | | | | | | | | | | | 1.56 | | | | 1.34 | | | | 1.77 | | | | 0.28 | | | | | | | 1.53 | | | | 1.32 | | | | 1.69 | | | | 0.27 | | | | | | | | Net profit per ADS attributable to FinVolution Group’s ordinary shareholders (one ADS equals to five ordinary shares) | | | | | | | | | | | | | | | | | | | | | | | | 7.78 | | | | 6.68 | | | | 8.83 | | | | 1.39 | | | | | | | 7.64 | | | | 6.61 | | | | 8.46 | | | | 1.33 | |
The accompanying notes form an integral part of these consolidated financial statements. CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY FOR THE YEARS ENDED DECEMBER 31, 2019, 2020 AND 2021 (All amounts in thousands, except share data, or otherwise noted) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
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| | |
| | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Balance as of December 31, 2018 | | | | | | | 1,533,071,169 | | | | 102 | | | | 5,896,017 | | | | (46,301,000 | ) | | | (332,121 | ) | | | 58,210 | | | | 256,006 | | | | 45,668 | | | | 61,856 | | | | 5,985,738 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Issuance of ordinary shares for share-based compensation plans | | | 12 | | | | 17,000,000 | | | | 1 | | | | — | | | | (17,000,000 | ) | | | (1 | ) | | | — | | | | — | | | | — | | | | — | | | | — | | Repurchase of ordinary shares | | | 12 | | | | — | | | | — | | | | — | | | | (12,729,500 | ) | | | (47,173 | ) | | | — | | | | — | | | | — | | | | — | | | | (47,173 | ) | | | | 13 | | | | — | | | | — | | | | 42,260 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 42,260 | | Exercise of share-based compensation plans | | | 13 | | | | — | | | | — | | | | (297,379 | ) | | | 55,396,235 | | | | 332,121 | | | | — | | | | — | | | | — | | | | — | | | | 34,742 | | | | | | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 2,372,850 | | | | 1,668 | | | | 2,374,518 | | Dividends paid to shareholders | | | | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | (390,715 | ) | | | — | | | | (390,715 | ) | Foreign currency translation adjustment | | | | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 12,110 | | | | — | | | | — | | | | — | | | | 12,110 | | Appropriation to statutory reserve | | | | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 61,192 | | | | (61,192 | ) | | | — | | | | — | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Balance as of December 31, 2019 | | | | | | | 1,550,071,169 | | | | 103 | | | | 5,640,898 | | | | (20,634,265 | ) | | | (47,174 | ) | | | 70,320 | | | | 317,198 | | | | 1,966,611 | | | | 63,524 | | | | 8,011,480 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY FOR THE YEARS ENDED DECEMBER 31, 2019, 2020 AND 2021 (Continued) (All amounts in thousands, except share data, or otherwise noted) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Accumulated other comprehensive income | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Balance as of December 31, 2019 | | | | | 1,550,071,169 | | | | 103 | | | | 5,640,898 | | | | (20,634,265 | ) | | | (47,174 | ) | | | 70,320 | | | | 317,198 | | | | 1,966,611 | | | | 63,524 | | | | 8,011,480 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Cumulative effect of accounting change | | 2(b) | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | (882,964 | ) | | | — | | | | (882,964 | ) | Repurchase of ordinary shares | | 12 | | | — | | | | — | | | | — | | | | (139,954,870 | ) | | | (384,871 | ) | | | — | | | | — | | | | — | | | | — | | | | (384,871 | ) | | | 13 | | | — | | | | — | | | | 42,169 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 42,169 | | Exercise of share-based compensation plans | | 13 | | | — | | | | — | | | | (23,077 | ) | | | 15,682,565 | | | | 30,424 | | | | — | | | | — | | | | — | | | | — | | | | 7,347 | | | | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 1,972,700 | | | | (4,119 | ) | | | 1,968,581 | | Dividends paid to shareholders | | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | (263,569 | ) | | | — | | | | (263,569 | ) | Foreign currency translation adjustment | | | | | — | | | | — | | | | — | | | | — | | | | — | | | | (75,462 | ) | | | — | | | | — | | | | — | | | | (75,462 | ) | Appropriation to statutory reserve | | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 140,860 | | | | (140,860 | ) | | | — | | | | — | | Capital injection from non-controlling interest | | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 7,619 | | | | 7,619 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Balance as of December 31, 2020 | | | | | 1,550,071,169 | | | | 103 | | | | 5,659,990 | | | | (144,906,570 | ) | | | (401,621 | ) | | | (5,142 | ) | | | 458,058 | | | | 2,651,918 | | | | 67,024 | | | | 8,430,330 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY FOR THE YEARS ENDED DECEMBER 31, 2019, 2020 AND 2021 (Continued) (All amounts in thousands, except share data, or otherwise noted) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Accumulated other comprehensive income | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Balance as of December 31, 2020 | | | | | 1,550,071,169 | | | | 103 | | | | 5,659,990 | | | | (144,906,570 | ) | | | (401,621 | ) | | | (5,142 | ) | | | 458,058 | | | | 2,651,918 | | | | 67,024 | | | | 8,430,330 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Repurchase of ordinary shares | | 12 | | | — | | | | — | | | | — | | | | (4,171,000 | ) | | | (16,228 | ) | | | — | | | | — | | | | — | | | | — | | | | (16,228 | ) | | | 13 | | | — | | | | — | | | | 95,213 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 95,213 | | Exercise of share-based compensation plans | | 13 | | | — | | | | — | | | | (60,470 | ) | | | 32,797,805 | | | | 93,678 | | | | — | | | | — | | | | — | | | | — | | | | 33,208 | | | | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 2,508,947 | | | | (13,631 | ) | | | 2,495,316 | | Dividends paid to shareholders | | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | (317,569 | ) | | | — | | | | (317,569 | ) | Foreign currency translation adjustment | | | | | — | | | | — | | | | — | | | | — | | | | — | | | | (11,627 | ) | | | — | | | | — | | | | — | | | | (11,627 | ) | Appropriation to statutory reserve | | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 152,345 | | | | (152,345 | ) | | | — | | | | — | | Capital injection from non-controlling interest | | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 967 | | | | 967 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Balance as of December 31, 2021 | | | | | 1,550,071,169 | | | | 103 | | | | 5,694,733 | | | | (116,279,765 | ) | | | (324,171 | ) | | | (16,769 | ) | | | 610,403 | | | | 4,690,951 | | | | 54,360 | | | | 10,709,610 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
The accompanying notes form an integral part of these consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2017, 20182019, 2020 AND 20192021 (All amounts in thousands, except share data, or otherwise noted) | | | | | | | | | | | | | | | | | | | | | | | | For the Years Ended December 31, | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Cash flows from operating activities: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Adjustments to reconcile net profit to net cash provided by (used in) operating activities: | | | | | | | | | | | | | | | | | | | | | Provision for loans receivable | | | | | | | | | | | | | | | | | | | | | Provision for accounts receivable | | | | | | | | | | | | | | | | | | | | | Depreciation and amortization | | | | | | | | | | | | | | | | | | | | | Amortization of right-of-use asset and interest of leasing liabilities | | | | | | | — | | | | — | | | | 49,373 | | | | 7,092 | | Change in fair value of short term investments | | | | | | | | ) | | | | ) | | | | | | | | | Gain from disposal of investments | | | | | | | — | | | | — | | | | (10,614 | ) | | | (1,525 | ) | Change in fair value of investments | | | | | | | | | | | | | | | | | | | | | Net gain from investment in loans | | | | | | | | ) | | | | ) | | | | ) | | | | ) | | | | | | | | | | | | | | | | | | | | | | Impairment of intangible assets | | | | | | | | | | | | | | | | | | | | | Changes in operating assets and liabilities: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | ) | | | | ) | | | (332,145 | ) | | | | ) | Quality assurance receivable | | | | | | | | ) | | | | ) | | | | ) | | | | ) | Financial guarantee derivative assets and discretionary payment | | | | | | | | | | | | ) | | | | | | | | | | | | | | | | | ) | | | | ) | | | | ) | | | | ) | Amounts due from related party | | | | | | | | ) | | | | ) | | | | | | | | | | | | | | | | | | | | | ) | | | | | | | | | Prepaid expenses and other assets | | | | | | | | ) | | | | ) | | | | ) | | | | ) | | | | | | | | | | | | | | | | | | | | | | Payable to platform customers | | | | | | | | | | | | ) | | | | ) | | | | ) | Quality assurance payable | | | | | | | | | | | | | | | | | | | | | Payroll and welfare payable | | | | | | | | | | | | | | | | ) | | | | ) | | | | | | | | | | | | | ) | | | | ) | | | | ) | | | | | | | | | | | | | ) | | | | ) | | | | ) | Amounts due to related party | | | | | | | | ) | | | | ) | | | | | | | | | | | | | | | | | | | | | | | | | ) | | | | ) | | | | | | | | | | | | | | | | | | | | | | Accrued expenses and other liabilities | | | | | | | | | | | | | | | 93,473 | | | | 13,427 | | | | | | | | | | | | | | | | | | | | | | | Net cash provided by operating activities | | | | | | | | | | | | | | | | ) | | | | ) | | | | | | | | | | | | | | | | | | | | | | Cash flows from investing activities: | | | | | | | | | | | | | | | | | | | | | Collection of loans originated and held by the Group | | | | | | | | | | | | | | | | | | | | | Investment in loans originated and held by the Group | | | | | | | | ) | | | | ) | | | | ) | | | | ) | Investment in convertible loan | | | | 5 | | | — | | | | — | | | | | ) | | | | ) | Proceeds from disposal of investments | | | | | | | | | | | | | | | | | | | | | | | | | | | | | ) | | | | ) | | | | ) | | | | ) | Proceeds from short-term investments | | | | | | | 6,485,536 | | | | 13,122,058 | | | | 5,532,569 | | | | 794,704 | | Purchase of short-term investments | | | | | | | | ) | | | | ) | | | | ) | | | | ) | Purchase of property, equipment and software | | | | | | | | ) | | | | ) | | | | ) | | | | ) | Proceeds from disposal of a subsidiary | | | | | | | | | | | | | | | | | | | | | Acquisition of intangible assets | | | | | | | | | | | | ) | | | | | | | | | Cash paid for business combinations, net of cash acquired | | | 3 | (b) | | | | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Net cash used in investing activities | | | | | | | | ) | | | | ) | | | | ) | | | | ) | | | | | | | | | | | | | | | | | | | | | | Cash flows from financing activities: | | | | | | | | | | | | | | | | | | | | | Cash received from investors - consolidated trusts | | | | | | | | | | | | | | | | | | | | | Cash paid to investors - consolidated trusts | | | | | | | | ) | | | | ) | | | | ) | | | | ) | Cash paid for repurchase of preferential beneficiaries of consolidated trusts | | | | | | | | ) | | | | ) | | | | ) | | | | ) | Cash received from short-term borrowings | | | | | | | | | | | | | | | | | | | | | Repayment of short-term borrowings | | | | | | | | | | | | ) | | | (25,000 | | | | (3,591 | | | | | | | | | | | | | | | | | | ) | | | | ) | Repurchase of ordinary shares | | | | | | | | | | | | ) | | | | ) | | | | ) | Proceeds from exercise of share-based compensation plans | | | | | | | | | | | | | | | | | | | | | Capital injection from non-controlling interest | | | | | | | | | | | | | | | | | | | | | Proceeds from issuance of ordinary shares, net | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Net cash provided by financing activities | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Effect of exchange rate changes on cash, cash equivalents and restricted cash | | | | | | | | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Net increase in cash, cash equivalents and restricted cash | | | | | | | | | | | | | | | | | | | | | Cash, cash equivalents and restricted cash at beginning of year | | | | | | | | | | | | | | | | | | | | | Cash, cash equivalents and restricted cash at end of year | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | For the years ended December 31, | | | | | | | | | | | | | | | | | | | | | | | | | Cash flows from operating activities: | | | | | | | | | | | | | | | | | | | | 2,374,518 | | | | 1,968,581 | | | | 2,495,316 | | | | 391,569 | | Adjustments to reconcile net profit to net cash provided by (used in) operating activities: | | | | | | | | | | | | | | | | | Provision for loans receivable | | | 299,504 | | | | 463,175 | | | | 374,243 | | | | 58,727 | | Provision for accounts receivable and contract assets | | | 261,882 | | | | 144,661 | | | | 139,226 | | | | 21,848 | | Provision for quality assurance receivable | | | 210,520 | | | | (49,590 | ) | | | 59,136 | | | | 9,280 | | Depreciation and amortization | | | 57,712 | | | | 51,780 | | | | 37,277 | | | | 5,850 | | Amortization of asset and interest of leasing liabilities | | | 49,373 | | | | 44,653 | | | | 31,956 | | | | 5,015 | | Change in fair value of short-term investments | | | 13,028 | | | | (7,211 | ) | | | (1,573 | ) | | | (247 | ) | | | | — | | | | 33,660 | | | | 5,000 | | | | 785 | | Gain from disposal of investments | | | (10,614 | ) | | | 0 | | | | 0 | | | | 0 | | Equity pick up of investments | | | — | | | | 0 | | | | 4,245 | | | | 666 | | Net gain from investment in loans | | | (1,106,669 | ) | | | (1,113,337 | ) | | | (1,216,170 | ) | | | (190,844 | ) | | | | 42,260 | | | | 42,169 | | | | 95,213 | | | | 14,941 | | Impairment of intangible assets | | | 4,600 | | | | 0 | | | | 0 | | | | 0 | | Changes in operating assets and liabilities: | | | | | | | | | | | | | | | | | Accounts receivable and contract assets | | | (240,597 | ) | | | (227,784 | ) | | | (1,166,166 | ) | | | (182,997 | ) | Quality assurance receivable | | | (1,795,796 | ) | | | 2,542,680 | | | | 130,620 | | | | 20,497 | | Financial guarantee derivative assets and discretionary payment | | | 56,287 | | | | 0 | | | | 0 | | | | 0 | | | | | (6,977 | ) | | | 151,335 | | | | (299,983 | ) | | | (47,074 | ) | Amounts due from related party | | | 2,830 | | | | 0 | | | | 0 | | | | 0 | | Prepaid expenses and other assets | | | (1,090,910 | ) | | | 353,383 | | | | (875,274 | ) | | | (137,351 | ) | Payable to platform customers | | | (220,404 | ) | | | (581,177 | ) | | | (22,303 | ) | | | (3,500 | ) | Quality assurance payable | | | 956,774 | | | | 0 | | | | 0 | | | | 0 | | Deferred guarantee income | | | — | | | | (613,858 | ) | | | (169,893 | ) | | | (26,660 | ) | Expected credit losses for quality assurance commitment | | | — | | | | (1,202,520 | ) | | | 798,060 | | | | 125,233 | | Payroll and welfare payable | | | (11,569 | ) | | | 44,304 | | | | 31,929 | | | | 5,010 | | | | | (96,803 | ) | | | 26,100 | | | | 46,250 | | | | 7,258 | | | | | (109,741 | ) | | | (52,281 | ) | | | 4,989 | | | | 784 | | Amounts due to related parties | | | 4,309 | | | | (2,325 | ) | | | 281 | | | | 44 | | | | | (51,370 | ) | | | (45,682 | ) | | | (36,066 | ) | | | (5,660 | ) | | | | 98,858 | | | | 14,816 | | | | 34,084 | | | | 5,349 | | Accrued expenses and other liabilities | | | 93,473 | | | | 221,377 | | | | 129,830 | | | | 20,373 | | | | | | | | | | | | | | | | | | | Net cash provided by (used in) operating activities | | | (215,522 | ) | | | 2,206,909 | | | | 630,227 | | | | 98,896 | | | | | | | | | | | | | | | | | | | Cash flows from investing activities: | | | | | | | | | | | | | | | | | Collection of loans originated and held by the Group | | | 10,520,227 | | | | 12,757,947 | | | | 7,032,972 | | | | 1,103,627 | | Investment in loans originated and held by the Group | | | (12,128,140 | ) | | | (9,826,856 | ) | | | (5,809,353 | ) | | | (911,614 | ) | Investment in convertible loan | | | (20,000 | ) | | | 0 | | | | 0 | | | | 0 | | Proceeds from disposal of investments | | | 21,508 | | | | 2,460 | | | | 0 | | | | 0 | | | | | (803,691 | ) | | | (36,829 | ) | | | (31,246 | ) | | | (4,903 | ) | Proceeds from short-term investments | | | 5,532,569 | | | | 6,177,791 | | | | 13,534,543 | | | | 2,123,865 | | Purchase of short-term investments | | | (3,902,033 | ) | | | (8,001,000 | ) | | | (12,676,800 | ) | | | (1,989,267 | ) | Purchase of property, equipment and software | | | (48,659 | ) | | | (11,017 | ) | | | (55,271 | ) | | | (8,673 | ) | Acquisition of intangible assets | | | — | | | | (21,000 | ) | | | 0 | | | | 0 | | | | | | | | | | | | | | | | | | | Net cash provided by (used in) investing activities | | | (828,219 | ) | | | 1,041,496 | | | | 1,994,845 | | | | 313,035 | | | | | | | | | | | | | | | | | | | Cash flows from financing activities: | | | | | | | | | | | | | | | | | Cash received from investors - consolidated trusts | | | 3,437,160 | | | | 766,160 | | | | 1,643,572 | | | | 257,911 | | Cash paid to investors - consolidated trusts | | | (1,488,301 | ) | | | (2,993,122 | ) | | | (1,574,118 | ) | | | (247,013 | ) | Cash paid for repurchase of preferential beneficiaries of consolidated trusts | | | (7,948 | ) | | | 0 | | | | 0 | | | | 0 | | Cash received from short-term borrowings | | | 235,000 | | | | 0 | | | | 0 | | | | 0 | | Repayment of short-term borrowings | | | (25,000 | ) | | | (235,000 | ) | | | 0 | | | | 0 | | | | | (390,715 | ) | | | (263,569 | ) | | | (317,569 | ) | | | (49,834 | ) | Repurchase of ordinary shares | | | (42,276 | ) | | | (379,984 | ) | | | (25,991 | ) | | | (4,079 | ) | Proceeds from exercise of share-based compensation plans | | | 31,592 | | | | 6,617 | | | | 33,339 | | | | 5,232 | | Capital injection from non-controlling interest | | | — | | | | 7,619 | | | | 967 | | | | 152 | | | | | | | | | | | | | | | | | | | Net cash provided (used in) by financing activities | | | 1,749,512 | | | | (3,091,279 | ) | | | (239,800 | ) | | | (37,631 | ) | | | | | | | | | | | | | | | | | | Effect of exchange rate changes on cash, cash equivalents and restricted cash | | | 11,253 | | | | (51,470 | ) | | | (10,132 | ) | | | (1,588 | ) | | | | | | | | | | | | | | | | | | Net increase in cash, cash equivalents and restricted cash
| | | 717,024 | | | | 105,656 | | | | 2,375,140 | | | | 372,712 | | Cash, cash equivalents and restricted cash at beginning of year | | | 5,293,721 | | | | 6,010,745 | | | | 6,116,401 | | | | 959,797 | | Cash, cash equivalents and restricted cash at end of year | | | 6,010,745 | | | | 6,116,401 | | | | 8,491,541 | | | | 1,332,509 | | | | | | | | | | | | | | | | | | |
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued) FOR THE YEARS ENDED DECEMBER 31, 2017, 20182019, 2020 AND 20192021 (All amounts in thousands, except share data, or otherwise noted) | | | | | | | | | | | | | | | | | | | | | | | | | | For the Years Ended December 31, | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Supplemental disclosure of cash investing and financing activities | | | | | | | | | | | | | | | | | | | | | Cash paid for interest including paid to investors of consolidated trusts | | | | | | | | ) | | | | ) | | | | ) | | | | ) | Cash paid for income taxes | | | | | | | | ) | | | | ) | | | | ) | | | | ) | Supplemental disclosure of non-cash investing and financing activities | | | | | | | | | | | | | | | | | | | | | Accretion on convertible redeemable preferred shares to redemption value | | | | | | | | | | | | | | | | | | | | | Payable for purchase of property, equipment and software | | | | | | | | | | | | | | | | | | | | | Payable for repurchase of ordinary shares | | | | | | | | | | | | | | | 4,897 | | | | 703 | | Receivable from exercise of share-based incentive plans | | | | | | | | | | | 788 | | | | 3,150 | | | | 452 | |
| | | | | | | | | | | | | | | | | | | For the years ended December 31, | | | | | | | | | | | | | | | | | | | | | | | | | Supplemental disclosure of cash investing and financing activities | | | | | | | | | | | | | | | | | Cash paid for interest including interest paid to investors of consolidated trusts | | | (94,957 | ) | | | (268,182 | ) | | | (161,431 | ) | | | (25,332 | ) | Cash paid for income taxes | | | (145,825 | ) | | | (367,004 | ) | | | (574,939 | ) | | | (90,220 | ) | Supplemental disclosure of non-cash investing and financing activities | | | | | | | | | | | | | | | | | Payable for purchase of property, equipment and software | | | 292 | | | | 607 | | | | 1,134 | | | | 178 | | Payable for purchase of intangible assets | | | — | | | | 5,000 | | | | 5,000 | | | | 785 | | Payable for repurchase of ordinary shares | | | 4,897 | | | | 9,784 | | | | 21 | | | | 3 | | Receivable from exercise of share-based compensation plans | | | 3,938 | | | | 4,668 | | | | 4,537 | | | | 712 | |
The following table sets forth cash, cash equivalents and restricted cash by category within the Consolidated Balance SheetsSheets: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Cash and cash equivalents | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Cash and cash equivalents | | | 2,632,174 | | | | 4,418,127 | | | | 693,301 | | | | | 3,484,227 | | | | 4,073,414 | | | | 639,208 | | | | | | | | | | | | | | | Total cash, cash equivalents and restricted cash | | | 6,116,401 | | | | 8,491,541 | | | | 1,332,509 | | | | | | | | | | | | | | |
The accompanying notes form an integral part of these consolidated financial statements. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (All amounts in thousands, except share data, or otherwise noted) 1. Principal activities and reorganization (a) Principal activitiesorganization
FinVolution Group (formerly known as PPDAI Group Inc., the(the “Company”) is an investment holding company and with its consolidated subsidiaries and the consolidated variable interest entities (“VIEs”) (collectively referred to as the “Group”) operates an online consumer finance marketplace through its platform (www.ppdai.com) registered in the People’s Republic of China (the “PRC” or “China”). The Company has been listed on the New York Stock Exchange in the United States of America since November 2017. As of December 31, 2021, the Company effectively controls a number of VIEs through a series of commercial agreements (the “VIE Agreements”) entered into between certain subsidiaries of the Group (the “WOFEs”), the VIEs and nominal shareholders of the VIEs. As of December 31, 2019,2021, the Company’s principal subsidiaries and consolidated VIEs are as follows: | | | | | | | | | | | | | | | ownershipeconomic interest | | | | | | | | | | | | | | | | | | | | | FinVolution (HK) LIMITED.Limited (“FinVolution HK”) | | | | %100% | | | | | | | | | Beijing Prosper Investment Consulting Co., Ltd. (“Beijing Prosper”) | | | | %100% | | | | | | | | | Shanghai Guangjian Information Technology Co., Ltd. (“Shanghai Guangjian”) | | | | %100% | | | | | | | | | Shanghai Shanghu Information Technology Co., Ltd. (“Shanghai Shanghu”) Shanghai Manyin Information Technology Co., Ltd. (“Shanghai Manyin”) | | | | %100% | | | | | Shanghai, China | Hainan Shanghu Information Technology Co., Ltd. (“Hainan Shanghu”) | | 100% | | | | August 1, 2018 | | | | | | | | | | | | Hainan, China | | | | | | | | | | | | | | Beijing Paipairongxin Investment Consulting Co., Ltd. (“Beijing Paipairongxin”) | | | 100 | %* | | | | | June 15, 2012 | | | | Shanghai Zihe Information Technology Co., Ltd. (“Shanghai Zihe”) | | | 100 | %* | | | | | July 6, 2017 | | | | Shanghai Nianqiao Technology Co., Ltd. (“ (“Shanghai Nianqiao”) | | | 100 | %* | | | | | August 8, 2018 | | | | Shanghai Ledao Technology Co., Ltd. (“ (“Shanghai Ledao”) | | | | | | | January 10, 2019 | | Shanghai, China | Chengdu Yougao Information Technology Co., Ltd. (“Chengdu Yougao”) | | Shanghai, China100%* | | December 26, 2019 | | Chengdu, China | Consolidated VIEs’ principal subsidiaries | | | | | | | | | | | | | Shanghai PPDai Financial Information Services Co.,Ltd. (“Shanghai PPDai”) | | | 100 | %* | | | | | January 18, 2011 | | | | Shanghai Erxu Information Technology Co., Ltd. (“Shanghai Erxu”) | | | 100 | %* | | | | | April 28, 2018 | | | | Fujian Zhiyun Financing Guarantee Co., Ltd..Ltd. (“Fujian Zhiyun”) | | | 100 | %* | | | November 21, 2019 | | | | Fujian, China | |
* | Controlled via contractual relationships |
Prior to 2012, the operation of the online consumer finance marketplace was carried out by Shanghai PPDAI and Beijing Paipairongxin, both of which were owned by the original shareholders (the “Founders”) and an angel investor. To facilitate offshore financing, an offshore corporate structure was formed in 2012 (the “Reorganization”), which was carried out as follows:
| 1) | FinV
olution Group was incorporated in theCayman Islands
onJune 6, 2012
by the Founders and angel investor. |
| 2) | On June 12, 2012,FinVolution
HK was incorporated in Hong Kong as a wholly owned subsidiary of the Company. |
| 3) | On June 15, 2012, Beijing Prosper was incorporated in the PRC as a wholly owned subsidiary of. |
| 4) | On August 21, 2012, Beijing Paipairongxin was incorporated in the PRC by the founders of Shanghai PPDAI. |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (All amounts in thousands, except share data, or otherwise noted) 1. Principal activities and reorganization (continued)
(b) Reorganization (continued)
By entering into a series of commercial agreements in 2012 to 2014 (the “VIE Agreements”) that included the founders. Beijing Prosper, Beijing Paipairongxin and Shanghai PPai, (i) Shanghai PPDAI became a wholly owned subsidiary of Beijing Paipairongxin and (ii) Beijing Pairongxin became a VIE whose primary beneficiary is Beijing Prosper. Upon entering into the agreements, the shareholders of Beijing Paipairongxin became the “Nominee Shareholders” of Beijing Paipairongxin.
The Company further carried out the following reorganization activities in 2017:
| 1) | On June 5, 2017, Shanghai Guangjian was incorporated in the PRC as a wholly owned subsidiary of Finvolution
HK. |
| 2) | On June 15, 2017, Shanghai Shanghu was incorporated in PRC as a wholly owned subsidiary of Shanghai Guangjian. |
In June 2017, Shanghai Guangjian, Shanghai Shanghu, Beijing Prosper, Beijing Paipairongxin, Shanghai PPDAI and the shareholders of Beijing Paipairongxin entered into a new set of contractual arrangements, including an equity pledge agreement, a business operation agreement, a power of attorney, an option agreement and an exclusive technology consulting and service agreement, replacing the previous contractual agreements among Beijing Prosper, Beijing Paipairongxin, Shanghai PPDai and the shareholders of Beijing Paipairongxin. The term of the new set of agreements do not change from the previous ones. As a result, the Company continues to have control over Beijing Paipairongxin.
In February 2018, the Group established Shanghai Manyin. In November 2018 and January 2019, Shanghai Manyin entered into a series of similar contractual agreements with Shanghai Nianqiao and Shanghai Ledao, which enable the Group to effective control Shanghai Niaoqiao and Shanghai Ledao.
Shanghai Guangjian and Shanghai Manyin are collectively referred to as the WOFEs. Beijing Paipairongxin, Shanghai Zihe, Shanghai Nianqiao and Shanghai Ledao are collectively referred to as the VIEs.
On October 20, 2017, the Company effected a share split.Each of ordinary share and preferred share of the Company was subdivided into100
shares at a par value of US$0.00001
. All shares and per share amounts presented in these consolidated financial statements and notes have been revised on a retroactive basis to reflect the effect of the share split. The par value per ordinary share has been retroactively revised as if it had been adjusted in proportion to the share split.2. Summary of significant accounting policies (a) Basis of presentation The Group’s consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the accompanying consolidated financial statements and related disclosures. Actual results may differ from those estimates. (b) Adoption of new credit loss accounting standard On January 1, 2020, the Group adopted ASU2016-13 Financial Instruments-Credit Losses (ASC Topic 326): ASC Topic 326 introduced a current expected credit loss (“CECL”) methodology, which replaced the probable incurred credit losses methodology used under the historical accounting guidance. Under ASC Topic 326 methodology, credit losses are recorded upon initial recognition of financial assets at an amount equal to the lifetime expected losses. Under probable incurred credit losses methodology, credit losses are recorded when the losses are probable or have been incurred. ASC Topic 326 requires the expected credit losses related to guarantee contracts be recorded separately from and in addition to the stand ready guarantee liability accounted for in accordance with ASC Topic 460. Before adoption of ASC Topic 326, guarantee liability is recorded at the higher of the amount determined in accordance with ASC Topic 450 and the amount determined in accordance with ASC Topic 460. The initial adoption resulted in an increase in guarantee liability related to the recognition of a separate contingent liability. Consequently, the quality assurance payable is separated into expected credit losses for quality assurance commitment, which represents the expected credit losses of the guarantee contracts accounted for in accordance with ASC Topic 326, and deferred guarantee income, which represents the stand-ready liability accounted for in accordance with ASC Topic 460. The adoption of ASC Topic 326 on January 1, 2020, resulted in a RMB883.0 million decrease to retained earnings.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (All amounts in thousands, except share data, or otherwise noted) 2. Summary of significant accounting policies (continued) (c) Principle of consolidation The consolidated financial statements include the financial statements of the Company and its subsidiaries, which include the WOFEs and consolidated VIEs, for which the Company is the ultimate primary beneficiary. Subsidiaries are those entities in which the Company, directly or indirectly, controls more than one half of the voting power; or has the power to govern the financial and operating policies, to appoint or remove the majority of the members of the board of directors, or to cast a majority of votes at the meeting of directors. Consolidated VIEs are entities in which the WOFEs through their respective contractual arrangements, bear the risks of, and enjoy the rewards normally associated with, ownership of the entities, and therefore the Company is the primary beneficiary of these entities.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in thousands, except share data, or otherwise noted)
2. Summary of significant accounting policies (continued)
(b) Principle of consolidation (continued)
All transactions and balances among the Company, its subsidiaries, the VIEs and the VIEs’ subsidiaries have been eliminated upon consolidation. Details of the typical structure of the Company’s significant VIEs are set forth below: i) VIE Agreements that give the Company effective control of VIEs Business Operation Agreement Pursuant to the relevant business operation agreements, the shareholders of the VIEs agree that to the extent permitted by law, they will accept and unconditionally execute the WOFEs’ instructions on business operations, such as appointment of directors and executive officers. They further agree that, without the WOFEs’ prior written consent, the VIEs will not take any action that may have material adverse effects on their assets, businesses, human resources, rights, obligations, or business operations. The shareholders of the VIEs agree to transfer any dividends or other similar income or interests they receive as the shareholders of the VIEs, if any, immediately and unconditionally to the WOFEs. This agreement also requires each of the shareholders of the VIEs to issue an irrevocable power of attorney authorizing the WOFEs or any person(s) designated by the WOFEs to execute shareholders’ rights on behalf of such shareholder. Unless the WOFEs terminate this agreement in advance, the agreement will remain effective until the VIEs are dissolved pursuant to PRC law. Pursuant to each power of attorney, each shareholder of the VIEs have irrevocably appointed the WOFEs or any persons designated by the WOFEs to act as such shareholder’s to exercise all shareholder rights under PRC law and the relevant articles of association, including but not limited to, appointing directors, supervisors and officers of the VIEs as well as the right to sell, transfer, pledge and dispose all or a portion of the shares held by Nominee Shareholder. The power of attorney will remain in force for ten years unless early terminated by the WOFEs. The term of the power of attorney can be extended at the WOFEs’ option until the VIEs are dissolved in accordance with PRC law and regulation. Exclusive Option Agreement Pursuant to the exclusive option agreements, the Nominee Shareholders of the VIEs granted the WOFEs or any third party designated by the WOFEs the exclusive and irrevocable right to purchase from the Nominee Shareholders, to the extent permitted by PRC law and regulations, all or part of its respective equity interests in the VIEs for a purchase price equal to the registered capital. The Nominee Shareholders will then return the purchase price to the WOFEs or any third party designated by the WOFEs after the option is exercised. The WOFEs may transfer all or part of its option to a third party at its own option. The VIEs and the Nominee Shareholders agree that without prior written consent of the WOFEs, they may not transfer or otherwise dispose the equity interests or declare any dividend. The exclusive option agreement will remain effective until the WOFEs or any third party designated by the WOFEs acquire all equity interest of the VIEs.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (All amounts in thousands, except share data, or otherwise noted) 2. Summary of significant accounting policies (continued) (b)(c) Principle of consolidation (continued)
i) VIE Agreements that give the Company effective control of VIEs (continued) Pursuant to relevant equity pledge agreements, each shareholder of the VIEs has pledged all of his or her equity interest held in the VIEs to the WOFEs to guarantee his or her obligations under the business operation agreement, the power of attorney, exclusive option agreement and the exclusive technology consulting and service agreement. In the event that the VIEs breach any obligations under these agreements, the WOFEs as the pledgee, will be entitled to request immediate disposal of the pledged equity interests and have priority to be compensated by the proceeds from the disposal of the pledged equity. The Nominee Shareholders may not dispose of the equity interests or create or permit any pledges which may have an adverse effect on the rights or benefits of the WOFEs without the prior written consent of the WOFEs. The relevant share pledge agreements will remain effective until the VIEs and its Nominee Shareholders discharge all of their obligations under the VIE Agreements and the pledgee consents such discharge in writing. ii) VIE that enables the Company to receive substantially all of the economic benefits from the VIEs Exclusive technology consulting and service agreement Pursuant to the exclusive technology consulting and service agreements, WOFEs have the exclusive right to provide the VIEs and their subsidiaries (as designated in the agreement) with technical support, consulting services and other services. The WOFEs shall exclusively own any intellectual property arising from the performance of the agreement. During the term of this agreement, the VIEs and their designated subsidiaries may not accept any services covered by this agreement provided by any third party. The VIEs and their designated subsidiaries agree to pay service fees equal to 100% of the net profit generated or otherwise determined by the WOFEs. Except by mutual agreement upon early termination by parties in writing, the exclusive business cooperation agreement will remain effective until the VIEs and their designated subsidiaries are dissolved in accordance with PRC law and regulation. Based on these contractual agreements, the Company believes that the VIEs as described above should be considered as VIEs because the equity holders do not have significant equity at risk nor do they have the characteristics of a controlling financial interest. Given that the Company, through the WOFEs, is the primary beneficiary of these VIEs, the Company believes that these VIEs should be consolidated based on the structure as described above. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (All amounts in thousands, except share data, or otherwise noted) 2. Summary of significant accounting policies (continued) (c) Principle of consolidation (continued)
The Group has established a series of trusts administrated by third-party trust companies. Since these trusts make loans solely to borrowers referred the Group to provide returns to the trust beneficiaries, the Group has power to direct the activities of the trusts. In addition, the Group has the obligation to absorb losses or the right to receive benefits from the trusts that could potentially be significant to the trusts. As a result, the Group is considered the primary beneficiary of the trusts and their assets including loans receivable (Note 3), liabilities, results of operations and cash flows are consolidated under Accounting Standards Codification (“ASC”) 810. The following table sets forth the assets, liabilities, results of operations and cash flows of the VIEs and their subsidiaries (including the consolidated trusts), which are included in the Group’s consolidated financial statements. Transactions between the VIEs (including the consolidated trusts) and their subsidiaries are eliminated in the balances presented below: | | | | | | | | | | | As of December 31, | | | | 2020 | | | 2021 | | | | RMB | | | RMB | | Cash and cash equivalents | | | 1,660,549 | | | | 2,176,581 | | | | | 3,176,799 | | | | 3,691,832 | | | | | 1,970,958 | | | | 1,173,523 | | Accounts receivable and contract assets | | | 685,556 | | | | 1,805,079 | | Quality assurance receivable | | | 1,121,554 | | | | 931,798 | | Property, equipment and software, net | | | 67,010 | | | | 43,241 | | | | | 35,187 | | | | 35,187 | | Right of use assets | | | 54,385 | | | | 48,941 | | Loans and receivables, net of credit loss allowance for | | | 2,107,837 | | | | 1,696,495 | | | | | 888,081 | | | | 820,607 | | Investment in subsidiaries and VIEs
| | | | | | | | | | | | 149,511 | | | | 343,494 | | Amounts due from Group companies | | | — | | | | 2,200,275 | | Prepaid expenses and other assets | | | 1,002,863 | | | | 1,672,654 | | | | | | | | | | | | | | 12,968,437 | | | | 16,710,285 | | | | | | | | | | | Payable to platform customers | | | 103,453 | | | | 81,150 | | Deferred guarantee income | | | 1,259,396 | | | | 1,089,503 | | Expected credit losses for quality assurance commitment | | | 2,390,501 | | | | 3,188,561 | | Payroll and welfare payable | | | 132,955 | | | | 146,697 | | Taxes payable | | | 53,552 | | | | 57,237 | | Funds payable to investors of consolidated trusts | | | 1,661,841 | | | | 1,795,640 | | Contract liabilities | | | — | | | | 6,826 | | Deferred tax liabilities | | | 67,217 | | | | 45,656 | | Leasing liabilities | | | 42,775 | | | | 33,184 | | Amounts due to Group companies | | | 2,151,941 | | | | 4,005,052 | | Amounts due to related party | | | 1,984 | | | | 2,265 | | Accrued expenses and other liabilities | | | 472,446 | | | | 598,570 | | | | | | | | | | | Total liabilities | | | 8,338,061 | | | | 11,050,341 | | | | | | | | | | |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (All amounts in thousands, except share data, or otherwise noted) 2. Summary of significant accounting policies (continued) (b)(c) Principle of consolidation (continued) | | | | | | | | | | | | | | | For the years ended December 31, | | | | 2019 | | | 2020 | | | 2021 | | | | RMB | | | RMB | | | RMB | | | | | 5,742,868 | | | | 6,993,099 | | | | 8,333,978 | | | | | 27,033 | | | | 159,319 | | | | 796,071 | | | | | | | | | | | | | | | | | | 5,769,901 | | | | 7,152,418 | | | | 9,130,049 | | | | | | | | | | | | | | | | | | (2,213,442 | ) | | | (2,000,511 | ) | | | (3,441,504 | ) | | | | (1,837,121 | ) | | | (1,129,163 | ) | | | (2,545,816 | ) | | | | (43,494 | ) | | | (10,104 | ) | | | (7,503 | ) | Provision for accounts receivable and contract assets | | | (258,071 | ) | | | (116,387 | ) | | | (134,938 | ) | Provision for loans receivable | | | (257,263 | ) | | | (302,243 | ) | | | 32,317 | | Credit losses for quality assurance commitment | | | — | | | | (2,007,968 | ) | | | (1,963,609 | ) | | | | | | | | | | | | | | | | | (4,609,391 | ) | | | (5,566,376 | ) | | | (8,061,053 | ) | | | | | | | | | | | | | | Loss from subsidiaries and VIEs | | | (1,128 | ) | | | (2,372 | ) | | | (448 | ) | | | | | | | | | | | | | | | | | 1,159,382 | | | | 1,583,670 | | | | 1,068,548 | | | | | | | | | | | | | | | | | | 32,435 | | | | 100,830 | | | | 93,674 | | Gain from quality assurance | | | 98,405 | | | | — | | | | — | | Realized gain from financial guarantee derivatives | | | 31,444 | | | | — | | | | — | | Fair value change of financial guarantee derivatives | | | (56,287 | ) | | | — | | | | — | | | | | | | | | | | | | | | Profit before income tax expense | | | 1,265,379 | | | | 1,684,500 | | | | 1,162,222 | | | | | (268,504 | ) | | | (319,700 | ) | | | (144,463 | ) | | | | | | | | | | | | | | | | | 996,875 | | | | 1,364,800 | | | | 1,017,759 | | | | | | | | | | | | | | |
The following table sets forth the assets, liabilities, results of operations and cash flows of the VIEs, which are included in the Group’s consolidated financial statements. Transactions between the VIEs and their subsidiaries are eliminated in the balances presented below:
| | | | | | | | | | | | | | | | | | | | | | | | | | | Cash and cash equivalents | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Quality assurance receivable | | | | | | | | | Property, equipment and software, net | | | | | | | | | Right of Use assets | | | — | | | | 94,852 | | Loans and receivables, net of provision for loan losses | | | — | | | | 36,344 | | Financial guarantee derivative assets | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Prepaid expenses and other assets | | | | | | | | | | | | | | | | | | | | | | | | | | | Payable to platform customers | | | | | | | | | Quality assurance payable | | | | | | | | | Payroll and welfare payable | | | | | | | | | | | | | | | | | | Short-term borrowings | | | — | | | | 85,000 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Accrued expenses and other liabilities | | | | | | | 237,802 | | | | | | | | | | | | | | | | | | | |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in thousands, except share data, or otherwise noted)
2. Summary of significant accounting policies (continued)
| | | | | | | | | | | | | | | For the years ended December 31, | | | | 2019 | | | 2020 | | | 2021 | | | | RMB | | | RMB | | | RMB | | Cash used in operating activities under service agreements for Inter-company | | | (239,476 | ) | | | (2,143,205 | ) | | | (2,313,224 | ) | Cash provided by operating activities under service agreements for Inter-company | | | 26,225 | | | | 137,624 | | | | 534,988 | | Net cash provided by operating activities for Third-party | | | 209,889 | | | | 2,415,649 | | | | 1,412,435 | | | | | | | | | | | | | | | | | | (3,362 | ) | | | 410,068 | | | | (365,801 | ) | | | | | | | | | | | | | | Capital contribution to Group companies | | | — | | | | — | | | | (22,432 | ) | Collection of loans from Group companies | | | — | | | | — | | | | 389,043 | | Cash paid as loans extended to Group companies | | | — | | | | — | | | | (2,328,235 | ) | Other investing activities | | | (981,638 | ) | | | 1,268,657 | | | | 1,668,517 | | | | | | | | | | | | | | | | | | (981,638 | ) | | | 1,268,657 | | | | (293,107 | ) | | | | | | | | | | | | | | Repayment of loans to Group companies | | | — | | | | — | | | | (164,719 | ) | Cash received as loans from Group companies | | | 31,920 | | | | — | | | | 1,785,238 | | Other financing activities | | | 2,000,911 | | | | (2,286,962 | ) | | | 69,454 | | | | | | | | | | | | | | | | | | 2,032,831 | | | | (2,286,962 | ) | | | 1,689,973 | | | | | | | | | | | | | | |
(b) Principle of consolidation (continued)
| | | | | | | | | | | | | | | For the Years Ended December 31, | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Net cash provided by operating | | | | | | | | | | | | | Net cash provided by (used in) investing activities | | | | ) | | | | ) | | | | | Net cash provided by (used in) financing activities | | | | ) | | | | | | | | | | | | | | | | | | | | | | Net increase in cash, cash equivalents and restricted cash | | | | | | | | | | | | | Cash, cash equivalents and restricted cash at beginning of year | | | | | | | | | | | | | | | | | | | | | | | | | | Cash, cash equivalents and restricted cash at end of year | | | | | | | | | | | | | | | | | | | | | | | | | |
Under the VIE Arrangements, the Company has the power to direct activities of the VIEs and can have assets transferred out of the VIEs. Therefore, the Company considers that there is no asset in the VIEs that can be used only to settle obligations of the VIEs, except for registered capital and PRC statutory reserves, if any. As the VIEs are incorporated as limited liability company under the Company Law of the PRC, creditors of the VIEs do not have recourse to the general credit of the Company for any of the liabilities of the VIEs. Currently there is no contractual arrangement which requires the Company to provide additional financial support to the VIEs. However, as the Company conducts its businesses primarily based on the licenses and approvals held by the VIEs and their subsidiaries, the Company has provided and will continue to provide financial support to the VIEs. VIEs’ assets comprise both recognized and unrecognized revenue-producing assets. The recognized revenue-producing assets include leasehold improvements, computers and network equipment and purchased intangible assets which are recognized in the Company’s consolidated balance sheet. The unrecognized revenue-producing assets mainly consist of copyrights, trademarks and operation licenses which are not recorded in the financial statements of VIEs as they did not meet the recognition criteria set in ASC 350-30-25.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (All amounts in thousands, except share data, or otherwise noted) 2. Summary of significant accounting policies (continued) (d) Business combinations and noncontrolling interests (continued) (d) Business combinations and noncontrolling interests The Company accounts for its business combinations using the acquisition method of accounting in accordance with Accounting Standards Codification (“ASC”) 805 “Business Combinations.” The cost of an acquisition is measured as the aggregate of the acquisition date fair values of the assets transferred and liabilities incurred by the Company to the sellers and equity instruments issued. Transaction costs directly attributable to the acquisition are expensed as incurred. Identifiable assets and liabilities acquired or assumed are measured separately at their fair values as of the acquisition date, irrespective of the extent of any noncontrolling interests. The excess of (i) the total costs of acquisition, fair value of the noncontrolling interests and acquisition date fair value of any previously held equity interest in the acquiree over (ii) the fair value of the identifiable net assets of the acquiree is recorded as goodwill. If the cost of acquisition is less than the fair value of the net assets of the subsidiary acquired, the difference is recognized directly in the consolidated income statements. During the measurement period, which can be up to one year from the acquisition date, the Company may record adjustments to the assets acquired and liabilities assumed with the corresponding offset to goodwill. Upon the conclusion of the measurement period or final determination of the values of assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments are recorded to the consolidated statements of operations. In a business combination achieved in stages, the Company re-measures the previously held equity interest in the acquiree immediately before obtaining control at its acquisition-date fair value and the re-measurement gain or loss, if any, is recognized in the consolidated income statements. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in thousands, except share data, or otherwise noted)
2. Summary of significant accounting policies (continued)
(c) Business combinations and noncontrolling interests (continued)
When there is a change in ownership interests that result in a loss of control of a subsidiary, the Company deconsolidates the subsidiary from the date control is lost. Any retained noncontrolling investment in the former subsidiary is measured at fair value and is included in the calculation of the gain or loss upon deconsolidation of the subsidiary. For the Company’s majority-owned subsidiaries and VIEs, a noncontrolling interest is recognized to reflect the portion of their equity which is not attributable, directly or indirectly, to the Company. Consolidated net income (loss) on the consolidated income statements includes the net income (loss) attributable to noncontrolling interests and mezzanine equity holders when applicable. Net income (loss) attributable to mezzanine equity holders is included in net income (loss) attributable to noncontrolling interests on the consolidated income statements, while it is excluded from the consolidated statements of changes in shareholders’ equity. The cumulative results of operations attributable to noncontrolling interests, along with adjustments for share-based compensation expense arising from outstanding share-based awards relating to subsidiaries’ shares, are also recorded as noncontrolling interests in the Company’s consolidated balance sheets. Cash flows related to transactions with noncontrolling interests are presented under financing activities in the consolidated statements of cash flows. The preparation of consolidated financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported and disclosed in the consolidated financial statements and accompanying notes. Financial statements amounts that reflect significant accounting estimates and assumptions include revenue recognition, fair value ofmeasurement for provisions and liabilities in scope for ASC Topic 326 including credit loss provision for quality assurance liabilities,receivables, loan receivables and accounts receivable and contract assets as well as expected credit losses for quality assurance commitment, valuation allowance for deferred tax assets, allowance for doubtful accounts, allowance for loan losses, determination of uncertain tax positions, accounting for convertible redeemable preferred shares, and valuation of share-based awards. Such accounting estimates are impacted significantly by judgements and assumptions used in the preparation of the Group’s consolidated financial statements, and actual results could differ materially from these estimates. Changes in estimates are recorded in the period they are identified. (e)(f) Foreign currency and foreign currency translation The Group uses Renminbi (“RMB”) as its reporting currency. The US$ is the functional currency of the Group’s entities incorporated in Cayman Islands and Hong Kong, and the RMB is the functional currency of the Group’s PRC subsidiaries.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (All amounts in thousands, except share data, or otherwise noted) 2. Summary of significant accounting policies (continued)
Transactions denominated in other than the functional currencies are re-measured into the functional currency of the entity at the exchange rates prevailing on the transaction dates. Financial assets and liabilities denominated in other than the functional currency are re-measured at the balance sheet date exchange rate. The resulting exchange differences are recorded in the consolidated statements of comprehensive income (loss).income. The financial statements of the Group are translated from the functional currency to the reporting currency, RMB. Assets and liabilities of the subsidiaries are translated into RMB using the exchange rate in effect at each balance sheet date. Income and expenses items are generally translated at the average exchange rates prevailing during the fiscal year. Foreign currency translation adjustments arising from these are accumulated as a separate component of shareholders’ deficitequity on the consolidated financial statements.statements . The exchange rates used for translation on December 31, 20182020 and 20192021 were US$1.00= RMB6.8632RMB6.5249 and RMB6.9762, RMB6.3757, respectively, representing the index rates stipulated by the People’s Bank of China.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in thousands, except share data, or otherwise noted)
2. Summary of significant accounting policies (continued)
(f)(g) Convenience translation
Translations of balances in the Group’s consolidated balance sheet, consolidated statement of operations and comprehensive income (loss) and consolidated statement of cash flows from RMB into US$ as of and for year ended December 31, 20192021 are solely for the convenience of the readers and were calculated at the rate of US$1.00= RMB6.9618,RMB6.3726, representing the noon buying rate set forth in the H.10 statistical release of the U.S. Federal Reserve Board on December 31, 2019.30 , 2021. No representation is made that the RMB amounts could have been, or could be, converted, realized or settled into US$ at that rate on December 31, 2019,30 , 2021, or at any other rate. (g)(h) Significant risks and uncertainties As of December 31, 20182020 and 2019,2021, substantially all of the Group’s cash, term deposit and cash equivalents, restricted cash and short-term investments were held in major financial institutions located in the PRC and in Hong Kong, which management considers to be of high credit quality. Accounts receivable and contract assets are generally unsecured and denominated in RMB, and are derived from revenues earned from operations arising primarily in the PRC. No individual customer accounted for more than 10% of net revenues for the years ended December 31, 2017, 20182019, 2020 and 2019.2021. No individual customer accounted for more than 10% of accounts receivable and contract assets as of December 31, 20182020 and 2019.2021. In October 2019, the China Banking and Insurance Regulatory Commission, together with eight other regulatory agencies jointly promulgated the Supplemental Rules to the Administration of Financing Guarantee Companies (“Circular 37”), which provides that any entity providing client referral or credit assessment services to the lending institutions may not provide financing guarantee services in a direct or a disguised form without the regulatory approval. If any entity operates financing guarantee business or provide financing guarantee services in a disguised form without appropriate approval, its business operations will be banned by the regulatory authorities and it will be required to properly settle existing business .business. Such entity might also subject to penalties including fines and confiscation of illegal gains if applicable. In the Group’s collaboration with institutional funding partners, the Group provides certain quality assurance commitmentin order to attract and maintain such business relationship, the Group’s cooperation withGroup currently provides quality assurance commitment mainly through (i) repurchase of default loans from third-party guarantee companies which provide guarantee for the loans from institutional funding partners.partners and (ii) setting aside security deposits with third-party guarantee companies to ensure the Group has enough cash to perform its repurchase obligation if the borrowers introduced by the Group default. Due to the lack of legal interpretation for financing guarantee in a disguised form, there is uncertainty related to whether thesesuch quality assurance commitment provided constituteto institutional funding partners constitutes a financing guarantee in a disguised form. If the quality assurance commitment provided by the Group were considereddetermined to be financing guarantee in a disguise form, the Group’s business, financial condition, results of operations and liquidity will be materially and adversely affected.
NOTES
TO CONSOLIDATEDFINANCIAL
STATEMENTS
(All amounts in thousands, except share data, or otherwise noted)
2. Summary of significant accounting policies (continued)
(g) Significant risks and uncertainties (continued)
Risk of uncertainties (continued)
In order to reduce the compliance risk under Circular 37, the Group incorporated a licensed financial guarantee company in late 2019, which, since its incorporation, provides direct guarantees for certain loans funded by the institutional funding partners to replace existing quality assurance commitment provided. The Group in the process of increasing its guarantee capability by obtaining additional financial guarantee licenses or increase the capital of its financial guarantee subsidiary to further reduce its risk of noncompliance.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (All amounts in thousands, except share data, or otherwise noted) 2. Summary of significant accounting policies (continued) In order to reduce the compliance risk under Circular 37, the Group incorporated three licensed financial guarantee companies since 2019, which, since the incorporation, provide direct guarantees for certain loans funded by the institutional funding partners to replace existing quality assurance commitment provided. In 2021, The Group increased the registered capital of the guarantee subsidiaries from RMB1.9 billion as of December 31, 2020, to RMB2.4 billion as of December 31, 2021. While the outstanding loan principle covered by proper direct guarantees provided by the Group as a percentage of all outstanding loan balances facilitated by the Group increased, the absolute amount of outstanding loan principle under the quality assurance commitment increased as a result of the Group’s expansion of the business size in 2021. However, the Group will continue its effort to increase its guarantee capability by obtaining additional financial guarantee licenses or increasing the capital of its financial guarantee subsidiaries to continue reducing its risk of noncompliance. (i) Cash and cash equivalents Cash and cash equivalents represent cash on hand, demand deposits, term deposits and highly liquid investments placed with banks or other financial institutions, which have original maturities less than three months. (i)
Restricted cash represents: | (i) | Cash in quality assurance is cash managed by the Group through designated bank accounts and cash managed by China United SME Guarantee Corporation under the new quality assurance program. There is no other use of these funds except for making payments to investors for default loans that are subject to quality assurance protection. As of December 31, 20182020 and 2019,2021, the restricted cash related to quality assurance obligations were RMB2,414,449RMB1,671,785 and RMB RMB2,042,084, respectively.
1,473,749, respectively. |
| (ii) | Cash held in investor reserve fundsescrow accounts that is jointly managed by the Group and institutional funding partners. As of December 31, 2020 and 2021, the restricted cash managed by the Group through a designated bank account or third party payment company account. There is no other use of these funds except for paymentsand institutional funding partners amounted to protect relevant investors from potential losses resulting from delinquent loansRMB701,673 and or underperformance of the investment programs.RMB1,281,869, respectively. |
| (iii) | Cash received via consolidated trusts that has not yet been distributed. As of December 31, 20182020 and 2019,2021, the restricted cash related to investor reserve fundscash not yet distributed amounted to RMBRMB482,285 and RMB341,397, respectively. |
17,971
and | (iv) | Cash held in capital verification account under the name of a subsidiary of the Group established in December 2020 as apaid-in capital. As of December 31, 2019,2020 and 2021, the underlying investment programs were all maturedrestricted cash related to capital verification account amounted to RMB300,000 and the Group was in the process of settling the remaining balance in this account.RMB NaN, respectively. |
| (iii)(v) | Cash received from borrowers that has not yet been disbursed to institutional funding partners. As of December 31, 2020 and 2021, the restricted cash held as related to cash not yet disbursed amounted to RMB225,031 and RMB326,914, respectively. |
| (vi) | Cash received from investors or borrowers that has not yet been disbursed, due to a settlement time lag. As of December 31, 20182020 and 2019,2021, the restricted cash related to cash not yet disbursed amounted to RMB905,034
andRMB684,630
, respectively. |
| (iv) | Cash received via consolidated trusts that has not yet been distributed. As of December 31, 2018RMB103,453 and 2019, the restricted cash related to cash not yet distributed amounted to RMB303,667RMB81,150, respectively.
andRMB799,646
, respectively.
|
| (v) | Cash held as collateral for short-term borrowings of subsidiaries
of the Group. As of December 31, 2018 and 2019, the restricted cash held as collateral amounted to RMB26,000
andRMB251,853
, respectively.
|
| (vi) | Cash held in escrow accounts that is jointly managed by theGroup
and institutional funding partners. As of December 31, 2018 and 2019, the restricted cash managed by theGroup
and institutional funding partners amounted to RMB10,436
andRMB44,367, respectively.
|
| (vii) | Cash held in designated account under the name of a subsidiary of the Group as a security deposit for an institutional funding partner. As of December 31, 2018 and 2019, the restricted cash related to security deposit amounted to Nil and
RMB390,000.
|
(k) Short-term Investments
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in thousands, except share data, or otherwise noted)
2. Summary of significant accounting policies (continued)
(j) Short-term Investments
Short-term investments mainly consist of investments in wealth management products. The wealth management products are certain deposits with variable interest rates or principal not guaranteed with certain financial institutions. Realized and unrealized gain related to the short-term investments is recorded as other income in the consolidated statements of comprehensive income. RMB35,516, RMB96,061RMB52,863, RMB33,189 and RMB52,863 RMB91,686 was recognized for the years years ended December 31, 2017, 20182019, 2020 and 2019,2021, respectively.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (k)(All amounts in thousands, except share data, or otherwise noted) 2. Summary of significant accounting policies (continued) (l) Accounts receivable, contract assets and credit loss allowance for accounts receivable Accounts receivable and contract assets is related to the facilitation and post-facilitation service in relation to loans facilitated by the Group. Contract assets represent the Group’s right to consideration in exchange for investment management services in relation to investment programs that the CompanyGroup has transferred to the customer before payment is due. The Group only recognizes accounts receivable and contract assets to the extent that the Group believes it is probable that it will collect substantially all of the consideration to which it will be entitled to in exchange for the services transferred to the customer. Accounts receivable and contract assets is stated at the historical carrying amount net of write-offs and allowance for doubtful accounts. Thecredit risk allowance. Beginning in 2020, the Group establishes ana credit loss allowance for doubtful accounts based on estimates,expectations of lifetime credit losses based on historical default experience, known or inherit risks in the portfolio, current economic conditions and macroeconomics forecasts as well as other factors surrounding the credit risk of borrowers (Note 2(b)). Prior 2020, the credit loss allowance was determined to be the amount of probable incurred credit losses based on historical default experience and other factors surrounding the credit risk of the borrowers. The Group evaluates and adjusts its credit loss allowance for accounts receivable and contract assets on a quarterly basis or more often as necessary. Accounts receivable and contract assets that are delinquent for 180 days or more are generally written off. The Group has classified its investments into equity method investments and non-marketable equity investments. The Group applies equity method in accounting for its investments in entities in which the Group has the ability to exercise significant influence but does not have control and the investments are in either common stock or in-substance common stock. Unrealized gains on transactions between the Group and an affiliated entity are eliminated to the extent of the Group’s interest in the affiliated entity, unrealized losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred. The Group accounts for private equity funds using the equity method of accounting unless the Group’s interest is so minor that the Group may have virtually no influence over partnership operating and financial policies. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in thousands, except share data, or otherwise noted)
2. Summary of significant accounting policies (continued)
(l) Investments (continued)
Non-marketable equity investments are investments in privately held companies without readily determinable market values. They’reThey are measured at cost minus impairments, if any, plus or minus changes resulting from observable price changes in orderly transactions for identical or a similar investment of the same issuer. The changes in the fair value of non-marketable equity investments are recognized in the consolidated statement of comprehensive income. The following table sets forth the investments the Group holds as of December 31, 20182020 and 20192021, respectively. | | | | | | | | | | | | | | | | | | | | Equity method investments | | | | | | | | | Non-marketable equity investments | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Equity method investments
For the years ended December 31, 2017, 2018 and 2019, the Group completed the following significant investments which were accounted for as equity investments:
In October 2018, the Group made investments in a private equity funds with the cash consideration ofRMB50,000RMB20,000 respectively.The Company accounted for these investments under equity methods.
For the years ended December 31, 2017, 2018 and 2019, the Company also made several insignificant equity method investments ranging from RMB5,000 to RMB25,000.
For the years ended 2017, 2018 and 2019, the Company disposed certain equity method investments for total consideration of NaN, NaN and RMB20,000, which results a gain of NaN, NaN, and RMB10,621 in other income, respectively.
As of December 31, 2018 and 2019, the equity pick up adjustment made by the Group on the equity method investments are not material. For the years
ended December 31, 2017, 2018 and 2019, 0 impairment losses were recognized for equity method investments. | | | | | | | | | | | As of December 31, | | | | 2020 | | | 2021 | | Equity method investments | | | 129,622 | | | | 132,377 | | Non-marketable equity investments | | | 820,893 | | | | 838,740 | | | | | | | | | | | | | | 950,515 | | | | 971,117 | | | | | | | | | | |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (All amounts in thousands, except share data, or otherwise noted) 2. Summary of significant accounting policies (continued) (m) Investments (continued) Equity method investments For the years ended December 31, 2019, 2020 and 2021, the Group made investments in several private equity funds and accounted these investments as equity method investments as the Group has ability to significantly influence the operations or financial activities of the investees. For the years ended December 31, 2019, 2020 and 2021, the Group recognized an impairment loss of NaNl, NaNl and RMB5,000 for equity method investments, respectively. Non-marketable equity investmentsFor the years ended December 31, 2019, 2020 and 2021, the Group made investments of less than 10% of equity interest in severalnon-listed companies. These investments were accounted for asnon-marketable equity investment using measurement alternative because these investments do not have readily determinable fair value and the Group does not have significant influence over the investees.For the years ended December 31, 2019, 2020 and 2021, the Group recognized an impairment loss of NaN, RMB33,600 and NaN for non-marketable equity investments, respectively.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (All amounts in thousands, except share data, or otherwise noted) 2. Summary of significant accounting policies (continued) (l) Investments (continued)
Non-marketable equity investments
For the years ended December 31, 2017, 2018 and 2019, the Group completed the following significant investments which were accounted for asnon-marketable
equity investments:In December 2019, the Group acquiredless than
10%of
ordinary sharei
for a cash considerationof appr
o
ximately
RMB0.7billion
and accounted for it as non-marketable equity investment using measurement alternative.In July 2019, the Group acquired approximately 3.22% preferred share in Fansheng Limited for a cash consideration of USD4,370 or equivalent of RMB30,000 and accounted for it as non-marketable equity investment using measurement alternative.
In April 2019, the Group acquired approximately 6.98% preferred share in Shanghai Zhan Lue data technology Co., Ltd. for a cash consideration of RMB30,000 and accounted for it as non-marketable equity investment using measurement alternative.
In October 2018, the Group acquired approximately 5% preferred share in Shanghai Yi Yang automobile service Co., Ltd. for a cash consideration of RMB30,000 and accounted for it as non-marketable equity investment using measurement alternative.
For the years ended 2017, 2018 and 2019, the Group also made several insignificant investments in non-marketable equity investments ranging from RMB209 to RMB13,952.
For the years ended 2017, 2018 and 2019, the Company disposed certain non-marketable equity investments for total consideration of NaN, NaN and RMB1,508, which results a loss of NaN, NaN, and RMB7 in other income, respectively.
As of December 31, 2018 and 2019, the amount of fair value change adjustment recognized for non-marketable equity investments were RMB77 and NaN, respectively.
(m)(n) Fair value measurement
Fair value is the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities required or permitted to be recorded at fair value, the Group considers the principal or most advantageous market in which it would transact and it considers assumptions that market participants would use when pricing the asset or liability. The established fair value hierarchy requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. A financial instrument’s categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The three levels of inputs that may be used to measure fair value include: Level 1: Quoted prices (unadjusted) in active markets for identical assets or liabilities. Level 2: Observable, market-based inputs, other than quoted prices, in active markets for identical assets or liabilities. Level 3: Unobservable inputs to the valuation methodology that are significant to the measurement of the fair value of the assets or liabilities.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in thousands, except share data, or otherwise noted)
2. Summary of significant accounting policies (continued)
(m) Fair value measurement (continued)
Accounting guidance also describes three main approaches to measuring the fair value of assets and liabilities: (1) market approach; (2) income approach and (3) cost approach. The market approach uses prices and other relevant information generated from market transactions involving identical or comparable assets or liabilities. The income approach uses valuation techniques to convert future amounts to a single present value amount. The measurement is based on the value indicated by current market expectations about those future amounts. The cost approach is based on the amount that would currently be required to replace an asset. The Group does not have any non-financial assets or liabilities that are recognized or disclosed at fair value in the financial statements on a recurring basis. The Group’s financial instruments consist principally of cash and cash equivalents, restricted cash, short-term investments, quality assurance receivable, loans receivable, accounts receivable, contract assets, financial guarantee derivative, payable to platform customers, quality assurance payable, deferred guarantee income, expected credit losses for quality assurance commitment, short-term borrowings and other liabilities. As of December 31, 2018 and 2019, the carrying values of cash and cash equivalents, restricted cash, The short-term investments accounts receivable, payable to platform customers,mainly consist of wealth management products and are measured at fair value. Other financial instruments The carrying amounts of financial instruments other than short-term borrowings and other liabilities approximatedinvestments, approximate their fair values reported in the consolidated balance sheets due to the short termshort-term maturities of these instruments. The quality assurance receivable is measured using the contractual amounts due from borrowers, taking into account an expected rate of default. Due to the short term nature of the contributions, no discount factor was applied. Subsequently, the carrying value approximates fair value due to the short term nature of the receivable.
The quality assurance payable is measured by taking into account the expected payout rate and incorporating a markup margin.
On a recurring basis, the Group measures its short-term investments, financial guarantee derivative and non-marketable equity investments at fair value. Since financial guarantee derivative and non-marketable equity investments do not have quoted price in active markets, they are valued using valuation model. Management is responsible for determining the fair value.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (All amounts in thousands, except share data, or otherwise noted) 2. Summary of significant accounting policies (continued) (m)(n) Fair value measurement (continued)
Assets and liabilities measured at fair value on a recurring basis The following table sets forth the Group’s assets and liabilities that are measured at fair value on a recurring basis and are categorized using the fair value hierarchy: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | —wealth management products | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | —non-marketable equity investments | | | | | | | | | | | | | | | | | Financial guarantee derivative assets | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | —wealth management products | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | —non-marketable equity investments | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Level 1 Inputs | | | Level 2 Inputs | | | Level 3 Inputs | | | Balance at Fair value | | | | RMB | | | RMB | | | RMB | | | RMB | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | —wealth management products | | | 0 | | | | 1,970,958 | | | | 0 | | | | 1,970,958 | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Level 1 Inputs | | | Level 2 Inputs | | | Level 3 Inputs | | | Balance at Fair value | | | | RMB | | | RMB | | | RMB | | | RMB | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | —wealth management products | | | 0 | | | | 1,204,901 | | | | 0 | | | | 1,204,901 | | | | | | | | | | | | | | | | | | |
The Group values its wealth management products held in certain bank accountsbanks using quoted rate of return or quoted subscription/redemption prices published by the banks for these products, and accordingly, the Group classifies such wealth management products as Level 2 within the fair value hierarchy based on the nature of the fair value inputs. The non-marketable equity investments are accounted for under the measurement alternativeAssets and therefore are classified as Level 3 within theliabilities measured at fair value hierarchy based on the nature of the fair value inputs.anon-recurring The Company did not transfer any assets or liabilities in or out of level 3 during the years ended December 31, 2018 and 2019.
Changes in fair value measurement categorized within Level 3 of the fair value hierarchy are analyzed each period for changes in estimates or assumptions.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in thousands, except share data, or otherwise noted)
2. Summary of significant accounting policies (continued)
(m) Fair value measurement (continued)
Level 3 Valuation Techniques
Level 3 financial assets and liabilities consist of financial guarantee derivatives andnon-marketable
equity investments for which determination of fair value requires significant judgment and estimation. Changes in fair value are recorded in the consolidated statement of comprehensive income.Non-marketable equity investments are measured at cost minus impairments, if any, plusfair value on anon-recurring basis. The following table sets forth the unrealized gains and losses from remeasurement (referred to as upward or minus changes resulting from observable price changes in orderly transactions for identical or a similar investmentdownward adjustments) recorded as adjustments to the carrying value of the same issuer. As the investees of thenon-marketable equity investments are eitherstart-up
companies in very early stage or private companies with no readily available fair market price, no fair value adjustment were made tonon-marketable
equity investmentsheld as of December 31, 20
19 as there were no observable price change.The Group uses the discounted cash flow model to value financial guarantee derivatives at inception2019, 2020 and subsequent valuation dates. The Group analyzes the fair value of this derivative by first defining the cash flows associated with the derivative and then considers the assumptions used in determining the cash flows from a market participant’s perspective. This discounted cash flow model incorporates assumptions such as the expected default rates, discount rates, as well as early repayment rates. The expected default rate is determined2021 based on the historical performance of loans withobservable price in an orderly transaction for the same or similar tenure and of similar credit worthiness and adjusted by the inputs that other market participants would use. Aside from the expected default rate, the Group has also considered the discount rate and early repayment rate in determining the fair valuesecurity of the financial guarantee derivatives. As the term of the loans are short and the market interest rate is relatively stable, the discount rate and early repayment rate assumptions does not have a significant impact on the fair value of the derivative. Changes in the fair value are recorded in fair value change of financial guarantee derivatives in the Group’s consolidated statements of Comprehensive Income (Loss).same issuers:
| | | | | | | | | | | | | | | For the years ended December 31, | | | | 2019 | | | 2020 | | | 2021 | | | | | 3,149 | | | | 0— | | | | 0 | | Downward adjustments (including impairment) | | | 0— | | | | (36,600 | ) | | | 0 | | | | | | | | | | | | | | | Total unrealized gain (losses) | | | 3,149 | | | | (36,600 | ) | | | 0 | | | | | | | | | | | | | | |
The following table sets forth the significant unobservable inputs used fortotal carrying value of the Group’snon-marketable equity investments at fair value measurementon anon-recurring basis held as of financial guarantee derivatives:December 31, 2020 and 2021 including cumulative unrealized upward and downward adjustments made to the initial cost basis of the securities: | | | | | | | | | | | As of December 31, | | | | 2020 | | | 2021 | | | | | 854,174 | | | | 872,021 | | | | | 3,319 | | | | 3,319 | | Downward adjustments (including impairment) | | | (36,600 | ) | | | (36,600 | ) | | | | | | | | | | Total carrying value at the end of the period | | | 820,893 | | | | 838,740 | | | | | | | | | | |
Please refer to Note 2(t) for the movement and gain of financial guarantee contracts and related derivatives.
The following table sets forth the movement of non-marketable investments measured using Level 3 valuation techniques:
| | | | | | | | | | | For the years ended December 31, | | | | | | | | | | | | | | | | | | Purchase of non-marketable investments | | | | | | | | | Disposal of non-marketable investments | | | | | | | | ) | | | | | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (All amounts in thousands, except share data, or otherwise noted) 2. Summary of significant accounting policies (continued) (n)(o) Net interest income
The Group, through consolidated trust plans (See Note 4)3), WOFEs and subsidiaries of VIEs, originate and hold loans. Interest on loans receivable is accrued based on the contractual interest rates of the loan as earned. Accrual of interest is generally discontinued when reasonable doubt exists as to the full, timely collection of interest or principal. When a loan is discontinued from interest accrual, the Group stops accruing interest and reverses all accrued but unpaid interest as of such date. As the primary beneficiary of the trusts, the Group incorporated the trust plans and recorded return of the other trust parties into interest expense. The interest expense is accrued based on the expected rate of return during the contractual term of the alternative investment products and the trusts. The net interest income recorded in the consolidated statement of comprehensive income related to the loans originated by the Group recorded for the years ended December 31, 2017, 20182019, 2020 and 20192021 are as follows: | | | | | | | | | | | | | | | For the Years Ended December 31, | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | ) | | | | ) | | | | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | For the years ended December 31, | | | | 2019 | | | 2020 | | | 2021 | | | | RMB | | | RMB | | | RMB | | | | | 1,342,289 | | | | 1,341,657 | | | | 1,290,016 | | | | | (235,620 | ) | | | (228,320 | ) | | | (73,846 | ) | | | | | | | | | | | | | | | | | 1,106,669 | | | | 1,113,337 | | | | 1,216,170 | | | | | | | | | | | | | | |
(o
)(p) Property and equipment, net Property and equipment are stated at cost less accumulated depreciation and amortization. Property and equipment are depreciated over the estimated useful lives of the assets using the straight-line method taking into account the estimated residual value, if any. The following table sets forth the estimated useful life and residual value: | | | | | | | | | | | | | Office furniture and equipment | | | | | 5 | % | Computer and electronic equipment | | | | | 5 | % | | | shorter of remaining lease period or estimated useful life | | | NaN | | | | | | | NaN | |
Expenditures for maintenance and repairs are expensed as incurred. Upon retirement or sale, the cost of assets disposed of and the related accumulated depreciation amortization are removed from the accounts and any resulting gain or loss is recognized in consolidated statement of comprehensive income.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in thousands, except share data, or otherwise noted)
2. Summary of significant accounting policies (continued)
As of December 31, 2019,2021, the intangible assets held by the Group includes micro-lending license, factoring license, financial leasing license and financing guaranteeinsurance brokerage license which have indefinite useful life. The Group evaluates these indefinite-lived intangible assets each reporting period to determine whether events and circumstances continue to support an indefinite useful life. If an intangible asset that is not being amortized is subsequently determined to have a finite useful life, the asset is tested for impairment.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (All amounts in thousands, except share data, or otherwise noted) q2. Summary of significant accounting policies (continued) )Goodwill represents the excess of the purchase consideration over the fair value of the identifiable tangible and intangible assets acquired and liabilities assumed of the acquired entity as a result of the Company’s acquisitions of interests in its subsidiaries and the consolidated VIEs. Goodwill is not amortized but is tested for impairment on an annual basis, or more frequently if events or changes in circumstances indicate that it might be impaired. The Company first assesses qualitative factors to determine whether it is necessary to perform the two-step quantitative goodwill impairment test. In the qualitative assessment, the Company considers primary factors such as industry and market considerations, overall financial performance of the reporting unit, and other specific information related to the operations. Based on the qualitative assessment, if it is more likely than not that the fair value of each reporting unit is less than the carrying amount, the quantitative impairment test is performed. In performing the two-step quantitative impairment test, the first step compares the fair values of each reporting unit to its carrying amount, including goodwill. If the fair value of each reporting unit exceeds its carrying amount, goodwill is not considered to be impaired and the second step will not be required. If the carrying amount of a reporting unit exceeds its fair value, the second step compares the implied fair value of goodwill to the carrying value of a reporting unit’s goodwill. The implied fair value of goodwill is determined in a manner similar to accounting for a business combination with the allocation of the assessed fair value determined in the first step to the assets and liabilities of the reporting unit. The excess of the fair value of the reporting unit over the amounts assigned to the assets and liabilities is the implied fair value of goodwill. This allocation process is only performed for the purposes of evaluating goodwill impairment and does not result in an entry to adjust the value of any assets or liabilities. Application of a goodwill impairment test requires significant management judgment, including the identification of reporting units, assigning assets, liabilities and goodwill to reporting units, and determining the fair value of each reporting unit. On January 1, 2020, the Group adopted ASUNo. 2017-04, Simplifying the Test for Goodwill Impairment to simplify the test for goodwill impairment by removing Step 2, which was issued by the FASB in January 2017. The Group, therefore, performs the goodwill impairment test by comparing the fair value of the reporting unit with its carrying amount and recognizing an impairment charge for the amount by which the carrying amount exceeds the fair value, not to exceed the total amount of goodwill allocated to the reporting unit. This adoption did not have impact on the consolidated financial statements. (r
)(s) Impairment of long-lived assets other than goodwill The Group evaluates its long-lived assets other than goodwill and intangible assets with indefinite useful life for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability is measured by comparison of the carrying amounts to the expected future undiscounted cash flows attributable to these assets. If it is determined that an asset is not recoverable, an impairment loss is recorded in the amount by which the carrying amount of the assets exceeds the expected discounted cash flows arising from those assets. Impairment losses of long-lived assets related to intangible assets recognized for the years ended December 31, 2017, 20182019, 2020 and 20192021 were NaN,RMB4,600, NaN and RMB4,600.NaN, respectively.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (All amounts in thousands, except share data, or otherwise noted) 2. Summary of significant accounting policies (continued) (s
)(t) Quality assurance payable and receivableobligationsForBorrowers may elect to, or in certain circumstances, are required to make contributions tooff-balance sheet loans funded by institutional funding partners, the quality assurance fund, in addition to the transaction service fee and payments of loan principal and interest. The quality assurance fund is maintained in a segregated restricted cash bank account. This contribution, which is a certain percentage of the principal amount, is determined at the time of the loan application based on the borrower’s credit score. The contribution does not change over time after the loan is matched and must be paid in its entirety even if the loan ispre-paid.
If a borrower who has contributed to the quality assurance fund is delinquent on an installment of principal and interest of a loan, the Group will withdraw an amount from the quality assurance fund to repay the delinquent installment of principal and interest to the corresponding investors. The quality assurance fund contributions are not refundable, including if there is no loan default. If the Group were to wind down its online consumer finance marketplace and there were no investors with outstanding loans, the Company would be entitled to the remaining funds in the restricted cash account, if any. The Group also provides quality assurance commitment to institutional funding partners under certain circumstances. The quality assurance commitment mainly includescompensate them in the event of borrowers’ default in the form of 1) guarantee provided by third-party financial guarantee companies or financial guarantee company within the Group; or 2) insurance provided by third-party insurance company, if the insurance coverage is exhausted, a third party guarantee company will repay the institutional funding partner in full. In either case s , after the third partythird-party guarantee companies repay the overdue amount, the Group is obligated to compensate the third partythird-party guarantee companies at an amount equal to the repayment made to the institutional funding partners. In certain cases, the Group is also required to provide a security deposit at an amount equal to a certain percentage of the outstanding balance of loans the institutional funding partners funded to the borrowers referred by the Group. The Group might also be required to replenish such security deposit in the event the security deposit is used by the institutional funding partners to make up for the loss they incurred. TheIn the past the Group is requiredused to record itsprovide quality assurance obligation associated withfund program to individual investors to compensate them in the qualityevent of borrowers’ default, which were terminated in 2019 due to regulation change. Quality assurance commitment provided to institutional funding partners and quality assurance fund in accordance withare hereinafter collectively referred to as “quality assurance obligations”.
Quality assurance payables Before adoption of ASC Topic 460, Guarantees. Accordingly,326, the liabilities are measured at their fair value at inception. For guarantee and quality assurance arrangement, default payments to investors are capped at the quality assurance balance at any point in time. The Group is not obligated to pay default loans in the event no funds are available in the quality assurance account. Once the investors are paid for a borrower’s default, any future principal and interests recovered are contributed into the quality assurance account. For quality assurance commitment provided to institutional funding partners, default payments are not capped and the Group is obligated to compensate the institutional funding partners in the event of any default. The quality assurance obligations are comprised of two components: (i) ASC Topic 460 component; and (ii) ASC Topic 450 component. In accordance with ASC 460-10-25-2 and ASC 460-10-30-3, the non-contingent and contingent aspect of the financial guarantee must both be considered at initial measurement. Each institutional funding partner or individual investor has a contract with the Group that specifies its ability to collect from either the Group or the quality assurance fund. Therefore, an individual contract is considered to be the unit of account for purposes of applying ASC Topic 460. Therefore, the liability recorded based on ASC Topic 460 is determined on a loan by loan basis and is reduced as the Group is released from the underlying risk, i.e., as the loan is repaid by the borrower or when the institutional funding partner or individual investor is compensated in the event of a default. This component is a stand ready obligation which is not subject to the probable threshold used to record a contingent obligation. The other component is a contingent liability determined based on historical default rates, representing the obligation to make future payouts from the Group itself or quality assurance fund, measured using the guidance in ASC Topic 450, Contingencies. The ASC Topic 450 contingent component is determined on a loan by loan basis, but considers the actual and expected performance of the pool when estimating the contingent liability. As each guarantee is a separate unit of account that has a contingent component pursuant to ASC Topic 450, the contingent component pertains only to the loan covered by the guarantee. However, the contingent liability recorded under ASC Topic 450 would take into consideration the performance of the overall pooled loan basis, including the cap, if any, imposed on the specific pool, as such data will inform the likelihood of payout on an individual contract basis. Subsequent to initial recognition, the quality assurances obligations are measured at the greater of the amount determined based on ASC Topic 460 and the amount determined based on ASC Topic 450. ASC Topic 460 does not prescribe a method for subsequently measuring and recording the non-contingent guarantee liability. As stated in ASC 460-10-35-1, the guarantee liability should generally be reduced by recording a credit to net income as the guarantor is released from the guaranteed risk. As the risk is reduced as each payment is made, a systematic and rational amortization method based on when the payments are made may be appropriate. If there is no difference between the ASC Topic 460 component and ASC Topic 450 component, no gain or loss is recorded. If the ASC Topic 460 component falls below the ASC 450 component, a contingent liability would be set up with an accompanying loss recognized in the gain (loss) from quality assurance in the consolidate statement of comprehensive income. As the risk of the guarantee liability is reduced, it is recognized into the income statement by a systematic and rational amortization method, e.g. over the term of the loan, within the “gain from the quality assurance” line item of the income statement. For the yearsyear ended December 31, 2017, 2018 and 2019, the amount of gainsgain recorded were RMB5.9 million, RMB510.9 million and was RMB98.4 million (US$14.1 million), respectively.million. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (All amounts in thousands, except share data, or otherwise noted) 2. Summary of significant accounting policies (continued) (s
)(t) Quality assurance payable and receivableobligations (continued) A quality assurance receivable is recognized at loan inception at its fair value on aloan-by-loan
basis. The fair value is estimated based on the contractual amounts of quality assurance contribution from the borrowers, taking into account the expected default rate. The receivable is determined to be collectible at loan inception because at this point in time, the borrower has committed to pay the full amount over the life of the loan, and is also contractually obligated to pay the full amount even if he or she prepays the loan. By taking into account the risk of default in the fair value estimate, the receivable the Group records is representative of what is deemed to be collectible. At each reporting date, the Group estimates the future cash flows and assesses whether there is any indicator of impairment to any individual underlying loan of the quality assurance receivable. If the carrying amounts of the quality assurance receivable exceeds the expected collections, an impairment loss is recorded for the quality assurance receivable not recoverable.On aloan-by-loan
basis, the Group determines the guarantee fee or quality assurance contributions required from a borrower based on the estimated loss rate of the loans. In estimating the loss rate of the loans, the underlying risk profile and historical loss experience are taken into consideration. The Group gathers information to assess each borrower’s risk profile and assigns a mirror grade, determined using the Group’s proprietary Magic Mirror Model. These borrowers are then grouped based on Magic Mirror score for which the Group develops an estimated default rate based on actual historical loss experience of each Magic Mirror score. An ultimate loss rate is estimated for each loan based on this method, with a risk premium added based on different Magic Mirror score. The Group regularly reviews the borrower’s risk profile, actual loss rate of each product line and Magic Mirror score and relevant market dynamics to ensure the ultimate loss rate is keptup-to-date.
Individual investors who invested in loans for which the borrower elected to participate in the quality assurance bear their own financial risk and may suffer a loss if the restricted cash balance plus the subsequent quality assurance contributions are exhausted by quality assurance payments which are made on a first-loss basis. Payouts from the quality assurance account are made to investors when a borrower delinquent in repaying an installment of principal and interest in the order of default date until the restricted cash balance is reduced to nil, even though there may still be investors protected by quality assurance. Amounts recovered from the defaulted borrower will be remitted to replenish the portion of the quality assurance fund used to repay the investors.
The following table sets forth the Group’s quality assurance obligations movement activities for the yearsyear ended December 31, 2017, 20182019: | | | | | | | For the year ended December 31, | | | | 2019 | | | | | 3,819,379 | | Fair value of newly written guarantee and quality assurance obligation | | | 6,156,826 | | Release of guarantee and quality assurance payable upon repayment | | | (6,718,809 | ) | | | | 6,409,884 | | | | | (12,299,134 | ) | Recoveries during the year | | | 7,408,007 | | | | | | | | | | 4,776,153 | | | | | | |
As of December 31, 2019, the maximum potential future payments, including all outstanding principal and 2019: | | | | | | | | | | | | | | | For the years ended December 31, | | | | | | | | | | | | | | | | | | | | | | | | | Fair value of newly written guarantee and quality assurance obligation | | | | | | | | | | | | | Release of guarantee and quality assurance payable upon repayment | | | | ) | | | | ) | | | | ) | Contingent liability | | | | | | | | | | | | | | | | | ) | | | | ) | | | | ) | Recoveries during the year | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
FINVOLUTION GROUPinterests covered by the quality assurance program were RMB21,794,353.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTSDeferred guarantee income and expected credit losses for quality assurance commitment
(All amountsUpon adoption of ASC Topic 326 as described in thousands, except share data, or otherwise noted)Note 2(b), deferred guarantee income represents the stand ready component of the guarantee contracts that are determined in accordance with ASC Topic 460. At initial recognition, deferred guarantee income is recorded at the fair value of the guarantee contract. Subsequent to initial recognition, deferred guarantee income is released systematically as guarantee income in revenue in the consolidated statement of comprehensive income as the Group is released from the underlying risk.
2. SummaryExpected credit losses for quality assurance commitment represents the expected life time credit losses of significant accounting policies (continued)
(s
) Qualitythe guarantee contract that are determined in accordance with ASC Topic 326, which are initially recorded separate from and in addition to deferred guarantee income at the amount equal to the expected lifetime credit losses of the underlying loans covered by the quality assurance payableobligation. The expected credit losses are determined based on historical default experience, known and receivable (continued)inherent risks in the portfolio, current economic conditions and future macroeconomic forecasts as well as other factors surrounding the credit risk of borrowers. The followingliability is calculated at portfolio-level since the loan portfolio is typically of smaller balance homogenous loans and is collectively evaluated for impairment. Subsequent to initial recognition, the expected credit losses are adjusted for changes in expected lifetime credit losses. The initial recognition and adjustments made to expected credit losses for quality assurance commitment are recorded as provision for quality assurance commitment in the consolidated statement of comprehensive income. The table below sets forth the Group’smovement of deferred guarantee income and expected credit losses for quality assurance receivables movement activitiescommitment for the years ended December 31, 2017, 20182020 and 2019:2021: | | | | | | | | | | | | | | | For the years ended December 31, | | | | | | | | | | | | | | | | | | | | | | | | | Fair value of newly written guarantee and quality assurance obligation | | | | | | | | | | | | | Guarantee fee and quality assurance obligation contribution received from borrowers | | | | ) | | | | ) | | | | ) | Gain (loss) from quality assurance | | | | | | | | ) | | | | ) | Fair value of early repaid investment program * | | | — | | | | — | | | | 1,709,382 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
* Since November 2019, the
Company early repaid investors of certain investment programs before maturity of the investment program due to our decision to discontinue our online lending information intermediary business. This is regarded as an advance to the borrowers, which resulted in an increase in quality assurance receivable. The initial recognition of such quality assurance relievable was based on best estimate of future cash receipt of the underlying loans. | | | | | | | | | Deferred guarantee income: | | For the years ended December 31, | | | | 2020 | | | 2021 | | Opening balance upon adoption of ASC Topic 326 (Note 2(b)) | | | 1,873,254 | | | | 1,259,396 | | Newly written quality assurance obligations | | | 2,838,707 | | | | 2,423,619 | | Release of quality assurance obligations upon repayment | | | (3,386,032 | ) | | | (2,593,512 | ) | Termination of P2P quality assurance obligations* | | | (66,533 | ) | | | — | | | | | | | | | | | | | | 1,259,396 | | | | 1,089,503 | | | | | | | | | | |
| | | | | | | | | Expected credit losses for quality assurance commitment: | | For the years ended December 31, | | | | 2020 | | | 2021 | | Opening balance upon adoption of ASC Topic 326 (Note 2(b)) | | | 3,593,021 | | | | 2,390,501 | | Provision for credit losses of quality assurance obligations | | | 2,057,558 | | | | 1,904,473 | | | | | (8,297,516 | ) | | | (7,227,869 | ) | Recoveries during the year | | | 5,199,893 | | | | 6,121,456 | | Termination of P2P quality assurance obligations* | | | (162,455 | ) | | | — | | | | | | | | | | | | | | 2,390,501 | | | | 3,188,561 | | | | | | | | | | |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (All amounts in thousands, except share data, or otherwise noted) 2. Summary of significant accounting policies (continued) (s)(t) Quality assurance payable and receivableobligations (continued)
* | In March 2020, the Company early repaid all outstanding loan balance before their maturity for one P2P funding partner as a result of the Group’s decision to discontinue business relationship with online lending information intermediary, which resulted in decrease in guarantee related receivables and liabilities. The overall impact on gain or loss is immaterial. |
As of December 31, 2018 and 2019,2021, the maximum potential future payments, including all outstanding principal and interests covered by the quality assurance program were RMB19,350,705 and RMB21,794,353, respectively.TRMB44,035,267.
he Group started to phase outfunding for loans on the platform from
individualinvestors
in 2019and
loans on the platform were
fully funded by institutional funding partners by the end of 2019
.(t) Financial guarantee derivativeFor investors who investQuality assurance receivable A quality assurance receivable is recognized at loan inception at its fair value on abasis. Beginning in loans without2020, the Group establishes a credit loss allowance primarily based on expectations of lifetime credit losses based on historical default experience, known or inherent risks in the portfolio, current economic conditions and macroeconomics forecasts as well as other factors surrounding the credit risk of borrowers (Note 2(b)). Prior to 2020, the credit loss allowance was determined to be the amount of probable incurred credit losses based on estimates of future cash flows and assesses whether there is any indicator of impairment to any individual underlying loan of the quality assurance through certain Investment Programs (Note 2(receivable. w
)) from whichThe following table presents the investors are entitled to anGroup’s quality assurance receivable as of December 31, 2020 and 2021: | | | | | | | | | | | For the years ended December 31, | | | | 2020 | | | 2021 | | Quality assurance receivable | | | 1,345,068 | | | | 1,171,304 | | Allowance for credit losses for quality assurance receivable | | | (223,514 | ) | | | (239,506 | ) | | | | | | | | | | Quality assurance receivable, net | | | 1,121,554 | | | | 931,798 | | | | | | | | | | |
The Group evaluates expected return, they participate incredit losses of quality assurance receivable by on a separate investor reserve fund program. Investors subscribing to these investment programs make contributions tocollective basis based on the corresponding investor reserve funds. Under this type of investment program,borrowers and delinquency pattern. Credit quality indicators are updated quarterly, and the credit quality of any surplus gains, less 0.1%given customer can change during the life of the principal amount invested,portfolio. The following table presents quality assurance receivables based on type of borrowers and delinquency as of December 31, 2020 and 2021: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Current | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 26,708 | | | | 5,651 | | | | 5,312 | | | | 5,407 | | | | 43,078 | | | | 191,155 | | | | 234,233 | | | | | 70,819 | | | | 25,745 | | | | 22,647 | | | | 15,388 | | | | 134,599 | | | | 976,236 | | | | 1,110,835 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 97,527 | | | | 31,396 | | | | 27,959 | | | | 20,795 | | | | 177,677 | | | | 1,167,391 | | | | 1,345,068 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 9,094 | | | | 2,340 | | | | 2,004 | | | | 1,931 | | | | 15,369 | | | | 269,919 | | | | 285,288 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 27,695 | | | | 6,771 | | | | 5,935 | | | | 5,616 | | | | 46,017 | | | | 839,999 | | | | 886,016 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 36,789 | | | | 9,111 | | | | 7,939 | | | | 7,547 | | | | 61,386 | | | | 1,109,918 | | | | 1,171,304 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
As the average tenor of loans facilitated on the Group’s platform are contributed to the investor reserve funds, while the 0.1%around 9 months, substantially all of the principal amount invested is paid to the Group. Similar to the quality assurance the Group maintains a separate dedicated restricted cash account for eachreceivable balance as of these investment programs. Such fundsDecember 31, 2021 are maintained solely for the benefit of the investors who investedoriginated in loans through the Investment Programs. In general, the investor reserve fund covers underperformance to the extent there are available funds, i.e., it protects investors from not only loan defaults, but also an investment program performing below its stated expected rate of return, which may be due to either a decline in market interest rates during the program’s term, or an inability to timely match repayments with new loans.2021.
Payouts will be made from the corresponding investor reserve funds to make up the gap between the actual return and the stated expected rate of return. The capital used for investment purposes in such programs is generated with the cash flows from the borrowers’ monthly repayments of principal and interest. The investor reserve funds are maintained separately and are used to compensate investors in the event of a program’s underperformance. The investor reserve funds are funded upon a program’s maturity, and are capped at a certain percentage of the total funding of each investment program. If an individual investment program underperforms, the Group will use the investor reserve fund to make up for the shortfall, which is paid out upon maturity of the program. An investor who participates in this program is entitled to coverage by the investor reserve fund for the duration he or she participates in the program.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (All amounts in thousands, except share data, or otherwise noted) 2. Summary of significant accounting policies (continued) (t
) Financial guarantee derivative (continued)In order to determine the accounting method used, the Group considered the criteria of the scope exception under ASC815-10-15-58.
In order to qualify for this scope exception, the financial guarantee contracts must meet all three of the following criteria: (a) provide for payments to be made solely to reimburse the guaranteed party for failure of the debtor to satisfy its required payment obligations either at prescriptive payment dates or accelerated payment dates as a result of the occurrence of an event of default or notice of acceleration being made to the debtor by the creditor; (b) payment be made only if the debtor’s obligation to make payments as a result of conditions as described in (a) is past due; and (c) the guaranteed party is, as a precondition in the contract for receiving payment of any claim under the guarantee, exposed to the risk ofnon-payment
both at inception and throughout its term either through direct legal ownership or through aback-to-back
arrangement. However, as the investor reserve fund does not solely reimburse investors for failure of the borrower to satisfy required payment obligations, but also to reimburse shortfalls due to underperformance of the investment programs, the scope exception under ASC815-10-15-58(a)
is not met. Therefore, these contracts are accounted for as a derivative under ASC Topic 815, Derivatives and Hedging, and should be recognized on the consolidated balance sheets as either assets or liabilities and recorded at fair value.Derivative assets and liabilities within the scope of ASC Topic 815 are required to be recorded at fair value at inception andre-measured
at fair value on an ongoing basis in accordance with ASC Topic 820, Fair Value Measurement. Therefore, the financial guarantee derivative will be subsequently marked to market at the end of each reporting period with gains and losses recognized as fair value change of financial guarantee derivative. Based on the valuation methodology and the significant unobservable inputs used for fair value measurement described in Note 2(l), the Group may have day one gain on the financial guarantee derivatives associated with the investor reserve funds program because the investors are willing to pay a premium above the expected default rate for a guarantee return. The Group evaluate the financial guarantee derivatives on a portfolio basis rather than individual basis, as the investor reserve fund are considered as a pool to make up the gap between the actual return and the stated expected rate of return.If there are changes to the expected defaults of loans and expected performance of the investment programs, the Group records these resulting adjustments to the “fair value change of financial guarantee derivatives” line item within “other income (expense)” on the consolidated statement of comprehensive income. Upon the maturity of an investment program, any cumulative gain or loss will be reclassified to the “realized gain or loss from financial guarantee derivatives” line item within “other income (expense).” That is, whenever cash flows occur upon maturity, the fair value changes are reclassified within the income statement and recorded as realized gain or loss.
In October 2017, along with the termination of investment program with flexible investment periods, the remaining restricted cash amounting to approximately RMB45,567 were transferred from restricted cash to cash and cash equivalents, as theC
ompany was released from the obligation to compensate the investors should the flexible term investment programs under-perform.The following table sets forth the Group’s financial guarantee derivative movement activitiesin the allowance for the years ended December 31, 2017, 2018 and 2019. | | | | | | | | | | | | | | | For the years ended December 31, | | | | | | | | | | | | | | | | | | | | ) | | | | | Initial recognition of and change in fair value of ongoing investor reserve arrangements | | | | ) | | | | | | | | ) | Settlement upon maturity of investor reserve arrangements | | | | ) | | | | | | | | ) | | | | | | | | | | | | | | | | | | ) | | | | | | | | | | | | | | | | | | | | | |
In December 2017, due to the deterioration of performance of investor reserve fund investment programs, the Group reversed all the gains recorded historically amounting to RMB213,958 and additional provision outside the Group’s contractual obligation related to the investor reserve fund amounting to RMB107,660 was recognizedcredit losses for quality assurance receivable as a reduction of revenue. In 2018, the Group experienced improved loan performance and a reversal amounting to RMB68,619 was recognized in revenue. Please refer to Note 2(u
) for details. As of December 31, 2019, all investment programs that offered protection on expected return of investors were matured.FINVOLUTION GROUP2020 and 2021, respectively:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in thousands, except share data, or otherwise noted) | | | | | | | | | | | For the years ended December 31, | | | | 2020 | | | 2021 | | | | | 809,503 | | | | 223,514 | | Impact of adoption of ASC 326 (Note 2(b)) | | | 34,998 | | | | 0 | | Provision/(reversal) for credit losses | | | (49,590 | ) | | | 59,136 | | | | | (571,397 | ) | | | (43,144 | ) | | | | | | | | | | | | | 223,514 | | | | 239,506 | | | | | | | | | | |
2. Summary of significant accounting policies (continued)
The Group engages primarily in operating an online consumer finance marketplace by providing an online platform which matches borrowers with both individual investors, institutional funding partners, and assisting facilitation of loans to investors on certain third-party online platforms (collectively referred to as “investors”). The Group determines that it is not the legal lender andor legal borrower in the above process. Therefore, the Group generally does not record loan receivable and payable arising from the loans between investors and borrowers on its balance sheets.sheets other than consolidated trusts (Note 3). Revenue comprises the fair value of the consideration received or receivable for the provision of services in the ordinary course of the Group’s activities and is recorded net of value-added tax (“VAT”). The Group discontinue matching of individual investors in 2019 due to change in regulations. On January 1, 2018, the Company adopted the revenue standard using the modified retrospective transition method to those contracts which were not completed as of January 1, 2018. Results for periods beginning after January 1, 2018 are presented under ASC Topic 606, while prior period amounts are not adjusted and continue to be reported in accordance with historic accounting under ASC Topic 605. Upon initial adoption, the Group recognized the cumulative effect of initially applying the revenue standard as an increase of approximately RMB176.5 million, net of tax, to the opening balances of retained earnings. These adjustments primarily arose from the timing of revenue recognition for transactionservice
fee collected in monthly instalments related to our loan products being recognized earlier under ASC Topic 606.The following table sets forth the impact to the consolidated statement of comprehensive income for the years ended December 31, 2018 as a result of adoption of ASC Topic 606.
| | | | | | | | | | | | | | | For the years ended December 31, 2018 | | | | | | | Amounts without adoption of ASC Topic 606 | | | | | Loan facilitation service fees | | | | | | | | | | | | | Post-facilitation service fees | | | | | | | | | | | | | | | | | | | | | | | | | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Revenue recognition policies for each type of services under ASC Topic 606 are discussed as follows: Revenue from Single Loans In accordance with a series contracts entered into among the borrowers, investors (either individual or institutional funding partners) and the Group, the Group generally provides the following services to the borrowers and investors: The Group operates a platform that enables borrowers and investors to exchange information; The Group collects information from borrowers, conduct credit assessment and match borrowers with investors; Once borrowers and investors are matched, the Group is responsible for collect and transfer funds between borrowers and investors; The Group will also provide investors with collection services upon borrowers’ default; On monthly basis, the borrowers are obligated to pay transaction service fee and quality assurance contribution/guarantee fee on top of the Group a monthly transactionfee as part of their monthly repayment.principle and interest payment. In the event of prepayment, borrowers are obligated to pay the outstanding unpaid transaction service fee in full; If a loan is subject to the protection of the quality assurance program which provides a protection mechanism to investors who subscribe to these loans, borrowers are obligated to pay a monthly quality assurance contribution on top of the principle, interest and transactionservice
fee as part of the monthly repayment;In the event of prepayment, the borrowers are also obligated to pay the outstanding unpaid transactionservice
fee and quality assurance contribution in full;full. Starting from 2021, in the event of early payment, some borrowers are not obligated to pay full contractual service fee and quality assurance contribution amount, and the service fee and quality assurance contribution is collected on a pro-rata basis upon early loan termination.If the investor is an institutional funding partner, the Group provides quality assurance commitment as credit enhancement.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (All amounts in thousands, except share data, or otherwise noted) 2. Summary of significant accounting policies (continued) (u) Revenue recognition (continued) Revenue from Single Loans (continued) The Group determines its customers to be both investors and borrowers. Starting from 2018, theThe Group charges the transaction service fee as part of the borrowers’ monthly repayment. In accordance with the relevant guidance in ASC Topic 606, the amounts associated with the quality assurance obligation is within the scope of ASC Topic 460 and should be accounted for in accordance with the provisions of that Topic. The services not within the scope of other Topics should be accounted for in accordance with the remaining provisions of ASC Topic 606 and the applicable revenue recognition guidance. The Group considers loan facilitation services (covering matching of investors to borrowers and facilitating the execution of loan agreement between investors and borrowers) and post-facilitation services (covering cash processing services and collection services) as two distinctive performance obligations in accordance with ASC Topic 606. The transaction price is first allocateallocated to the quality assurance commitment and quality assurance program, if any, which is recorded at fair value in accordance with ASC Topic 460. Then the remaining considerations are allocated to the loan facilitation and post-facilitation services using their relative standalone selling prices. When estimating total consideration, the Group considers early termination scenarios based on historical early payment and other termination scenarios as the Group can not receive the full contractual service fee amount under early termination, given the service fee is collected on a pro-rata basis upon early loan termination. Such service fee is determined to be variable consideration that meets the “probable of not reversing” threshold. As such, the Group recognizes revenue related to early termination based on its best estimate and true up adjustments are made from time to time. The Group does not have observable standalone selling price for the loan facilitation services or post-facilitation services because it does not provide loan facilitation services or post-facilitation services on a standalone basis in similar circumstances to similar customers. There is no direct observable standalone selling price for similar services in the market that is reasonably available to the Group. As a result, the estimation of standalone selling price involves significant judgment. The Group uses an expected cost plus margin approach to estimate the standalone selling prices of loan facilitation services and post facilitation services as the basis of revenue allocation. When estimating the selling prices, the Group considers the cost related to such services, profit margin, customer demand, effect of competition on services, and other market factors.
FINVOLUTION GROUP the cost of providing the services is the most significant.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in thousands, except share data, or otherwise noted)
2. Summary of significant accounting policies (continued)
(u) Revenue recognition (continued)
Revenue from Single Loans (continued)
The transaction price allocated to loan facilitation is recognized as revenue upon execution of loan agreements between investors and borrowers; the consideration allocated to post-facilitation services is recognized over the period of the loan on a straight line method, which approximates the pattern of when the underlying services are performed. In additional to transaction service fee, the Group also receives fees on future events, such as collection fees. For loans with no quality assurance protection, collection is considered a separate performance obligation, and therefore collection fee is allocated to this specific performance obligation. For loans with quality assurance protection, as the quality assurance will compensate the investors should the borrowers are delinquent, the collection fee is considered a variable consideration for the loan facilitation and post-facilitation performance obligations and therefore is included in the total transaction price which is allocated to these two performance obligation based on their relative standalone selling price. The collection fee is only probable of not reserving upon successful collection and as such is not included in the transaction price until then.
TableFor the off-balance sheet loans funded by certain other institutional funding partners, where the Group does not provide credit enhancement to the institutional funding partners for the borrowers referred by the Group and takes no credit risks of Contents FINVOLUTION GROUPborrowers in respect of principal and interests, the Group charges the service fees for loan facilitation at predetermined rates based on the performance of the underlying off-balance sheet loans. Such service fee is determined to be variable consideration that meets the “probable of not reversing” threshold. As such, the Group recognizes revenue related to such services based on its best estimate and true up adjustments are made when service fee amounts are confirmed by institutional funding partners.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in thousands, except share data, or otherwise noted)
2. Summary of significant accounting policies (continued)
(u
) Revenue recognition (continued)Revenue from Investment Programs For investment programs that only fund loans protected by the quality assurance, the loan transaction service fee fees and monthly contribution to the quality assurance paid by the borrowers are the same as those discussed under “Revenue from Single Loans” above. In addition, the Group charges the surplus gain, i.e., the actual rate of return exceeds the stated expected rate of return in the investment program agreement, as investment program management fee. The investment program management fee is a separate fee charged to investors in a separate contract and therefore is allocate specifically to the investment management performance obligation. The Group determines that the “probable of not reserving” threshold is met for surplus gain and therefore surplus gain is included in the transaction price upon the effective of investment program. The Group estimates the surplus gain on a monthly basis for the duration of an investment program to monitor the expected outcome of the portfolio and the amount is recognized over the term of the investment program as the investor simultaneously receives and consumes the benefits provided by the Company’s performance throughout the term of the investment program. The Group stopped offering investment program in 2019 as a result of regulatory requirements to stop P2P business. As of December 31, 2019, the remaining outstandingbusiness and all investment programs typically mature within a year.matured in 2020.
Incentives NOTES TO CONSOLIDATED FINANCIAL STATEMENTSTo expand its market presence, attract new investors and increase activity level on our platform, the Group will occasionally provide incentives to potential investors at its sole discretion. The Group provides the following types(All amounts in thousands, except share data, or otherwise noted) 2. Summary of incentives:significant accounting policies (continued) (u) Revenue recognition (continued) When a loan is successfully matched during the relevant incentive program period, the investor receives a cash incentive, either provided upfront as aone-time
contribution to the loan investment amount (effectively reducing the amount an investor has to fund in cash for a loan, while still being entitled to repayment of the entire stated principal balance) or on a monthly basis over the term of the loan as additional interest. These cash incentives are considered a reduction of transaction price. In certain other circumstances, the Group may provide a cash incentive to a new potential investor upon signing up as a new user on the platform, without a requirement for the potential investor to fund a loan. This is considered a type of marketing expense to attract potential investors to the platform, and is recorded as expense, rather than a reduction of transaction price.
Other than the collection fees charged for certain loans and investment management fee for investment programs, other revenue primarily includes borrower referral fees. The Group refers borrowers that do not meet the Group’s risk appetite to other lending platforms, and charges a referral fee based on the loan origination volume, cost per-click or other performance based criteria. Such fee is recognized as other revenue upon loan origination, each click or other performance obligation is satisfied.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in thousands, except share data, or otherwise noted)
2. Summary of significant accounting policies (continued)
(u
) Revenue recognition (continued)Revenue disaggregation analysis The following table sets sets forth the Group’s operating revenue from different service type:types: | | | | | | | | | | | | | | | | | | | For the year ended December 31, | | | | | | | | | | | With quality assurance protection | | | Without quality assurance protection | | | With quality assurance protection | | | Without quality assurance protection | | Loan facilitation service fees | | | | | | | | | | | | | | | | | Post-facilitation service fees | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | - investment management fee | | | | | | | | | | | | | | | | | - borrowers referral fee | | | — | | | | 96,167 | | | | — | | | | 130,677 | | | | | | | | | | | | | | | | | | | Changes in expected discretionary payment to IRF investors | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | For the years ended December 31, | | | | 2019 | | | 2020 | | | 2021 | | | | | | | | | | | | | | | | | | | | | Loan facilitation service fees | | | 2,984,063 | | | | 326,812 | | | | 1,908,851 | | | | — | | | | 3,604,019 | | | | 190,163 | | Post-facilitation service fees | | | 1,096,660 | | | | 103,713 | | | | 672,981 | | | | — | | | | 1,287,760 | | | | 21,805 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | — | | | | 130,677 | | | | — | | | | 290,337 | | | | — | | | | 239,070 | | -investment management fee | | | 109,423 | | | | — | | | | 31,767 | | | | — | | | | — | | | | — | | | | | 37,949 | | | | 66,791 | | | | 95,286 | | | | 64,496 | | | | 105,758 | | | | 211,871 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 4,228,095 | | | | 627,993 | | | | 2,708,885 | | | | 354,833 | | | | 4,997,537 | | | | 662,909 | | | | | | | | | | | | | | | | | | | | | | | | | | |
Interest income (Note 2(o)) and guarantee income (Note 2(t)) is not included in the table above as it is not accounted for under ASC Topic 606. 606. Contract assets represent the Group’s right to consideration in exchange for facilitation and post-facilitation service that the Company has transferred to the customer before payment is due. Contract liabilities represent the Group’s obligation to transfer facilitation and post-facilitation service to the customer due to received payment. The timing of revenue recognition, scheduled payments, and cash collections results in contract assets and contract liability.liabilities. Practical expedient and exemptions The Group generally expenses sales commission when incurred for loans with a term for one year or less. These costs are recorded within sales and marketing expenses. The Group does not disclose the value of unsatisfied performance obligation as most of the loans facilitated through its platform with an original term of one year or less. Expected discretionary payment to investor reserve fund investors
In relation to investor reserve fund, the Group records approximately RMB107,660 as of December 31, 2017 in provision for expected discretionary payment to investors in investment programs protected by investor reserve fund investor as a reduction of revenue as such compensation is deemed beyond its legal obligations. For the year ended December 31, 2018, the Group made in total F-3RMB39,041
payment under such provision. As of December 31, 2018, considering the improved loan performance observed and decrease in expected default rate for remaining IRF investment programs, the Group reversed the provision amounting to
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (All amounts in thousands, except share data, or otherwise noted) 2. Summary of significant accounting policies (continued)
(u) Revenue recognition (continued)
Revenue Recognition Under ASC Topic 605
Consistent with the criteria of ASC 605 “Revenue Recognition” (“ASC 605”), the Group recognizes revenue when the following four revenue recognition criteria are met:
| (i) | Persuasive evidence of an arrangement exists; |
| (ii) | Delivery has occurred or services have been provided; |
| (iii) | The selling price is fixed or determinable; and, |
| (iv) | Collectability is reasonably assured. |
Revenue recognition policies for each type of service are discussed as follows:
Revenue from Single Loans
The Group charges fees at the inception of the loan, which are deducted from the amount that borrowers receive from investors, for facilitating loan origination (covering matching of investors to borrowers and facilitating the execution of loan agreement between investors and borrowers) and for providing ongoing monthly services (covering cash processing services and collection services)(“non-contingent
fee”). The Group generally collects the entire amount relating to loan facilitation and post-facilitation services as one combined fee, and these amounts are allocated to the two deliverables based on their relative fair values.The Group considers the loan facilitation services and post-facilitation services as multiple deliverable arrangements. Although the Group does not sell these services separately, the Group determined that all deliverables have standalone value. Thus, allnon-contingent
fees are allocated among loan facilitation services and post-facilitation services. The Group does not have vendor specific objective evidence of selling price for the loan facilitation service and the post-facilitation service because the Group does not provide these services separately. Third-party evidence of selling price does not exist either, as public information is not available regarding the amount of fees our competitors charge for these services. Since neither vendor-specific objective evidence nor third-party evidence is available, the Group generally uses its best estimate of selling prices of the different deliverables as the basis for allocation. When estimating the selling prices, the Group considers the cost related to such services, profit margin, customer demand, effect of competition on services, and other market factors. Thenon-contingent
fee allocated to loan facilitation is recognized as revenue upon execution of loan agreements between investors and borrowers; thenon-contingent
fees allocated to post-origination services are deferred and amortized over the period of the loan on a straight line method, which approximates the pattern of when the underlying services are performed. In instances where the loan transactionservice
fee is not collected entirely upfront but over time, the amount allocated to each deliverable is limited to the amount that is not contingent upon the delivery of additional items or meeting other specified performance conditions. As the remaining portion of the loan transactionservice
fee is collected and becomesnon-contingent,
the Group will allocate the amount between the two deliverables.In December 2017, to comply with a series of regulatory requirements, the Group discontinued upfront fee collection. Instead, the transactionservice
fee is collected in monthly installments. In accordance with ASC605-30-5,
The Group determines that the transactionservice
fee is only allocable to the two deliverables when the fee is collected.In addition to the loan transactionfee, the Group also receives fees which are contingent on future events, such as loan collection fees and fees related to loan transfers on the Group’s secondary loan market. These contingent fees are not recognized until the contingencies are resolved and the fees become fixed and determined, which also coincide with when the services are performed and collectability is reasonably assured. These fees are classified within Other Revenue in the consolidated statement of comprehensive income.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in thousands, except share data, or otherwise noted)
2. Summary of significant accounting policies (continued)
(u) Revenue recognition (continued)
Revenue Recognition Under ASC Topic 605 (continued)(v) Origination, servicing expenses and other cost of revenue
Revenue from Single Loans (continued)
Under certain circumstances, in addition to the loan transactionfee, borrowers pay a monthly contribution to the quality assurance fund, which provides a protection mechanism to investors who subscribe to these loans. In accordance with the relevant guidance in ASC 605, Revenue Recognition, the amounts associated with the quality assurance fund is within the scope of another Topic (ASC 460, Guarantees) and should be accounted for in accordance with the provisions of that Topic. The deliverables not within the scope of other Topics should be accounted for in accordance with the remaining provisions of ASC 605 and the applicable revenue recognition guidance. The fair value of the guarantee associated with the quality assurance fund is recorded under ASC 460, with the remaining amount of consideration accounted for under ASC 605.Revenue from Investment Programs
For investment programs that only fund loans that are protected by the quality assurance fund, the loan transaction
fee
and monthly contribution to the quality assurance fund paid by the borrowers are the same as those discussed under “Revenue from Single Loans” above. In addition, under this type of investment program, if there is any surplus gain, i.e., the actual rate of return exceeds the stated expected rate of return in the investment program agreement, this is recognized as an investment program management fee in other revenue upon maturity of such program, when the amount becomes fixed and determinable.
To expand its market presence, attract new investors and increase activity level on our platform, the Group will occasionally provide incentives to potential investors at its sole discretion. The Group provides the following types of incentives:
When a loan is successfully matched during the relevant incentive program period, the investor receives a cash incentive, either provided upfront as aone-time
contribution to the loan investment amount (effectively reducing the amount an investor has to fund in cash for a loan, while still being entitled to repayment of the entire stated principal balance) or on a monthly basis over the term of the loan as additional interest. These cash incentives are accounted for as reduction of revenue in accordance with ASC subtopic605-50.
In certain other circumstances, the Group may provide a cash incentive to a new potential investor upon signing up as a new user on the platform, without a requirement for the potential investor to fund a loan. This is considered a type of marketing expense to attract potential investors to the platform, and is recorded as expense, rather than a reduction of revenue.
Other revenue includes collection fees charged to borrowers, management fees charged to investors for certain investment programs, service fees charged to borrowers for transfer of loans on the secondary loan marketOrigination, servicing expenses and other fees charged to our customers.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in thousands, except share data, or otherwise noted)
2. Summary of significant accounting policies (continued)
(v
) Origination and servicing expensesOrigination and servicing expensesrevenue primarily consist of salaries and benefits of employees who facilitate loan origination, perform risk pricing, debt-collection service, customer service, data processing, data analysis and data analysis.other cost of revenue.
Origination, servicing expenses and servicing expenses-relatedother cost of revenue-related party consist of expenses for data collection service provided by PPcredit, a related party of the Group.Group (See Note 11)10). (w
)(w) Sales and marketing expenses Sales and marketing expenses consist primarily of advertising and online marketing promotion expenses. Advertising and online marketing expenses, amounting to approximately RMB779,737, RMB702,508RMB710,203, RMB470,243 and RMB710,203 RMB1,569,167 for the years ended December 31, 2017, 20182019, 2020 and 2019,2021, respectively, are charged to the consolidated statements of comprehensive income (loss) as incurred. (x) General and administrative expenses General and administrative expenses consist primarily of salaries and benefits for general management, finance and administrative personnel, share-based compensation expenses, rental, professional service fees and other expenses. (y) Research and development expenses Research and development expenses consist primarily of payroll and related expenses for IT professionals involved in developing technology platform and website, server and other equipment depreciation, bandwidth and data center costs. All research and development costs have been expensed as incurred as the costs qualifying for capitalization have been insignificant. (z) Share-based compensation The Group follows ASC Topic 718, which requires all share-based payments to employees and directors, including grants of employee stock options, to be recognized as compensation expense in the financial statements over the vesting period of the award based on the fair value of the award determined at the grant date. Under ASC Topic 718, the number of share-based awards for which the service is not expected to be rendered for the requisite period should be estimated, and the related compensation cost is not recorded for that number of awards. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in thousands, except share data, or otherwise noted)
2. Summary of significant accounting policies (continued)
(z) Share-based compensation (continued)
In accordance with ASC Topic 718, the Group recognize share-based compensation expenses, net of a forfeiture rate, using the straight-line method for awards with services conditions only, and using the graded-vesting attribution method for awards with graded vesting features and performance conditions. Compensation cost is accrued if it is probable that a performance condition will be achieved.
Prior to the adoption of ASC 842 on January 1, 2019NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A lease for which substantially all the benefits and risks incidental to ownership remain with the lessor is classified as an operating lease. (All leases of the Group are currently classified as operating leases. When a lease contains rent holidays, the Group records the total expenses on a straight-line basis over the lease term.amounts in thousands, except share data, or otherwise noted) Upon and hereafter the adoption2. Summary of ASC 842 on January 1, 2019significant accounting policies (continued)
The Group determines if an arrangement is a lease or contains a lease at inception. Operating leases are included in operating lease (“ROU”) assets and operating lease liabilities, in the Group’s consolidated balance sheets. The Group does not have any finance leases as offor the adoption date oryears ended December 31, 2019. 2019, 2020 and 2021.ROU assets represent the Group’s right to use an underlying asset for the lease term and lease liabilities represent the Group’s obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. When determining the lease term, the Group includes options to extend or terminate the lease when it is reasonably certain that it will exercise that option, if any. As the Group’s leases do not provide an implicit rate, the Group uses its incremental borrowing rate, which it calculates based on the credit quality of the Group and by comparing interest rates available in the market for similar borrowings, and adjusting this amount based on the impact of collateral over the term of each lease. The Group has elected to adopt the following lease practical expedients in conjunction with the adoption of ASU 2016-02: (i) elect for each lease to not separate non-lease components from lease components and instead to account for each separate lease component and the non-lease components associated with that lease component as a single lease component; (ii) for leases that have lease terms of 12 months or less and does not include a purchase option that is reasonably certain to exercise, the Group elected not to apply ASC 842 recognition requirements; and (iii) the Group elected to apply the package of practical expedients for existing arrangements entered into prior to January 1, 2019 to not reassess (a) whether an arrangement is or contains a lease, (b) the lease classification applied to existing leases, and (c) initial direct costs. (ab) Government grants and subsidy income The Group receives government grants and subsidies in the PRC from various levels of local governments from time to time which are granted for general corporate purposes and to support its ongoing operations in the region. The grants are determined at the discretion of the relevant government authority and there are no restrictions on their use. The government subsidies are recorded as other income in the consolidated statement of comprehensive income in the period the cash is received. The government grants received by the Group amounting to RMB1,682, RMB53,739RMB62,517, RMB74,104 and RMB62,517 RMB30,596 for the years ended December 31, 2017, 20182019, 2020 and 2019,2021, respectively. Current income taxes are provided on the basis of net income for financial reporting purposes, adjusted for income and expense items which are not assessable or deductible for income tax purposes, in accordance with the regulations of the relevant tax jurisdictions.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in thousands, except share data, or otherwise noted)
2. Summary of significant accounting policies (continued)
(ac) Taxation (continued)
Deferred income taxes are recognized for temporary differences between the tax bases of assets and liabilities and their reported amounts in the consolidated financial statements, net operating loss carry forwards and credits. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Current income taxes are provided in accordance with the laws of the relevant taxing authorities. Deferred tax assets and liabilities are measured using enacted rates expected to apply to taxable income in which temporary differences are expected to be received or settled. The effect on deferred tax assets and liabilities of changes in tax rates is recognized in the statement of comprehensive income (loss) in the period of the enactment of the change.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (All amounts in thousands, except share data, or otherwise noted) 2. Summary of significant accounting policies (continued) (ac) Taxation (continued) The Group considers positive and negative evidence when determining whether a portion or all of its deferred tax assets will more likely than not be realized. This assessment considers, among other matters, the nature, frequency and severity of current and cumulative losses, forecasts of future profitability, the duration of statutory carry-forward periods, its experience with tax attributes expiring unused, and its tax planning strategies. The ultimate realization of deferred tax assets is dependent upon its ability to generate sufficient future taxable income within the carry-forward periods provided for in the tax law and during the periods in which the temporary differences become deductible. When assessing the realization of deferred tax assets, the Group has considered possible sources of taxable income including (i) future reversals of existing taxable temporary differences, (ii) future taxable income exclusive of reversing temporary differences and carry-forwards, (iii) future taxable income arising from implementing tax planning strategies, and (iv) specific known trend of profits expected to be reflected within the industry. The Group recognizes a tax benefit associated with an uncertain tax position when, in its judgment, it is more likely than not that the position will be sustained upon examination by a taxing authority. For a tax position that meets the more-likely-than-not recognition threshold, the Group initially and subsequently measures the tax benefit as the largest amount that the Group judges to have a greater than 50% likelihood of being realized upon ultimate settlement with a taxing authority. The Group’s liability associated with unrecognized tax benefits is adjusted periodically due to changing circumstances, such as the progress of tax audits, case law developments and new or emerging legislation. Such adjustments are recognized entirely in the period in which they are identified. The Group’s effective tax rate includes the net impact of changes in the liability for unrecognized tax benefits and subsequent adjustments as considered appropriate by management. The Group classifies interest and penalties recognized on the liability for unrecognized tax benefits as income tax expenses.
(ad) Earnings (loss)Net profit per share
Basic earnings (loss)net profit per share is computed by dividing net income (loss)profit attributable to FinVolution Group’s ordinary shareholders by the weighted average number of ordinary shares outstanding during the period using the two-class method. Under the two-class method, net incomeprofit is allocated between ordinary shares and other participating securities based on their participating rights. Net loss is not allocated to other participating securities if based on their contractual terms they are not obligated to share in the losses. Diluted earnings (loss)net profit per share is calculated by dividing net income (loss)profit attributable to FinVolution Group’s ordinary shareholders by the weighted average number of ordinary and dilutive ordinary equivalent shares outstanding during the period. Ordinary equivalent shares consist of shares issuable upon the conversion of the preferred shares using the if-converted method and shares issuable upon the exercise of share options using the treasury stock method. Ordinary equivalent shares are not included in the denominator of the diluted loss per share calculation when inclusion of such shares would be anti-dilutive.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (All amounts in thousands, except share data, or otherwise noted) 2. Summary of significant accounting policies (continued) The Group’s chief operating decision maker, the Chief Executive Officer, reviews the consolidated results when making decisions about allocating resources and assessing performance of the Group as a whole and therefore, the Group only has 1 reportable segment. The Group does not distinguish between markets or segments for the purpose of internal reporting. The Group’s long-lived assets are substantially all located in the PRC and substantially all of the Group’s revenues are derived from within the PRC. Therefore, 0 geographical segments are presented.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in thousands, except share data, or otherwise noted)
2. Summary of significant accounting policies (continued)
The Group accounts for treasury shares using the cost method. Under this method, the cost incurred to purchase the shares is recorded in the treasury shares account in the consolidated balance sheets. At retirement, the ordinary shares account is charged only for the aggregate par value of the shares. The excess of the acquisition cost of treasury shares over the aggregate par value is allocated between additional paid-in capital (up to the amount credited to the additional paid-in capital upon original issuance of the shares) and retained earnings. In the event that treasury shares are reissued at an amount different from the cost the Company paid to repurchase the treasury shares, the Company will recognize the difference in additional paid-in capital by using first-in, first-out method.first-out method. The treasury shares account includes 46,301,000 144,906,570 and 20,634,265 116,279,765 ordinary shares mainly for the purpose of exercise of share-based compensation plans as of December 31, ,
2018 2020 and 2019, 2021, respectively.
In accordance with the relevant regulations and their articles of association, subsidiaries of the Company incorporated in the PRC are required to allocate at least 10% of their after-tax profit determined based on the PRC accounting standards and regulations to the general reserve until such reserve has reached 50% of the relevant subsidiary’s registered capital. These reserves can only be used for specific purposes and are not transferable to the Company in the form of loans, advances or cash dividends. During the years ended December 31, 2017, 20182019, 2020 and 2019,2021, appropriations to the general reserve amounted to RMB39,428, RMB200,916RMB61,192, RMB140,860 and RMB61,192
,RMB152,345, respectively. (ah) Change in accounting estimate effected by a change in accounting principle
The Group historically does not apply a quantitative threshold for its accounts receivable and loans receivable write off policies and only writes off the accounts receivable and loans receivable when it’s certain that these balances are uncollectible. In 2019, the Group changes its write off policy so that accounts receivable and loans receivable that are 180 days or more past due would be written off. This change in write off policy is a change in accounting estimate effected by a change in accounting principle in accordance with ASC Topic 250 with the comparative figures adjusted to conform to the same accounting principle. This change has no material impact on the Group’s consolidated statements of balance sheet, comprehensive income or consolidated statements of cash flows.
The Group historically presented interest income, interest expenses and provision for loan receivables within the financial statement line item “Net interest income (expense) and loan provision losses”. In 2019, the Group reclassified provision for loan receivables amounting RMB299,504 from “Net interest income (expense) and loan provision losses” in operating revenue to “Provision for loan receivables” in operating expenses. The amount of provision for loan receivables that have been reclassified to conform to the current period financial statement presentation were RMB46,586 and RMB192,749 for the year ended December 31, 2017 and 2018, respectively.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (All amounts in thousands, except share data, or otherwise noted) 2. Summary of significant accounting policies (continued) (ah) Recently issued accounting standards Adoption of new accounting standards In February 2016, the FASB issued ASU 2016-02,
Leases (Topic 842) (“ASU2016-02”),
which requires lessees to put most leases on their balance sheets but recognize the expenses on their income statements in a manner similar to current practice. ASU2016-02
states that a lessee would recognize a lease liability for the obligation to make lease payments and aright-to-use
asset for the right to use the underlying asset for the lease term. The new standard is effective for interim and annual periods beginning after December 15, 2018 and early adoption is permitted. In July 2018, the FASB issued ASU2018-10,
“Codification Improvements to Topic 842, Leases” which clarifies the use of rate implicit in the lease and requirements of lease reclassification reassessment. Further in July, 2018, FASB issued ASU2018-11,
“Leases (Topic 842): Targeted improvements” which provides another transition method in addition to the existing transition method by allowing entities to initially apply the new leases standard at the adoption date and recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption.The Group adopted ASC Topic 842 using the modified retrospective transition approach. Prior period results continue to be presented under ASC Topic 840 based on the accounting standards originally in effect for such periods. Please refer to Note 2(aa
) for the Group’s accounting policy under ASC Topic 842. Upon adoption of ASC 842, on January 1, 2019, the Group recorded the operating lease right-of-use-assets and operating lease liabilities amounting to RMB127,066 and RMB118,420, respectively, which are primarily related to the lease of the Group’s office spaces. The adoption of ASC 842 did not have a material impact on the Group’s results of operations or cash flows.New accounting standards not yet adopted
In June 2016, the FASB amended guidance related to impairment of financial instruments as part of ASU 2016-13 Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which will be effective January 1, 2020. The guidance replaces the incurred loss impairment methodology with an expected credit loss model for which a Group recognizes an allowance based on the estimate of expected credit loss. In November 2018, the FASB issued an amendment (ASU 2018-19): Codification Improvements to Topic 326, Financial Instruments—Credit Losses, to align the implementation date for nonpublic entities’ annual fiscal statements with the implementation date for their interim financial statements and clarify the scope of the guidance in the amendments in ASU 2016-13. Upon adoption of the standard on January 1, 2020, a
fter after adjusting for deferred tax and other adoption effects, a RMB882,964 decrease was recorded in the retained earnings through a cumulative-effect adjustment.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in thousands, except share data, or otherwise noted)
2. Summary of significant accounting policies (continued)
(aj) Recently issued accounting standards (continued)
New accounting standards not yet adopted (continued)
In January 2017, the FASB issued ASU 2017-04, “Intangibles—Goodwill and Other (Topic 350): simplifying the test for goodwill impairment”, the guidance removes Step 2 of the goodwill impairment test, which requires a hypothetical purchase price allocation. Goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not the difference between the fair value and carrying amount of good will which was the step 2 test before. The ASU should be adopted on a prospective basis for the annual or any interim goodwill impairment tests beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Group hasadoption of ASC 350 did not early adopted this guidance. The Group does not believe this standard will have a material impact on its consolidated financial statements.the Group’s results of operations or cash flows.In August 2018, the FASB issued ASU 2018-13, “Fair Value Measurement (Topic 820): Disclosure framework – changes to the disclosure requirements for fair value measurement” which modifies the disclosure requirements on fair value measurements in Topic 820 Fair Value Measurement. It also requires to add disclosures relating to changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements held at the end of the reporting period and the range and weighted average of significant unobservable inputs used to develop Level 3 measurements. ASU 2018-13 is effective for all entities for fiscal years and interim periods within those fiscal years, beginning after December 15, 2019. The Group doesadoption of ASC 820 did not believe this standard will have a material impact on its consolidated financial statements.the Group’s results of operations or cash flows.In December 2019, the FASB issued ASU2019-12—Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. This update simplifies the accounting for income taxes as part of the FASB’s overall initiative to reduce complexity in accounting standards. The amendments in ASU2019-12 simplify the accounting for income taxes by removing certain exceptions to the general principles in Topic 740. The amendments also improve consistent application of and simplify GAAP for other areas of Topic 740 by clarifying and amending existing guidance. ASU2019-12 is effective for all entities beginning on January 1, 2021. The adoption of ASC 740 did not have a material impact on the Group’s results of income tax expenses or cash flows. New accounting standards not yet adopted In May 2021, the FASB issued ASU No. 2021-04, Earnings Per Share (Topic 260), Debt — Modifications and Extinguishments (Subtopic 470-50), Compensation — Stock Compensation (Topic 718), and Derivatives and Hedging — Contracts in Entity’s Own Equity (Subtopic 815-40) to clarify and reduce diversity in an issuer’s accounting for modifications or exchanges of freestanding equity classified written call options (for example, warrants) that remain equity classified after modification or exchange. The amendments in this update are effective for all entities for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. Early adoption of the amendments is permitted. The adoption of this standard is not expected to have a material impact on the Group’s disclosures. In November 2021, the FASB issued ASU 2021-10, Government Assistance (Topic 832): Disclosures by Business Entities about Government Assistance. This update requires certain annual disclosures about transactions with a government that are accounted for by applying a grant or contribution accounting model by analogy. This update is effective for annual periods beginning after December 15, 2021, and early application is permitted. The adoption of this standard is not expected to have a material impact on the Group’s disclosures.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (All amounts in thousands, except share data, or otherwise noted) 3. Significant equity transactions and acquisitions
(a) | Initial public offering |
On November 10, 2017, the Company completed its initial public offering on the New York Stock Exchange under the symbol “PPDF”. The Company offered 17,000,000 American Depositary Shares (“ADS”). Each ADS represents5
ordinary share and was sold to the public at US$13.00 per ADS. Also, the Company offered 3,846,154 ADS through concurrent private placement at US$13.00 per ADS. Net proceeds raised by the Company from the initial public offering and private placement in total amounted to approximately US$253.0 million after deducting underwriting discounts and commissions and other offering expenses.Immediately prior to the completion of the initial public offering, all classes of preferred shares of the Company were converted and redesignated as Class A ordinary shares on aone-for-one
basis, all ordinary shares of the Company were redesignated as Class B ordinary share except for the 4,000,000 ordinary shares held by GF Sino Vest FundSPC-Star
6 SP. (i.e. the ordinary shares held by4
founders of the Company were converted to Class B ordinary shares with the preferred ordinary shares held by the rest of the shareholders were converted into Class A ordinary shares.)In respect of all matters subject to shareholders’ vote, each holder of Class A ordinary share is entitled to one and each holder of Class B ordinary share is entitled to twenty votes. Class B ordinary share is convertible into one Class A ordinary share at any time by the holder thereof. Class A ordinary shares are not convertible into Class B ordinary shares under any circumstances. Upon any sale, transfer, assignment or disposition of any Class B ordinary share by the shareholder to any person who is not an affiliate of such shareholder, or upon a change of ultimate beneficial ownership of any Class B ordinary share to any person who is not an affiliate of the registered shareholder of such share, such Class B ordinary shares shall be automatically and immediately converted into the equivalent number of Class A ordinary shares.
(b) | Acquisition of HB micro lending company |
On August 31, 2017, the Group, through one of its subsidiaries, entered into a share purchase agreement to purchase 32% of the common shares of HB micro lending company (“HB”) on National Equities Exchange and Quotations an equity exchange market in China for a total cash consideration of RMB48.2 million. Further in October, the Group, through another subsidiary, entered into an equity pledge agreement with HB and paid cash consideration of RMB42.0 million to acquire 28% of its restricted common shares. As of December 31, 2017, the Group was able to control 60% of the voting rights of HB and has majority seats on the board of directors thus controlling HB.
In accordance with ASC Topic 805, the acquisition of HB had been accounted for as a business combination and the results of operations of HB from the acquisition date, i.e.October 31, 2017
, have been included in the Group’s consolidated financial statements. The Group made estimates and judgments in determining the fair value of acquired assets and liabilities, based on an independent valuation report and management’s experiences with similar assets and liabilities.The allocation of the purchase price is as follows:
| | | | | | | | | | | | | | | | | | | | | | | Identifiable assets acquired
| | | | | | | | | Identifiable intangible asset
| | | | | | | | | | | | | | | | | | | | | | | | | | | Identifiable liabilities assumed
| | | | | | | | | | | | | ) | | | | | | | | | ) | | | | | | | | | | | | | | | | | | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
FINVOLUTION GROUP2. Summary of significant accounting policies (continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(ah) Recently issued accounting standards (continued) (All amounts in thousands, except share data, or otherwise noted)New accounting standards not yet adopted (continued) 4.In March 2022, the FASB issued ASU 2022-02, Financial Instruments-Credit Losses (Topic 326), Troubled Debt Restructurings and Vintage Disclosures. This update eliminates the accounting guidance for troubled debt restructurings (TDRs) for creditors, requires new disclosures for creditors for certain loan refinancings and restructurings when a borrower is experiencing financial difficulty and requires inclusion of current-period gross writeoffs in the vintage disclosure tables. The adoption of this standard is not expected to have a material impact on the Group’s disclosures.
Loans receivable originated and retained by the Group consist of the following: | | | | | | | | | | | | | | | | | | | | | | | | | | | Loans (adjusted, Note 2(ah)) | | | | | | | | | Allowance for loan losses (adjusted, Note 2(ah)) | | | | ) | | | | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | As of December 31, | | | | 2020 | | | 2021 | | | | RMB | | | RMB | | | | | 2,736,894 | | | | 2,410,149 | | Credit loss allowance for loans receivable | | | (382,012 | ) | | | (427,873 | ) | | | | | | | | | | | | | 2,354,882 | | | | 1,982,276 | | | | | | | | | | |
As of December 31, 20192021 and 2018,2020, the entire loans receivable balance represents the outstanding loans made to the borrowers from consolidated trusts and loans held by subsidiaries of the Group. As part of the Group’s efforts to develop new product offerings for institutional funding partners, the Group has established a series of trusts were established and administrated by third-party trust companies. These trusts make loans solely to borrowers referred the Group to provide returns to the trust beneficiaries. As such, the Group has power to direct the activities of the trusts. Also,In addition, the Group is either the sole beneficiary of certain trusts or has the obligation to absorb losses or the right to receive residual benefits from certain trusts that could potentially be significant to these trusts. As a result, the Group is considered the primary beneficiary of the trusts and their assets, liabilities, results of operations and cash flows are consolidated accordingly. The following table sets forth the activity in the allowance for loan losses for the years ended December 31, 2017, 20182019, 2020 and 2019.2021. | | | | | | | | | | | | | | | For the Years Ended December 31, | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | ) | | | | ) | | | | ) | | | | | | | | | ) | | | | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
The following table sets forth theaging
of loans as of December 31, 2018 and December 31, 2019:As of December 31, 2018 and 2019, loans receivable amounting to RMB25,952 and RMB137,130 were in non-accrual status with no loans receivables accruing interest 90 days past due. Interest income for non-accrual loans receivable is recognized on a cash basis. For the year ended December 31, 2017, 2018 and 2019, interest income earned from non-accrual loans receivable were not material.
As prescribed in ASC Topic 310, credit losses shall be deducted from the allowance for credit losses and written off in the period deemed uncollectible. Uncollectible generally means loans remain past due after all commercially reasonable means of recovering the loan balance have been exhausted. As disclosed in note 2(n), the Company writes-off the loans receivable and the related allowance when the loans receivables are delinquent for 180 days or more.
| | | | | | | | | | | | | | | For the years ended December 31, | | | | 2019 | | | 2020 | | | 2021 | | | | RMB | | | RMB | | | RMB | | | | | 74,381 | | | | 316,124 | | | | 382,012 | | Impact of adoption of ASC 326 (Note 2(b)) | | | 0 | | | | 303,291 | | | | 0 | | Provision for loans receivable | | | 299,504 | | | | 463,175 | | | | 374,243 | | | | | (57,761 | ) | | | (700,578 | ) | | | (328,382 | ) | | | | | | | | | | | | | | | | | 316,124 | | | | 382,012 | | | | 427,873 | | | | | | | | | | | | | | |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (All amounts in thousands, except share data, or otherwise noted) 4.3. Loans receivable, net (continued)
The Group evaluates expected credit losses of loans receivable by on a collective basis based on the type of borrowers and delinquency pattern. Credit quality indicators are updated quarterly, and the credit quality of any given customer can change during the life of the portfolio. The following table presents loans receivables based on type of borrowers and delinquency as of December 31, 2020 and December 31, 2021: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Current | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 19,443 | | | | 5,564 | | | | 5,359 | | | | 4,667 | | | | 35,033 | | | | 231,001 | | | | 266,034 | | | | | 101,880 | | | | 28,994 | | | | 27,251 | | | | 27,449 | | | | 185,574 | | | | 2,285,286 | | | | 2,470,860 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 121,323 | | | | 34,558 | | | | 32,610 | | | | 32,116 | | | | 220,607 | | | | 2,516,287 | | | | 2,736,894 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 31,036 | | | | 8,658 | | | | 9,771 | | | | 7,181 | | | | 56,646 | | | | 251,554 | | | | 308,200 | | | | | 93,254 | | | | 25,998 | | | | 26,061 | | | | 21,617 | | | | 166,930 | | | | 1,935,019 | | | | 2,101,949 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 124,290 | | | | 34,656 | | | | 35,832 | | | | 28,798 | | | | 223,576 | | | | 2,186,573 | | | | 2,410,149 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
As the average tenor of loans facilitated on the Group’s platform are around 9 months, substantially all of the loans receivable balance as of December 31, 2021 are originated in 2021. The allowanceAs of December 31, 2020
and 2021, loans receivable amounting to RMB99,284 and RMB109,303 were innon-accrual status with no loans receivables accruing interest 90 days past due. Interest income for loan lossesnon-accrual loans receivable is maintained atrecognized on a level considered adequate to provide for losses that will probably incur. Managementcash basis. For the years ended December 31, 2019, 2020 and 2021, interest income earned fromnon-accrual loans receivable were not material.Beginning in 2020, management performs a quarterly evaluation of the adequacy of the allowance. Thecredit loss allowance isfor loan receivables primarily based on the Group’s past loan loss history,expectations of lifetime credit losses based on historical default experience, known and inherentor inherit risks in the portfolio, adverse situations that may affect the borrower’s ability to repay, composition of the loan portfolio, current economic conditions and macroeconomic forecasts as well as other factors surrounding the credit risk of borrowers (Note 2(b)). When forecasting macroeconomic factors, management primarily considered gross domestic product, consumer price index and other pertinent factors such as money supply wherein M1 money supply was determined to be the most relevant factors.to the Group’s business. The allowance is calculated at portfolio-level since the loansloan portfolio is typically of smaller balance homogenous loans and is collectively evaluated for impairment. In estimating the probable loss of the loan portfolio, the Group also considers qualitative factors such as current economic conditions and or events in specific industries and geographical areas, including unemployment levels, trends in real estate values, peer comparisons, and other pertinent factors such as regulatory guidance.
The following table sets forth the total assets, liabilities, results of operations and cash flows of the above trusts, which are included in the Group’s consolidated financial statements.F-42 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Loans and other receivable | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Funds payable to investors of consolidated trusts | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | For the Years Ended December 31, | | | | | | | | | | | | | | | | | | | | | | | | | | ) | | | | ) | | | | ) | | | | | ) | | | | | | | | | | | | | | | | | | | | | | Net cash used in operating activities | | | | ) | | | | ) | | | | ) | Net cash used in investing activities | | | | ) | | | | ) | | | | ) | Net cash provided by financing activities | | | | | | | | | | | | | Net increase in cash, cash equivalents and restricted cash | | | | | | | | | | | | | Cash, cash equivalents and restricted cash at beginning of year | | | | | | | | | | | | | | | | | | | | | | | | | | Cash, cash equivalents and restricted cash at end of period | | | | | | | | | | | | | | | | | | | | | | | | | |
The following table sets forth the breakdown of funds payable to investors of consolidated trusts between the institutional funding partners and the Group as of December 31, 2018 and December 31, 2019:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Accrued interest/residual interest | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (All amounts in thousands, except share data, or otherwise noted) 4. Prepaid expenses and other assets Receivables, prepayments and other assets consist of the following: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Prepaid online marketing expenses | | | | | | | | | | | | | | | | | | | | | | | | | 20,000 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | As of December 31, | | | | 2020 | | | 2021 | | | | RMB | | | RMB | | Security deposits and other deposits | | | 965,117 | | | | 1,666,713 | | Deductible value-added taxes | | | 20,292 | | | | 105,002 | | Prepaid online marketing expenses | | | 15,956 | | | | 33,709 | | | | | 10,455 | | | | 15,715 | | | | | 38,189 | | | | 78,299 | | | | | | | | | | | | | | 1,050,009 | | | | 1,899,438 | | | | | | | | | | |
| The balances representSecurity deposits and other deposits primarily includes security deposits and rental deposits. Security deposits were set aside as requested by certain institutional funding partners, held in deposit accounts with the institutional funding partners. |
2 | In 2019, As of December 31, 2020 and 2021, security deposits set aside by the Group agreesamounted to grant a RMB20,000 loan, which can be extend to RMB40,000, to Shanghai Qiaopan Technology Company Limited (“Qiaopan”), a third party company founded by a former employee of the Group. Together with the loan agreement, the Group agrees to lent certain equipment amounting to RMB8,000 to Qiaopan. The loanRMB953,856 and equipment are convertible into a minority interest in Qiaopan upon occurrence of certain events in 2020. If Qiaopan fails to fulfill such events, Qiaopan is obligated to repay loan at a 8% interest rate and pay a rental fee of certain percentage on the equipment amount for its usage of the equipment. The Group considered this arrangement and concluded although Qiaopan meets the definition of VIE, the Group does not need to consolidate Qiaopan in its consolidated financial statements as the Group does not have power to direct the activities of Qiaopan.RMB1,654,989, respectively. |
Qiaopan engaged in offline B2C consumption-oriented lending business with focuses on consumers of 3C products (i.e. computer, communications, and consumer electronics). Qiaopan refers these offline B2C borrowers to institutional funding partners. A reserve pool equals to 5% to 10% of the total lending amount is set aside by Qiaopan to repay the institutional funding partners in the event of default of borrowers referred by Qiaopan. Qiaopan and its founders/directors are obligated to replenish the reserve pool whenever payment is made from the reserve pool.
In December, 2019, the Group granted a guarantee in an amount up to RMB100,000 to Shanghai Qiaopan Technology Company Limited (“Qiaopan”) to facilitate its offline B2C lending business.
Under the guarantee agreement, the Group is only liable to the institutional funding partner when the reserve pool is depleted. Once the Group makes any guarantee payment under this guarantee agreement, the Group shall be able to claim the payment amount from the founders/directors of Qiaopan who gave personal guarantee to the Group to repay any payments made by the Group under this guarantee agreement, as well as any applicable penalties, damages and professional fees incurred by the Group. For the year ended December 31, 2019, no guarantee payments were made by the Group under this guarantee agreement. As of December 31, 2019, no liability was recorded by the Group as the Group believe the reserve pool set aside by Qiaopan is enough to cover the default risk of borrowers referred by Qiaopan to its institutional funding partners and the relevant guarantee liability, if any, for the outstanding loans covered by this guarantee agreement is not material.
6. Property, equipment and software, net
Property, equipment and software, net consist of the following:
| | | | | | | | | | | | | | | | | | | | | | | | | | | Computer and electronic equipment | | | | | | | | | Office furniture and equipment | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Less: Accumulated depreciation and amortization (1) | | | | ) | | | | ) | | | | | | | | | | Property, equipment and software, net | | | | | | | | | | | | | | | | | |
(1) | Depreciation and amortization expenses for the years ended December 31, 2017, 2018 and 2019 was RMB22,555
, RMB42,162
and RMB57,712
, respectively. |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (All amounts in thousands, except share data, or otherwise noted) 5. Property, equipment and software, net Property, equipment and software, net consist of the following: | | | | | | | | | | | As of December 31, | | | | 2020 | | | 2021 | | | | RMB | | | RMB | | Computer and electronic equipment | | | 173,653 | | | | 231,196 | | Office furniture and equipment | | | 17,136 | | | | 22,279 | | | | | 47,324 | | | | 39,266 | | | | | 45,582 | | | | 46,752 | | | | | | | | | | | | | | 283,695 | | | | 339,493 | | Less: Accumulated depreciation and amortization | | | (189,819 | ) | | | (227,096 | ) | | | | | | | | | | Property, equipment and software, net | | | 93,876 | | | | 112,397 | | | | | | | | | | |
| Depreciation and amortization expenses for the years ended December 31, 2019, 2020 and 2021 was RMB57,712, RMB51,780 and RMB37,277 respectively. |
Intangible assets consist of the following: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Financing guarantee License 1 | | | | | | | | | | | | | | | | | | Financial Leasing License 1 | | | | | | | | | | | | | | | | | | | | | | | | | | | Less: Accumulated amortization and impairment | | | | | | | | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | As of December 31, | | | | 2020 | | | 2021 | | | | RMB | | | RMB | | | | | 63,760 | | | | 63,760 | | | | | 265 | | | | 265 | | Financial Leasing License | | | 255 | | | | 255 | | Insurance Brokerage License 1 | | | 34,667 | | | | 34,667 | | | | | | | | | | | | | | 98,947 | | | | 98,947 | | Less: Accumulated amortization and impairment | | | 0 | | | | 0 | | | | | | | | | | | | | | 98,947 | | | | 98,947 | | | | | | | | | | |
| The Group acquired Shenzhen Rongze Commerecial Co., Ltd, Zhongyu Financial Leasing and Zhongyisheng Financial Guarantee Co., Ltd.an insurance brokeage company in 2018.2020. The acquisitions met the “single or similar asset threshold” and are not considered as business combination in accordance with ASC Topic 805. In 2019, the financial guarantee licenses related to Zhongyisheng Financial Guarantee Co., Ltd. was revoked and therefore full impairment was provided.805 but asset acquisition. |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (All amounts in thousands, except share data, or otherwise noted) 7. Accounts receivable and contract assets The following table presents the accounts receivable as of December 31, 2018 and 2019: | | | | | | | | | | | | | | | | | | | | | | | | | | | Accounts receivable (adjusted, Note 2(ah)) | | | | | | | | | Allowance for doubtful accounts (adjusted, Note 2(ah)) | | | | ) | | | | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | |
The following table presents the aging of past-due accounts receivable or more by type of fee as of December 31, 2018 and 2019:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total | | | 790,130 | | | | 42,965 | | | | 9,882 | | | | 9,963 | | | | 9,646 | | | | 862,586 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total | | | 860,681 | | | | 90,365 | | | | 27,014 | | | | 25,678 | | | | 24,266 | | | | 1,028,004 | | | | | | | | | | | | | | | | | | | | | | | | | | |
As disclosed in note 2(k), the Company writes-off the accounts receivable and the related allowance when the accounts receivables are delinquent for 180 days or more.
The following table sets forth the movement of provision for accounts receivable as of December 31, 2018 and 2019, respectively:
| | | | | | | | | | | For the Years Ended December 31, | | | | | | | | | | | | | | | | | | | | | | | | | Impact due to adoption of new revenue standard | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
The following table sets forth the contract assets as of December 31, 20182020 and 2019:2021:
| | | | | | | | | | | | | | | | | | | | | | | | | | | Investment management fee for investment programs | | | | | | | | | Contract acquisition cost | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | As of December 31, | | | | 2020 | | | 2021 | | | | RMB | | | RMB | | Accounts receivable and contract assets | | | 1,052,631 | | | | 2,141,542 | | Credit loss allowance for accounts receivable and contract assets | | | (188,725 | ) | | | (250,696 | ) | | | | | | | | | | Accounts receivable and contract assets, net | | | 863,906 | | | | 1,890,846 | | | | | | | | | | |
F-54The Group evaluates expected credit losses of accounts receivable and contract assets on a collective basis based on the type of borrowers and delinquency pattern. Credit quality indicators are updated quarterly, and the credit quality of any given customer can change during the life of the portfolio. The following table presents accounts receivable and contract assets based on type of borrowers and delinquency as of December 31, 2020 and 2021:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total past due | | | Current | | | receivable and contract assets | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 6,781 | | | | 1,672 | | | | 1,587 | | | | 1,870 | | | | 11,910 | | | | 117,030 | | | | 128,940 | | | | | 20,105 | | | | 5,942 | | | | 5,356 | | | | 5,458 | | | | 36,861 | | | | 756,322 | | | | 793,183 | | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 130,508 | | | | 130,508 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 26,886 | | | | 7,614 | | | | 6,943 | | | | 7,328 | | | | 48,771 | | | | 1,003,860 | | | | 1,052,631 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 16,964 | | | | 3,626 | | | | 2,863 | | | | 2,491 | | | | 25,944 | | | | 451,127 | | | | 477,071 | | | | | 50,589 | | | | 10,409 | | | | 8,207 | | | | 6,811 | | | | 76,016 | | | | 1,365,710 | | | | 1,441,726 | | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 222,745 | | | | 222,745 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 67,553 | | | | 14,035 | | | | 11,070 | | | | 9,302 | | | | 101,960 | | | | 2,039,582 | | | | 2,141,542 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
As the average tenor of loans facilitated on the Group’s platform are around 9 months, substantially all of the accounts receivable and contract assets balance as of December 31, 2021 are originated in 2021. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (All amounts in thousands, except share data, or otherwise noted) 8.7. Accounts receivable and contract assets (continued) As disclosed in note 2(l), the Companywrites-off the accounts receivable and contract assets and the related allowance when the accounts receivables and contract assets are delinquent for 180 days or more. The following table sets forth the movement of credit loss allowance for accounts receivable and contract assets for the years endedas of December 31, 20182020 and 2019: 2021, respectively: | | | | | | | | | | | For the Years Ended December 31, | | | | | | | | | | | | | | | | | | | | | | | | | Impact due to adoption of new revenue standard | | | | | | | | | Recognition of investment management fee | | | | | | | | | Recognition of contract acquisition cost | | | | | | | | | Settlement upon maturity of investment programs | | | | ) | | | | ) | Settlement upon fulfilment of contract | | | | ) | | | | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | For the years ended December 31, | | | | 2019 | | | 2020 | | | 2021 | | | | | | | RMB | | | RMB | | | | | 50,544 | | | | 145,699 | | | | 188,725 | | Impact of adoption of ASC 326 (Note 2(b)) | | | 0 | | | | 142,077 | | | | 0 | | Provision for accounts receivable and contract assets | | | 261,882 | | | | 124,661 | | | | 139,226 | | | | | (166,727 | ) | | | (223,712 | ) | | | (77,255 | ) | | | | | | | | | | | | | | | | | 145,699 | | | | 188,725 | | | | 250,696 | | | | | | | | | | | | | | |
The full time employees of the Group are entitled to staff welfare benefits, including medical insurance, basic pensions, unemployment insurance, work injury insurance, maternity insurance and housing funds. The Group is required to accrue for these benefits based on certain percentages of the employees’ salaries in accordance with the relevant regulations and to make contribution to the state-sponsored pension and medical plans. The total amounts charged to the consolidated statements of comprehensive income (loss) for such employee benefits amounted to approximately RMB128,554
, RMB143,078 RMB144,596, RMB80,505 and RMB144,596 RMB140,135 for the years
ended December 31, 2017, 20182019, 2020 and 2019,2021, respectively. 10. Accrued expenses and other liabilities
Accrued expenses and other liabilities consist of the following:F-46 | | | | | | | | | | | | | | | | | | | | | | | | | | | Funds payable to financial institution partners* | | | | | | | | | Accrued marketing expense | | | 113,568 | | | | 45,616 | | Accrued collection service fee | | | | | | | | | Accrued technical services expense | | | 16,510 | | | | 20,945 | | Accrued payment channel expenses | | | | | | | | | Accrued professional service fee | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
* | The balance of payable mainly includes funds received from borrowers but not yet transferred to the institutional funding partners due to the settlement time lag. |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (All amounts in thousands, except share data, or otherwise noted) 9. Accrued expenses and other liabilities Accrued expenses and other liabilities consist of the following: | | | | | | | | | | | As of December 31, | | | | 2020 | | | 2021 | | | | RMB | | | RMB | | Funds payable to institutional funding partners * | | | 225,031 | | | | 326,914 | | | | | | | | | | | Accrued marketing expense | | | 134,743 | | | | 133,399 | | Accrued collection service fee | | | 36,943 | | | | 41,654 | | Accrued technical services expense | | | 16,930 | | | | 25,988 | | Accrued payment channel expenses | | | 13,212 | | | | 21,055 | | Accrued professional service fee | | | 25,503 | | | | 25,074 | | | | | 56,640 | | | | 64,748
| | | | | | | | | | | | | | 509,002 | | | | 638,832 | | | | | | | | | | |
* | The balance of payable mainly includes funds received from borrowers but not yet transferred to the institutional funding partners due to the settlement time lag. |
11.10. Related party balances and transactions Transaction with PPcredit Amounts incurred by the Group | | | | | | | | | | | | | | | For the Years ended December 31, | | | | | | | | | | | | | | | | | | | | | | Data collection service expense (i) . | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | For the years ended December 31, | | | | 2019 | | | 2020 | | | 2021 | | | | RMB | | | RMB | | | RMB | | Data collection service expense (i) | | | 43,494 | | | | 10,104 | | | 7,503 | | | | | | | | | | | | | | | |
(i) | PPcredit Data Service (Shanghai) Co., Ltd. (“PPcredit”) was founded in April 2016 by the founders of the Group to provide data collection services. The Group mainly uses PPcredit as a data provider since PPcredit was established. The price for the service is determined based on the price charged by other market participants. |
Amounts due to related partyparties | | | | | | | | | | | As of December 31, | | | | 2020 | | | 2021 | | | | RMB | | | RMB | | | | | 1,984 | | | | 2,265 | | | | | | | | | | |
F-47 Amounts due from related party
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (All amounts in thousands, except share data, or otherwise noted) Under the current laws of the Cayman Islands, the Company is not subject to tax on income or capital gain. Additionally, upon payments of dividends to the shareholders, no Cayman Islands withholding tax will be imposed. Under the current Hong Kong Inland Revenue Ordinance, the Company’s subsidiaries incorporated in Hong Kong are subject to 16.5% income tax on their taxable income generated from operations in Hong Kong. Additionally, payments of dividends by the subsidiaries incorporated in Hong Kong to the Company are not subject to any Hong Kong withholding tax. Commencing from the year of assessment of 2018, the first HK$2 million of profits earned by the Company’s subsidiaries incorporated in Hong Kong will be taxed at half the current tax rate is(i.e. 8.25%) while the remaining profits will continue to be taxed at the existing 16.5% for the years ended December 31, 2016 and 2017.tax rate. No Hong Kong profits tax was provided for as there was 0 estimated assessable profits tax during the relevant periods. Under the current laws of Indonesia, the Company’s subsidiaries incorporated in Indonesia are subject to 22% income tax on their taxable income generated from operations in Indonesia. On March 16, 2007, the National People’s Congress of the PRC enacted an Enterprise Income Tax Law (“EIT Law”), under which Foreign Investment Enterprises (“FIEs”) and domestic companies would be subject to EIT at a uniform rate of 25
% 25%. The EIT law became effective on January 1, 2008. On April 14, 2008, relevant governmental regulatory authorities released qualification criteria, application procedures and assessment processes for “high and new technology enterprises” (“HNTE”), which will be entitled to a favorable statutory tax rate of 15
% 15%. An enterprise’s qualification as a HNTE is reassessed by the relevant PRC governmental authorities every three years. In November 2013, the local governments announced thatShanghai PPDai and Shanghai Erxu were entitled for a subsidiarypreferential income tax rate of the Group was15% from 2018 to 2020 as they are qualified as HNTE and was subject toHNTE. Starting from 2021, these subsidiaries no longer enjoyed a preferential statutoryincome tax rate of % for 2013, 2014 and 2015. In 2016, the subsidiaryre-applied
for HNTE status and was approved the HNTE status in December 2016. Accordingly, the subsidiary continued to be taxed at a15
% rate for 2016, 2017 and 2018. Currently, the subsidiary is under process for renewal application. 15%. In January 2018, another subsidiary of the GroupShanghai Shanghu was approved the Software Enterprise Status. In accordance with PRC EIT Law, Shanghai Shanghu was entitled to enjoy full income tax exemption for 2017 and 2018, and a preferential income tax rate of 12.5% for 2019 to 2021. In May 2020, Shanghai Shanghu was approved the subsidiaryqualification of Key Software Enterprise Status in 2019 and was entitled to a preferential tax rate of 10% for 2019. In 2020, Hainan Shanghu applied for Software Enterprise Status and obtained Software Enterprise Status in 2021. In accordance with PRC EIT Law, Hainan Shanghu is entitled to enjoy full exemption from EIT for two years beginning with their first profitable yearfrom 2020 to 2021, and a 50% reduction for the subsequent three years. The EIT law also provides for companies that qualifies as small and micro entities are eligible to apply 20% tax rate and enjoy a 50% reduction of its taxable income.The EIT Law also provides that an enterprise established under the laws of a foreign country or region but whose “de facto management body” is located in the PRC be treated as a resident enterprise for PRC tax purposes and consequently be subject to the PRC income tax at the rate of 25%25 % for its global income. The Implementing Rules of the EIT Law merely define the location of the “de facto management body” as “the place where the exercising, in substance, of the overall management and control of the production and business operation, personnel, accounting, properties, etc., of a non-PRC company is located.” Based on a review of surrounding facts and circumstances, the Group does not believe that it is likely that its entities registered outside of the PRC should be considered as resident enterprises for the PRC tax purposes.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (All amounts in thousands, except share data, or otherwise noted) The EIT Law also imposes a withholding income tax of 10% on dividends distributed by a FIE to its immediate holding company outside of China, if such immediate holding company is considered as a non-resident enterprise without any establishment or place within China or if the received dividends have no connection with the establishment or place of such immediate holding company within China, unless such immediate holding company’s jurisdiction of incorporation has a tax treaty with China that provides for a different withholding arrangement. The Cayman Islands, where the Company incorporated, does not have such tax treaty with China. According to the arrangement between the mainland China and Hong Kong Special Administrative Region on the Avoidance of Double Taxation and Prevention of Fiscal Evasion in August 2006, dividends paid by an FIE in China to its immediate holding company in Hong Kong will be subject to withholding tax at a rate of no more than 5% (if the foreign investor owns directly at least 25% of the shares of the FIE). In accordance with accounting guidance, all undistributed earnings are presumed to be transferred to the parent company and are subject to the withholding taxes. All FIEs are subject to the withholding tax from January 1, 2008. Under U.S. GAAP, undistributed earnings are presumed to be transferred to the parent company and are subject to the withholding taxes.
Prior to 2020, as the Company had the intent and ability to indefinitely reinvest the PRC subsidiaries’ accumulated profits for expansion of its PRC business, no withholding tax was recorded for those accumulated profits. Starting from 2020, the Company decided to remit certain percentage of the annual profits of its PRC subsidiaries to their overseas parent company for dividend distribution purposes. The presumption mayGroup accrued RMB18 million and RMB58 million withholding tax liabilities based on a 10% tax rate for certain percentage of the PRC subsidiaries’ profits to be overcome ifdistributed in 2020 and 2021, respectively. As of December 31, 2020 and 2021, there were approximately RMB2,669 million and RMB4,604 million accumulated undistributed profits of PRC subsidiaries that 0 deferred tax liabilities were provided, respectively. The Group still intends to indefinitely reinvest these remaining undistributed earnings in its PRC subsidiaries. The Group has not accrued any tax for the outside basis difference represented by the accumulated undistributed profits of the consolidated VIEs, which amounted to RMB5,123 million at December 31, 2021 as, after review, it was determined that relevant tax laws and regulations provide fortax-free transfer of such amounts to the Group’s PRC subsidiaries. Moreover, the Group has sufficient evidencethe intent and ability to demonstrate thatindefinitely reinvest such accumulated profits for expansion of its PRC business, in line with its strategic goals.Composition of income tax expenses The current and deferred portions of income tax expenses included in the undistributed dividends will bere-invested consolidated statements of comprehensive income during the years ended December 31, 2019, 2020 and the remittance of the dividends will be postponed indefinitely. The Group did02021 are as follows:
t record any dividend withholding tax for any of the periods presented. | | | | | | | | | | | | | | | For the years ended December 31, | | | | 2019 | | | 2020 | | | 2021 | | | | RMB | | | RMB | | | RMB | | Current income tax expenses | | | 390,080 | | | | 298,096 | | | | 503,139 | | Deferred income tax expense | | | 91,882 | | | | 157,325 | | | | (262,321 | ) | | | | | | | | | | | | | | | | | 481,962 | | | | 455,421 | | | | 240,818 | | | | | | | | | | | | | | |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (All amounts in thousands, except share data, or otherwise noted) 12.11. Taxation (continued)
Composition of income tax expenses
The current and deferred portions of income tax expenses included in the consolidated statements of comprehensive income (loss) during the years ended December 31, 2017, 2018 and 2019 are as follows:
| | | | | | | | | | | | | | | For the Years Ended December 31, | | | | | | | | | | | | | | | | | | | | | | Current income tax expenses | | | | | | | | | | | | | Deferred income tax expense (benefit) | | | | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Reconciliation of the differences between statutory tax rate and the effective tax rate The Group did not identify significant unrecognized tax benefits for the years ended December 31, 2017, 20182019, 2020 and 20192021 and does not anticipate any significant change in unrecognized tax benefits within 12 months from December 31, 2019. Aggregate undistributed earnings of the Company’s subsidiaries and VIE located in the PRC that are available for distribution at December 31, 2019 are considered to be indefinitely reinvested and accordingly, 0 provision has been made for the Chinese dividend withholding taxes that would be payable upon the distribution of those amounts to any entity within the Group that is outside the PRC.2021.
The following table sets forth reconciliation between the computed expected tax expenses (benefit) rate and the effective income tax rate: | | | | | | | | | | | | | | | For the Years Ended December 31, | | | | | | | | | | | | | | | | | | | | | | | | | | % | | | | % | | | | % | Research and development tax credit | | | | )% | | | | )% | | | | ) % | | | | | )% | | | | )% | | | | ) % | Change in valuation allowance | | | | | | | | | | | | % | | | | | % | | | | % | | | | % | | | | | % | | | | | | | | | | | | | | | | | | | | | | Effective income tax rate | | | | % | | | | % | | | | % | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | For the years ended December 31, | | | | 2019 | | | 2020 | | | 2021 | | | | RMB | | | RMB | | | RMB | | | | | 25 | % | | | 25 | % | | | 25 | % | Research and development tax credit | | | (3 | )% | | | (2 | )% | | | (3 | )% | | | | (7 | )% | | | (7 | )% | | | (17 | )% | Change in valuation allowance | | | 1 | % | | | 1 | % | | | 1 | % | | | | 1 | % | | | 1 | % | | | 1 | % | | | | — | | | | 1 | % | | | 2 | % | | | | | | | | | | | | | | Effective income tax rate | | | 17 | % | | | 19 | % | | | 9 | % | | | | | | | | | | | | | |
* | | Due to the confirmation ofAs Hainan Shanghu obtained software enterprise status of a subsidiary of the Group in the fourth quarter of 2018,2021, the Group reversed a total of
RMB268,051 RMB220.2 million tax expenses in the fourth quarter of 20182021 including RMB136,424 RMB76.1 million related to the tax expenses of 20172020 and RMB131,627 RMB144.1 million related to for the tax expenses for first three quarters of 2018.2021. As Shanghai Shanghu obtained Key Software Enterprise Status in 2020, the Group reversed a total of RMB33.8 million tax expenses related to 2019 in 2020. |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in thousands, except share data, or otherwise noted)
The aggregate amount and per share effect of the tax holidays are as follows | | | | | | | | | | | | | | | For the Years Ended December 31, | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Net income per share effect | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | For the years ended December 31, | | | | 2019 | | | 2020 | | | 2021 | | | | RMB | | | RMB | | | RMB | | | | | 202,923 | | | | 168,677 | | | | 471,798 | | Net profit per share effect | | | | | | | | | | | | | | | | 0.13 | | | | 0.11 | | | | 0.33 | | | | | | | | | | | | | | | | | | 0.13 | | | | 0.11 | | | | 0.32 | | | | | | | | | | | | | | |
The following table sets forth the significant components of the deferred tax assets:F- | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Timing difference in revenue recognition for transaction service fee | | | | | | | | | Provision for accounts receivable and loans receivable | | | | | | | | | Net accumulated losses-carry forward | | | | | | | | | Payroll and welfare payable and other temporary difference | | | | | | | | | Less: valuation allowance | | | | ) | | | | ) | Total deferred tax assets | | | | | | | | | Deferred tax liabilities: | | | | | | | | | Quality assurance payable | | | | ) | | | | ) | Intangible assets arisen from business combination | | | | ) | | | | ) | | | | (23,287 | ) | | | (15,523 | ) | Unrealized gain in consolidated trusts | | | | | | | (130,009 | ) | Other taxable temporary difference | | | | ) | | | | ) | Total deferred tax liabilitie s | | | | ) | | | | ) | Net deferred tax assets (liabilities) | | | 22,699 | | | | (69,182 | |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (All amounts in thousands, except share data, or otherwise noted) 12.11. Taxation (continued)
The following table sets forth the significant components of the deferred tax assets: | | | | | | | | | | | As of December 31, | | | | 2020 | | | 2021 | | | | RMB | | | RMB | | | | | | | | | | | Timing difference in revenue recognition | | | — | | | | 244,215 | | Provision for accounts receivable and contract assets and loans receivable | | | 77,578 | | | | 168,398 | | Net accumulated losses-carry forward | | | 69,454 | | | | 117,850 | | Payroll and welfare payable and other temporary difference | | | 5,831 | | | | 12,379
| | Quality assurance obligations | | | 45,128 | | | | 2,016 | | Less: Valuation allowance | | | (42,233 | ) | | | (89,117 | ) | | | | | | | | | | Total deferred tax assets | | | 155,758 | | | | 455,741 | | | | | | | | | | | Deferred tax liabilities: | | | | | | | | | Intangible assets arisen from business combination and asset acquisition | | | (24,607 | ) | | | (24,607 | ) | Unrealized gain in consolidated trusts | | | (58,897 | ) | | | (36,989 | ) | Other taxable temporary difference | | | (2,044 | ) | | | — | | Withholding tax for undistributed earnings | | | (18,000 | ) | | | (76,036 | ) | | | | | | | | | | Total deferred tax liabilities | | | (103,548 | ) | | | (137,632 | ) | | | | | | | | | |
Movement of valuation allowances | | | | | | | | | | | | | | | For the Years Ended December 31, | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | ) | | | | ) | | | | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | For the years ended December 31, | | | | 2019 | | | 2020 | | | 2021 | | | | RMB | | | RMB | | | RMB | | | | | 40,143 | | | | 6,245 | | | | 42,233 | | | | | 741 | | | | 40,054 | | | | 50,925 | | | | | (34,639 | ) | | | (4,066 | ) | | | (4,041
| ) | | | | | | | | | | | | | | | | | 6,245 | | | | 42,233 | | | | 89,117 | | | | | | | | | | | | | | |
Valuation allowances have been provided on deferred tax assets due to the uncertainty surrounding their realization. As of December 31, 20182020 and 2019,2021, valuation allowances on deferred tax assets mainly arising from tax loss carry forwards were provided because it was more likely than not0t that the Group will 0
t not be able to utilize tax loss carry forwards and certain deductible expenses generated by certain unprofitable subsidiaries. As of December 31, 2019,2021, total tax loss carry forwards of the Company’s subsidiaries in the PRC of approximately RMB64,655
,RMB487,439, will expire if not used between 20202022 and 2024.2026. The applicable carry-forward limitation period is 5 years under the PRC EIT law. The Group evaluates the level of authority for each uncertain tax position (including the potential application of interest and penalties) based on the technical merits, and measures the unrecognized benefits associated with the tax positions. As of December 31, 20182020 and 2019,2021, the Group did 0
t 0t have any significant unrecognized uncertain tax positions.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (All amounts in thousands, except share data, or otherwise noted) 13.12. Ordinary shares and treasury stock
In June 2012, FinVolution Group was incorporated as Limited Liability Company with authorized share capital of US$50,000 divided into 5,000,000,000 shares, of which 4,266,159,600 shares are designated as ordinary shares at par value of US$0.00001 and 733,840,400 as preferred shares.
Immediately prior to the completion of the initial public offering, the Company adopted a dual class share structure. All classes of preferred shares of the Company were converted and designated as Class A ordinary shares on a 1-for-one basis and all the ordinary shares of our company were redesignated as Class B ordinary shares on a1-for-one
basis except for the 4,000,000 ordinary shares held by GF Sino Vest Fund SPC Star 6 SP, which will be redesignated as Class A ordinary shares on a1-for-one
basis.On November 10, 2017, the Company successfully completed its initial public offering on the New York Stock Exchange. The Company sold 85,000,000 Class A ordinary shares (equivalent to 17,000,000 ADS) at US$2.6 per share (equivalent to US$13.0 per ADS) for a total offering size of approximately RMB1,464.8 million (US$221.0 million). Concurrently with the initial public offering, the Company also closed a private placement with Sun Kung Kai & Co. (CP) Limited and sold 19,230,769 Class A ordinary shares at an aggregate investment amount of RMB331.4 million (US$50.0 million).
For the years ended December 31, 20182019, 2020 and 2019, unanimously approved by the Board,2021, the Company issued 30,000,000repurchased 12,729,500, 139,954,870 and 17,000,000 Class A Ordinary Shares for exercise of share based incentive plans. For the years ended December 31, 2018 and 2019, the Company repurchasedand 12,729,5004,171,000 Class A ordinary shares on the open market for an aggregate cash consideration of
6.8 million (RMB47.2 million), US$55.4 million (RMB384.9 million) and US$6,802 (RMB47,173)2.5 million (RMB16.2 million). The weighted average price of these shares repurchased were US$1.120.53, US$0.40 and US$0.530.60 per share. These issued and repurchased shares are considered not outstanding and therefore were accounted for under the cost method and includes such treasury stock as a component of the shareholder’s equity. For the yearyears ended December 31, 20182019, 2020 and 2019, a total of44,005,360treasury stock were used for exercise of option. As of December 31, 2018 and 2019,and 20,634,265 shares were not in use and not outstanding, respectively.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in thousands, except share data, or otherwise noted)
13. Ordinary shares and treasury stock (continued)
For the year ended December 31, 2018 and 2019,2021, certain Class B ordinary shareholders sold 2,000,00073,000,000, 5,000,000 and 73,000,0001,800,000 Class B ordinary shares on the open market which were automatically transferred into Class A ordinary shares upon completion of the transaction.
As of December 31, 2019,2021, 1,550,071,169 ordinary shares have been issued at par value of US$0.00001, including (i) 964,071,169970,871,169 Class A ordinary shares and (ii) 586,000,000579,200,000 Class B ordinary shares. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in thousands, except share data, or otherwise noted)
14
. Redeemable convertible preferred sharesOn September 13, 2012, the Company issued2,850,000
shares of Series A convertible redeemable preferred shares (the “Series A Shares”) for US$1.60
per share for cash of US$4,560
. On February 13, 2014, the Company issued2,142,857
shares of Series B convertible redeemable preferred shares (the “Series B Shares”) for US$7.00
per share for cash of US$15,000
. On February 9, 2015, the Company issued2,345,547
shares of Series C convertible redeemable preferred shares (the “Series C Shares”) for US$19.90
per share for cash of US$46,667
. The Series A, Series B and Series C shares are collectively referred to as the Preferred Shares.On October 20, 2017, the Company effected a share split.Each of ordinary share and preferred share of the Company was subdivided into100
shares at a par value of US$0.00001
, such that Series A Shares, Series B Shares and Series C Shares were divided into285,000,000
Series A Shares,214,285,700
Series B Shares and234,554,700
Series C Shares, respectively.All of the preferred shares were converted to Class B ordinary shares immediately upon the completion of the Company’s initial public offering on November 10, 2017. Prior to their conversion, the preferred shares were entitled to certain preference with respect to conversion, redemption, dividends and liquidation.
The Company classified the Preferred Shares in the mezzanine section of the consolidated balance sheets because they were redeemable at the holders’ option any time after a certain date and were contingently redeemable upon the occurrence of certain liquidation events outside of the Company’s control.
The Company recognized accretion to the respective redemption value of the Preferred Shares over the period starting from issuance date to the earliest redemption date. The Company recognized accretion of the Preferred Shares amounted to RMB3,073,471
,NaN
andNaN
for the years ended December 31, 2017, 2018 and 2019 respectively.15
.13. Share-based compensation 1) Share based compensation plan of FinVolution Group The Group recognizes share-based compensation, net of estimated forfeitures, on a straight line basis over the vesting term of the awards. All the share-based awards granted by the Group are service conditions only. There was 0 income tax benefit recognized on the Consolidated Statements of Operations for share-based compensation and the Group did not capitalize any of the share-based compensation as part of the cost of any asset in the years ended December 31, 2017, 20182019, 2020 and 2019.2021.In June 2013 and October 2017, the Group adopted 2013 Share Incentive Plan or the 2013 plan,(the “2013 plan”) and 2017 Share Incentive Plan (the “2017 plan”), which allows the Group to offer share based incentive awards to employees, officers, directors and individual consultants who render services to the Group. The maximum number of theGroup by granting options, restricted shares that may be issued pursuant to all awards under the 2013 Plan is 221,917,800 ordinary shares after giving effect to the 100-for-1or restricted share split effected by the Group in October 2017. Share optionsunits. Awards granted under 2013 plan or 2017 plan are generally subject to a four-year vesting schedule as determined by the administrator of the plans. In October 2017, the Company adopted 2017 Share Incentive Plan, or the 2017 plan, which allows the Group to offer a variety of share-based incentive awards to employees, officers, directors and individual consultants who render services to the Group. The plan permits the grant of three types of awards: options, restricted shares and restricted share units. The maximum number of the shares that may be issued pursuant to all awards under the 2017 Plan is 1,000,000,000 ordinary shares after giving effect to the100-for-1
share split effected by the Group in October 2017. Share options and RSUs granted are generally subject to a four-year vesting schedule as determined by the administrator of the plans.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (All amounts in thousands, except share data, or otherwise noted) 15
.13. Share-based compensation (continued) 1) Share based compensation plan of FinVolution Group (continued) The following table sets forth the stock option shares activities under all the option plans for the years ended December 31, 2017, 20182019, 2020 and 2019:2021: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Outstanding at December 31, 2016 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Outstanding at December 31, 2017 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | ) | | | | | | | | | | | | | | | | | ) | | | | | | | | | | | | | | | | | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Outstanding at December 31, 2018 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | ) | | | | | | | | | | | | | | | | | ) | | | | | | | | | | | | | Outstanding at December 31, 2019 | | | | | | | | | | | | | | | | | Vested and expected to vest at December 31, 2019 | | | | | | | | | | | | | | | | | Exercisable as of December 31, 2019 | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | Options Outstanding | | | Weighted Average Exercise Price | | | Weighted Average Remaining Contractual Life | | | Aggregate Intrinsic Value | | | | | | | US$ | | | | | | US$ | | Outstanding at December 31, 2019 | | | 54,564,430 | | | | 0.4519 | | | | 2.51 | | | | 4,264 | | | | | | | | | | | | | | | | | | | | | | 3,035,750 | | | | 0.1111 | | | | — | | | | — | | | | | (19,350,460 | ) | | | 0.1327 | | | | — | | | | — | | | | | (454,170 | ) | | | 0.9663 | | | | — | | | | — | | | | | (11,765,920 | ) | | | 0.1235 | | | | — | | | | — | | | | | | | | | | | | | | | | | | | Outstanding at December 31, 2020 | | | 26,029,630 | | | | 0.3708 | | | | 1.31 | | | | 5,581 | | | | | | | | | | | | | | | | | | | Vested and expected to vest at December 31, 2020 | | | 25,712,658 | | | | 0.3704 | | | | 1.30 | | | | 5,524 | | Exercisable as of December 31, 2020 | | | 17,371,695 | | | | 0.3097 | | | | 0.88 | | | | 4,524 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Outstanding at December 31, 2021 | | | 7,074,035 | | | | 0.5331 | | | | 1.24 | | | | 3,607 | | | | | | | | | | | | | | | | | | | Vested and expected to vest at December 31, 2021 | | | 7,022,578 | | | | 0.5333 | | | | 1.24 | | | | 3,580 | | Exercisable as of December 31, 2021 | | | 4,527,920 | | | | 0.4981 | | | | 0.53 | | | | 2,541 | |
For the years ended December 31, 2019, 2020 and 2021, total share-based compensation expenses recognized related to the share options were RMB22,118, RMB6,218 and RMB774, respectively. As of December 31, 2021, the unrecognized compensation cost was RMB1,839. These amounts are expected to be recognized over a weighted average period of 1.68 years. Total compensation cost may be adjusted for future changes in estimated forfeitures. The aggregate intrinsic value is calculated as the difference between the exercise prices of the options and theper-share fair value of ordinary shares of the Group of US$0.53, US$0.52 and US$0.99 as of December 31, 2019, 2020 and 2021, respectively. The weighted average grant-dateper-share fair value of options granted during the years ended December 31, 2019, 2020 and 2021 was US$0.24, US$0.13 and US$ NaN, respectively. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (All amounts in thousands, except share data, or otherwise noted) 15.13. Share-based compensation (continued)
1) Share based compensation of FinVolution Group (continued) The Group did not recognize the
share-based compensation expenses for the options excisable upon the occurrence of initial public offering. Immediately upon the completion of the
Group’s initial
public offering, share-based compensation expenses amounting to RMB
61,544
were recognized. For the years ended December
31,
2017,
2018and
2019, total share-based compensation expenses recognized
related to the share options were
RMB
65,324
, RMB
44,490
and RMB
22,118, respectively. As of December
31,
2019, the unrecognized compensation cost was RMB
38,055
. These amounts are expected to be recognized over a weighted average period of
years. Total compensation cost may be adjusted for future changes in estimated forfeitures.
The aggregate intrinsic value is calculated as the difference between the exercise prices of the options and theper-share
fair value of ordinary shares of the Groupof US$1.422
, US$0.7200
and US$0.5300 as of December 31, 2017, 2018 and 2019, respectively.The weighted average grant-dateper-share
fair value of options granted during the year ended December 31, 2017, 2018 and 2019 was US$0.2599,US$0.7595
and US$0.2355, respectively.The fair value of each option granted under the Company’s Incentive Shares plan was estimated on the date of grant using the binomial model that uses the assumption noted in the following table: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | % | | | | % | | | 2.62% | | | | | | | | | | | | | 5 | | | | | 0 | % | | | 0 | % | | | 0% | | | | | | % | | | | % | | | 38.01% | | | | | | | | | | | | | 2.2-2.8 | |
| | | | | | | | | | | Options Granted in 2019 | | | Options Granted in 2020 | | | | RMB | | | RMB | | | | | 2.62 | % | | | 0.6 | % | | | | 5 | | | | 5 | | | | | 0 | % | | | 0 | % | | | | 38.01 | % | | | 48.61 | % | | | | 2.2-2.8 | | | | 2.8 | |
The following table sets forth the Company’s RSUs activities under all incentive plans for the years ended December 31, 2017, 20182019, 2020 and 2019:2021: | | | | | | | | | | | | | | Weighted- average grant date fair value | | | | | | | | | Unvested at December 31, 2017 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Unvested at December 31, 2018 | | | | | | | | | | | | | | | | | | Vested | | | | ) | | | | | | | | | ) | | | | | Unvested at December 31, 2019 | | | | | | | | |
| | | | | | | | | | | Number of RSUs | | | Weighted-average grant date fair value | | | | | | | US$ | | Unvested at December 31, 2019 | | | 12,023,795 | | | | 0.9880 | | | | | 71,935,155 | | | | 0.3551 | | | | | (3,916,645 | ) | | | 0.8144 | | | | | (4,211,810 | ) | | | 0.6760 | | | | | | | | | | | Unvested at December 31, 2020 | | | 75,830,495 | | | | 0.4290 | | | | | | | | | | | | | | 22,322,425 | | | | 0.7675
| | | | | (15,183,045
| ) | | | 0.4803
| | | | | (10,052,130 | ) | | | | | | | | | | | | | | Unvested at December 31, 2021 | | | 72,917,745 | | | | 0.5452
| | | | | | | | | | |
Total share-based compensation cost for the RSUs amounted to NaN
, RMB5,829 RMB20,142, RMB35,951 and RMB20,142RMB94,439 for the years ended December 31, 2017, 20182019, 2020 and 2019,2021, respectively. As of December 31, 2019,2021, there was RMB65,829 RMB184,130 unrecognized compensation cost, net of estimated forfeitures, related to unvested restricted shares, which are to be recognized over a weighted average vesting period of 2.93 2.68 years. Total unrecognized compensation cost may be adjusted for future changes in estimated forfeitures. The Company determined the fair value of RSUs based on its stock price on the date of grant. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (All amounts in thousands, except share data, or otherwise noted) 15. Share-based compensation (continued)
2) Share based compensation plan of Shanghai Paifenle Internet Technology Co., Ltd. (“Paifenle”)
In April, 2017, the Group authorized a share based compensation plan (the “Paifenle Plan”) that provides for the issuance of up to15,000,000
ordinary shares of its subsidiary, Paifenle. Under the Paifenle Plan, the administrator of the plan may, at their discretion grant any officers and employees of Paifenle (i) up to11,650,000
units of options to subscribe for ordinary shares and (ii) up to3,350,000
units RSUs.In December, 2017, the Board of Directors decided to cancel the Paifenle Plan since Paifenle has discontinued most of its operations. The share-based compensation expenses for the remaining periods were recognized immediately to the current period totaling at RMB40,828
.16.14. Net income (loss)profit per share
Basic earningsnet profit per share is computed using the weighted average number of the ordinary shares outstanding during the period. Diluted earningsnet profit per share (‘‘EPS’’) is computed using the weighted average number of ordinary shares and potential ordinary shares outstanding during the period under the treasury stock method. For the year ended December 31, 2017, stock options to purchase ordinary shares and the Series A, Series B and Series C Preference Shares convertible into ordinary shares were anti-dilutive and excluded from the calculation of diluted net loss per share of the Company were 11,302,024 and 631,303,796 on a weighted average basis, respectively.
Basic earnings (loss)net profit per share and diluted earnings (loss)net profit per share have been calculated in accordance with ASC Topic 260 on computation of earnings per share for the years ended December 31, 2017, 20182019, 2020 and 20192021 as follows: | | | | | | | | | | | | | | | For the years ended December 31, | | | | | | | | | | | | | | | | | | | | | | Basic net income (loss) per share calculation: | | | | | | | | | | | | | | | | | | | | | | | | | | Net profit (loss) attributable to FinVolution Group | | | | | | | | | | | | | Accretion on Series A convertible redeemable preferred shares redemption value | | | | ) | | | | | | | | | Accretion on Series B convertible redeemable preferred shares redemption value | | | | ) | | | | | | | | | Accretion on Series C convertible redeemable preferred shares redemption value | | | | ) | | | | | | | | | | | | | | | | | | | | | | Net income (loss) attributable to ordinary shareholders - basic | | | | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Weighted average number of ordinary shares outstanding - basic | | | 779,804,270 | | | | 1,498,780,165 | | | | 1,525,814,189 | | Net income (loss) per share attributable to ordinary shareholders - basic | | | | ) | | | | | | | | | | | | | | | | | | | | | | Dilute net income (loss) per share calculation: | | | | | | | | | | | | | | | | | | | | | | | | | | Net income (loss) attributable to ordinary shareholders | | | | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Weighted average number of ordinary shares outstanding - basic | | | | | | | | | | | | | Ordinary shares issuable upon the exercise of outstanding stock options using the treasury stock method | | | | | | | 98,670,254 | | | | 23,831,652 | | Ordinary shares issuable upon the vesting of outstanding restricted share units using the treasury stock method | | | | | | | 2,141,812 | | | | 2,777,219 | | Weighted average number of ordinary shares outstanding - diluted | | | 779,804,270 | | | | 1,599,592,231 | | | | | | Net income (loss) per share attributable to ordinary shareholders - diluted | | | (2.5525 | ) | | | 1.5436 | | | | 1.5285 | |
| | | | | | | | | | | | | | | For the years ended December 31, | | | | 2019 | | | 2020 | | | 2021 | | | | RMB | | | RMB | | | RMB | | Basic net profit per share calculation: | | | | | | | | | | | | | | | | | | | | | | | | | | Net profit attributable to FinVolution Group’s ordinary shareholders | | | 2,372,850 | | | | 1,972,700 | | | | 2,508,947
| | | | | | | | | | | | | | | | | | | | | | | | | | | | Weighted average number of ordinary shares outstanding—basic | | | 1,525,814,189 | | | | 1,477,162,991 | | | | 1,420,870,790
| | | | | | | | | | | | | | | Net profit per share attributable to FinVolution Group’s ordinary shareholders—basic | | | 1.56 | | | | 1.34 | | | | 1.77
| | | | | | Dilute net profit per share calculation: | | | | | | | | | | | | | | | | | | | | | | | | | | Net profit attributable to FinVolution Group’s ordinary shareholders | | | 2,372,850 | | | | 1,972,700 | | | | 2,508,947
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Weighted average number of ordinary shares outstanding—basic | | | 1,525,814,189 | | | | 1,477,162,991 | | | | 1,420,870,790
| | Ordinary shares issuable upon the exercise of outstanding stock options using the treasury stock method | | | 23,831,652 | | | | 9,801,862 | | | | 8,495,974
| | Ordinary shares issuable upon the vesting of outstanding restricted share units using the treasury stock method | | | 2,777,219 | | | | 4,360,567 | | | | 53,135,068
| | Weighted average number of ordinary shares outstanding—diluted | | | 1,552,423,060 | | | | 1,491,325,420 | | | | | | | | | | | | | | | | | | | Net profit per share attributable to FinVolution Group’s ordinary shareholders—diluted | | | 1.53 | | | | 1.32 | | | | 1.69
| |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (All amounts in thousands, except share data, or otherwise noted)
17. Short-term borrowings
As of December 31, 2018 and 2019, the Company had short-term borrowings from banks which were repayable in one year and charged weighted average interest rates
of 3.63% and
4.27% per annum. The borrowings are denominated in RMB.of RMB25,000 and RMB235,000 are
collateralized by a pledge of certain bank deposits with carrying values of RMB26,000 and RMB251,853, as of December 31, 2018 and 2019, respectively. As of December 31, 2019, the Company is in compliance with all covenants in relation to bank borrowings.
As of December 31, 2019, all of the borrowings will be due within one year.
The companyT he Company leases facilities under non-cancellable operating leases expiring on different dates. The terms of substantially all of these leases are four years or less. When determining the lease term, the Group includes options to extend or terminate the lease when it is reasonably certain that it will exercise that option, if any. All of the Group’s leases qualify as operating leases. With the adoption of the new leasing standard, the Group has recorded a asset and corresponding lease liability, by calculating the present value of future lease payments, discounted at additional borrowing rate. (a) The following table sets forth the breakdown of leasing expenses: | | | | | | | For the years ended December 31,
| | | | | | | | | | | | | | | Amortization of right-of-use assets
| | | | | Interest of lease liabilities
| | | | | Expenses for short-term leases within 12 months
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | For the years ended December 31, | | | | 2020 | | | 2021 | | | | RMB | | | RMB | | | | | | | | | | | | | | 41,377 | | | | 30,261 | | Interest of lease liabilities | | | 3,276 | | | | 1,695 | | Expenses for short-term leases within 12 months | | | 7,526 | | | | 5,911 | | | | | | | | | | | | | | 52,179 | | | | 37,867 | | | | | | | | | | |
(b) The following table sets forth the supplemental cash flow information related to leases: | | | | | | | For the years ended December 31,
| | | | | | | | | | | | | | | Cash paid for amounts included in the measurement of lease liabilities:
| | | | | | | | | | | | | | |
| | | | | | | | | | | For the years ended December 31, | | | | 2020 | | | 2021 | | | | RMB | | | RMB | | | | | | | | | | | Cash paid for amounts included in the measurement of lease liabilities: | | | | | | | | | | | | 45,682 | | | | 36,066 | | | | | | | | | | |
(c) The following table sets forth the weighted-average remaining lease term and discount rate: | | | | | | | | | | | | | Weighted-average remaining lease term
| | | | | | | | | | Weighted-average discount rate
| | | | | | | | | % | | | | | |
| | | | | | | | | | | As of December 31, | | | | 2020 | | | 2021 | | Weighted-average remaining lease term | | | | | | | | | | | | 1.70 years | | | | 3.30 years | | Weighted-average discount rate | | | | | | | | | | | | 4.75 | % | | | 4.75 | % | | | | | | | | | |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in thousands, except share data, or otherwise noted)
(d) The following table sets forth the maturities of lease liabilities:
| | | | | | | For the years ended December 31, | | | | | | | | | | | | | | | | | | | | | | | | | 2023 | | | 640 | | | | | | | Total undiscounted lease payments | | | | | | | | | ) | | | | | | | | | | | | | | | |
(e) The following table sets forth the non-cancellable future minimum lease payments for the Group’s operating leasesunder the previous lease standard (“ASC Topic 840”) as of December 31, 2018:
19. Commitments and contingencies
(a) Capital and other commitments
Other than mentioned, the Group did not have capital and other significant commitments, long-term obligations, or guarantees as of December 31, 2019.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (All amounts in thousands, except share data, or otherwise noted) (d) The following table sets forth the movement of right of use assets for the years ended December 31, 2020 and 2021: | | | | | | | | | | | For the years ended December 31, | | | | 2020 | | | 2021 | | | | RMB | | | RMB | | | | | 95,786 | | | | 54,968 | | Recognition of additional leasing contract | | | 559 | | | | 24,431 | | Amortization of right of use assets | | | (41,377 | ) | | | (30,261 | ) | | | | | | | | | | | | | 54,968 | | | | 49,138 | | | | | | | | | | |
(e) The following table sets forth the movement of leasing liabilities for the years ended December 31, 2020 and 2021: | | | | | | | | | | | For the years ended December 31, | | | | 2020 | | | 2021 | | | | RMB | | | RMB | | | | | 85,143 | | | | 43,296 | | Recognition of additional leasing contract | | | 559 | | | | 24,431 | | Interest of lease liabilities | | | 3,276 | | | | 1,695
| | | | | (45,682 | ) | | | (36,066 | ) | | | | | | | | | | | | | 43,296 | | | | 33,356 | | | | | | | | | | |
(f) The following table sets forth the maturities of lease liabilities: | | | | | | | As of | | | | December 31, 2021 | | | | RMB | | | | | 17,111 | | | | | 6,308 | | | | | 4,476 | | | | | 4,700 | | | | | 3,655 | | | | | | | Total undiscounted lease payments | | | 36,250 | | | | | (2,894 | ) | | | | | | | | | 33,356 | | | | | | |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (All amounts in thousands, except share data, or otherwise noted) 16 . Commitments and contingencies (continued) (a) Capital and other commitments The Group did not have capital and other significant commitments, long-term obligations, or guarantees as of December 31, 2021. From time to time, the Group is involved in claims and legal proceedings that arise in the ordinary course of business. Based on currently available information, management does not believe that the ultimate outcome of these unresolved matters, individually and in the aggregate, is likely to have a material adverse effect on the Group’s financial position, results of operations or cash flows. However, litigation is subject to inherent uncertainties and the Group’s view of these matters may change in the future. If an unfavorable outcome were to occur, there exists the possibility of a material adverse impact on the Group’s financial position, results of operations and cash flows for the periods in which the unfavorable outcome occurs. The Group accounts for loss contingencies in accordance with ASC Topic 450 “Contingencies” and other related guidance. Set forth below is a description of certain loss contingencies as well as the opinion of management as to the likelihood of loss. Current PRC laws and regulations include limitations on foreign ownership in PRC companies that conduct online business. Specifically, foreign investors are not allowed to own any equity interests in any entity conducting online business. Since the Company is incorporated in the Cayman Islands, neither the Company nor its PRC subsidiary is eligible to conduct online business in China. To comply with PRC laws and regulations, the Company conducts its operations in China through a series of contractual arrangements entered into among its wholly owned PRC subsidiaries, the WOFEs, its affiliated PRC entities, the VIEs and the VIEs’ shareholders. The VIEs and their subsidiaries hold the licenses that are essential to the operation of the Group’s business. In the opinion of management and the Company’s PRC legal counsel, (i) the ownership structure of the Company, the WOFE and the VIEs are in compliance with existing PRC laws and regulations;(ii) the contractual arrangements with the VIEs and their shareholders are valid and binding, and will not result in any violation of PRC laws or regulations currently in effect; and (iii) the Group’s business operations are in compliance with existing PRC laws and regulations in all material respects. However, there are substantial uncertainties regarding the interpretation and application of current and future PRC laws and regulations. Accordingly, the Company cannot be assured that PRC regulatory authorities will not ultimately take a contrary view to its opinion. If the current ownership structure of the Company and its contractual arrangements with the VIEs were found to be in violation of any existing or future PRC laws and regulations, the Company may be required to restructure its ownership structure and operations in the PRC to comply with the changing and new PRC laws and regulations. Under PRC Ministry of Commerce (“MOFCOM”) security review rules promulgated in September 2011, a national security review is required for certain mergers and acquisitions by foreign investors raising concerns regarding national defense and security. Foreign investors are prohibited from circumventing the national security review requirements by structuring transactions through proxies, trusts, indirect investment, leases, loans, control through contractual arrangements, or offshore transactions. Management, in conjunction with its PRC legal counsel, has concluded there is no need to submit the existing contractual arrangements with its consolidated VIEs and its shareholders to the MOFCOM for national security review based upon analysis of the rules. However, there are substantial uncertainties regarding the interpretation and application of the MOFCOM security review rules, and any new laws, rules, regulations or detailed implementation measures in any form relating to such rules. Therefore, the Company cannot be assured that the relevant PRC regulatory authorities, such as the MOFCOM, would not ultimately take a contrary view to the opinion of management and the Company’s PRC legal counsel. If the MOFCOM or other PRC regulatory authority determines that the Company needs to submit the existing contractual arrangements with the VIEs and its shareholders for national security review, the Company may face sanctions by the MOFCOM or other PRC regulatory authority, which may include, among others, requiring the Company to restructure its ownership structure, discontinuation or restriction of operations in the PRC, or invalidation of the agreements that the VIEs have entered into with the VIEs and its shareholders.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (All amounts in thousands, except share data, or otherwise noted) 16 . Commitments and contingencies (continued)(b) Contingencies (continued) | | VIE Arrangements (continued) |
In such case, the Company may not be able to operate or control business in the same manner as it currently does, and therefore, may not be able to consolidate the VIEs and their subsidiaries. In addition, the relevant regulatory authorities would have broad discretion in dealing with such violations which may adversely impact the financial statements, operations and cash flows of the Company (including restrictions on the Company to carry out business). NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in thousands, except share data, or otherwise noted)
19
. Commitments and contingencies (continued)(b) Contingencies (continued)
| | VIE Arrangements (continued)
|
If the VIEs and their respective shareholders fail to perform their respective obligations under the current contractual arrangements, the Company may have to incur substantial costs and expend significant resources to enforce those arrangements and rely on legal remedies under PRC laws. The PRC laws, rules and regulations are relatively new, and because of the limited volume of published decisions and their non-binding nature, the interpretation and enforcement of these laws, rules and regulations involve substantial uncertainties. These uncertainties may impede the ability of the Company to enforce these contractual arrangements or suffer significant delay or other obstacles in the process of enforcing these contractual arrangements and may materially and adversely affect the results of operations and the financial position of the Company. In the opinion of management, the likelihood of loss in respect of the Company’s current ownership structure or the contractual arrangements with the VIEs is remote. In accordance with the Interim Measures on Administration of Business Activities of Online Lending Information Intermediaries (Interim Measures) jointly issued by China Banking Regulatory Commission, or the CBRC, together with three other PRC regulatory agencies in August 2016, a record-filing and licensing regime is introduced. It requires online lending information intermediaries to register with the local financial regulatory authority, update their industrial and commercial registration with the local commercial registration authority to include “online lending information intermediary” in their business scope, and obtain telecommunication business license from the relevant telecommunication regulatory authority. As of the date of this report, the local financial regulatory authorities are still in the process of making detailed implementation rules regarding the filing procedures and the Company has not been permitted to submit such filing application. | | Class ActionVIE Enforceability |
In the opinion of management and the Company’s PRC legal counsel, (i) the ownership structure of the Company, the WOFEs and the VIEs are in compliance with existing PRC laws and regulations; (ii) the contractual arrangements with the VIEs and their shareholders are valid and binding and enforceable. However, uncertainties in the interpretation and enforcement of the PRC laws, regulations and policies could limit the Company’s ability to enforce these contractual arrangements. In addition, shareholders of certain VIEs are founders of the Group, who collectively controls more than 50% of total voting power. Therefore, the enforceability of the contractual agreements between VIEs and their shareholders depends on whether shareholders or their PRC holding entities will fulfill these contractual agreements. As a result, the Company may be unable to consolidate the VIE and VIE’ subsidiaries in the consolidated financial statements. Starting in September 2018, the Company and certain of its current and former officers and directors, the underwriters of the Company’s initial public offering in November 2017, and the Company’s agent for the service of process in the U.S. have been named as defendants in putative securities class actions captioned Yizhong Huang v. FinVolutionPPDAI Group Inc., et al. , Case No. 654482/2018 (New York County of the Supreme Court of the State of New York, filed on September 10, 2018) (the “Huang Case”); Ravindra Vora v. FinVolutionPPDAI Group Inc., et al., Case No. 654777/2018 (New York County of the Supreme Court of the State of New York, filed on September 27, 2018) (the “Vora Case”); Lai v. FinVolutionPPDAI Group Inc., et al. Case No. 1:2018-cv-06716 (U.S. District Court for the Eastern District of New York, filed on November 26, 2018) (the “Lai Case”); and Goyal v. FinVolutionPPDAI Group Inc., et al. Case No. 2:2019-cv-00168 (U.S. District Court for the Eastern District of New York, filed on January 9, 2019) (the “Goyal Case”).
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (All amounts in thousands, except share data, or otherwise noted) 16 . Commitments and contingencies (continued)(b) Contingencies (continued) These actions allege that defendants made misstatements and omissions in connection with the Company’s initial public offering in November 2017 in violation of the Securities Act of 1933. The Lai Case also advances claims under the Securities Exchange Act of 1934. On October 16, 2018, the Supreme Court of the State of New York consolidated the two state court lawsuits (the Huang Case and the Vora Case) under the caption In re PPDAI Group Securities Litigation, No. 654482/2018 (the “New York State Action”). On December 17, 2018, the plaintiffs in the New York State Action filed a consolidated amended complaint, which the Company and certain other defendants moved to dismiss. On July 31, 2019, the Company and certain other defendants filed a motion to dismiss the New York State Action. On February 26, 2020, the Court in the New York State Action granted in part and denied in part thedefendants’ motion to dismiss. The Company and certain other defendants have appealed the partial denial of their motion, and that appeal is in the process of being briefed.motion. On February 21, 2019, the U.S. District Court for the Eastern District of New York consolidated the two federal court lawsuits (the Lai Case and the Goyal Case) under the caption In re PPDAI Group Inc. Securities Litigation, No. (the “Federal Court Action”) , appointed lead plaintiffs of the Federal Court Action, and approved a scheduling stipulation for the filing of the plaintiffs’ amended complaint and the defendants’ responsive pleadings.. On April 22, 2019, plaintiffs in the Federal Court Action filed a second amended complaint. Defendants filed a motion to dismiss the Federal Court Action, which was fully briefed as of January 17, 2020. On December 9, 2020, the parties notified both courts that they reached an agreement in principle to settle both lawsuits. On June 11, 2021, the lead plaintiffs in both actions filed an unopposed motion with the Federal Court for preliminary approval of a global settlement of both the Federal Court Action and remains pending. As such,the New York State Action for a settlement amount of USD9 million in total, in which the Company is currently not inborne USD1.35 million and the insurers were responsible for the remaining USD7.65 million. The Federal Court granted that motion and, on December 16, 2021, held a position to estimatesettlement fairness hearing. On January 21, 2022, the possible loss or possible rangeFederal Court approved the settlement and issued final judgment, ending the Federal Court Action. On February 11, 2022, the parties submitted a stipulation of loss, if any, associated withdismissal for the resolutionNew York State Action. On April 5, 2022, the New York State Court so-ordered the stipulation of the lawsuits.dismissal.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in thousands, except share data, or otherwise noted)
2017
. Restricted net assets Relevant PRC laws and regulations permit PRC companies to pay dividends only out of their retained earnings, if any, as determined in accordance with PRC accounting standards and regulations. Additionally, the Company’s PRC subsidiaries can only distribute dividends upon approval of the shareholders after they have met the PRC requirements for appropriation to statutory reserves. The statutory general reserve fund requires annual appropriations of 10% of net after-tax income prior to payment of any dividends. Furthermore, registered share capital and capital reserve accounts are also restricted from distribution. As a result of these and other restrictions under PRC laws and regulations, the PRC subsidiaries and affiliates are restricted in their ability to transfer a portion of their net assets to the Company either in the form of dividends, loans or advances, which restricted portion amounted to approximately RMB4,577,602,RMB7,796,303 or 57.1%72.8% of the consolidated net assets of the Group as of December 31, 2019
.2021. Even though the Company currently does not require any such dividends, loans or advances from the PRC subsidiaries and affiliates for working capital and other funding purposes, the Company may in the future require additional cash resources from ourits PRC subsidiaries and affiliates due to changes in business conditions, to fund future acquisitions and developments, or merely declare and pay dividends or distributions to the Company’s shareholders. Furthermore, cash transfers from the Group’s PRC subsidiaries to their parent companies outside of China are subject to PRC government control of currency conversion. Shortages in the availability of foreign currency may temporarily delay the ability of the PRC subsidiaries and consolidated affiliated entities to remit sufficient foreign currency to pay dividends or other payments to the Group, or otherwise satisfy their foreign currency denominated obligations. 2118
. Condensed financial information of the parent company The Company performed a test on the restricted net assets of consolidated subsidiaries in accordance with Securities and Exchange Commission Regulation S-X Rule 4-08 (e) (3), “General Notes to Financial Statements’ and concluded that it was applicable for the Company to disclose the financial statements for the parent company. The subsidiaries did not pay any dividend to the Company for the years years presented. For the purpose of presenting parent only financial information, the Company records its investments in its subsidiaries under the equity method of accounting. Such investments are presented on the separate condensed balance sheets of the Company as “Investments in subsidiaries” and the profit (loss) of the subsidiaries is presented as “share of profit (loss) of subsidiaries”. Certain information and footnote disclosures generally included in financial statements prepared in accordance with U.S. GAAP have been condensed and omitted. These statements should be read in conjunction with the notes to the consolidated financial statements of the Company. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (All amounts in thousands, except share data, or otherwise noted) 21 8 . Condensed financial information of the parent company (continued) The Company did not have significant capital and other commitments, long-term obligations, or guarantees as of December 31, 20182020 and 2019.2021. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Cash and cash equivalents | | | | | | | | | | | | | Prepaid expenses and other assets | | | | | | | | | | | | | Investment in and advances to subsidiaries | | | | | | | | | | | | | | | | | | | | | | | | | | Liabilities and Shareholders’ Equity | | | | | | | | | | | | | Accrued expenses and other liabilities | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Class A ordinary shares (US$0.00001 par value; 10,000,000,000 shares authorized as of December 31, 2018 and 2019; 874,071,169 and 964,071,169 issued as of December 31, 2018 and 2019; 827,770,169 and 943,436,904 outstanding as of December 31, 2018 and 2019) | | | | | | | | | | | | | Class B ordinary shares (US$0.00001 par value; 10,000,000,000 shares authorized as of December 31, 2018 and 2019; 659,000,000 and 586,000,000 issued and outstanding as of December 31, 2018 and 2019) | | | | | | | | | | | | | | | | | | | | | | | | | | Treasury stock (46,301,000 and 20,634,265 shares as of December 31, 2018 and 2019, respectively) | | | | ) | | | | ) | | | | ) | | | | | | | | | | | | | | Accumulated other comprehensive income | | | | | | | | | | | | | | | | | | | | | | | | | | Total shareholders’ equity | | | | | | | | | | | | | Total liabilities and shareholders’ equity | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | RMB | | | RMB | | | | | | | | | | | | | | | | | | Cash and cash equivalents | | | 28,435 | | | | 38,231 | | | | 5,999 | | Prepaid expenses and other assets | | | 1,247 | | | | 2,795 | | | | 439 | | Amounts due from Group companies | | | | | | | | | | | | | Investment in subsidiaries and VIEs | | | 7,949,999 | | | | 10,574,557 | | | | 1,659,379 | | | | | | | | | | | | | | | | | | 9,282,287 | | | | 11,309,706 | | | | 1,774,740 | | | | | | | | | | | | | | | Liabilities and Shareholders’ Equity | | | | | | | | | | | | | Accrued expenses and other liabilities | | | 32,571 | | | | 5,647 | | | | 885 | | | | | | | | | | | | | | | Amounts due to Group companies | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 918,981 | | | | 654,456 | | | | 102,697 | | | | | | | | | | | | | | | | | | | | | | | | | | | | Class A ordinary shares (US$0.00001 par value; 10,000,000,000 shares authorized as of December 31, 2020 and 2021; 969,071,169 and 970,871,169 issued as of December 31, 2020 and 2021; 824,164,599 and 854,591,404 outstanding as of December 31, 2020 and 2021) | | | 64 | | | | 64 | | | | 10 | | Class B ordinary shares (US$0.00001 par value; 10,000,000,000 shares authorized as of December 31, 2020 and 2021; 581,000,000 and 579,200,000 issued and outstanding as of December 31, 2020 and 2021) | | | 39 | | | | 39 | | | | 6 | | | | | 5,659,990 | | | | 5,694,733 | | | | 893,628 | | Treasury stock (144,906,570 and 116,279,765 shares as of December 31, 2020 and 2021, respectively) | | | (401,621 | ) | | | (324,171 | ) | | | (50,870 | ) | | | | 458,058 | | | | 610,403 | | | | 95,786 | | Accumulated other comprehensive income | | | (5,142 | ) | | | (16,769 | ) | | | (2,630 | ) | | | | 2,651,918 | | | | 4,690,951 | | | | 736,113 | | | | | | | | | | | | | | | Total shareholders’ equity | | | 8,363,306 | | | | 10,655,250 | | | | 1,672,043 | | | | | | | | | | | | | | | Total liabilities and shareholders’ equity | | | 9,282,287 | | | | 11,309,706 | | | | 1,774,740 | | | | | | | | | | | | | | |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (All amounts in thousands, except share data, or otherwise noted) 121.8 . Condensed financial information of the parent company (continued) Statements of comprehensive lossincome | | | | | | | | | | | | | | | | | | | For the Years Ended December 31, | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Sales and marketing expenses | | | | | | | | ) | | | | | | | | | General and administrative expenses | | | | ) | | | | ) | | | | ) | | | | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Share of profit of subsidiaries | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Accretion on Series A convertible redeemable preferred shares to redemption value | | | | ) | | | | | | | | | | | | | Accretion on Series B convertible redeemable preferred shares to redemption value | | | | ) | | | | | | | | | | | | | Accretion on Series C convertible redeemable preferred shares to redemption value | | | | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Net profit (loss) attributable to ordinary shareholders | | | | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | For the years ended December 31, | | | | | | | | | | | | | | RMB | | | RMB | | | RMB | | | US$ Note 2(f) | | | | | | | | | | | | | | | | | | | General and administrative expenses | | | (25,590 | ) | | | (20,720 | ) | | | (18,617 | ) | | | (2,921 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 7,898 | | | | 2,158 | | | | 1,502 | | | | 236 | | Income from subsidiaries and VIEs | | | 2,390,542 | | | | 1,991,262 | | | | 2,526,062 | | | | 396,394 | | | | | | | | | | | | | | | | | | | | | | 2,372,850 | | | | 1,972,700 | | | | 2,508,947 | | | | 393,709 | | | | | | | | | | | | | | | | | | | Net profit attributable to ordinary shareholders | | | 2,372,850 | | | | 1,972,700 | | | | 2,508,947 | | | | 393,709 | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | For the Years Ended December 31, | | | | | | | | | | | | | | | | | | | | | | | | | Net cash provided by (used in) operating activities | | | | ) | | | | | | | | | | | | | Net cash used in investing activities | | | | ) | | | | ) | | | | | | | | | Net cash provided by (used in) financing activities | | | | | | | | ) | | | | ) | | | | ) | Effect of exchange rate changes on cash, cash equivalents and restricted cash | | | | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Net increase (decrease) in cash, cash equivalents and restricted cash | | | | | | | | ) | | | | ) | | | | ) | Cash, cash equivalents and restricted cash-beginning of year | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Cash, cash equivalents and restricted cash-end of year | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | For the years ended December 31, | | | | | | | | | | | | | | RMB | | | RMB | | | RMB | | | | | Net cash provided by (used in) operating activities for Third-party | | | 8,474 | | | | (6,282 | ) | | | (45,587 | ) | | | (7,154 | ) | | | | | | | | | | | | | | | | | | Net cash provided by (used in) operating activities | | | 8,474 | | | | (6,282 | ) | | | (45,587 | ) | | | (7,154 | ) | | | | | | | | | | | | | | | | | | Collection of loans from Group companies | | | 86,471 | | | | 557,936 | | | | 846,737 | | | | 132,871 | | Cash paid as loans extended to Group companies | | | 0 | | | | 0 | | | | (238,254 | ) | | | (37,387 | ) | | | | | | | | | | | | | | | | | | Net cash provided by (used in) investing activities | | | 86,471 | | | | 557,936 | | | | 608,483 | | | | 95,484 | | | | | | | | | | | | | | | | | | | Repayment of loans to Group companies | | | 0 | | | | 0 | | | | (839,719 | ) | | | (131,770 | ) | Cash received as loans from Group companies | | | 0 | | | | 0 | | | | 603,955 | | | | 94,774 | | Other financing activities | | | (401,400 | ) | | | (636,936 | ) | | | (310,221 | ) | | | (48,681 | ) | | | | | | | | | | | | | | | | | | Net cash provided by (used in) financing activities | | | (401,400 | ) | | | (636,936 | ) | | | (545,985 | ) | | | (85,677 | ) | | | | | | | | | | | | | | | | | |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (All amounts in thousands, except share data, or otherwise noted) On March 19, 2020,15 , 2022 , the Board of Directors of the Company unanimously approved a cash dividend of US$ 0.120.205 (RMB1.31) per ADS, payableand is expected to be distributed on or around April 30, 2020 May 6, 2022 to shareholders of record the close of business on April 7, 202013, 2022. .In early 2020, in response to intensifying efforts to contain the spread of COVID-19, the Chinese government took a number of actions, which included extending the Chinese New Year holiday, quarantining and otherwise treating individuals in China who had the COVID-19, asking China residents to remain at home and to avoid gathering in public, and other actions. The COVID-19 has also resulted in temporary closure of many corporate offices, retail stores, and manufacturing facilities and factories across China. In respond to the pandemic, the Company also made remote working arrangement and suspended the Company’s offline customer acquisition activities and business travels to ensure the safety and health of the Company’s employees. All of the above measures reduce the Company’s business operation capacity and negatively affect its operating results. The outbreak of COVID-19 also cause an increase in default of the loans on the Company’s platform as the extension of the Chinese New Year holiday and suspension of business activities across various sectors are likely to hurt income of the borrowers on the Company’s platform. As a result, the provision for loan receivable, accounts receivable and quality assurance payable increased which negatively impacted the Company’s earnings in the first quarter of 2020. If the outbreak drags on for longer, the private enterprises, especially SMEs, could also start to encounter cash flow or operating difficulties, thus leading to a rise in unemployment and weakening debt repayment ability of borrowers on the Company’s platform. As a result of the sharp slowdown in consumption activities, especially in leisure spending or outdoor entertainment, the growth of the Company’s loan volume also slowdown in the first quarter of 2020 due to a weaker loan demand, which negatively impacted the Company’s revenue for the three months ended March 31, 2020.
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