| Nature of operations and reorganizations | 1. a) RLX Technology Inc. (the “Company”) is a holding company incorporated in the Cayman Islands. The Company, its subsidiaries, the VIE and VIE’s subsidiaries together are referred to as the “Group”. The Group is primarily engaged in the manufacturing and sales of e-vapor products in the PRC (the “PRC Business”) and overseas markets. b) The Company is an exempted company with limited liability in connection with a group reorganization of Relx Inc. i) First Reorganization The PRC Business was initially carried out by Shenzhen Wuxin Technology Co., Ltd. (“Shenzhen Wuxin”), established on January 2, 2018 (date of inception), and Beijing Wuxin Technology Co., Ltd. (“Beijing Wuxin”), established on February 22, 2018. On May 18, 2018, Beijing Wuxin closed a preferred share financing (the “Domestic PS Financing”) with two investors, Investor A and Investor B. On August 16, 2018, Relx Inc. was incorporated by Ms. Ying (Kate) Wang and Mr. Bing Du under the laws of the Cayman Islands as an exempted company with limited liability. By October 31, 2018, Relx Inc. completed a series of reorganization transactions (the “First Reorganization”) and obtained control over the PRC Business through contractual arrangements. The First Reorganization was completed with the steps described as below: ● Relx Inc. established a directly wholly owned subsidiary Relx HK Limited (“Relx HK”) on August 21, 2018. In October 2018, Relx HK established a wholly foreign-owned subsidiary in China, Beijing Yueke Technology Co., Ltd. (“Beijing Yueke”, or the “WFOE”). ● Beijing Yueke entered into a series of agreements with Beijing Wuxin and its shareholders, through which Beijing Yueke obtained control over Beijing Wuxin and its subsidiaries. Refer to Note 1 (c) VIE arrangements between Relx HK’s PRC subsidiaries for detailed information. ● Relx Inc. issued ordinary shares to Ms. Ying (Kate) Wang and Mr. Bing Du and issued Series Angel Preferred Shares (the “PS Angel”) to Investor A and Investor B, to replace their respective equity interest in Beijing Wuxin. As the shareholdings in Beijing Wuxin and Relx Inc. were with a high degree of common ownership immediately before and after the First Reorganization, the First Reorganization was determined to be a recapitalization transaction of the PRC Business and to lack economic substance, and therefore it was accounted for in a manner similar to a common control transaction. Consequently, the PRC Business’ assets and liabilities are presented on a carryover basis. After the First Reorganization, Relx Inc. completed multiple rounds of preferred shares financing (the “Relx Inc. PS”). Some of the proceeds were given to the Group as operating fund to support the growth of PRC Business, and other funds were used to pay for start-up and other expenses of newly developed operations in non-PRC countries and regions through other subsidiaries of Relx Inc., which are not part of the Group. The operating fund given to the Group were accounted for as an increase to amounts due to related parties, and the fund the Group paid on behalf of the fellow subsidiaries were accounted for as an offset to such amounts due to Relx Inc. 1. b) Reorganizations (Continued) ii) Second Reorganization On September 24, 2020, the Company was established as a wholly owned subsidiary of Relx Inc. Pursuant to a series of agreements entered into on September 25, 2020 and October 19, 2020 (the “Second Reorganization Agreements”), Relx Inc. transferred its 100% equity interests in Relx HK to the Company, upon completion of which, Relx HK became a wholly owned subsidiary of the Company and continues to hold the PRC Business through the same corporate structure in the PRC and the Company newly issued one ordinary share to Relx Inc. on October 19, 2020 (the “Second Reorganization”). Upon incorporation, the Company had 500,000,000 shares authorized, 1 ordinary share issued and outstanding outstanding Immediately before and after the Second Reorganization, the Company, Relx HK and its subsidiaries, the VIE and VIE’s subsidiaries involved in the Second Reorganization are ultimately controlled by Relx Inc. Accordingly, the Second Reorganization is accounted for as a common control transaction and another recapitalization of the PRC Business. Therefore, the accompanying consolidated financial statements of the Company include the assets, liabilities, revenue, expenses and cash flows of the PRC Business for all the periods presented and are prepared as if the corporate structure of the Group after the Second Reorganization had been in existence throughout the periods presented. As of December 31, 2023, major subsidiaries, the VIE and VIE’s subsidiaries of Relx HK, the holding company of the PRC Business, were as follows: Percentage of direct or indirect Place of Date of economic incorporation incorporation ownership Principal activities Subsidiaries Beijing Yueke Technology Co., Ltd. Beijing, China October 25, 2018 100 % Investment holding Shanghai Wuke Information Technology Co., Ltd. (“Shanghai Wuke”) Shanghai, China July 26, 2019 100 % Investment holding Mons Co., Ltd Incheon, South Korea June 1, 2020 100 % Selling e‑vapor products VIE Beijing Wuxin Technology Co., Ltd. Beijing, China February 22, 2018 100 % Investment holding Subsidiaries of VIE Shenzhen Wuxin Technology Co., Ltd. Shenzhen, China January 2, 2018 100 % Selling e‑vapor products, research and development Ningbo Wuxin Information Technology Co., Ltd. (“Ningbo Wuxin”) Ningbo, China October 10, 2018 100 % Selling e‑vapor products 1. b) Reorganizations (Continued) iii) Share splits and waiver of amount due to Relx Inc. On November 25, 2020, the Company issued additional 143,681,555 ordinary shares to Relx Inc. and the total number of ordinary shares issued and outstanding Concurrent with the November 2020 share split, a net amount due to Relx Inc. of RMB600,000, mainly originating from operating funds advanced by Relx Inc., offset by the payments made by the Company on behalf of the non-PRC related parties and the corporate expense allocated to Relx Inc., was waived. The accounting for the waiver was recorded in additional paid-in capital as a contribution to the Group from Relx Inc. and a deduction on the net amount due to Relx Inc. on November 25, 2020. iv) Share distribution On March 26, 2021, the Company announced that Relx Inc. has approved a share distribution pursuant to which Relx Inc. shall distribute its shares in the Company to its shareholders of record on March 26, 2021 (the “Record Date”) in proportion to Relx Inc.’s shareholding structure on the Record Date (the “Share Distribution”). On April 16, 2021, the Share Distribution was completed. Accordingly on April 16, 2021, Relx Holdings Limited owns 618,171,790 Class B ordinary shares of the Company and the other existing shareholders of Relx Inc. owns 952,618,780 Class A ordinary shares of the Company. The Class B ordinary shares then beneficially owned by Relx Holdings Limited represent all of the Company’s issued and outstanding Class B ordinary shares upon the completion of Share Distribution and constitute approximately 39.4% beneficial ownership or 86.6% voting power of the Company’s total issued and outstanding share capital immediately after the completion of Share Distribution. c) As of December 31, 2023, the Company, through the WFOE, entered into the following contractual arrangements with the VIE and its shareholders that enabled the Company to (i) have power to direct the activities that most significantly affect the economic performance of the VIE, and (ii) bear the risks and enjoy the rewards normally associated with ownership of the VIE. Accordingly, the Company is the primary beneficiary of the VIE. Consequently, the financial results of the VIE were included in the Group’s consolidated financial statements. 1. c) VIE arrangements between the Company’s PRC subsidiaries (Continued) Agreements that provide the Company with effective control over the VIE Powers of Attorney Equity Interest Pledge Agreement Agreement that allows the Company to receive economic benefits from the VIE Exclusive Business Cooperation Agreement 1. c) VIE arrangements between the Company’s PRC subsidiaries (Continued) Agreement that provides the Company with the option to purchase the equity interests in the VIE Exclusive Option Agreement Exclusive Assets Option Agreement d) It is possible that the Group’s operations of certain of its businesses through the VIE could be found by the PRC authorities to be in violation of the PRC laws and regulations prohibiting or restricting foreign ownership of companies that engage in such operations and businesses. The National People’s Congress approved the Foreign Investment Law on March 15, 2019 and the State Council approved the Regulation on Implementing the Foreign Investment Law (the “Implementation Regulations”) on December 12, 2019, effective from January 1, 2020. The Supreme People’s Court of China issued a judicial interpretation on the Foreign Investment Law on December 27, 2019, effective from January 1, 2020. The Foreign Investment Law and the Implementation Regulations do not touch upon the relevant concepts and regulatory regimes that were historically suggested for the regulation of VIE structures, and thus this regulatory topic remains unclear under the Foreign Investment Law. There are substantial uncertainties with respect to the implementation and interpretation of the Foreign Investment Law and the Implementation Regulations, and it is also possible that variable interest entities will be deemed as foreign invested enterprises and be subject to restrictions in the future. Such restrictions may cause interruptions to the Group’s operations, products and services and may incur additional compliance cost, which may in turn materially and adversely affect the Group’s business, financial condition and results of operations. 1. Nature of operations and reorganizations (Continued) d) Risks in relation to the VIE structure (Continued) In addition, if the legal structure and contractual arrangements were found to be in violation of any other existing PRC laws and regulations, the PRC government could: ● revoke the business licenses and/or operating licenses of such entities; ● impose fines on the Group; ● confiscate any of the Group’s income that they deem to be obtained through illegal operations; ● discontinue or placing restrictions or onerous conditions on the operations of the consolidated VIE; ● place restrictions on the Group’s right to collect revenues; ● shut down the Group’s servers or block the Group’s app/websites; ● require the Group to restructure the ownership structure or operations; ● require the nullification of the contractual arrangements between the WFOE, the consolidated VIE and its shareholders; ● restrict or prohibit the Group’s use of the proceeds from the offering or listing or other of the Group’s capital raising activities to fund the business and operations of the consolidated VIE; or ● take other regulatory or enforcement actions that could be harmful to the Group’s business. The imposition of any of these penalties may result in a material and adverse effect on the Group’s ability to conduct the Group’s businesses. In addition, if the imposition of any of these penalties causes the Group to lose the right to direct the activities of any of the VIE (through its equity interests in its subsidiaries) or the right to receive their economic benefits, the Group will no longer be able to consolidate the relevant VIE and its subsidiaries, if any. In the opinion of management, the likelihood of loss in respect of the Group’s current ownership structure or the contractual arrangements with the VIE is remote. There is no VIE for which the Group has variable interests but is not the primary beneficiary. 1. Nature of operations and reorganizations (Continued) d) Risks in relation to the VIE structure (Continued) The following consolidated financial information of the VIE and its subsidiaries taken as a whole as of December 31, 2022 and 2023 and for the years ended December 31, 2021, 2022 and 2023 was included in the consolidated financial statements of the Group as follows: As of December 31, 2022 2023 RMB RMB Current assets Cash and cash equivalents 956,918 927,097 Restricted cash 20,574 29,718 Short-term bank deposits, net 130,000 99,996 Receivables from online payment platforms 2,817 5,398 Short-term investments, net 2,434,864 2,148,719 Accounts and notes receivable, net 50,259 20,490 Inventories 130,122 72,468 Amounts due from group companies 98,515 129,214 Amounts due from related parties 5,112 102,661 Prepayments and other current assets, net 80,267 112,575 Total current assets 3,909,448 3,648,336 Non ‑ current assets Property, equipment and leasehold improvement, net 75,780 52,102 Intangible assets, net 4,718 53,672 Long-term investments, net 8,000 8,000 Deferred tax assets, net 54,736 42,808 Right-of-use assets, net 57,261 42,529 Long-term bank deposits, net 1,167,325 1,398,376 Other non-current assets, net 10,871 2,599 Total non-current assets 1,378,691 1,600,086 Total assets 5,288,139 5,248,422 Current liabilities Accounts and notes payable 268,761 224,383 Contract liabilities 3,829 11,319 Salary and welfare benefits payable 53,438 19,519 Taxes payable 93,700 36,932 Accrued expenses and other current liabilities 132,762 95,125 Amounts due to group companies 261,729 275,376 Amounts due to related parties 423 — Lease liabilities - current portion 36,905 25,422 Total current liabilities 851,547 688,076 Non-current liabilities Deferred tax liabilities 8,653 7,695 Lease liabilities - non-current portion 30,593 18,092 Total non-current liabilities 39,246 25,787 Total liabilities 890,793 713,863 1. Nature of operations and reorganizations (Continued) d) Risks in relation to the VIE structure (Continued) For the year ended December 31, 2021 December 31, 2022 December 31, 2023 RMB RMB RMB Third-party revenues 8,520,978 5,330,992 1,338,746 Inter-group revenues (i) — 4,533 15,937 Third-party cost of revenues (4,848,190) (2,965,169) (664,660) Inter-group cost of revenues (ii) — (144) (1,268) Excise tax on products — (52,668) (342,354) Third-party operating expenses (1,182,492) (713,520) (484,994) Inter-group operating expenses (iii) (122,568) (459,549) (237,664) Other (expenses)/income (367,311) 132,736 220,220 Net income/(loss) 2,000,417 1,277,211 (156,037) (i) Starting from 2022, the consolidated VIE and its subsidiaries provide operation services to entities within the Group. The inter-group service revenue is eliminated at the consolidated level. (ii) Starting from 2022, the entities within the Group sell products to the consolidated VIE. The inter-group cost of revenues is eliminated at the consolidated level. (iii) The subsidiaries of the Group and the primary beneficiary of the consolidated VIE provide operation supporting services to the consolidated VIE and its subsidiaries. The inter-group service charge is eliminated at the consolidation level. For the year ended December 31, 2021 December 31, 2022 December 31, 2023 RMB RMB RMB Net cash used in operating activities with group company — (512,685) (210,479) Other operating activities 1,842,887 641,865 202,414 Net cash generated from/(used in) operating activities 1,842,887 129,180 (8,065) Loans to group companies (96,058) (450,769) (80,805) Repayment of loans from group companies 191,620 342,000 61,590 Other investing activities (2,755,324) 343,317 53,451 Net cash (used in)/generated from investing activities (2,659,762) 234,548 34,236 Borrowings under loans from group companies — 390,358 543,912 Repayment of borrowings under loans from group companies — (164,408) (590,760) Other financing activities (10,785) (763) — Net cash (used in)/generated from financing activities (10,785) 225,187 (46,848) 1. Nature of operations and reorganizations (Continued) d) Risks in relation to the VIE structure (Continued) The above includes intercompany balances and transactions which have been eliminated on the Company’s consolidated financial statements. Under the contractual arrangements with the VIE and through its equity interests in its subsidiaries, the Group has the power to direct the activities of the VIE and the VIE’s subsidiaries and the transfer of assets out of the VIE and the VIE’s subsidiaries. Therefore, the VIE assets are considered to be fully available to the Company. As the consolidated VIE and VIE’s subsidiaries are incorporated as limited liability companies under the PRC Company Law, the creditors of the liabilities of the consolidated VIE and the VIE’s subsidiaries do not have recourse to the general credit of the Company. e) Business combination In December 2023, to facilitate on international expansion, the Group acquired from its related parties 100% equity interest of certain e-vapor related businesses, including SS North Asia Holding Limited and its consolidated subsidiaries (“SS North Asia”), Sunnyheart HK Limited and its consolidated subsidiaries (“Sunnyheart”) and Relx Indonesia Holding Inc. and its consolidated subsidiaries (“Relx Indonesia”), for purchase prices in cash totaling RMB173,274 (US$24,362). Each of the acquired businesses is primarily engaged in the sales of e-vapor products in its home country, located in North Asia and Southeast Asia, respectively. As the Company and the acquired companies were under common control by Ms. Ying (Kate) Wang both before and after the closing of the transactions, in accordance with ASC 805-50, the acquisitions were accounted for as business combination under common control. The purchase prices in excess of the former parent’s basis of the transferred businesses were recorded as deemed distribution to the shareholders. The results of operations of the acquired businesses have been included in the Group’s consolidated financial statements retrospectively throughout the periods presented at historical carrying values as if the combination had been in effect since the inception of common control. The footnote disclosures to these consolidated financial statements have also been retrospectively adjusted, as applicable. |
