| Operations and Principal Activities | 1. Operations and Principal Activities (a) Principal activities Zhihu Inc., (the “Company” or “Zhihu”), previously known as Zhihu Technology Limited, was incorporated in the Cayman Islands on May 17, 2011 under the Cayman Islands Companies Law as an exempted company with limited liability. The Company, through its consolidated subsidiaries and variable interest entities (“VIEs”) (collectively referred to as the “Group”), is primarily engaged in the operation of one online content community which monetizes through paid membership services, advertising services, content-commerce solutions services and vocational training in the People’s Republic of China (the “PRC” or “China”). The Company completed its initial public offering (the “IPO”) on the New York Stock Exchange in the United States of America in March 2021, and successfully listed its Class A ordinary shares on the Main Board of the Hong Kong Stock Exchange in April 2022. As of December 31, 2022, the Company’s major subsidiaries, VIEs and VIE’s subsidiary are as follows Place and year of Incorporation/acquisition Principal activities Major Subsidiaries Zhihu Technology (HK) Limited Hong Kong, 2011 Investment holding Zhizhe Sihai (Beijing) Technology Co., Ltd. PRC, 2012 Technology, business support and consulting service Beijing Zhihu Network Technology Co., Ltd. PRC, 2018 Information and marketing service Shanghai Zhishi Technology Co., Ltd. (formerly known as “Shanghai Zhishi Commercial Consulting Co., Ltd.”) PRC, 2021 Technology and consulting service Shanghai Paya Information Technology Co., Ltd. PRC, 2021 Consulting service Zhizhe Information Technology Services Chengdu Co., Ltd. PRC, 2016 Technology, business support in the PRC Chengdu Zhizhewanjuan Technology Co., Ltd. PRC, 2017 Information transmission, software and information technology service in the PRC VIEs Beijing Zhizhe Tianxia Technology Co., Ltd. PRC, 2011 Internet service Shanghai Pinzhi Education Technology Co., Ltd. PRC, 2021 Vocational training Shanghai Biban Network Technology Co., Ltd. PRC, 2021 Vocational training VIE’s subsidiary Beijing Leimeng Shengtong Cultural Development Co., Ltd. PRC, 2017 Audio-Visual Permit holder in the PRC (b) VIE arrangements between the Company’s PRC subsidiaries As of December 31, 2022, the Company, through the Zhizhe Sihai (Beijing) Technology Co., Ltd., Shanghai Zhishi Technology Co., Ltd and Shanghai Paya Information Technology Co., Ltd. (“WFOEs”), entered into the following contractual arrangements with the Beijing Zhizhe Tianxia Technology Co., Ltd., Shanghai Pinzhi Education Technology Co., Ltd and Shanghai Biban Network Technology Co., Ltd (“VIEs”) and their shareholders, respectively, that enabled the Company to (1) have power to direct the activities that most significantly affect the economic performance of the VIEs, and (2) bear the risks and enjoy the rewards normally associated with ownership of the VIEs. Accordingly, the WFOEs have a controlling financial interest in the VIEs and are considered the primary beneficiary of the VIEs. As such, and the financial results of operations, assets and liabilities of the VIEs are consolidated pursuant to US GAAP (ASC 810) in the Group’s consolidated financial statements. 1. Operations and Principal Activities (Continued) (b) VIE arrangements between the Company’s PRC subsidiaries (Continued) The following is a summary of the contractual agreements entered into by and among the WFOEs, the VIEs and their shareholders: i) Contracts that give the Company effective control of the VIEs Exclusive Share Option Agreements. Shareholders Voting Proxy Agreements. Equity Interest Pledge Agreements. Spousal Consent Letters. 1. Operations and Principal Activities (Continued) (b) VIE arrangements between the Company’s PRC subsidiaries (Continued ) ii) Contracts that enable the Company to receive substantially all of the economic benefits from the VIEs Exclusive business cooperation agreements. iii) Risks in relation to VIE structure Part of the Group’s business is conducted through the VIEs of the Group, of which the Company is the ultimate primary beneficiary. In the opinion of the management, the contractual arrangements with the VIEs and the nominee shareholders are in compliance with PRC laws and regulations and are legally binding and enforceable. The nominee shareholders indicate they will not act contrary to the contractual arrangements. However, there are substantial uncertainties regarding the interpretation and application of the PRC laws and regulations including those that govern the contractual arrangements, which could limit the Group’s ability to enforce these contractual arrangements and if the nominee shareholders of the VIEs were to reduce their interests in the Group, their interests may diverge from that of the Group and that may potentially increase the risk that they would seek to act contrary to the contractual arrangements. On March 15, 2019, the National People’s Congress approved the Foreign Investment Law, which took effect on January 1, 2020. Along with the Foreign Investment Law, the Implementing Regulation of Foreign Investment Law promulgated by the State Council and the Interpretation of the Supreme People’s Court on Several Issues Concerning the Application of the Foreign Investment Law promulgated by the Supreme People’s Court became effective on January 1, 2020. Since the Foreign Investment Law and its current implementation and interpretation rules are relatively new, uncertainties still exist in relation to their further application and improvement. The Foreign Investment Law and its current implementation and interpretation rules do not explicitly classify whether variable interest entities that are controlled through contractual arrangements would be deemed as foreign-invested enterprises if they are ultimately “controlled” by foreign investors. However, it has a catch-all provision under the definition of “foreign investment” that includes investments made by foreign investors in China through other means as provided by laws, administrative regulations, or the State Council. Therefore, it still leaves leeway for future laws, administrative regulations, or provisions of the State Council to provide for contractual arrangements as a form of foreign investment. Therefore, there can be no assurance that the Group’s control over the variable interest entities through contractual arrangements will not be deemed as a foreign investment in the future. Furthermore, if future laws, administrative regulations or provisions mandate further actions to be taken by companies with respect to existing contractual arrangements, the Group may face substantial uncertainties as to whether the Group can complete such actions in a timely manner, or at all. Failure to take timely and appropriate measures to cope with any of these or similar regulatory compliance challenges could materially and adversely affect the Group’s current corporate structure and business operations. 1. Operations and Principal Activities (Continued) (b) VIE arrangements between the Company’s PRC subsidiaries (Continued ) iii) Risks in relation to VIE structure (Continued) If the Group is found in violation of any PRC laws or regulations or if the contractual arrangements among WFOEs, VIEs and their nominee shareholders are determined as illegal or invalid by any PRC court, arbitral tribunal or regulatory authorities, the relevant governmental authorities would have broad discretion in dealing with such violation, including, without limitation: ● revoke the agreements constituting the contractual arrangements; ● revoke the Group’s business and operating licenses; ● require the Group to discontinue or restrict operations; ● restrict the Group’s right to collect revenue; ● restrict or prohibit the Group’s use of the proceeds from the public offering to fund the Group’s business and operations in China; ● shut down all or part of the Group’s websites or services; ● levy fines on the Group or confiscate the proceeds that they deem to have been obtained through non-compliant operations; ● require the Group to restructure the operations in such a way as to compel the Group to establish a new enterprise, re-apply for the necessary licenses or relocate the Group’s businesses, staff, and assets; ● impose additional conditions or requirements with which the Group may not be able to comply; 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 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 VIEs and their 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 its VIEs is remote. The Group’s operations depend on the VIEs and their nominee shareholders to honor their contractual arrangements with the Group. These contractual arrangements are governed by PRC law and disputes arising out of these agreements are expected to be decided by arbitration in the PRC. The management believes that each of the contractual arrangements constitutes valid and legally binding obligations of each party to such contractual arrangements under the PRC laws. However, the interpretation and implementation of the laws and regulations in the PRC and their application on the legality, binding effect and enforceability of contracts are subject to the discretion of competent PRC authorities, and therefore there is no assurance that relevant PRC authorities will take the same position as the Group herein in respect of the legality, binding effect and enforceability of each of the contractual arrangements. Meanwhile, since the PRC legal system continues to evolve, the interpretations of many laws, regulations and rules are not always uniform and enforcement of these laws, regulations and rules involve uncertainties, which may limit legal protections available to the Group to enforce the contractual arrangements should the VIEs or the nominee shareholders of the VIEs fail to perform their obligations under those arrangements. 1. Operations and Principal Activities (Continued) (b) VIE arrangements between the Company’s PRC subsidiaries (Continued) iii) Risks in relation to VIE structure (Continued) The following consolidated financial information of the Group’s VIEs and their subsidiaries as of December 31, 2021 and 2022 and for the years ended December 31, 2020, 2021 and 2022 was included in the accompanying consolidated financial statements of the Group as follows (in thousands): As of December 31, 2021 2022 RMB RMB ASSETS Current assets: Cash and cash equivalents 59,313 250,759 Short-term investments 434,505 38,500 Trade receivables 58,282 121,796 Amounts due from related parties 7,971 22,013 Amounts due from Group companies 7,742 8,671 Prepayments and other current assets 50,753 68,491 Non-current assets: Property and equipment, net 557 813 Intangible assets, net 66,186 66,124 Goodwill 73,663 103,514 Right-of-use assets 5,878 4,772 Other non-current assets 243 8,943 Total assets 765,093 694,396 Current liabilities Accounts payable and accrued liabilities 120,057 187,595 Salary and welfare payables 2,473 10,132 Taxes payable 2,508 3,925 Contract liabilities 130,420 269,425 Amounts due to related parties 16,303 16,000 Amounts due to Group companies (a) 420,411 145,247 Short-term lease liabilities 1,613 2,428 Other current liabilities 22,537 22,991 Non-current liabilities Long-term lease liabilities 3,689 2,525 Deferred tax liabilities 14,030 8,555 Other non-current liabilities 8,439 30,373 Total liabilities 742,480 699,196 1. Operations and Principal Activities (Continued) (b) VIE arrangements between the Company’s PRC subsidiaries (Continued ) iii) Risks in relation to VIE structure (Continued) For the Year Ended December 31, 2020 2021 2022 RMB RMB RMB Inter-company revenues 1,113 196 866 Third-party revenues 368,933 766,032 1,548,003 Inter-company cost (a) (187,993) (330,486) (582,440) Third-party cost (177,598) (373,390) (618,365) Gross Profit 4,455 62,352 348,064 Operating Expenses (15,561) (85,017) (361,723) Other income 4,572 4,834 9,452 Loss before income tax (6,534) (17,831) (4,207) Income tax expense (1,049) (3,435) (6,948) Net loss (7,583) (21,266) (11,155) Net loss attributable to non-controlling interests shareholders — — 128 Net loss attributable to the Company (7,583) (21,266) (11,027) For the Year Ended December 31, 2020 2021 2022 RMB RMB RMB Purchases of goods and services from Group Companies (a) (159,651) (45,579) (906,100) Operating activities with external parties 225,436 432,031 727,853 Net cash provided by/(used in) operating activities 65,785 386,452 (178,247) Purchases of short-term investments (175,000) (870,000) (1,513,535) Proceeds of maturities of short-term investments 165,000 490,000 1,924,071 Other investing activities with external parties — (33,626) (40,843) Net cash (used in)/provided by investing activities (10,000) (413,626) 369,693 Net increase/(decrease) in cash and cash equivalents 55,785 (27,174) 191,446 Cash and cash equivalents at beginning of the year 30,702 86,487 59,313 Cash and cash equivalents at end of the year 86,487 59,313 250,759 (a) VIEs have incurred RMB 186.1 million, RMB 330.5 million and RMB 572.3 million in fees related to services provided by the WFOEs and WFOEs concurrently recognized same amounts as revenues for the years ended December 31, 2020, 2021 and 2022, respectively. In 2020, 2021, and 2022, the total amount of such service fees that VIEs paid to the relevant WFOE under the relevant agreements was RMB 159.7 million, RMB 45.6 million and RMB 896.3 million, respectively. Unsettled balance of such transactions was RMB 345.9 million and RMB 54.6 million as of December 31, 2021 and 2022, respectively. In accordance with various contractual agreements, the Company has the power to direct the activities of the VIEs and can have assets transferred out of the VIEs and their subsidiaries. Therefore, the Company considers that there are no assets in the VIEs and their subsidiaries that can be used only to settle obligations of the VIEs and their subsidiaries, except for the registered capital of the VIEs and their subsidiaries amounting to approximately RMB22.8 million and RMB22.9 million as of December 31, 2021 and 2022, respectively. As the VIEs are incorporated as limited liability company under the PRC Company Law, creditors do not have recourse to the general credit of the Company for the liabilities of the VIEs and their subsidiaries. There is currently no contractual arrangement that would require the Company to provide additional financial support to the VIEs. 1. Operations and Principal Activities (Continued) (c) Liquidity The Group incurred net losses of RMB517.6 million, RMB1,298.9 million and RMB1,578.4 million for the years ended December 31, 2020, 2021 and 2022, respectively. Net cash used in operating activities was RMB244.4 million, RMB440.2 million and RMB1,115.0 million for the years ended December 31, 2020, 2021 and 2022, respectively. Accumulated deficit was RMB6,280.8 million and RMB7,862.0 million as of December 31, 2021 and 2022, respectively. The Group assesses its liquidity by its ability to generate cash from operating activities and attract investors’ investments. Historically, the Group has relied principally on both operational sources of cash and non-operational sources of financing from investors to fund its operations and business development. The Group’s ability to continue as a going concern is dependent on management’s ability to successfully execute its business plan, which includes increasing revenues while controlling operating expenses, as well as, generating operational cash flows and continuing to gain support from outside sources of financing. The Group has been continuously receiving financing support from outside investors through the issuance of preferred shares. In March 2021, with the completion of its initial public offering on New York Stock Exchange, the Group received net proceeds of RMB |
