ITEM
3. KEY INFORMATION
Not
applicable.
A. Selected
Financial Data
We
have derived the selected consolidated statement of comprehensive income data for the years ended December 31, 2018, 2019 and
2020, the selected consolidated balance sheet data as of December 31, 2019 and 2020, and the selected consolidated statements
of cash flows data for the year ended December 31, 2018, 2019 and 2020 from our audited consolidated financial statements included
in this annual report. The selected consolidated statement of comprehensive income data for the year ended December 31, 2016 and
2017, the consolidated balance sheet data as of December 31, 2016 and 2017, and the selected consolidated statements of cash flows
data for the year ended December 31, 2016 and 2017 have been derived from our audited consolidated financial statements, which
are not included in this annual report. Our financial statements have been prepared in accordance with U.S. GAAP.
You
should read the following information in conjunction with our audited consolidated financial statements and related notes and
“Item 5. Operating and Financial Review and Prospects” in this annual report. Our historical operating results presented
below are not necessarily indicative of the results to be expected for any future fiscal period.
|
|
Year Ended December 31,
|
|
|
|
2016
|
|
|
2017
|
|
|
2018
|
|
|
2019
|
|
|
2020
|
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
US$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands, except for share and per share data)
|
|
Summary Consolidated Statements of Operations and Comprehensive Loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues
|
|
|
117,353
|
|
|
|
280,666
|
|
|
|
651,013
|
|
|
|
644,773
|
|
|
|
330,228
|
|
|
|
50,609
|
|
Cost of revenues
|
|
|
(17,748
|
)
|
|
|
(85,742
|
)
|
|
|
(183,369
|
)
|
|
|
(186,541
|
)
|
|
|
(88,801
|
)
|
|
|
(13,609
|
)
|
Gross profit
|
|
|
99,605
|
|
|
|
194,924
|
|
|
|
467,644
|
|
|
|
458,232
|
|
|
|
241,427
|
|
|
|
37,000
|
|
Total operating expenses
|
|
|
(180,700
|
)
|
|
|
(266,665
|
)
|
|
|
(535,681
|
)
|
|
|
(719,269
|
)
|
|
|
(412,752
|
)
|
|
|
(63,258
|
)
|
Net loss from continuing operations
|
|
|
(81,508
|
)
|
|
|
(75,694
|
)
|
|
|
(75,088
|
)
|
|
|
(251,299
|
)
|
|
|
(163,478
|
)
|
|
|
(25,056
|
)
|
Net loss from discontinued operations
|
|
|
(5,060
|
)
|
|
|
(14,977
|
)
|
|
|
(3,612
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Net loss
|
|
|
(86,568
|
)
|
|
|
(90,671
|
)
|
|
|
(78,700
|
)
|
|
|
(251,299
|
)
|
|
|
(163,478
|
)
|
|
|
(25,056
|
)
|
Accretion to pre-IPO preferred shares redemption value
|
|
|
(16,905
|
)
|
|
|
(20,945
|
)
|
|
|
(35,066
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Comprehensive loss attributable to the TuanChe Limited’s shareholders
|
|
|
(103,156
|
)
|
|
|
(112,983
|
)
|
|
|
(110,365
|
)
|
|
|
(242,224
|
)
|
|
|
(169,887
|
)
|
|
|
(26,038
|
)
|
Comprehensive loss attributable to non-controlling interest
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(659
|
)
|
|
|
(444
|
)
|
|
|
(68
|
)
|
Net loss attributable to the TuanChe Limited’s ordinary shareholders per share from continuing operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
(1.10
|
)
|
|
|
(1.02
|
)
|
|
|
(0.90
|
)
|
|
|
(0.85
|
)
|
|
|
(0.54
|
)
|
|
|
(0.08
|
)
|
Diluted
|
|
|
(1.10
|
)
|
|
|
(1.02
|
)
|
|
|
(0.90
|
)
|
|
|
(0.85
|
)
|
|
|
(0.54
|
)
|
|
|
(0.08
|
)
|
Net loss attributable to the TuanChe Limited’s ordinary shareholders per share from discontinuing operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
(0.06
|
)
|
|
|
(0.16
|
)
|
|
|
(0.03
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Diluted
|
|
|
(0.06
|
)
|
|
|
(0.16
|
)
|
|
|
(0.03
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Weighted average number of ordinary shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
89,423,362
|
|
|
|
94,870,580
|
|
|
|
121,938,427
|
|
|
|
294,922,074
|
|
|
|
304,439,440
|
|
|
|
304,439,440
|
|
Diluted
|
|
|
89,423,362
|
|
|
|
94,870,580
|
|
|
|
121,938,427
|
|
|
|
294,922,074
|
|
|
|
304,439,440
|
|
|
|
304,439,440
|
|
Non-GAAP Financial Data(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA
|
|
|
(81,684
|
)
|
|
|
(84,004
|
)
|
|
|
7,482
|
|
|
|
(143,868
|
)
|
|
|
(141,097
|
)
|
|
|
(21,625
|
)
|
Adjusted net (loss)/income
|
|
|
(84,268
|
)
|
|
|
(87,385
|
)
|
|
|
3,276
|
|
|
|
(140,331
|
)
|
|
|
(145,797
|
)
|
|
|
(22,346
|
)
|
(1)
See “Item 5. Operating and Financial Review and Prospects—A. Operating results—Non-GAAP Financial Measures.”
|
|
As of December 31,
|
|
|
|
2016
|
|
|
2017
|
|
|
2018
|
|
|
2019
|
|
|
2020
|
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
US$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Summary Consolidated Balance Sheet Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
|
24,785
|
|
|
|
66,695
|
|
|
|
578,558
|
|
|
|
193,920
|
|
|
|
109,916
|
|
|
|
16,845
|
|
Restricted Cash
|
|
|
—
|
|
|
|
11,108
|
|
|
|
—
|
|
|
|
1,529
|
|
|
|
29,829
|
|
|
|
4,571
|
|
Accounts receivable, net
|
|
|
4,871
|
|
|
|
8,467
|
|
|
|
52,255
|
|
|
|
72,391
|
|
|
|
66,126
|
|
|
|
10,134
|
|
Prepayment and other current assets
|
|
|
14,740
|
|
|
|
16,181
|
|
|
|
68,819
|
|
|
|
193,782
|
|
|
|
59,856
|
|
|
|
9,173
|
|
Total assets
|
|
|
49,375
|
|
|
|
112,835
|
|
|
|
725,925
|
|
|
|
567,195
|
|
|
|
474,407
|
|
|
|
72,704
|
|
Total liabilities
|
|
|
112,982
|
|
|
|
176,797
|
|
|
|
123,935
|
|
|
|
144,220
|
|
|
|
187,346
|
|
|
|
28,711
|
|
Total mezzanine equity
|
|
|
226,488
|
|
|
|
336,073
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Total shareholders’ (deficit)/equity
|
|
|
(290,095
|
)
|
|
|
(400,035
|
)
|
|
|
601,990
|
|
|
|
422,975
|
|
|
|
287,061
|
|
|
|
43,993
|
|
Total liabilities, mezzanine equity and shareholders’ deficit/equity
|
|
|
49,375
|
|
|
|
112,835
|
|
|
|
725,925
|
|
|
|
567,195
|
|
|
|
474,407
|
|
|
|
72,704
|
|
|
|
For the year ended December 31,
|
|
|
|
2016
|
|
|
2017
|
|
|
2018
|
|
|
2019
|
|
|
2020
|
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
US$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Net cash used in operating
activities
|
|
|
(54,092
|
)
|
|
|
(59,662
|
)
|
|
|
(53,338
|
)
|
|
|
(161,806
|
)
|
|
|
(88,854
|
)
|
|
|
(13,618
|
)
|
Net cash generated from/(used in) investing activities
|
|
|
14,969
|
|
|
|
(4,272
|
)
|
|
|
(20,746
|
)
|
|
|
(187,548
|
)
|
|
|
37,698
|
|
|
|
5,777
|
|
Net cash generated from/(used in) financing activities
|
|
|
52,477
|
|
|
|
117,954
|
|
|
|
562,126
|
|
|
|
(37,245
|
)
|
|
|
(63
|
)
|
|
|
(10
|
)
|
Effect of exchange rate effect on cash, cash
equivalents and restricted cash
|
|
|
26
|
|
|
|
(1,002
|
)
|
|
|
12,713
|
|
|
|
3,490
|
|
|
|
(4,485
|
)
|
|
|
(687
|
)
|
Net increase/(decrease) in cash, cash equivalents and restricted cash
|
|
|
13,380
|
|
|
|
53,018
|
|
|
|
500,755
|
|
|
|
(383,109
|
)
|
|
|
(55,704
|
)
|
|
|
(8,538
|
)
|
Cash and cash equivalents, and restricted cash at beginning of the period
|
|
|
11,405
|
|
|
|
24,785
|
|
|
|
77,803
|
|
|
|
578,558
|
|
|
|
195,449
|
|
|
|
29,954
|
|
Cash and cash equivalents, and restricted cash at end of the period
|
|
|
24,785
|
|
|
|
77,803
|
|
|
|
578,558
|
|
|
|
195,449
|
|
|
|
139,745
|
|
|
|
21,416
|
|
B. Capitalization
and Indebtedness
Not
applicable.
C. Reasons
for the Offer and Use of Proceeds
Not
applicable.
D. Risk
Factors
An
investment in our ADSs involves risks. You should carefully consider the risks described below, as well as the other information
included or incorporated by reference in this annual report, before making an investment decision. Our business, financial condition
or results of operations could be materially adversely affected by any of these risks. The market or trading price of our ADSs
could decline due to any of these risks, and you may lose all or part of your investment. In addition, the risks discussed below
also include forward-looking statements and our actual results may differ substantially from those discussed in these forward-looking
statements. You should also review the section of this annual report captioned “Item 5. Operating and Financial Review and
Prospects—G. Safe Harbor on Forward-Looking Statements.” Please note that additional risks not presently known to
us, that we currently deem immaterial or that we have not anticipated may also impair our business and operations.
Summary
Risk Factors
Our
business is subject to numerous risks and uncertainties, including risks that may prevent us from achieving our business objectives
or may adversely affect our business, financial condition, results of operations, cash flows, and prospects. These risks are discussed
more fully below and include, but are not limited to, risks related to:
Risks
Related to Our Business and Industry
|
•
|
our reliance on China’s automotive industry for our net revenues and future growth;
|
|
•
|
material and adverse impact from the COVID-19 pandemic on our business operations;.
|
|
•
|
our dependence on collaboration with our industry customers;
|
|
•
|
our ability to attract and retain automobile consumers;
|
|
•
|
our net losses in the past and ability to generate net income;
|
|
•
|
liquidity risks in the operation and expansion of our business;
|
|
•
|
our evolving business focuses which may make it difficult to evaluate our business by comparing our results of operations from period to period, or to predict the profitability of certain of our business lines due to their limited operating history;
|
Risks
Related to Our Corporate Structure
|
•
|
the agreements that establish the structure for operating some of our operations in China to be found not compliant with PRC regulations relating to the relevant industries;
|
|
•
|
uncertainties with respect to the interpretation and implementation of the PRC Foreign Investment Law;
|
|
•
|
the risk of losing the ability to use and enjoy assets held by our VIEs and their subsidiaries that are important to our business if our VIEs and their subsidiaries declare bankruptcy or become subject to a dissolution or liquidation proceeding;
|
|
•
|
failure of the custodians or authorized users of our controlling non-tangible assets, including chops and seals, to fulfill their responsibilities, or misappropriate or misuse these assets, our business and operations may be materially and adversely affected;
|
Risks
Related to Doing Business in China
|
•
|
impact from PRC economic, political and social conditions, as well as changes in any government policies, laws and regulations;
|
|
•
|
uncertainties with respect to the PRC legal system;
|
|
•
|
us being classified as a PRC resident enterprise for PRC enterprise income tax purposes;
|
|
•
|
PRC regulation of loans to and direct investment in PRC entities by offshore holding companies and governmental control of currency conversion delaying or preventing us from using the proceeds of our initial offering;
|
|
•
|
our ADSs being delisted under the Holding Foreign Companies Accountable Act if the PCAOB is unable to inspect auditors who are located in China;
|
Risks
Related to Our Ordinary Shares and ADSs
|
•
|
We
are an emerging growth company within the meaning of the Securities Act and may take
advantage of certain reduced reporting requirements.
|
|
•
|
The
trading price of our ADSs is likely to be volatile, which could result in substantial
losses to investors.
|
|
•
|
Our
dual-class share structure with different voting rights will limit your ability to influence
corporate matters and could discourage others from pursuing any change of control transactions
that holders of our Class A ordinary shares and ADSs may view as beneficial.
|
|
•
|
Substantial
future sales or perceived potential sales of our ADSs in the public market could cause
the price of our ADSs to decline.
|
|
•
|
If
securities or industry analysts do not publish research or publish inaccurate or unfavorable
research about our business, the market price for our ADSs and trading volume could decline.
|
|
•
|
Uncertainty involving certain proposed transactions that we have announced from time to time may adversely affect our business and the market price of our ADSs.
|
Risks
Related to Our Business and Industry
We
rely on China’s automotive industry for our net revenues and future growth, the prospects of which are subject to many uncertainties,
including government regulations and policies.
We
rely on China’s automotive industry for our net revenues and future growth. We benefited greatly from the rapid growth of
China’s automotive industry in the past. However, the prospects of China’s automotive industry are subject to many
uncertainties, including those relating to general economic conditions in China, the urbanization rate of China’s population
and the cost of automobiles. In addition, government policies may have a considerable impact on the growth of the automotive industry
in China. For example, in an effort to alleviate traffic congestion and improve air quality, a number of cities in China have
issued regulations to limit the number of new passenger car license plates issued each year starting from 2010. In September 2013,
the PRC government released a plan for the prevention and remediation of air pollution, which requires large cities to further
restrict the number of automobiles. Since 2010, the Beijing municipal government has issued the interim regulations, which were
amended from time to time, to control the quantity of small passenger cars in the city. Pursuant to the latest Interim Provisions
of Quantity Adjustment and Control for Small Passenger Cars in Beijing and the Implementing Rules of the Interim Provisions of
Quantity Adjustment and Control for Small Passenger Cars in Beijing (Revised in 2020), both of which were came into force on January
1, 2021, the city imposes an annual quota on the issuance of new vehicle registration plates. The annual car license plate quota
in 2021 has been further reduced to 100,000, down from 150,000 in 2017. Some other cities in China, including Tianjin, Hangzhou,
and Shenzhen, have also implemented certain interim provisions to control the quantity of small cars in the cities. Such regulatory
developments, as well as other uncertainties, may adversely affect the growth prospects of China’s automotive industry,
and in turn reduce consumer demand for automobiles. If automakers, auto dealers or automotive service providers reduce their marketing
expenditures as a result, our business, financial condition and results of operations could be materially and adversely affected.
Our
business operations have been and may continue to be materially and adversely affected by the COVID-19 pandemic.
The
outbreak of a novel strain of coronavirus (COVID-19) spread throughout China and to other countries globally. We, as well as our
suppliers and customers, have experienced significant business disruptions due to government-mandated quarantine measures and travel
restrictions to contain the spread of the pandemic. Out of public health concerns, we cancelled all offline events such as auto
shows and special promotion events previously scheduled in February and March 2020, and held very few offline events in April 2020.
We continued to reduce the number of offline events in the first half of 2020, as the Chinese government has issued guidelines to
continue to curb indoor public gatherings. For example, on April 6, 2020, the State Council promulgated a notice pursuant to which
the various shows and fairs shall be temporarily suspended due to the COVID-19 pandemic. As the COVID-19 pandemic became largely
under control in China, we saw a rapid pick-up of the number of auto shows we held in the second half of 2020. However, regional
outbreaks may occur from time to time, causing us to have no choice but cancel our auto shows and special promotion events. For
example, in January and February 2021, we were forced to cancel two auto shows due to a regional COVID-19 outbreak in Hebei
province. In addition, the spread of COVID-19 may continue to cause a general slowdown of the Chinese economy in 2020 and beyond,
leading to a further slump in the demand for automobiles in China. Furthermore, as the business operations of our industry customers
have also been severely disrupted, we continue to experience a delay in collecting our accounts receivable since the COVID-19
outbreak, which could materially and adversely affect our liquidity. In response to the significant impact of the COVID-19 pandemic,
we implemented measures to adjust the pace of our business expansion and conserve resources, such as furlough arrangements and
scaling back our recruitment budget and employee size in 2020. As the COVID-19 pandemic has been largely contained, our daily
operation has been mostly back to normal with necessary pandemic prevention measures in place, and we have cautiously resumed our
recruiting and expansion pace. However, regional outbreaks of COVID-19 may still subject our business, results of operations,
financial condition and cash flows to uncertainties, and we may resort to other cost cutting measures if the outbreak of COVID-19
and its impact persist or escalate, which may result in labor disputes and have a material adverse effect on our business, results
of operations and financial condition. We are closely monitoring the development of the COVID-19 pandemic and continuously evaluate
its impact on our business, results of operations, financial condition and liquidity, the severity of which will depend on the
duration of the pandemic and the government’s responsive measures.
Our
business is substantially dependent on our collaboration with our industry customers, including automakers, auto dealers, and
automotive service providers, and our agreements with them typically do not contain long-term contractual commitments.
Our
business is substantially dependent on our collaboration with automakers, auto dealers and automotive service providers. We generally
enter into cooperation agreements with them (1) on an ad-hoc basis for a particular auto show or special promotion event or (2)
for a stipulated term of up to one year, and our agreements do not impose any contractual obligations requiring them to maintain
their relationships with us beyond the completion of each such event we organize or beyond the contractual term. Accordingly,
there is no guarantee for future cooperation after the event and there is no assurance that we can maintain stable and long-term
business relationships with any such industry customers. If a significant number of our industry customers terminate or do not
renew their agreements with us and we are not able to replace these business partners on commercially reasonable terms in a timely
manner or at all, our business, results of operations and financial condition would be materially and adversely affected.
If
we fail to attract and retain automobile consumers, our business and results of operations may be materially and adversely affected.
In
order to maintain and strengthen our leading market position and to attract industry customers, we must continue to attract and
retain consumers to our auto shows and other offline events. We must also innovate and introduce services and applications that
improve consumers’ purchase experience. In addition, we must maintain and enhance our brand recognition among automobile
consumers. If we fail to enhance consumers’ ability to secure favorable purchase prices, offer a superior purchase experience
or maintain and enhance our brand, we may not be able to attract and retain automobile consumers and thus fail to retain and attract
our industry customers, from whom we derive our net revenues, and our brand and reputation may be materially and adversely affected.
If
our consumer base decreases, our service offerings may be less attractive to our industry customers. As a result, our net revenues
may decline, and our business, financial condition and results of operations may be materially and adversely affected.
We
have incurred net losses in the past and may incur losses again in the future.
We
commenced our business operations in 2010, and only began to generate significant net revenues in 2012 from our group-purchase
facilitation business. Our net revenues from continuing operations were, RMB651.0 million, RMB644.8 million and RMB330.2 million
(US$50.6 million) in 2018, 2019 and 2020, respectively. We may fail to recapture a sustainable growth rate, which may continue
to decrease in the future, especially considering the impact of the COVID-19 pandemic. We experienced net loss attributable to
our shareholders of RMB113.8 million ,RMB250.6 million and RMB163.0 million (US$25.0million) in 2018, 2019 and 2020, respectively.
See “Item 8. Financial Information—A. Consolidated Statements and Other Financial Information.”
Our
ability to achieve profitability and positive cash flow will depend in large part on our ability to execute our growth strategies
and appropriately control our costs and expenses. We may continue to incur significant losses in the future for a number of reasons,
including the other risks described in this annual report. We may also further encounter unforeseen expenses, difficulties, complications,
delays and other unknown events. If we fail to increase our net revenues at the rate we anticipate or if our expenses increase
at a faster rate than the increase in our net revenues, we may not be able to achieve profitability.
We
may also continue to incur net losses in the future due to various factors beyond our control, such as changes in the macroeconomic
and regulatory environment, as well as competitive dynamics. Our inability to respond to these changes in a timely and effective
manner may materially and adversely affect our business, results of operations and financial condition.
We
may face liquidity risks in the operation and expansion of our business.
We
face liquidity risks in the operation of our businesses. Under our auto show business, we in some cases permit our industry customers
to pay us after they attend the offline events we organize. We also in some cases pay service and venue providers in advance.
As we undertake to expand our industry customer base to include more automakers, we may offer extended payment periods. Under
our virtual dealership business, we purchase automobiles from automakers and franchised dealerships on behalf of secondary dealers.
For details of our virtual dealership business model, see “Item 4. Information on the Company—B. Business Overview—Our
Services.” We are typically required to pay the full purchase price to automakers and franchised dealerships in order to
take delivery of the automobiles. By contracts, we generally require secondary dealers to pay the full purchase price within a
certain number of days after submitting the written purchase request. We may allow secondary dealers to pay us for the automobiles
after we pay automakers or franchised dealerships, and we may need to use our own cash to pay for the automobiles before receiving
payment from secondary dealers. We sometimes provide supply-chain financial support to our secondary dealers to help them pay
automakers. Generally, we provide such support on the condition that secondary dealers have already secured sale orders from consumers.
We require secondary dealers to offer the automobiles as collaterals. The credit term is usually shorter than one month. If our
industry customers fail to pay us within the pre-agreed payment periods, or if we are unable to collect the proceeds from secondary
dealers before or shortly after we pay automakers or franchised dealerships, we may have outlay capital, which might impose a
strain on our working capital. Further, while we continue to explore opportunities to grow our business,
we have not yet achieved a business scale that is able to generate a sufficient level of revenues to achieve net profit and positive cash
flows from operating activities, and we expect the operating losses and negative cash flows from operations will continue for the foreseeable
future. While we have sufficient cash for the next twelve months from the date of this annual report, if we are unable to grow the business
to achieve economies of scale in the future, it will become even more difficult for us to sustain a sufficient source of cash to cover
our operating costs. The liquidity risks could materially and adversely affect our business, results of our operations,
and financial condition.
Historically
our business focuses have evolved and may continue to change in the future, which may make it difficult to evaluate our business
by comparing our results of operations from period to period, or to predict the profitability of certain of our business lines
due to their limited operating history.
We
have expanded and adjusted our business focuses multiple times in the past in order to compete in the evolving automotive industry
in China. We commenced our automobile group-purchase business in 2010, and began our auto show business in the fourth quarter
of 2016. In 2017, we expanded our auto shows to tier-3 and below cities. We began the operation of our virtual dealership business
in the second quarter of 2018. In January 2020, we completed the acquisition of Longye, a leading developer and implementer of
social CRM cloud systems for China’s automotive industry. Going forward, we may establish new business lines or discontinue
existing ones as our business further develops and new business opportunities arise in the automotive industry. As a result, it
is difficult to make period-over-period comparisons of our results of operations, liquidity position or financial conditions.
In addition, it may be difficult to predict the profitability of our certain business lines, especially special promotion events,
virtual dealership and online marketing services, due to their limited operating history. We cannot assure you that our business
will continue to grow as a result of our expanded and adjusted business focuses, or that our attempts to expand or adjust our
business focus will be successful.
We
may not be able to successfully operate and expand our virtual dealership business and social CRM cloud services, which could
materially and adversely affect our business, results of operations and financial condition.
In
June 2018, we began to operate our virtual dealership business in which we function as a virtual dealer connecting automakers
with secondary dealers by providing a suite of services traditionally undertaken by franchised dealers without setting up a permanent
physical presence. In January 2020, we completed the acquisition of Longye, a leading developer and implementer of social customer
relationship management (social CRM) cloud systems for China’s automotive industry. Longye’s principal software as
a service (SaaS) product, Cheshangtong, provides China’s auto dealers with social CRM cloud services based on a system that
facilitates the effective flow of information between auto dealers and customers. See “Item 4. Information on the Company—B.
Business Overview—Our Services—Virtual Dealerships.” We may fail to successfully implement our virtual dealership
business strategies and integrate Longye into our business operations due to our limited operating experience and other reasons
beyond our control. For example, we may have disagreement with automakers over whether this new business model complies with the
standard contracts commonly adopted by them, and we may also be unable to guarantee that our secondary dealer partners will maintain
physical storefronts or otherwise perform their contractual obligations that are critical to our virtual dealership business as
well as our collaborative arrangements with automakers. We cannot assure you that Cheshangtong will continue to enjoy its popularity
among auto dealers. Should any resulting disputes arise or should we fail to successfully implement our virtual dealership business
strategies, our business, results of operations and financial condition could be materially and adversely affected.
Our
business is subject to risks related to the overall automotive industry ecosystem, including consumer demand, consumption habits,
global supply chain challenges and other macroeconomic issues.
Decreasing
consumer demand could adversely affect the market for automobile purchases and, as a result, adversely affect our business. Consumer
purchases of new and used automobiles generally decline during recessionary periods and other periods in which disposable income
is adversely affected. Purchases of new and used automobiles are typically discretionary for consumers and have been, and may
continue to be, affected by negative trends in the economy, including the rising cost of energy and gasoline, the limited availability
and increasing cost of credit, reductions in business and consumer confidence, stock market volatility, and increased unemployment.
Further, in recent years the automotive market has experienced rapid changes in technology and consumer demands. Self-driving
technology, ride sharing, transportation networks, and other fundamental changes in transportation could impact consumer demand
for the purchase of automobiles. A reduction in the number of automobiles purchased by consumers could adversely affect automakers
and auto dealers and lead to a reduction in their spending on our services. In addition, our business may be negatively affected
by challenges to the overall automotive industry ecosystem, including global supply chain challenges and other macroeconomic issues
such as uncertainty with respect to trade policies, treaties, government regulations and tariffs between China and the United
States due to the recent trade tension. The occurrence of any of the foregoing could materially and adversely affect our business,
results of operations, and financial condition.
If
we fail to help facilitate the marketing and sales of our industry customers due to factors beyond our control, our operational
and financial results might suffer.
Our
industry customers are attracted to our offline events due to their marketing needs and the prospects of selling a large number
of automobiles to individual consumers through the events. The marketing results and the sales volume at our offline events might
fail to meet the expectation of our industry customers due to factors beyond our control, including among others, changes in the
regulatory environment, a downturn or unfavorable development in the automotive industry, overall economic downturn and the resulting
decrease in purchasing power and willingness of consumers, and contingencies that occur on event dates such as inclement weather
or sudden public security measures which affect our ability to host the events effectively, or at all. Other factors that affect
consumer attendance at our offline events may also affect sales volume, such as conflicts with other local events, road traffic
control, outbreaks of contagious disease or the potential for infection, or acts of nature, such as earthquakes, storms, and typhoons.
If we fail to help facilitate the marketing and sales of our industry customers, they might be less inclined to participate in
our future events, which directly affects our business, results of operations, and financial condition.
We
may incur additional costs and decrease the number of auto shows due to severe weather conditions, which could negatively impact
our gross profit margin and overall results of operations.
We
host most of our auto shows outdoors. The table below sets forth the number of outdoor auto shows during the periods indicated:
|
|
For
the three months ended
|
|
|
|
March 31,
2019
|
|
|
June 30,
2019
|
|
|
September 30,
2019
|
|
|
December 31,
2019
|
|
|
March 31,
2020
|
|
|
June 30,
2020
|
|
|
September 30,
2020
|
|
|
December 31,
2020
|
|
Number of outdoor auto
shows
|
|
|
118
|
|
|
|
252
|
|
|
|
132
|
|
|
|
210
|
|
|
|
0
|
|
|
|
46
|
|
|
|
103
|
|
|
|
137
|
|
In
addition to the recent and fast-evolving COVID-19 pandemic, severe weather conditions may also cause unplanned cancellation of our outdoor
auto shows and lower the level of industry customer attendance at the affected auto shows, resulting in a decrease in our net revenues.
For example, in 2020, we cancelled two auto shows due to weather conditions. In addition, to ensure the smooth operation of these outdoor
auto shows and minimize the impact of potential severe weather conditions on these outdoor auto shows, we may seek to manage such contingencies
by securing backup indoor venues or setting up temporary facilities for these auto shows. These contingency management plans could lead
to our outlay of additional financial resources, which could negatively impact our gross profit margin and overall results of operations.
Our
failure to obtain necessary permits for our offline events may subject us to penalties and adversely affect our business, results
of operations, and financial condition.
Under
PRC laws and regulations, we may be required to obtain certain permits each time before we hold an offline event, including a
security permit to organize large-scale mass activities and a permit for temporary occupation of urban roads, depending on the
estimated number of participants and the need to temporarily occupy public roads. See “Item 4. Information on the Company—B.
Business Overview—Regulation—Regulations Relating to Security Administration of Large-scale Mass Activities and Temporary
Urban Road Occupation.” Although we have endeavored and will continue to endeavor to obtain all necessary permits according
to our estimate of the condition of each specific event, we cannot assure you that we have been or will continue to be in full
compliance with the licensing requirements for all the offline events we have held or will hold because the regulatory practices
with respect to an offline event vary among different regions and the local authorities retain broad discretion in enforcing the
licensing requirements. In addition, the licensing requirements in China are constantly evolving, and we may be subject to more
stringent regulatory requirements due to political or economic changes in the future. We cannot assure you that we will be able
to satisfy such regulatory requirements and as a result we may be unable to obtain the necessary permits for each of our offline
events in a timely manner in the future. If relevant PRC government authorities determine that we are operating our offline events
without proper licenses or permits or impose additional restrictions on the operation of any of our offline events, we might be
subject to administrative penalties, such as fines, confiscation of income, additional restrictions and forced discontinuation
of our offline events, which may materially and adversely affect our business, results of operations, and financial condition.
Relevant
government authorities may suspend our offline events due to various reasons beyond our control.
Even
if we have obtained all prerequisite permits, government authorities may unexpectedly suspend our scheduled offline events due
to a variety of reasons beyond our control. For example, two weeks prior to an auto show in April 2018 in Beijing National Stadium,
the local public security authority abruptly demanded that we suspend our auto show for one morning, even though we had already
obtained the required approvals. Under such circumstances, we usually negotiate with our industry customers to reschedule the
auto show. In addition, the local police security authorities may prevent consumers from entering our auto shows and impose administrative
penalties on us if the visitor flow exceeds the prescribed limit. Such abrupt suspensions, re-scheduling and restrictions might
adversely affect the sales volumes of our industry customers, which in turn could discourage them from participating in our future
events and materially and adversely affect our business, results of operations, and financial condition.
Successful
strategic relationships with third-party cooperative partners are important for our future success.
We
have established strategic relationships with third-party business partners from a variety of industries. For example, we have
established strategic business relationships with insurance companies that offer automotive insurance products during our offline
events, which we believe will enhance consumers’ end-to-end shopping experience. We have also entered into strategic partnerships
with Tmall Auto, the automotive arm of Alibaba Group’s Tmall, through which we expect to further explore additional growth
opportunities along China’s automotive transaction value chain, and Beijing Easyhome Furnishing Chain Group Co., Ltd. (“Easyhome”),
a company that operates one of the largest home improvement supplies and furniture chains in China, through which we expect to
jointly establish an innovative one-stop retail experience that combines home decoration products and automotive services to serve
a broader range of consumers in China. Also, we operate some of our auto shows in cooperation with one of the leading e-commerce
platforms in China, which we believe will increase the influence of our auto shows. We anticipate that we will continue to leverage
our strategic relationships with existing third-party business partners and potentially establish new relationships with more
partners in order to grow our business. However, we may have disagreements or disputes with such third-party business partners,
or our interests may not be aligned with theirs, which could cause disruptions to or terminations of such business collaboration
and adversely affect our reputation, results of operations, and financial condition.
We
face various forms of competition, and if we fail to compete effectively, we may lose market shares and our business, prospects,
and results of operations may be materially and adversely affected.
Our
offline events face competition from alternative auto show organizers and other marketing service providers, while our virtual
dealership business competes with franchised dealerships. As we expand our business operations and service offerings, we expect
to encounter more competitors from more industries and markets as well as different forms of competition. For example, our virtual
dealership business may face competition from other forms of automobile sales models. Some of these competitors or potential competitors
may have longer operating histories and may have better resources than us in terms of funding, management, technology and sales
and marketing. Our competitors may be acquired and consolidated by owners who are able to further invest significant resources
into our operating field. If we are unable to compete effectively and at a reasonable cost against our existing and future competitors,
our business, prospects, and results of operations could be materially and adversely affected.
If
we are unable to manage our growth or execute our strategies effectively, our business and prospects may be materially and adversely
affected.
We have historically experienced rapid growth in
our auto shows and other offline events nationwide. Our net revenues increased significantly from RMB280.7 million in 2017 to RMB651.0
million in 2018, and remained stable at RMB644.8 million in 2019. Our net revenue decreased to RMB330.2 million (US$50.6 million) in 2020.
We were not able to sustain this level of growth in 2020 due to the impact of COVID-19 that led to cancellation of most of our auto shows
and offline events. We may not be able to resume this level of growth in the future due to a number of factors, including, among others,
our ability to retain and expand our industry customer base, maintain customer satisfaction, compete effectively within the automotive
industry, integrate, develop, motivate and manage an increasing number of employees, control our expenses and acquire the resources for
our future growth as well as macroeconomic factors that are beyond our control. If our operational capabilities fall behind, the quality
of our services and efficiency of our operations could suffer, which could harm our brand, results of operations and our overall business.
In
addition, our anticipated development and expansion plans will place a significant strain on our management, systems and resources.
Our development and expansion strategies of virtual dealership business will require substantial managerial efforts and skills
and incurrence of additional expenditures and may subject us to new or increased risks. Moreover, our expansion strategies may
incur higher costs than the net revenues generated. Our failure to efficiently or effectively implement our growth strategies
or manage the growth of our operations may limit our future growth and hamper our business strategies.
Our
business depends heavily on our reputation and consumer perception of our brand, and any negative publicity or other harm to our
brand or failure to maintain and enhance our brand recognition may materially and adversely affect our financial condition and
results of operations.
We
believe that our reputation and consumer perception of our brand “TuanChe” are critical to our financial condition
and results of operations. Maintaining and enhancing our reputation and brand recognition depends primarily on the quality and
consistency of our services, as well as the success of our marketing and promotional efforts. While we have devoted significant
resources to brand promotion efforts in recent years, our ongoing marketing efforts may not be successful in further promoting
our brand. In addition, there may be from time to time negative publicity about our company, our business, our management or our
services. For example, if auto dealers breach their contracts with automobile consumers concluded during the auto show and raise
the purchase price, we may be found at fault by consumers and our reputation may be materially and adversely affected. We may
be subject to litigation as well as government or regulatory investigation as a result of such negative publicity, which might
require us to spend significant time and resources to resolve.
Our
failure to satisfactorily handle complaints from industry customers and consumers could also harm our reputation and discourage
them from attending our future offline events or working with us in our virtual dealership business. For example, they may complain
about the cancellation or rescheduling of our auto shows. While we have been improving and will continue to improve our customer
service capabilities, we cannot assure you that our employees will satisfactorily resolve all complaints from industry customers
or consumers. If we fail to resolve a particular complaint from industry customers or consumers, whether or not such resolutions
are within our control, our perceived reputation and the confidence these industry customers and consumers place in us may diminish,
which could materially and adversely affect our business, financial condition and results of operations.
Acquisitions,
strategic alliances and investments could prove difficult to integrate, disrupt our business and lower our results of operations
and the value of your investment.
As
part of our business strategy, we regularly evaluate investments in, or acquisitions of, complementary businesses, joint ventures,
services and technologies. For example, in January 2020, we completed the acquisition of Longye, a leading system developer and
implementer of social CRM systems. We expect that periodically we will continue to make such investments and acquisitions in the
future. Acquisitions, strategic alliances and investments involve numerous risks, including:
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•
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the
potential failure to achieve the expected benefits and synergies of the combination or
acquisition;
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|
•
|
difficulties
in, and the cost of, integrating operations, technologies, services and personnel;
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•
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lack
of knowledge and experience in the new business;
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|
•
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inability
to obtain funding for the investments;
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|
•
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potential
write-offs of acquired assets or investments; and
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|
•
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downward
effect on our results of operations.
|
In
addition, if we finance acquisitions by issuing equity or convertible debt securities, our existing shareholders may be diluted,
which could affect the market price of the ADSs. Further, if we fail to properly evaluate and execute acquisitions or investments,
our business and prospects may be seriously harmed and the value of your investment may decline.
Furthermore,
we may fail to identify or secure suitable acquisition and business partnership opportunities or our competitors may capitalize
on such opportunities before we do, which could impair our ability to compete with our competitors and adversely affect our growth
prospects and results of operations.
Any
financial or economic crisis, or perceived threat of such a crisis, including a significant decrease in consumer confidence, may
materially and adversely affect our business, financial condition and results of operations.
Any
actual or perceived threat of a financial crisis in China, in particular a credit and banking crisis, could have an indirect,
but material and adverse, impact on our business and results of operations. Economic conditions in China are sensitive to global
economic conditions, as well as changes in domestic economic and political policies and the expected or perceived overall economic
growth rate in China.
Furthermore,
any slowdown in China’s economic development might lead to tighter credit markets, increased market volatility, sudden declines
in business and consumer confidence and dramatic changes in business and consumer behaviors. For example, the COVID-19 pandemic
has caused a general slowdown of the Chinese economy in 2020, and in response to the uncertainty in economic conditions, consumers
might delay, reduce or cancel purchases of automobiles, which to some extent are considered as luxury items by many people in
China, and as a result, our industry customers may also defer, reduce or cancel purchasing our services. In addition, although
the government-mandated quarantine measures against the COVID-19 pandemic has largely been lifted in China, normal economic activities
in China, including production, transportation and sales of automobiles, may be disrupted if there is any regional outbreak of
COVID-19. The continued spread of the COVID-19 pandemic throughout the world also materially and adversely affect the supply chain
of China’s automobile industry, as well as the business, results of operations, financial condition and liquidity of major
market players in this industry, including automakers and auto dealers, from whom we generate a substantial portion of our net
revenues. To the extent any fluctuations in the Chinese economy significantly affect the demand from automakers or auto dealers
for our services or change the spending habits of automobile consumers, our business, results of operations, and financial condition
may be materially and adversely affected. See “—Our business operations have been and may continue to be materially
and adversely affected by the COVID-19 pandemic.”
In
addition, the economic downturn may reduce the number of automakers and auto dealers in China resulting in the decrease of the
demand for our services. Since the early 1990s, many non-automotive enterprises joined China’s automotive industry and began
to offer new lines of automobiles. An increasing number of foreign brands gradually entered the PRC market primarily by forming
joint ventures with Chinese brands. Growing automobile production capacity and production volume have significantly increased
the number of auto dealers. By contrast, negative economic trends could lead to market consolidation of automakers and auto dealers,
which in effect will reduce our customer base and, in turn, reduce the demand for our services. As a result, our ability to generate
net revenues, as well as our business, results of operations and financial condition, will be materially and adversely affected.
We
may not be able to successfully expand our operations into certain additional geographical markets in China.
We
organized auto shows in 172 cities across China in 2020, and we had sales representatives located in 126 cities as of December
31, 2020. We plan to expand our operations to more cities and counties in China. Geographic expansion is particularly important
for us to acquire more industry customers, whose operations are usually localized and spread out in the regions they serve. Nonetheless,
expansion into new geographical markets imposes additional burdens on our sales, marketing and general managerial resources. As
China is a large and diverse market, business practices and demands may vary significantly by region and our experience in the
markets in which we currently operate may not be applicable in other parts of China. As a result, we may not be able to leverage
our experience when entering into new markets in China. If we are unable to manage our expansion efforts effectively, if our expansion
efforts take longer than planned or if our costs for these efforts exceed our expectations, our business, results of operations,
and financial condition may be materially and adversely affected.
We
may be subject to administrative penalties if we fail to register our premises as branches.
Under the PRC laws and regulations, a company is
required to register a branch, whether in the form of a branch office or a subsidiary under the PRC laws, at each of the premises where
it conducts business outside its registered domicile. As of the date of this annual report, we have registered certain regional offices,
including those in Shenzhen, Chongqing, Xiangtan, Tianjin, Hangzhou, Xi’an, Harbin, and Hefei, as our branches, and we have not
yet received any inquiry or investigation from any PRC government authority regarding the absence of any registration. However, we cannot
assure you that we will set up all necessary branches in a timely manner due to complex procedural requirements and the relocation of
branch offices from time to time, if the PRC regulatory authorities determine that we have failed to complete registration in a timely
manner as required by the applicable laws and regulations, we may be subject to penalties, including fines, confiscation of income and
suspension of operation, which may adversely affect our business, results of operations, and financial condition.
Our
cooperation with a commercial bank might be deemed as operating financing guarantee business in violation of relevant financing
guarantee regulations in China.
In
October 2019, we commenced our referral services in collaboration with a commercial bank, where we facilitate the bank in expanding its
cooperation with our industry customers to grow its auto loan business. With respect to our cooperation with the commercial bank, we
are required to compensate the bank for the principal loan amount and interest of such auto loan upon the occurrence of certain events
of default by the referred customers. The specified events of default
by referred customers, include the failure to timely complete the vehicle mortgage registration within a certain period of time or the
repayment of the first three installment of loan becoming overdue for more than thirty days. Therefore, such cooperation might be deemed
as operating financing guarantee business without proper qualification under the Regulations on the Supervision and Administration of
Financing Guarantee Companies, or the Financing Guarantee Regulations, which were promulgated by State Council on August 2, 2017 and
became effective on October 1, 2017, and the Supplementary Provisions on the Supervision and Administration of Financing Guarantee Companies,
or the Financing Guarantee Supplementary Provisions, which were promulgated by CBIRC and other eight PRC regulatory agencies and became
effective on October 9, 2019.
Pursuant to the Financing Guarantee Regulations,
“financing guarantee” refers to the activities in which guarantors provide guarantee to the guaranteed parties as to the debt
financing (including but not limited to the extension of loans or issuance of bonds), and “financing guarantee companies”
refer to companies legally established and operating financing guarantee business. According to the Financing Guarantee Regulations, the
establishment of financing guarantee companies shall be subject to the approval by the competent government authorities, and, unless otherwise
stipulated by the state, no entity may operate financing guarantee business without such approval. If any entity violates these regulations
and operates financing guarantee business without approval, the entity may be subject to various penalties, including but not limited
to suspension of operation, confiscation of illegal gains, fines of up to RMB1,000,000 and criminal liabilities if such operation constitutes
a crime.
In addition to the Financing Guarantee Regulations,
the Financing Guarantee Supplementary Provisions further clarifies that institutions providing services such as client recommendation
and credit assessment to various institutional funding partners shall not render any financing guarantee services, directly or in disguised
form, without the necessary approval. Otherwise, the penalties set forth in the Financing Guarantee Regulations may be imposed by the
regulatory authorities, and the existing business shall be properly settled. In case an institution intends to continue the financing
guarantee business, certain financing guarantee companies shall be established in accordance with the Financing Guarantee Regulations.
As of the date of this annual report, we have not
been subject to any fine or other penalties with regard to our cooperation with the commercial bank. However, due to a lack of further
interpretations, the exact definition and scope of “operating financing guarantee business” under the Financing Guarantee
Regulations or “providing financing guarantee services in disguised form” under the Financing Guarantee Supplementary Provisions
remain unclear. It is uncertain whether we would be deemed to have operated financing guarantee business or provided financing guarantee
services in disguised form because of our arrangements with the commercial bank.
Nevertheless, we have been taking necessary measures to fully comply
with the foregoing laws and regulations on financing guarantee business. According to the cooperation agreement with the commercial bank,
our cooperation will expire in October 2021, which will allow us to exit the cooperation unless both parties agree otherwise. We cannot assure you that we will not be subject to
penalties for our past operation of such business. To the extent any of the foregoing were to occur, our business, results of operations
and financial condition could be adversely affected.
Material
weaknesses in our internal control over financial reporting have been identified, and if we fail to implement and maintain effective
internal control over financial reporting, we may be unable to accurately report our results of operations, meet our reporting
obligations or prevent fraud.
We
are subject to the reporting requirements of the Exchange Act, the Sarbanes-Oxley Act and the rules and regulations of the Nasdaq
Capital Market. The Sarbanes-Oxley Act requires, among other things, that we maintain effective disclosure controls and procedures
and internal control over financial reporting. Commencing with our fiscal year ended December 31, 2019, we must perform system
and process evaluation and testing of our internal control over financial reporting to allow management to report on the effectiveness
of our internal control over financial reporting in our Form 20-F filing for that year, as required by Section 404 of the Sarbanes-Oxley
Act.
Our
management has concluded that, as of December 31, 2020, our existing disclosure controls and procedures and internal control over financial
reporting were ineffective, due to two material weaknesses. In accordance with U.S. GAAP and financial reporting requirements set forth
by the SEC, a “material weakness” is a deficiency, or a combination of deficiencies, in internal control over financial reporting,
such that there is a reasonable possibility that a material misstatement of our company’s annual or interim consolidated financial
statements will not be prevented or detected on a timely basis. The material weaknesses relate to (1) lack of sufficient financial reporting and accounting personnel,
especially those with U.S. GAAP knowledge, and (2) lack of formal financial closing policies and effective control over periodic financial
closing procedures which resulted into management’s late adjustments at period ends.
To
remedy the first material weakness, we have begun to, and will continue to (1) hire additional finance and accounting staff with qualifications
and work experiences in U.S. GAAP and SEC reporting requirements to formalize and strengthen the key internal control over financial reporting,
(2) allocate sufficient resources to prepare and review consolidated financial statements and related disclosures in accordance with U.S.
GAAP and SEC reporting requirements, and (3) hire qualified consultant to assess Sarbanes-Oxley Act compliance readiness, to assess where
we can improve our overall internal control over financial reporting function, and to assist us in implementing improvements where necessary.
Once
we cease to be an “emerging growth company” as such term is defined in the JOBS Act, our independent registered public
accounting firm must attest to and report on the effectiveness of our internal control over financial reporting. In the future,
our management may conclude that our internal control over financial reporting remains ineffective. Moreover, even if our management
concludes that our internal control over financial reporting is effective, our independent registered public accounting firm,
after conducting its own independent testing, may issue a report that is qualified if it is not satisfied with our internal controls
or the level at which our controls are documented, designed, operated or reviewed, or if it interprets the relevant requirements
differently from us. In addition, our reporting obligations may place a significant strain on our management, operational and
financial resources and systems for the foreseeable future. We may be unable to timely complete our evaluation testing and any
required remediation.
Our
internal control over financial reporting will not prevent or detect all errors and all fraud. A control system, no matter how
well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will
be met. In light of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance
that misstatements due to error or fraud will not occur or that all control issues and instances of fraud will be detected.
During
the course of documenting and testing our internal control procedures, in order to satisfy the requirements of Section 404, we
may identify other weaknesses and deficiencies in our internal control over financial reporting. In addition, if we fail to maintain
the adequacy of our internal control over financial reporting, as these standards are modified, supplemented or amended from time
to time, we may not be able to conclude on an ongoing basis that we have effective internal control over financial reporting in
accordance with Section 404. Generally, if we fail to achieve and maintain an effective internal control environment, we could
suffer material misstatements in our financial statements and fail to meet our reporting obligations, which would likely cause
investors to lose confidence in our reported financial information. This could in turn limit our access to capital markets, harm
our results of operations, and lead to a decline in the trading price of the ADSs. Additionally, ineffective internal control
over financial reporting could expose us to increased risk of fraud or misuse of corporate assets and subject us to potential
delisting from the stock exchange on which we list, regulatory investigations and civil or criminal sanctions. We may also be
required to restate our financial statements from prior periods.
Our
failure or alleged failure to comply with China’s anti-corruption laws or the U.S. Foreign Corrupt Practices Act could result
in penalties, which could harm our reputation and have an adverse effect on our business, results of operations, and financial
condition.
We
are subject to PRC laws and regulations related to anti-corruption, which prohibit bribery to government agencies, state or government
owned or controlled enterprises or entities, to government officials or officials that work for state or government owned enterprises
or entities, as well as bribery to non-government entities or individuals. We are also subject to the U.S. Foreign Corrupt Practices
Act, or the FCPA, which generally prohibits companies and any individuals or entities acting on their behalf from offering or
making improper payments or providing benefits to foreign officials for the purpose of obtaining or keeping business, along with
various other anti-corruption laws. Our existing policies prohibit any such conduct and we are in the process of implementing
additional policies and procedures, and providing training, to ensure that we, our employees and other third parties comply with
PRC anti-corruption laws and regulations, the FCPA and other anti-corruption laws to which we are subject. There is, however,
no assurance that such policies or procedures will work effectively all the time or protect us against liability under the FCPA
or other anti-corruption laws. There is no assurance that our employees and other third parties would always comply with our policies
and procedures. Further, there is uncertainty in connection with the implementation of PRC anti-corruption laws. We could be held
liable for actions taken by our employees and other third parties with respect to our business or any businesses that we may acquire.
As of the date of this annual report, significantly all our operations are in the PRC. If we are found not to be in compliance
with PRC anti-corruption laws, the FCPA and other applicable anti-corruption laws, we may be subject to criminal, administrative,
and civil penalties and other remedial measures, which could have an adverse impact on our business, results of operations and
financial condition. Any investigation of any potential violations of the FCPA or other anti-corruption laws by U.S. or foreign
authorities, including Chinese authorities, could adversely impact our reputation, cause us to lose customer relationships, subject
us to administrative penalties or sanctions, and lead to other adverse impacts on our business, results of operations, and financial
condition.
If
we lose the services of any of our key executive officers, senior management, or other key employees, or are unable to retain,
recruit and hire sufficiently qualified staff, our ability to effectively manage and execute our operations and meet our strategic
objectives could be harmed.
Our
future success depends on the continued service of our key executive officers, senior management, and other key employees. We
benefit from the leadership of a strong management team with proven vision, rich professional work experience and extensive knowledge
of China’s automotive industry. We also rely on a number of key staff for the development and operation of our business.
In addition, we will need to continue attracting and retaining skilled and experienced staff for our businesses to maintain our
competitiveness.
If
one or more of our key personnel are unable or unwilling to continue in their present positions, we may not be able to replace
them easily or at all and may incur additional expenses to recruit and train new personnel. In addition, if any of our executive
officers, senior management, or key employees joins a competitor or forms a competing company, we may be disadvantaged in the
competition and risk losing our know-how, trade secrets, suppliers and customers. Substantially all of our employees, including
each of our executive officers, senior management, and key employees, have entered into employment agreements with us, which contain
customary non-compete provisions. Although non-compete provisions are generally enforceable under PRC laws, PRC legal practice
regarding the enforceability of such provisions is not as well-developed as in countries such as the United States. Therefore,
if we lose the services of any of our key executive officers, senior management, or other key employees, or are unable to retain,
recruit and hire experienced staff, our ability to effectively manage and execute our operations and meet our strategic objectives
could be harmed.
We
rely upon certain advertising service providers, and any significant change in our relationship with these suppliers could have
a material adverse effect on our business, results of operations, and financial condition if we cannot find suitable replacements.
Historically
we relied upon certain advertising service providers to advertise our service offerings. Our two largest advertising service providers
accounted for approximately 55% and 43% of our total advertising expenses in 2019 and 2020, respectively. Our agreements with
them typically do not contain long-term contractual commitments. We cannot assure you that we will be able to maintain business
relationships with these existing advertising suppliers. In the event that the existing major advertising service providers terminate
or refuse to renew their agreements with us, and we are unable to find new providers with similar or more favorable terms within
a reasonable period of time or at all, our business, results of operations, and financial condition may be materially and adversely
affected.
If
we fail to protect our intellectual property rights, our brand and business performance may suffer.
We
rely on a combination of trademark, patent, copyright and trade secret protection laws in China and other jurisdictions, as well
as through confidentiality agreements and other measures, to protect our intellectual property rights. Our major brand names and
logos are registered trademarks in China. Most of our professionally produced contents available on our websites are protected
by copyright laws. Despite our precautions, third parties may obtain and use our intellectual property without our authorization.
Historically, the Chinese legal system and courts have not protected intellectual property rights to the same extent as the U.S.
legal system and courts, and companies operating in China continue to face an increased risk of intellectual property infringement.
Furthermore, the validity, application, enforceability and scope of protection of intellectual property rights for many internet-related
activities, such as internet commercial methods patents, are uncertain and still evolving in China and abroad, which may make
it more difficult for us to protect our intellectual property. From time to time, other websites may use our articles, photographs
or other content without our proper authorization. Although such use has not in the past caused any material damage to our business,
it is possible that there may be misappropriation on a much larger scale with a material adverse impact to our brand, business,
and results of operations.
Third
parties may claim that we infringe their proprietary intellectual property rights, which could cause us to incur significant legal
expenses and prevent us from promoting our services.
Internet,
technology and media companies are frequently involved in litigation based on allegations of infringement of intellectual property
rights, unfair competition, invasion of privacy, defamation and other violation of other parties’ rights. We have not experienced
any material claims on these issues against us in the past, but as we face increasing competition and as litigation becomes more
common in China in resolving commercial disputes, we face a higher risk of being the subject of intellectual property infringement
claims. We may be subject to legal proceedings and claims from time to time relating to the intellectual property of others in
the ordinary course of our business. We could also be subject to claims based upon the content that is displayed on our websites
or accessible from our websites through links to other websites or information on our websites supplied by third parties. Intellectual
property claims and litigation are expensive and time-consuming to investigate and defend and may divert resources and management
attention from the operation of our websites. Such claims, even if they do not result in liability, may harm our reputation. Any
resulting liability or expenses, or changes required to our websites to reduce the risk of future liability, may have a material
adverse effect on our business, financial condition, and results of operations.
We
may be subject to liability for placing advertisements with inappropriate or misleading content.
PRC
laws and regulations prohibit advertising companies from producing, distributing or publishing any advertisement with content
that violates PRC laws and regulations, impairs the national dignity of China, involves designs of the national flag, the national
emblem or the national anthem, is considered reactionary, obscene, superstitious or absurd, is fraudulent, or disparages similar
products. As we provide advertising services to our industry customers, we are obligated to review supporting documents provided
by advertisers, verify the content of the advertisements and are prohibited from publishing any advertisement inconsistent with
or with the lack of supporting documents. In addition, in case we are advertisers, we are required by PRC laws and regulations
to ensure that the content of our advertisements is true and in full compliance with applicable laws and regulations. While we
have made significant efforts to comply with such verification requirements before publishing, we cannot assure you that all the
content contained in the advertisements is true and accurate as required by the advertising laws and regulations, especially given
the uncertainty in the interpretation of these PRC laws and regulations. If we are found to be in violation of applicable PRC
advertising laws and regulations, we may be subject to penalties, including fines, confiscation of our advertising income, orders
to cease dissemination of the advertisements, orders to publish an announcement correcting the misleading information, and suspension
or termination of our advertising business, any of which may have a material and adverse effect on our business and results of
operations. See “Item 4. Information on the Company—B. Business Overview—Regulation—Regulations Relating
to Advertisements.”
The
performance and reliability of the internet infrastructure and wireless and landline telecommunications networks in China will
affect our operations and growth, including our ability to accommodate prospective customers in the future.
With
our principal executive offices located in China, we conduct central management of consumer data, provide data transmission and
communications, and monitor our overall operations, relying on wireless and landline telecommunications networks in China. The
national networks in China are connected to the internet through international gateways controlled by the PRC government, which
are the only channels through which a domestic user can connect to the internet. These international gateways may not support
the demand necessary for the continued growth in internet traffic by users in China. We cannot assure you that the development
of China’s information infrastructure will be adequate to support our operations and growth. In addition, in the event of
any infrastructure disruption or failure, we would have no access to alternative networks and services on a timely basis, if at
all, which could have a material adverse effect on our business, results of operations, and prospects.
Unintended
leakage of consumer information or privacy breaches may materially and adversely affect our reputation and business performance.
As
we conduct our business, we collect and store a large amount of automobile consumer data gathered from our offline events. We
rely on encryption and authentication technology to provide the security and authentication necessary for secure transmission
of such data. However, our security control may not prevent the improper leakage of consumer data. Anyone may circumvent our security
measures and misappropriate proprietary information or cause interruptions in our operations. A security breach that leads to
leakage of our consumer data could still harm our reputation. Moreover, many jurisdictions have passed laws regulating the storage,
sharing, use, disclosure and protection of personally identifiable or other confidential information and data. The Chinese government
has enacted a series of laws and regulations relating to the protection of privacy and personal information, under which internet
service providers and other network operators are required to clearly indicate the purposes, methods and scope of any information
collection and usage, obtain appropriate user consent and establish user information protection systems with appropriate remedial
measures. See “Item 4. Information on the Company—B. Business Overview—Regulations—Regulations Relating
to Internet Information Security and Privacy Protection.” However, the regulatory framework for privacy protection in China
and other jurisdictions is fast-evolving, and therefore, involves uncertainties and is subject to change in the foreseeable future.
We cannot assure you that our existing privacy and personal information protection measures will be considered sufficient under
the current or future applicable laws and regulations. In addition to laws, regulations and other applicable rules, industry associations
or other private parties may adopt different privacy protection standards. Because the interpretation and application of privacy
and data protection laws and privacy protection standards is still uncertain, it is possible that these laws or privacy standards
may be interpreted and applied in a manner inconsistent with our practices. Our actual or perceived failure to comply with industry
standards, governmental regulation and other legal obligations related to user privacy could harm our business. We may be required
to expend significant capital and other resources to prevent such security breaches or alleviate problems caused by such breaches.
Any of the circumstances may materially and adversely affect our business and results of operations.
Failure
to obtain, renew, or retain licenses, permits or approvals or failure to comply with applicable laws and regulations may affect
our ability to conduct our business.
We
have obtained all material licenses, permits or approvals from the PRC regulatory authorities for our current operations, except
that we may need to obtain certain permits each time before we hold an offline event. See “—Our failure to obtain
necessary permits for our offline events may subject us to penalties and adversely affect our business, results of operations,
and financial condition.” However, the licensing requirements in China are constantly evolving, and we may be subject to
more stringent regulatory requirements due to changes in the political or economic policies in the relevant jurisdictions. We
cannot assure you that we will be able to satisfy such regulatory requirements and as a result we may be unable to retain, obtain
or renew relevant licenses, permits or approvals in the future. If we fail to do so, we may be subject to administrative penalties
or sanctions, which may materially and adversely affect our business, financial condition, and results of operations. For example,
TuanChe Internet has obtained certain value-added telecommunications service license for the operation of internet content service
from the Beijing Administration of Telecommunications which will remain valid until September 2023, Drive New Media has obtained
certain value-added telecommunications service license for the operation of internet content service from the Guangdong Administration
of Telecommunications which will remain valid until June 2024, and TuanChe (Beijing) Automobile Sales & Service Co., Ltd.,
a subsidiary of TuanChe Internet, has obtained certain value-added telecommunications service license for the operation of internet
content service from the Beijing Administration of Telecommunications which will remain valid until January 2026. However, as
we provide mobile applications to mobile device users, it is uncertain if we will be required to obtain a separate operating license
for our mobile applications in addition to the value-added telecommunications service licenses, although we believe that not obtaining
such separate license is in line with the current market practice.
We
may need additional capital, and we may be unable to obtain such capital in a timely manner or on acceptable terms, or at all.
We
may require additional capital from time to time to grow our business, including to better serve our customers, develop new features
or enhance our marketplace, improve our operating and technology infrastructure or conduct acquisition of complementary businesses
and technologies. Accordingly, we may need to sell additional equity or debt securities or obtain a credit facility. Future issuances
of equity or equity-linked securities could significantly dilute our existing shareholders, and any new equity securities we issue
could have rights, preferences and privileges superior to those of holders of our ordinary shares. The incurrence of debt financing
would result in increased debt service obligations and could result in operating and financing covenants that would restrict our
operations or our ability to pay dividends to our shareholders.
Our
ability to obtain additional capital is subject to a variety of uncertainties, including:
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our
market position and competitiveness in the automotive industry;
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our
future profitability, overall financial condition, results of operations and cash flows;
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general
market conditions for capital raising activities in China and globally; and
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economic,
political and other conditions in China and globally.
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We
may be unable to obtain additional capital in a timely manner or on acceptable terms or at all, and our financing may also be
subject to regulatory requirements. If we are unable to obtain adequate financing on terms satisfactory to us when we require
it in the future, our ability to continue to support our business growth could be significantly impaired, and our business and
prospects could be adversely affected.
Failure
to renew or retain any preferential tax treatments that are available in China could adversely affect our results of operations
and financial condition.
The
modified Enterprise Income Tax Law, effective on December 29, 2018 and its implementation rules and regulations generally impose a uniform
income tax rate of 25% on all enterprises, but grant preferential treatments, including a preferential enterprise tax rate of 15%, to
high and new technology enterprises (“HNTEs”) strongly supported by the state. Such preferential tax rate is subject to reapplication
and renewal every three years. During the three-year period, an HNTE must conduct annual qualification self-reviews, and will lose the
15% preferential rate and be subject to the regular 25% rate for any year in which it does not meet relevant criteria. TuanYuan, TuanChe
Internet and Drive New Media have been accredited as HNTEs and are eligible for a preferential enterprise tax rate of 15% for as long
as they meet the criteria of HNTE in each year of the accredited period. We cannot assure you that our affiliated entities will continue
to meet the relevant criteria, and that the tax authorities will continue to approve the preferential tax rate of 15% even if these entities
are accredited as HNTE. Moreover, it is uncertain how the modified Enterprise Income Tax Law and its implementing rules and regulations
will be interpreted or implemented in the future. It is possible that the HNTE status currently enjoyed by TuanYuan, TuanChe Internet
and Drive New Media, and other income tax exemptions for which our affiliated entities qualify, will be challenged by tax authorities
and be repealed. Future implementing rules and regulations might be inconsistent with current interpretations of the modified Enterprise
Income Tax.
Seasonality
may cause fluctuations in our results of operations.
Our
quarterly net revenues and other results of operations have fluctuated in the past and may continue to fluctuate depending upon
a number of factors, many of which are beyond our control. For these reasons, comparing our results of operations on a period-to-period
basis may not be meaningful, and you should not rely on our past results as an indication of our future performance. For example,
consumer purchases typically slow down in the first quarter, and then increase through the next three quarters of each year. Therefore,
the demand for booth spaces in our auto shows is generally the lowest in the first quarter of each year, primarily due to a general
slowdown in business activities and a reduced number of working days during the Chinese New Year holiday period. The timing of
such releases, however, is subject to uncertainties due to various factors such as automakers’ design or manufacturing issues,
their marketing plans, general marketing conditions and government incentives or restrictions. These factors may make our results
of operations difficult to predict and cause our quarterly results of operations to fall short of expectations.
We
may be held liable for injuries to individual participants of our offline events or damages to automobiles displayed in our offline
events, which may adversely affect our reputation and adversely affect our financial condition and results of operations.
We
make every effort to ensure the safety of our participants and the automobiles displayed during our offline events. However, we
cannot guarantee that no physical injury or damages will occur during our events, for which we could be held liable. For example,
under the PRC laws and regulations, the undertaker of a mass activity bears tort liability for damages to a third party arising
from such undertakers’ failure to fulfill its security obligations. If the act of a third party results in damage to others
in a mass activity, the undertaker that failed to fulfill security obligations shall also bear supplementary liability. See “Item
4. Information on the Company—B. Business Overview—Regulation—Regulations Relating to Consumer Rights Protection
and Tort Liabilities.” In addition, we have contractual obligations to compensate the event venue provider from any damages
it suffers arising from the accident occurring on the venue and claims by the participants of the event. Therefore, we might face
negligence claims alleging that we failed to maintain our facilities or to supervise our employees. In addition, if any participants
of our offline events commit acts of violence, we could also face allegations that we failed to provide adequate security or were
otherwise responsible for his or her actions.
We
typically require our event set-up service providers to purchase liability insurance. However, such insurance might not be adequate
to cover our potential liabilities, or may not cover us at all. If we are held liable for the injury or damages, we may be subject
to litigations, and our financial condition and results of operations may be adversely affected. Additionally, our offline events
may be perceived to be unsafe, which may discourage prospective consumers and industry customers from attending. These negative
perceptions might also adversely affect our reputation and results of operations.
We
may be subject to claims under consumer protection laws, product quality laws and tort liabilities law, including health and safety
claims and product liability claims, if people or properties are harmed by automobiles sold during our events or through our virtual
dealership networks.
The
automobiles sold during our events or through our virtual dealership networks are designed and manufactured by third parties,
and we cannot guarantee that none of these automobiles is defectively designed or manufactured. We may be subject to claims under
applicable consumer protection laws, product quality laws and tort liabilities law, including health and safety claims and product
liability claims for damages to third parties arising from the defects of automobiles sold through our virtual dealership networks.
Although we would have legal recourse against the manufacturer or the sealer of such products under PRC law if the liabilities
are attributable to such manufacturer or sealer, attempting to enforce our rights against such manufacturer or dealer may be expensive,
time-consuming and ultimately futile. See “Item 4. Information on the Company—B. Business Overview—Regulation—Regulations
Relating to Consumer Rights Protection and Tort Liabilities.” In addition, we do not currently maintain any third-party
liability insurance or product liability insurance in relation to most of the automobiles sold during our events or through our
virtual dealership networks. As a result, any material product liability claim or litigation could have a material adverse effect
on our business, financial condition and results of operations. Even unsuccessful claims could result in the expenditure of funds
and managerial efforts in defending them and could have a negative impact on our reputation.
Our
lack of insurance could expose us to significant costs and business disruption.
The
insurance industry in China is still at an early stage of development. Insurance companies in China offer limited business insurance
products and are, to our knowledge, not well-developed in the field of business liability insurance. We do not have any business
liability or disruption insurance to cover our operations in China, which, based on public information available to us relating
to China’s automotive industry, is consistent with customary industry practice in China. We have determined that the costs
of insuring for these risks and the difficulties associated with acquiring such insurance on commercially reasonable terms make
it impractical for us to have such insurance. In addition, we do not maintain any insurance policies covering risks including
loss and theft of and damages to our servers or other technology infrastructure. Any uninsured occurrence of business disruption,
litigation or natural disaster, or significant damages to our uninsured equipment or technology infrastructure could result in
substantial costs and diversion of resources for us and could adversely affect our financial condition and results of operations.
Any
catastrophe, including outbreaks of health pandemics and other extraordinary events, could have a negative impact on our business
operations.
We
are vulnerable to natural disasters and other calamities. Fire, floods, typhoons, earthquakes, power loss, telecommunications
failures, wars, riots, terrorist attacks or similar events may give rise to server interruptions, breakdowns, system failures
or internet failures, which could cause the loss or corruption of data or malfunctions of software or hardware as well as adversely
affect our ability to provide our services.
Our
business could also be adversely affected by the effects of Ebola virus diseases, H1N1 flu, H7N9 flu, avian flu, Severe Acute
Respiratory Syndrome (SARS), COVID-19 or other epidemics. Our business operation could be disrupted if any of our employees is
suspected of having any of the aforementioned epidemics or another contagious disease or condition, since it could require our
employees to be quarantined and/or our offices to be disinfected. In addition, our business, results of operations and financial
condition could be adversely affected to the extent that any of these epidemics harms the Chinese economy in general.
Risks
Related to Our Corporate Structure
If
the PRC government finds that the agreements that establish the structure for operating some of our operations in China do not
comply with PRC regulations relating to 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 the value-added telecommunication services industry in China is extensively regulated and subject to numerous restrictions.
For example, foreign investors are not allowed to own more than 50% of the equity interests in a value-added telecommunication
service provider with certain exceptions relating to e-commerce business, domestic multi-party communications services business,
store-and-forward business and call center business, 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 special management measures for the
entry of foreign investment (as amended), or the Negative List, and other applicable laws and regulations.
We
are a Cayman Islands company and our wholly-owned PRC subsidiaries are currently considered foreign-invested enterprises. Accordingly,
our PRC subsidiaries are not eligible to provide value-added telecommunication services in China. Due to these restrictions, we carry
out our value-added telecommunication business in China through TuanChe Internet, Drive New Media, Internet Drive Technology and
their subsidiaries. We, through TuanYuan, Sangu Maolu and Chema, our wholly owned subsidiary in China, or WFOEs, entered into a series
of contractual arrangements with our VIEs and their respective shareholders, in order to (1) exercise effective control over our consolidated
affiliated entities, (2) receive substantially all of the economic benefits of our consolidated affiliated entities, and (3) have an exclusive
option to purchase all or part of the equity interests in our VIEs when and to the extent permitted by PRC law. We have been and expect
to continue to be dependent on our consolidated affiliated entities to operate our value-added telecommunication business. As a result
of these contractual arrangements, we have control over and are the primary beneficiary of our VIEs and hence consolidate the financial
results of our consolidated affiliated entities under U.S. GAAP. See “Item 4. Information on the Company—C. Organizational
Structure” for details.
In
the opinion of our PRC counsel, Shihui Partners, the ownership structures of our WFOEs and our VIEs, currently do not result in
any violation of the applicable PRC laws or regulations currently in effect; and the contractual arrangements among our WFOEs,
our VIEs and their respective shareholders, are governed by PRC laws or regulations, and are currently valid, binding and enforceable
in accordance with the applicable PRC laws or regulations currently in effect, and do not result in any violation of the applicable
PRC laws or regulations currently in effect, except that the equity pledge under that certain equity pledge agreement would not
be deemed validly created until they are registered with the competent governmental authorities. However, Shihui Partners has
also advised us that there are substantial uncertainties regarding the interpretation and application of current or future PRC
laws and regulations, and there can be no assurance that the PRC government will ultimately take a view that is consistent with
the opinion of our PRC counsel.
In
particular, in March 2019, the National People’s Congress, or the NPC, passed the PRC Foreign Investment Law, which became
effective as of January 1, 2020. For the effect of the PRC Foreign Investment Law on us, see “—Risks Related to Our
Corporate Structure—Uncertainties exist with respect to the interpretation and implementation of the PRC Foreign Investment
Law and how it may impact the viability of our current corporate structure, corporate governance and business operations.”
If
our ownership structure and contractual arrangements are found to violate any PRC laws or regulations, or if we are found to be
required but failed to obtain any of the permits or approvals for our value-added telecommunication business, the relevant PRC
regulatory authorities, including the Ministry of Industry and Information Technology, or MIIT, would have broad discretion in
imposing fines or administrative penalties upon us for such violations, including:
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revoking
the business and operating licenses of our company;
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discontinuing
or restricting any related-party transactions between our group and our consolidated
affiliated entities;
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imposing
fines and penalties, confiscating the income from our company, or imposing additional
requirements for our operations which we may not be able to comply with;
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requiring
us to restructure our ownership structure or operations, including terminating the contractual
arrangements and deregistering the equity pledges of our VIEs, which in turn would affect
our ability to consolidate, derive economic interests from, or exercise effective control
over our consolidated affiliated entities;
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restricting
or prohibiting our use of the proceeds of this offering to finance our business and operations
in China, particularly the expansion of our business through strategic acquisitions;
or
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restricting
the use of financing sources by us or our consolidated affiliated entities or otherwise
restricting our or their ability to conduct business.
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As
of the date of this annual report, similar ownership structure and contractual arrangements have been used by many China-based
companies listed overseas, including a number of value-added telecommunication companies listed in the United States. To our knowledge,
none of the fines or punishments listed above has been imposed on any of these public companies. However, we cannot assure you
that such fines or punishments will not be imposed on us or any other companies in the future. If any of the above fines or punishments
is imposed on us, our business, financial condition and results of operations could be materially and adversely affected. If any
of these penalties results in our inability to direct the activities of our consolidated affiliated entities that most significantly
impact their economic performance, and/or our failure to receive the economic benefits from our consolidated affiliated entities,
we may not be able to consolidate them in our financial statements in accordance with U.S. GAAP. However, we do not believe that
such actions would result in the liquidation or dissolution of our company, our WFOEs or VIEs or their subsidiaries.
Uncertainties
exist with respect to the interpretation and implementation of the PRC Foreign Investment Law and how it may impact the viability
of our current corporate structure, corporate governance and business operations.
On
March 15, 2019, the NPC approved 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. In December 2019, the State Council promulgated the Implementation Regulation on the Foreign Investment
Law to further clarify relevant provisions of the Foreign Investment Law, which came into effect on January 1, 2020. The Foreign
Investment Law and its implementation regulation embody 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 the Foreign Investment Law and its implementation regulation are relatively new, uncertainties still exist in relation to
their 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 arrangements would not be deemed as a type of indirect foreign investment activities under the definition
in the future. In addition, the definition has 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. However, the Implementation
Regulations on the Foreign Investment Law still remains silent on whether contractual arrangements should 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. In any of these cases, it will be
uncertain whether our contractual arrangements will be deemed to be in violation of the market access requirements for foreign
investment under the PRC laws and regulations. Furthermore, if future laws, administrative regulations or provisions prescribed
by the State Council mandate further actions to be taken by companies with respect to existing contractual arrangements, we may
face substantial uncertainties as to whether we can complete such actions in a timely manner, or at all. In addition, the Foreign
Investment Law provides that foreign-invested enterprises established before the Foreign Investment Law came into effect may maintain
their structure and corporate governance within a five-year transition period, which means that we may be required to adjust the
structure and corporate governance of certain of our PRC subsidiaries when such transition period ends. Failure to take timely
and appropriate measures to cope with any of these or similar regulatory compliance challenges could materially and adversely
affect our current corporate structure, corporate governance and business operations.
We
may lose the ability to use and enjoy assets held by our VIEs and their subsidiaries that are important to our business if our
VIEs and their subsidiaries declare bankruptcy or become subject to a dissolution or liquidation proceeding.
Our
VIEs and their subsidiaries hold substantially all of our assets in China. Under our contractual arrangements, the shareholders of our
VIEs may not voluntarily liquidate our VIEs or approve them to sell, transfer, mortgage or dispose of their assets or legal or beneficial
interests exceeding certain threshold in the business in any manner without our prior consent. However, in the event that the shareholders
breach this obligation and voluntarily liquidate our VIEs, or our VIEs declare bankruptcy, or all or part of their assets become subject
to liens or rights of third-party creditors, we may be unable to continue some or all of our operations, which could materially and adversely
affect our business, financial condition and results of operations. Furthermore, if our VIEs or their subsidiaries undergo a voluntary
or involuntary liquidation proceeding, their shareholders or unrelated third-party creditors may claim rights to some or all of its assets,
hindering our ability to operate our business, which could materially and adversely affect our business, financial condition and results
of operations.
If
the custodians or authorized users of our controlling non-tangible assets, including chops and seals, fail to fulfill their responsibilities,
or misappropriate or misuse these assets, our business and operations may be materially and adversely affected.
Under
PRC law, legal documents for corporate transactions, including agreements and contracts that our business relies on, are executed
using the chop or seal of the signing entity or with the signature of a legal representative whose designation is registered and
filed with the relevant local branch of the SAMR. We generally execute legal documents by affixing chops or seals, rather than
having the designated legal representatives sign the documents.
We
have three major types of chops, corporate chops, contract chops and finance chops. We use corporate chops generally for documents to
be submitted to government agencies, such as applications for changing business scope, directors or company name, and for legal letters.
We use contract chops for executing leases and commercial contracts. We use finance chops generally for making and collecting payments,
including issuing invoices. Use of corporate chops and contract chops must be approved by our legal department and administrative department,
and use of finance chops must be approved by our finance department. The chops of our subsidiary and VIEs are generally held by the relevant
entities so that documents can be executed locally. Although we usually utilize chops to execute contracts, the registered legal representatives
of our subsidiary and VIEs and their subsidiaries have the apparent authority to enter into contracts on behalf of such entities without
chops, unless such contracts set forth otherwise.
In
order to maintain the physical security of our chops, we generally have them stored in secured locations accessible only to the
designated key employees of our legal, administrative or finance departments. Our designated legal representatives generally do
not have access to the chops. Although we have approval procedures in place and monitor our key employees, including the designated
legal representatives of our subsidiaries and VIEs and their subsidiaries, the procedures may not be sufficient to prevent all
instances of abuse or negligence. There is a risk that our key employees or designated legal representatives could abuse their
authority, for example, by binding our subsidiaries and VIEs and their subsidiaries with contracts against our interests, as we
would be obligated to honor these contracts if the other contracting party acts in good faith in reliance on the apparent authority
of our chops or signatures of our legal representatives. If any designated legal representative obtains control of the chop in
an effort to obtain control over the relevant entity, we would need to have a shareholder or board resolution to designate a new
legal representative and to take legal action to seek the return of the chop, apply for a new chop with the relevant authorities,
or otherwise seek legal remedies for the legal representative’s misconduct. If any of the designated legal representatives
obtains and misuses or misappropriates our chops and seals or other controlling intangible assets for whatever reason, we could
experience disruption to our normal business operations. We may have to take corporate or legal action, which could involve significant
time and resources to resolve while distracting management from our operations, and our business and operations may be materially
and adversely affected.
We
rely on contractual arrangements with our VIEs and their respective shareholders for a large portion of our business operations
which may not be as effective as direct ownership in providing operational control.
We
have relied and expect to continue to rely on the contractual arrangements with our VIEs and their respective shareholders to
operate our value-added telecommunication business. For a description of these contractual arrangements, see “Item 4. Information
on the Company—C. Organizational Structure.” The revenue contribution of our consolidated affiliated entities accounted
for substantially all of our net revenues in 2019 and 2020, and a portion of our net revenues in 2019. However, these contractual
arrangements may not be as effective as direct equity ownership in providing us with control over our consolidated affiliated
entities. Any failure by our consolidated affiliated entities, including our VIEs and their respective shareholders, to perform
their obligations under the contractual arrangements would have a material adverse effect on our financial position and results
of operations. For example, should any dispute relating to the contractual arrangements arises, we will have to enforce our rights
under the contracts through the operations of PRC law and arbitration, litigation and other legal proceedings and therefore will
be subject to uncertainties in the PRC legal system. Therefore, our contractual arrangements with our VIEs and their respective
shareholders may not be as effective in ensuring our control over the relevant portion of our business operations as direct ownership
would be.
Any
failure by our VIEs and their respective shareholders to perform their obligations under our contractual arrangements with them
would have a material adverse effect on our business.
If
our VIEs and their respective shareholders fail to perform their respective obligations under the contractual arrangements, we
may have to incur substantial costs and expend additional resources to enforce such arrangements. We may also have to rely on
legal remedies under PRC law, including seeking specific performance or injunctive relief, and claiming damages, which we cannot
assure will be effective under PRC law. For example, if the shareholders of our VIEs refuse to transfer their equity interest
in our VIEs to us or our designee if we exercise the purchase option pursuant to the contractual arrangements, or if they otherwise
act in bad faith toward us, then we may have to take legal actions to compel them to perform their contractual obligations. In
addition, if any third parties claim any interest in such shareholders’ equity interests in our VIEs, our ability to exercise
shareholders’ rights or foreclose the share pledge according to the contractual arrangements may be impaired.
All
of the contractual arrangements are governed by and interpreted in accordance with PRC law, and disputes arising from the contractual
arrangements will be resolved through arbitration in China. The legal system in the PRC is not as developed as in some other jurisdictions,
such as the United States. As a result, uncertainties in the PRC legal system could limit our ability to enforce these contractual
arrangements. See “—Risks Related to Doing Business in China—Uncertainties with respect to the PRC legal system
could have a material adverse effect on us.” Meanwhile, there are very few precedents and little formal guidance as to how
contractual arrangements in the context of a variable interest entity should be interpreted or enforced under PRC law. There remain
significant uncertainties regarding the ultimate outcome of such arbitration should legal action become necessary. In addition,
under PRC law, rulings by arbitrators are final, parties cannot appeal the arbitration results in courts, and if the losing parties
fail to carry out the arbitration awards within a prescribed time limit, the prevailing parties may only enforce the arbitration
awards in PRC courts through arbitration award recognition proceedings, which would require additional expenses and delay. In
the event we are unable to enforce the contractual arrangements, or if we suffer significant delays or other obstacles in the
process of enforcing these contractual arrangements, we may not be able to exert effective control over our consolidated affiliated
entities, and our ability to conduct our business may be negatively affected.
The
shareholders of our VIEs may have actual or potential conflicts of interest with us, which may materially and adversely affect
our business, results of operations and financial condition.
The
shareholders of our VIEs may have actual or potential conflicts of interest with us. These shareholders may refuse to sign or
breach, or cause our VIEs to breach, or refuse to renew, the existing contractual arrangements we have with them and our VIEs,
which would have a material adverse effect on our ability to effectively control our consolidated affiliated entities and receive
economic benefits from them. For example, the shareholders may be able to cause our agreements with our VIEs to be performed in
a manner adverse to us by, among other things, failing to remit payments due under the contractual arrangements to us on a timely
basis. We cannot assure you that when conflicts of interest arise any or all of these shareholders will act in the best interests
of our company or such conflicts will be resolved in our favor. Currently, we do not have any arrangements to address potential
conflicts of interest between these shareholders and our company, except that we could exercise our purchase option under the
exclusive option agreement with these shareholders to request them to transfer all of their equity interests in our variable interest
entities to a PRC entity or individual designated by us, to the extent permitted by PRC laws. If we cannot resolve any conflict
of interest or dispute between us and these shareholders, we would have to rely on legal proceedings, which could result in disruption
of our business and subject us to substantial uncertainty as to the outcome of any such legal proceedings.
Our
contractual arrangements may be subject to scrutiny by the PRC tax authorities, and they may determine that we or our
VIEs owe additional taxes, which could negatively affect our business, financial condition, and results of operations.
Under
applicable PRC laws and regulations, arrangements and transactions among related parties may be subject to audit or challenge by the
PRC tax authorities. The tax authorities may impose reasonable adjustments on taxation if they have identified any related party
transactions that are inconsistent with arm’s length principles. We could face material and adverse tax consequences if the
PRC tax authorities determine that our contractual arrangements were not entered into on an arm’s-length basis in such a way
as to result in an impermissible reduction in taxes under applicable PRC laws, rules and regulations, and adjust the income of our
VIEs in the form of a transfer pricing adjustment. A transfer pricing adjustment could, among other things, result in a reduction of
expense deductions recorded by our VIEs for PRC tax purposes, which could in turn increase its tax liabilities without reducing our
PRC subsidiary’s tax expenses. In addition, if our WFOEs request the shareholders of our VIEs to transfer their equity
interests at nominal or no value pursuant to the contractual arrangements, such transfer could be viewed as a gift and subject our
WFOEs to PRC income tax. Furthermore, the PRC tax authorities may impose late payment fees and other penalties on our VIEs for the
adjusted but unpaid taxes according to the applicable regulations. Our financial position could be materially and adversely affected
if our VIEs’ tax liabilities increase or if they are required to pay late payment fees and other penalties.
We
may lose the ability to use, or otherwise benefit from, the licenses, approvals and assets held by our consolidated affiliated
entities, which could severely disrupt our business, render us unable to conduct some or all of our business operations and constrain
our growth.
We
currently conduct our operations in China through contractual arrangements with our VIEs and their respective shareholders. As
part of these arrangements, certain assets, licenses and permits that are material to our business operations are held by our
VIEs and their subsidiaries, such as value-added telecommunications business license. The contractual arrangements contain terms
that specifically obligate shareholders of our VIEs to ensure the valid existence of our VIEs and restrict the disposal of material
assets of our VIEs. However, in the event shareholders of our VIEs breach the terms of the contractual arrangements and voluntarily
liquidate our VIEs, or any of our VIEs declares bankruptcy and all or part of its assets become subject to liens or rights of
third-party creditors, or are otherwise disposed of without our consent, we may be unable to conduct some or all of our business
operations or otherwise benefit from the assets held by our consolidated affiliated entities, which could have a material adverse
effect on our business, financial condition and results of operations. Furthermore, if our VIEs undergo a voluntary or involuntary
liquidation proceeding, their shareholders or unrelated third-party creditors may claim rights to some or all of the assets of
our VIEs, thereby hindering our ability to operate our business as well as constrain our growth.
Certain
existing shareholders have substantial influence over our company and their interests may not be aligned with the interests of
our other shareholders.
As
of April 30, 2021, our directors, officers and principal shareholders collectively own an aggregate of 90.9% of the total voting power
of our outstanding ordinary shares. As a result, they have substantial influence over our business, including significant corporate
actions such as mergers, consolidations, election of directors and other significant corporate actions.
They
may take actions that are not in the best interest of us or our other shareholders. This concentration of ownership may discourage,
delay or prevent a change in control of our company, which could deprive our shareholders of an opportunity to receive a premium
for their shares as part of a sale of our company and may reduce the price of the ADSs. These actions may be taken even if they
are opposed by our other shareholders. In addition, the significant concentration of share ownership may adversely affect the
trading price of the ADSs due to investors' perception that conflicts of interest may exist or arise.
Risks
Related to Doing Business in China
PRC
economic, political and social conditions, as well as changes in any government policies, laws and regulations, could adversely
affect the overall economy in China or the automotive market, which could harm our business.
Substantially
all of our operations are conducted in China, and substantially all of our net revenues are derived from China. Accordingly, our
business, prospects, financial condition and results of operations are subject, to a significant extent, to economic, political
and legal developments in China.
The
PRC economy differs from the economies of most developed countries in many respects. Although the PRC economy has been transitioning
from a planned economy to a more market-oriented economy since the late 1970s, the PRC government continues to play a significant
role in regulating the industry. The PRC government continues to exercise significant control over China’s economic growth
through allocating resources, controlling the incurrence and payment of foreign currency-denominated obligations, setting monetary
policy and providing preferential treatment to particular industries or companies. Uncertainties or changes in any of these policies,
laws and regulations, including but without limitations, those affecting the automotive industry in China, could adversely affect
the economy in China or our business. For example, the China Banking and Insurance Regulatory Commission, or the CBIRC, promulgated
the Interim Measures for Administration of Internet Loans Issued by Commercial Banks, or the Commercial Banks Online Lending Measures,
in July 2020, and the Circular on Further Regulating the Internet Loan Business of Commercial Banks, or the Circular 24, in February
2021. The Commercial Banks Online Lending Measures, as well as Circular 24, set several rules for commercial banks to collaborate
with external institutions on online lending, which may affect our cooperation with Commercial Banks in China.
While
the PRC economy has experienced significant growth in the past two to three decades, growth has been uneven, both geographically
and among various sectors of the economy. Demand for our services depends, in large part, on economic conditions in China. Any
significant slowdown in China’s economic growth may reduce our net revenues. In addition, any sudden changes to China’s
political system or the occurrence of social unrest could also have a material adverse effect on our business, prospects, financial
condition and results of operations.
Uncertainties
with respect to the PRC legal system could have a material adverse effect on us.
The
PRC legal system is a civil law system based on written statutes. Unlike the common law system, prior court decisions in a civil
law system may be cited as reference but have limited precedential value. Since 1979, newly introduced PRC laws and regulations
have significantly enhanced the protections of interest relating to foreign investments in China. However, since these laws and
regulations are relatively new and the PRC legal system continues to evolve rapidly, the interpretations of such laws and regulations
may not always be consistent, and enforcement of these laws and regulations involves significant uncertainties, any of which could
limit the available legal protections.
In
addition, the PRC administrative and judicial authorities have significant discretion in interpreting, implementing or enforcing
statutory rules and contractual terms, and it may be more difficult to predict the outcome of administrative and judicial proceedings
and the level of legal protection we may enjoy in the PRC than under some more developed legal systems. Furthermore, the PRC legal
system is based in part on government policies and internal rules (some of which are not published in a timely manner or at all)
that may have retroactive effect. These uncertainties may affect our decisions on the policies and actions to be taken to comply
with PRC laws and regulations, and may affect our ability to enforce our contractual or tort rights. In addition, the regulatory
uncertainties may be exploited through unmerited legal actions or threats in an attempt to extract payments or benefits from us.
Such uncertainties may therefore increase our operating expenses and costs, and materially and adversely affect our business and
results of operations.
If
we are classified as a PRC resident enterprise for PRC enterprise income tax purposes, such classification could result in unfavorable
tax consequences to us and our non-PRC shareholders and the ADS holders.
The
PRC enterprise income tax law and its implementing rules provide that enterprises established outside of China whose “de
facto management bodies” are located in China are considered “resident enterprises” under PRC tax laws. The
implementing rules define the term “de facto management bodies” as a management body which substantially manages,
or has control over the business, personnel, finance and assets of an enterprise. In April 2009, the State Administration of Taxation,
or the SAT, issued the Notice Regarding the Determination of Chinese-Controlled Overseas Incorporated Enterprises as PRC Tax Resident
Enterprises on the Basis of De Facto Management Bodies, or SAT Circular 82, which provides that a foreign enterprise controlled
by a PRC company or a group of PRC companies will be classified as a “resident enterprise” with its “de facto
management body” located within China if all of the following requirements are satisfied: (1) the senior management and
core management departments in charge of its daily operations function are mainly in China; (2) its financial and human resources
decisions are subject to determination or approval by persons or bodies in China; (3) its major assets, accounting books, company
seals, and minutes and files of its board and shareholders’ meetings are located or kept in China; and (4) at least half
of the enterprise’s directors with voting right or senior management reside in China. The SAT issued a bulletin in August
2011 to provide more guidance on the implementation of SAT Circular 82. The bulletin clarifies certain matters relating to resident
status determination, post-determination administration and competent tax authorities. Although both the circular and the bulletin
only apply to offshore enterprises controlled by PRC enterprises and not those by PRC individuals, the determination criteria
set forth in the circular and administration clarification made in the bulletin may reflect the general position of the SAT on
how the “de facto management body” test should be applied in determining the tax resident status of offshore enterprises
and the administration measures should be implemented, regardless of whether they are controlled by PRC enterprises or PRC individuals.
In
addition, the SAT issued a bulletin in January 2014 to provide more guidance on the implementation of SAT Circular 82. This bulletin
further provides that, among other things, an entity that is classified as a “resident enterprise” in accordance with
the circular shall file the application for classifying its status of residential enterprise with the local tax authorities where
its main domestic investors are registered. From the year in which the entity is determined as a “resident enterprise,”
any dividend, profit and other equity investment gain shall be taxed in accordance with the enterprise income tax law and its
implementing rules.
As
the tax resident status of an enterprise is subject to the determination by the PRC tax authorities, if we are deemed as a PRC
“resident enterprise,” we will be subject to PRC enterprise income tax on our worldwide income at a uniform tax rate
of 25.0%, although dividends distributed to us from our existing PRC subsidiaries and any other PRC subsidiaries which we may
establish from time to time could be exempt from the PRC dividend withholding tax due to our PRC “resident recipient”
status. This could have a material adverse effect on our overall effective tax rate, our income tax expenses and our net income.
Furthermore, dividends, if any, paid to our shareholders and ADS holders may be decreased as a result of the decrease in distributable
profits. In addition, if we were to be considered a PRC “resident enterprise,” dividends we pay with respect to the
ADS or ordinary shares and the gains realized from the transfer of the ADS or ordinary shares may be considered income derived
from sources within China and be subject to PRC withholding tax, which could have a material adverse effect on the value of your
investment in us and the price of the ADS.
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 offering to make loans to or make additional capital
contributions to our PRC subsidiaries and consolidated affiliated entities, which could materially and adversely affect our liquidity
and our ability to fund and expand our business.
As
an offshore holding company of our PRC subsidiaries, we may make loans to our PRC subsidiaries and our consolidated affiliated
entities, or we may make additional capital contributions to our PRC subsidiaries. Such loans to our PRC subsidiaries or our consolidated
affiliated entities in China and capital contributions are subject to PRC regulations and approvals. For example, loans by us
to our PRC subsidiaries and consolidated affiliated entities cannot exceed statutory limits and must be filed with the State Administration
of Foreign Exchange, or SAFE, via SAFE’s official online system. Besides SAFE filing, such loans may also need to be filed
with the NDRC or its local branches. Capital contributions to our PRC subsidiaries must be approved by or filed with the MOFCOM
or its local counterpart. In addition, the PRC government also restricts the convertibility of foreign currencies into Renminbi
and use of the proceeds. In March 2015, SAFE promulgated SAFE Circular 19, which took effect and replaced certain previous SAFE
regulations from June 2015. SAFE further promulgated the Notice of the State Administration of Foreign Exchange on Reforming and
Standardizing the Administrative Provisions on Capital Account Foreign Exchange Settlement, or SAFE Circular 16, effective in
June 2016, which, among other things, amend certain provisions of SAFE Circular 19. According to SAFE Circular 19 and SAFE Circular
16, the flow and use of the Renminbi capital converted from foreign currency denominated registered capital of a foreign-invested
company is regulated such that Renminbi capital may not be used for business beyond its business scope or to provide loans to
persons other than affiliates unless otherwise permitted under its business scope. In October 2019, the SAFE promulgated the Circular
Regarding Further Promotion of the Facilitation of Cross-Border Trade and Investment, or SAFE Circular 28, pursuant to which all
foreign-invested enterprises can make equity investments in the PRC with their capital funds in accordance with the law. As SAFE
Circular 28 is new and the relevant government authorities have broad discretion in interpreting the regulation, it is unclear
whether SAFE will permit such capital funds to be used for equity investments in the PRC in actual practice.
Violations
of the applicable circulars and rules may result in severe penalties, including substantial fines as set forth in the Foreign
Exchange Administration Regulations. If our consolidated affiliated entities require financial support from us or our wholly owned
subsidiaries in the future and we find it necessary to use foreign currency-denominated capital to provide such financial support,
our ability to fund our consolidated affiliated entities’ operations will be subject to statutory limits and restrictions,
including those described above.
The
applicable foreign exchange circulars and rules may significantly limit our ability to convert, transfer and use the net proceeds
from our initial public offering or any offering of additional equity securities in China, which may adversely affect our business,
financial condition and results of operations. As the foreign exchange related regulatory regime and practice are complex and
still evolving and involve many uncertainties, we cannot assure you that we have complied or will be able to comply with all applicable
foreign exchange circulars and rules, or that we will be able to complete the necessary government registrations or filings on
a timely basis, if at all, with respect to future loans by us to our PRC subsidiaries or with respect to future capital contributions
by us to our PRC subsidiaries. If we fail to complete such registrations or filings, our ability to contribute additional capital
to fund our PRC operations may be negatively affected, which could adversely and materially affect our liquidity and our ability
to fund and expand our business.
There
are significant uncertainties under the PRC enterprise income tax law relating to the withholding tax liabilities of our PRC subsidiaries,
and dividends payable by our PRC subsidiaries to our offshore subsidiaries may not qualify to enjoy certain treaty benefits.
Under
the PRC enterprise income tax and its implementation rules, the profits of a foreign-invested enterprise generated through operations,
which are distributed to its immediate holding company outside China, will be subject to a withholding tax rate of 10.0%. Pursuant
to a special arrangement between Hong Kong and China, such rate may be reduced to 5.0% if a Hong Kong resident enterprise owns
at least 25.0% of the equity interest in the PRC company and satisfies other conditions as provided under the special tax arrangement.
Our current PRC subsidiaries are wholly owned by our Hong Kong subsidiary.
Moreover,
under the Notice of the State Administration of Taxation on Issues regarding the Administration of the Dividend Provision in Tax
Treaties promulgated in February 2009, the taxpayer needs to satisfy certain conditions to enjoy the benefits under a tax treaty.
These conditions include: (1) the taxpayer should be a company as provided in the tax treaty, (2) the taxpayer must directly own
the required percentage of equity interests and voting rights in the PRC subsidiaries, and (3) the corporate shareholder to receive
dividends from the PRC subsidiaries must have continuously met the direct ownership thresholds during the 12 consecutive months
preceding the receipt of the dividends. Further, the SAT promulgated the Notice on Issues Related to the “Beneficial Owner”
in Tax Treaties in February 2018, which requires the “beneficial owner” to have ownership and the right to dispose
of the income or the rights and properties giving rise to the income and generally engage in substantive business activities and
sets forth certain detailed factors in determining the “beneficial owner” status.
Entitlement
to a lower tax rate on dividends according to tax treaties or arrangements between the PRC central government and governments
of other countries or regions is subject to inspection or approval of the relevant tax authorities. As a result, we cannot assure
you that we will be entitled to any preferential withholding tax rate under tax treaties for dividends received from our PRC subsidiaries.
We
face uncertainties with respect to indirect transfers of the equity interests in PRC resident enterprises by their non-PRC holding
companies.
In
February 2015, the SAT issued the Public Notice Regarding Certain Corporate Income Tax Matters on Indirect Transfer of Properties
by Non-Tax Resident Enterprises, or SAT Bulletin 7. SAT Bulletin 7 extends its tax jurisdiction to transactions involving the
transfer of taxable assets through offshore transfer of a foreign intermediate holding company. In addition, SAT Bulletin 7 has
introduced safe harbors the purchase and sale of equity through a public securities market. SAT Bulletin 7 also brings challenges
to both foreign transferor and transferee (or other person who is obligated to pay for the transfer) of taxable assets.
In
October 2017, the SAT issued the Announcement of the State Administration of Taxation on Issues Concerning the Withholding of
Non-resident Enterprise Income Tax at Source, or SAT Bulletin 37, which came into effect in December 2017. The SAT Bulletin 37
further clarifies the practice and procedure of the withholding of non-resident enterprise income tax.
Where
a non-resident enterprise transfers taxable assets indirectly by disposing of the equity interests of an overseas holding company,
which is an Indirect Transfer, the non-resident enterprise as either transferor or transferee, or the PRC entity that directly
owns the taxable assets, may report such Indirect Transfer to the relevant tax authority. 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 transferee or other person who is obligated to pay for the transfer
is obligated to withhold the applicable taxes, currently at a rate of 10% for the transfer of equity interests in a PRC resident
enterprise. Both the transferor and the transferee may be subject to penalties under PRC tax laws if the transferee fails to withhold
the taxes and the transferor fails to pay the taxes.
We
face uncertainties as to the reporting and other implications of certain past and future transactions where PRC taxable assets
are involved, such as offshore restructuring, sale of the shares in our offshore subsidiaries and investments. Our company may
be subject to filing obligations or taxed if our company is transferor in such transactions, and may be subject to withholding
obligations if our company is transferee in such transactions, under SAT Bulletin 7 and/or SAT Bulletin 37. For transfer of shares
in our company by investors who are non-PRC resident enterprises, our PRC subsidiaries may be requested to assist in the filing
under SAT Bulletin 7 and/or SAT Bulletin 37. As a result, we may be required to expend valuable resources to comply with SAT Bulletin
7 and/or SAT Bulletin 37 or to request the relevant transferors from whom we purchase taxable assets to comply with these circulars,
or to establish that our company should not be taxed under these circulars, which may have a material adverse effect on our financial
condition and results of operations.
Restrictions
on currency exchange may limit our ability to receive and use our net revenues effectively.
Substantially
all of our net revenues is denominated in Renminbi. As a result, restrictions on currency exchange may limit our ability to use net revenues
generated in Renminbi to fund any business activities we may have outside China in the future or to make dividend payments to our shareholders
and ADS holders in U.S. dollars. Under current PRC laws and regulations, Renminbi is freely convertible for current account items, such
as trade and service-related foreign exchange transactions and dividend distributions. However, Renminbi is not freely convertible for
direct investment or loans or investments in securities outside China, unless such use is approved by SAFE. For example, foreign exchange
transactions under our subsidiary’s capital account, including principal payments in respect of foreign currency-denominated obligations,
remain subject to significant foreign exchange controls and the approval requirement of SAFE. These limitations could affect our ability
to obtain foreign exchange for capital expenditures.
Our
PRC subsidiaries are permitted to declare dividends to our offshore subsidiary holding their equity interest, convert the dividends
into a foreign currency and remit to its shareholder outside China. In addition, in the event that our PRC subsidiaries liquidate,
proceeds from the liquidation may be converted into foreign currency and distributed outside China to our overseas subsidiary
holding its equity interest.
Other
than the above distributions by and through our PRC subsidiaries which are permitted to be made without the necessity to obtain
further approvals, any conversion of the Renminbi-denominated net revenues generated by our consolidated affiliated entities for
direct investment, loan or investment in securities outside China will be subject to the limitations discussed above. To the extent
we need to convert and use any Renminbi-denominated net revenues generated by our consolidated affiliated entities not paid to
our PRC subsidiaries and net revenues generated by our PRC subsidiaries not declared and paid as dividends, the limitations discussed
above will restrict the convertibility of, and our ability to directly receive and use such net revenues. As a result, our business
and financial condition may be adversely affected. In addition, we cannot assure you that the PRC regulatory authorities will
not impose more stringent restrictions on the convertibility of Renminbi in the future, especially with respect to foreign exchange
transactions.
Our
subsidiaries and consolidated affiliated entities in China are subject to restrictions on making dividends and other payments
to us.
We
are a holding company and rely principally on dividends paid by our subsidiaries in China for our cash needs, including paying
dividends and other cash distributions to our shareholders to the extent we choose to do so, servicing any debt we may incur and
paying our operating expenses. The income for our PRC subsidiaries, especially our WFOEs, in turn depends on the service fees
paid by our consolidated affiliated entities. Current PRC regulations permit our subsidiaries in China to pay dividends to us
only out of their accumulated profits, if any, determined in accordance with Chinese accounting standards and regulations. Under
the applicable requirements of PRC law, our PRC subsidiaries may only distribute dividends after they have made allowances to
fund certain statutory reserves. These reserves are not distributable as cash dividends. Furthermore, if our subsidiaries or our
consolidated affiliated entities in China incur debt on their own behalf in the future, the instruments governing the debt may
restrict their ability to pay dividends or make other payments to us. Any such restrictions may materially affect such entities’
ability to make dividends or make payments, in service fees or otherwise, to us, which may materially and adversely affect our
business, financial condition and results of operations.
Fluctuations
in the value of the Renminbi may have a material adverse effect on your investment.
The
value of the Renminbi against the U.S. dollar and other currencies may fluctuate. The change in value of the Renminbi against
the U.S. dollar and other currencies is affected by, various factors, such as changes in China’s political and economic
conditions. In July 2005, the PRC government changed its decade-old policy of pegging the value of the Renminbi to the U.S. dollar.
Under such policy, the Renminbi was permitted to fluctuate within a narrow and managed band against a basket of certain foreign
currencies. Later on, the People’s Bank of China has decided to further implement the reform of the RMB exchange regime
and to enhance the flexibility of RMB exchange rates. Such changes in policy have resulted in a significant appreciation of the
Renminbi against the U.S. dollar since 2005. There remains significant international pressure on the PRC government to adopt a
more flexible currency policy, which could result in a further and more significant adjustment of the Renminbi against the U.S.
dollar.
Any
significant appreciation or revaluation of the Renminbi may have a material adverse effect on the value of, and any dividends
payable on, the ADS in foreign currency terms. More specifically, if we decide to convert our Renminbi into U.S. dollars, appreciation
of the U.S. dollar against the Renminbi would have a negative effect on the U.S. dollar amount available to us. To the extent
that we need to convert U.S. dollars we receive from our initial public offering into Renminbi for our operations, appreciation
of the Renminbi against the U.S. dollar would have an adverse effect on the Renminbi amount we would receive from the conversion.
In addition, appreciation or depreciation in the exchange rate of the Renminbi to the U.S. dollar could materially and adversely
affect the price of the ADS in U.S. dollars without giving effect to any underlying change in our business or results of operations.
Certain
PRC regulations, including the M&A Rules and national security regulations, may require a complicated review and approval
process which could make it more difficult for us to pursue growth through acquisitions in China.
The
M&A Rules established additional procedures and requirements that could make merger and acquisition activities in China by
foreign investors more time-consuming and complex. For example, MOFCOM must be notified in the event a foreign investor takes
control of a PRC domestic enterprise. Moreover, certain acquisitions of domestic companies by offshore companies that are related
to or affiliated with the same entities or individuals of the domestic companies, are subject to approval by the anti-monopoly
law enforcement agency. In addition, the Implementing Rules Concerning Security Review on Mergers and Acquisitions by Foreign
Investors of Domestic Enterprises, issued by MOFCOM in August 2011, require that mergers and acquisitions by foreign investors
in “any industry with national security concerns” be subject to national security review by MOFCOM. Furthermore, any
activities attempting to circumvent such review process, including structuring the transaction through a proxy or contractual
control arrangement, are strictly prohibited. Moreover, in December 2020, the NDRC and the MOFCOM promulgated the Measures for
Security Review of Foreign Investment, which became effective on January 18, 2021. Pursuant to the Measures for Security Review
of Foreign Investment, any foreign investment activities falling in the scope such as important cultural products and services,
important information technologies and internet products and services, important financial services, key technologies and other
important fields that concern state security while obtaining the actual control over the enterprises invested in, a foreign investor
or a party concerned in the PRC shall take the initiative to make a declaration to the working mechanism office prior to making
the investment. See “Item 4. Information on the Company—B. Business Overview—Regulation—Regulations Relating
to Foreign Investment in Value-added Telecommunication Companies.”
There
is significant uncertainty regarding the interpretation and implementation of these regulations relating to merger and acquisition
activities in China. In addition, complying with these requirements could be time-consuming, and the required notification, review
or approval process may materially delay or affect our ability to complete merger and acquisition transactions in China. As a
result, our ability to seek growth through acquisitions may be materially and adversely affected.
It
may be difficult for overseas regulators to conduct investigations or collect evidence within China.
Shareholder
claims or regulatory investigation that are common in the United States generally are difficult to pursue as a matter of law or
practicality in China. For example, in China, there are significant legal and other obstacles to providing information needed
for regulatory investigations or litigation initiated outside China. Although the authorities in China may establish a regulatory
cooperation mechanism with the securities regulatory authorities of another country or region to implement cross-border supervision
and administration, such cooperation with the securities regulatory authorities in the Unities States may not be efficient in
the absence of mutual and practical cooperation mechanism. Furthermore, according to Article 177 of the PRC Securities Law, which
became effective in March 2020, no foreign securities regulator is allowed to directly conduct investigations or evidence collection
activities within the PRC territory. While detailed interpretation of or implementation rules under Article 177 have yet to be
promulgated, the inability for a foreign securities regulator to directly conduct investigations or evidence collection activities
within China may further increase the difficulties you face in protecting your interests.
A
failure by the beneficial owners of our shares who are PRC residents to comply with certain PRC foreign exchange regulations could
restrict our ability to distribute profits, restrict our overseas and cross-border investment activities and subject us to liability
under PRC law.
SAFE
has promulgated regulations, including the Notice on Relevant Issues Relating to Foreign Exchange Control on Domestic Residents’
Investment and Financing and Round-Trip Investment through Special Purpose Vehicles, or SAFE Circular 37, effective in July 2014,
and its appendices, that require PRC residents, including PRC institutions and individuals, 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.” The term “control” under
SAFE Circular 37 is broadly defined as the operation rights, beneficiary rights or decision-making rights acquired by the PRC
residents in the offshore special purpose vehicles by such means as acquisition, trust, proxy, voting rights, repurchase, convertible
bonds or other arrangements. 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 subsidiaries. Further,
failure to comply with the various SAFE registration requirements described above could result in liability under PRC law for
foreign exchange evasion.
These
regulations apply to our direct and indirect shareholders who are PRC residents and may apply to any offshore acquisitions or
share transfers that we make in the future if our shares are issued to PRC residents. However, in practice, different local SAFE
branches may have different views and procedures on the application and implementation of SAFE regulations. As of the date of
this annual report, all PRC residents known to us that currently hold direct or indirect interests in our company have completed
the necessary registrations with SAFE as required by SAFE Circular 37. However, we may not be informed of the identities of all
the PRC residents or entities holding direct or indirect interest in our company, nor can we compel our beneficial owners to comply
with the requirements of SAFE Circular 37. As a result, we cannot assure you that these individuals or any other direct or indirect
shareholders or beneficial owners of our company who are PRC residents will be able to successfully complete the registration
or update the registration of their direct and indirect equity interest as required in the future. If they fail to make or update
the registration, our PRC subsidiaries could be subject to fines and legal penalties, and SAFE could restrict our cross-border
investment activities and our foreign exchange activities, including restricting our PRC subsidiaries’ ability to distribute
dividends to, or obtain loans denominated in foreign currencies from, our company, or prevent us from contributing additional
capital into our PRC subsidiaries. As a result, our business operations and our ability to make distributions to you could be
materially and adversely affected.
We
face regulatory uncertainties in China that could restrict our ability to grant share incentive awards to our employees or consultants
who are PRC citizens.
Pursuant
to SAFE Circular 37, PRC residents who participate in stock incentive plans in overseas non-publicly-listed companies may submit
applications to SAFE or its local branches for the foreign exchange registration with respect to offshore special purpose vehicles.
In the meantime, pursuant to the Notices on Issues concerning the Foreign Exchange Administration for Domestic Individuals Participating
in a Stock Incentive Plan of an Overseas Publicly-Listed Company issued by SAFE in February 2012, or SAFE Circular 7, a qualified
PRC agent (which could be the PRC subsidiary of the overseas-listed company) is required to file, on behalf of “domestic
individuals” (both PRC residents and non-PRC residents who reside in China for a continuous period of not less than one
year, excluding the foreign diplomatic personnel and representatives of international organizations) who are granted shares or
share options by the overseas-listed company according to its share incentive plan, an application with SAFE to conduct SAFE registration
with respect to such share incentive plan, and obtain approval for an annual allowance with respect to the purchase of foreign
exchange in connection with the share purchase or share option exercise. Such PRC individuals’ foreign exchange income received
from the sale of shares and dividends distributed by the overseas listed company and any other income shall be fully remitted
into a collective foreign currency account in China, which is opened and managed by the PRC domestic agent before distribution
to such individuals. In addition, such domestic individuals must also retain an overseas entrusted institution to handle matters
in connection with their exercise of share options and their purchase and sale of shares. The PRC domestic agent also needs to
update registration with SAFE within three months after the overseas-listed company materially changes its share incentive plan
or make any new share incentive plans.
We
and our directors, executive officers and other employees who are PRC citizens or who reside in the PRC for a continuous period
of no less than one year and who have been granted stock options are subject to these regulations. Failure to complete the SAFE
registrations may subject them to fines and legal sanctions, and may also limit our ability to contribute additional capital into
our PRC subsidiaries and limit our PRC subsidiaries’ ability to distribute dividends to us. We also face regulatory uncertainties
that could restrict our ability to adopt additional incentive plans for our directors, executive officers and employees under
PRC law. See “Item 4. Information on the Company—B. Business Overview—Regulation—Regulations Relating
to Foreign Currency Exchange—Share Option Rules.”
Labor
contract laws in China may adversely affect our results of operations.
The
current PRC labor contract law imposes considerable liabilities on employers and significantly affects the cost of an employer’s
decision to reduce its workforce. Further, it requires certain terminations be based on the mandatory retirement age. In the event
we decide to significantly change or decrease our workforce, the Labor Contract Law could adversely affect our ability to enact
such changes in a manner that is most advantageous to our business or in a timely and cost-effective manner, thus materially and
adversely affecting our financial condition and results of operations.
Increases
in labor costs and employee benefits in China may adversely affect our business and our profitability.
The
PRC economy has been experiencing significant growth, leading to inflation and increased labor costs. China’s overall economy
and the average wage in China are expected to continue to grow. In addition, we are required by PRC laws and regulations to pay
various statutory employee benefits, including pensions, housing fund, medical insurance, work-related injury insurance, unemployment
insurance and maternity insurance to designated government agencies for the benefit of our employees. It is subject to the determination
of the relevant government agencies whether an employer has made adequate payments of the requisite statutory employee benefits,
and employers that fail to make adequate payments may be subject to late payment fees, fines and/or other penalties. Future increases
in China’s inflation and material increases in labor costs and employee benefits may materially and adversely affect our
profitability and results of operations. If we are subject to late fees or fines in relation to the underpaid employee benefits,
our financial condition and results of operations may be adversely affected.
Failure
to make adequate contributions to various mandatory social security plans and withhold individual income tax as required by PRC
regulations may subject us to penalties.
PRC
laws and regulations require us to pay several statutory social welfare benefits for our employees, including pensions, medical
insurance, work-related injury insurance, unemployment insurance, maternity insurance and housing provident fund contributions.
Local governments usually implement localized requirements as to mandatory social security plans considering differences in economic
development in different regions. PRC laws and regulations also require us to withhold individual income tax on employees' salaries
based on the actual salary of each employee upon payment. Our failure in making contributions to various mandatory social security
plans, withholding individual income tax and in complying with applicable PRC labor-related laws may subject us to late payment
penalties. With respect to the underpaid statutory social welfare benefits, we may be required to make up the contributions for
these plans as well as to pay late fees and fines; with respect to the underwithheld individual income tax, we may be required
to make up sufficient withholding and pay late fees and fines. If we are subject to late fees or fines in relation to the failure
in making contributions to various mandatory social security or withholding individual income tax, our financial condition and
results of operations may be affected.
Proceedings
instituted by the SEC against certain PRC-based accounting firms, including our independent registered
public accounting firm, could result in financial statements being determined to not be in compliance with the requirements of
the Exchange Act.
In December 2012, the SEC brought administrative
proceedings against five accounting firms in China, including our independent registered public
accounting firm, alleging that they had refused to produce audit work papers and other documents related to certain other China-based
companies under investigation by the SEC for potential accounting fraud. On January 22, 2014, an initial administrative law decision was
issued, censuring these accounting firms and suspending four of the five firms from practicing before the SEC for a period of six months.
The four firms appealed to the SEC against this decision and, on February 6, 2015, each of the four accounting firms agreed to a censure
and to pay a fine to the SEC to settle the dispute and avoid suspension of their ability to practice before the SEC. The firms’
ability to continue to serve all their respective clients is not affected by the settlement. The settlement requires the firms to follow
detailed procedures to seek to provide the SEC with access to Chinese firms’ audit documents via the CSRC. If the firms do not follow
these procedures, the SEC could impose penalties such as suspensions, or it could restart the administrative proceedings. The settlement
did not require the firms to admit to any violation of law and preserves the firms’ legal defenses in the event the administrative
proceeding is restarted.
We were not and are not subject to any SEC investigations,
nor are we involved in the proceedings brought by the SEC against the accounting firms. However, the independent registered public accounting
firm that issues the audit reports included in our annual reports filed with the SEC is affiliated to one of the four accounting firms
above.
In the event that the SEC restarts the administrative
proceedings, depending upon the final outcome, listed companies in the United States with major PRC operations may find it difficult or
impossible to retain auditors in respect of their operations in the PRC, which could result in financial statements being determined to
not be in compliance with the requirements of the Exchange Act, including possible delisting. Moreover, any negative news about the proceedings
against these audit firms may cause investor uncertainty regarding China-based, United States-listed companies and the market price of
our ADSs may be adversely affected.
If
our independent registered public accounting firm was denied, even temporarily, the ability to practice before the SEC and we
were unable to timely find another registered public accounting firm to audit and issue an opinion on our financial statements,
our financial statements could be determined not to be in compliance with the requirements of the Exchange Act. Such a determination
could ultimately lead to the delisting of the ADSs from Nasdaq Stock Market or deregistration from the SEC, or both, which would
substantially reduce or effectively terminate the trading of our ADSs in the United States.
Our ADSs may be delisted under the Holding Foreign
Companies Accountable Act if the PCAOB is unable to inspect auditors who are located in China. The delisting of our ADSs, or the threat
of their being delisted, may materially and adversely affect the value of your investment. Additionally, the inability of the PCAOB to
conduct inspections deprives our investors with the benefits of such inspections.
The Holding Foreign Companies Accountable Act,
or the HFCA Act, was enacted on December 18, 2020. The HFCA Act states if the SEC determines that we have filed audit reports issued by
a registered public accounting firm that has not been subject to inspection by the PCAOB for three consecutive years beginning in 2021,
the SEC shall prohibit our shares or ADSs from being traded on a national securities exchange or in the over the counter trading market
in the U.S.
Our auditor, the independent registered public
accounting firm that issues the audit report included elsewhere in this annual report, as an auditor of companies that are traded publicly
in the United States and a firm registered with the PCAOB, is subject to laws in the United States pursuant to which the PCAOB conducts
regular inspections to assess its compliance with the applicable professional standards. Since our auditor is located in China, a jurisdiction
where the PCAOB has been unable to conduct inspections without the approval of the Chinese authorities, our auditor is currently not inspected
by the PCAOB.
On March 24, 2021, the SEC adopted interim final
rules relating to the implementation of certain disclosure and documentation requirements of the HFCA Act, which became effective on May
5, 2021. We will be required to comply with these rules if the SEC identifies us as having a “non-inspection” year under a
process to be subsequently established by the SEC. The requirements of annual report for foreign
issuers have been updated by the SEC to reflect the disclosure requirements, which require disclosure in a foreign issuer’s annual
report regarding the audit arrangements of, and governmental influence on, such foreign issuer. A foreign issuer will not be required
to comply with such disclosure requirement until the SEC has identified it as having a “non-inspection” year under a process
to be subsequently established by the SEC with appropriate notice. Once identified, such foreign issuer will be required to comply with
such disclosure requirement in its annual report for each fiscal year in which it is identified.
The SEC is assessing how to implement other requirements of the HFCA
Act, including the listing and trading prohibition requirements described above.
The SEC may propose additional rules or guidance
that could impact us if our auditor is not subject to PCAOB inspection. For example, on August 6, 2020, the President’s Working
Group on Financial Markets, or the PWG, issued the Report on Protecting United States Investors from Significant Risks from Chinese Companies
to the then President of the United States. This report recommended the SEC implement five recommendations to address companies from jurisdictions
that do not provide the PCAOB with sufficient access to fulfil its statutory mandate. Some of the concepts of these recommendations were
implemented with the enactment of the HFCA Act. However, some of the recommendations were more stringent than the HFCA Act. For example,
if a company was not subject to PCAOB inspection, the report recommended that the transition period before a company would be delisted
would end on January 1, 2022.
The SEC has announced that the SEC staff is preparing
a consolidated proposal for the rules regarding the implementation of the HFCA Act and to address the recommendations in the PWG report.
It is unclear when the SEC will complete its rulemaking and when such rules will become effective and what, if any, of the PWG recommendations
will be adopted. The implications of this possible regulation in addition the requirements of the HFCA Act are uncertain. Such uncertainty
could cause the market price of our ADSs to be materially and adversely affected, and our securities could be delisted or prohibited from
being traded “over-the-counter” earlier than would be required by the HFCA Act. If our securities are unable to be listed
on another securities exchange by then, such a delisting would substantially impair your ability to sell or purchase our ADSs when you
wish to do so, and the risk and uncertainty associated with a potential delisting would have a negative impact on the price of our ADSs.
The PCAOB’s inability to conduct inspections
in China prevents it from fully evaluating the audits and quality control procedures of our independent registered public accounting firm.
As a result, we and investors in our ordinary shares are deprived of the benefits of such PCAOB inspections. The inability of the PCAOB
to conduct inspections of auditors in China makes it more difficult to evaluate the effectiveness of our independent registered public
accounting firm’s audit procedures or quality control procedures as compared to auditors outside of China that are subject to the
PCAOB inspections, which could cause investors and potential investors in our stock to lose confidence in our audit procedures and reported
financial information and the quality of our financial statements.
In May 2013, the PCAOB announced that it had entered
into a Memorandum of Understanding on Enforcement Cooperation with the CSRC and the PRC Ministry of Finance, which establishes a cooperative
framework between the parties for the production and exchange of audit documents relevant to investigations undertaken by the PCAOB in
the PRC or by the CSRC or the PRC Ministry of Finance in the United States. The PCAOB continues to be in discussions with the CSRC and
the PRC Ministry of Finance to permit joint inspections in the PRC of audit firms that are registered with the PCAOB and audit Chinese
companies that trade on U.S. exchanges.
Regulation
and censorship of information disseminated over the internet in China may adversely affect our business and reputation and subject
us to liability for information displayed on our website.
The
PRC government has adopted regulations governing internet access and the distribution of news and other information over the internet.
Under these regulations, internet content providers and internet publishers are prohibited from posting or displaying over the
internet content that, among other things, violates PRC laws and regulations, impairs the national dignity of China, or is reactionary,
obscene, superstitious, fraudulent or defamatory. Failure to comply with these requirements may result in the revocation of licenses
to provide internet content and other licenses, and the closure of the concerned websites. The website operator may also be held
liable for such censored information displayed on or linked to the websites. If our website is found to be in violation of any
such requirements, we may be penalized by relevant authorities, and our operations or reputation could be adversely affected.
Risks
Related to Our Ordinary Shares and ADSs
We
are an emerging growth company within the meaning of the Securities Act and may take advantage of certain reduced reporting requirements.
We
are an “emerging growth company,” as defined in the JOBS Act, and we may take advantage of certain exemptions from
requirements applicable to other public companies that are not emerging growth companies including, most significantly, not being
required to comply with the auditor attestation requirements of Section 404 for so long as we are an emerging growth company until
the fifth anniversary from the date of our initial listing. As a result, if we elect not to comply with such auditor attestation
requirements, our investors may not have access to certain information they may deem important. The JOBS Act also provides that
an emerging growth company does not need to comply with any new or revised financial accounting standards until such date that
a private company is otherwise required to comply with such new or revised accounting standards.
The
trading price of our ADSs is likely to be volatile, which could result in substantial losses to investors.
The
trading price of our ADSs is likely to be volatile and could fluctuate widely due to factors beyond our control. This may happen
because of broad market and industry factors, akin to the performance and fluctuation of the market prices of other companies
with business operations located mainly in China that have listed their securities in the United States. A number of Chinese companies
have listed or are in the process of listing their securities on U.S. stock markets. The securities of some of these companies
have experienced significant volatility, including price declines in connection with their initial public offerings. The trading
performances of these Chinese companies’ securities after their offerings may affect the perception and attitudes of investors
toward Chinese companies listed in the United States in general and consequently may impact the trading performance of our ADSs,
regardless of our actual operating performance.
In
addition to market and industry factors, the price and trading volume for our ADSs may be highly volatile due to a number of factors,
including the following:
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regulatory
developments affecting us or our industry, and users of our online platform;
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actual
or anticipated fluctuations in our quarterly results of operations and changes or revisions
of our expected results;
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changes
in the market condition, market potential and competition in automobile industry;
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announcements
by us or our competitors of new automobile services, expansions, investments, acquisitions,
strategic partnerships or joint ventures;
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fluctuations
in global and Chinese economies;
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changes
in financial estimates by securities analysts;
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adverse
publicity about us;
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additions
or departures of our key personnel and senior management;
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release
of lock-up or other transfer restrictions on our outstanding equity securities or sales
of additional equity securities; and
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potential
litigation or regulatory investigations.
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Any
of these factors may result in large and sudden changes in the volume and price at which our ADSs will trade.
In
the past, shareholders of public companies have often brought securities class action suits against those companies following
periods of instability in the market price of their securities. If we were involved in a class action suit, it could divert a
significant amount of our management’s attention and other resources from our business and operations and require us to
incur significant expenses to defend the suit, which could harm our results of operations. Any such class action suit, whether
or not successful, could harm our reputation and restrict our ability to raise capital in the future. In addition, if a claim
is successfully made against us, we may be required to pay significant damages, which could have a material adverse effect on
our financial condition and results of operations.
Our
dual-class share structure with different voting rights will limit your ability to influence corporate matters and could discourage
others from pursuing any change of control transactions that holders of our Class A ordinary shares and ADSs may view as beneficial.
Mr.
Wei Wen beneficially owns 75.9% of the aggregate voting power of our company as of April 30, 2021. See “Item 6. Directors,
Senior Management and Employees—E. Share Ownership.” As a result of the dual-class share structure and the concentration
of ownership, Mr. Wei Wen has considerable influence over matters such as decisions regarding mergers, consolidations, sale of
all or substantially all of our assets, election of directors and other significant corporate actions. He may take actions that
are not in the best interest of us or our other shareholders. This concentration of ownership may discourage, delay or prevent
a change in control of our company, which could have the effect of depriving our other shareholders of the opportunity to receive
a premium for their shares as part of a sale of our company and may reduce the price of our ADSs. This concentrated control will
limit your ability to influence corporate matters and could discourage others from pursuing any potential merger, takeover or
other change of control transactions that holders of Class A ordinary shares and ADSs may view as beneficial.
Substantial
future sales or perceived potential sales of our ADSs in the public market could cause the price of our ADSs to decline.
Sales
of substantial amounts of our ADSs in the public market, or the perception that these sales could occur, could adversely affect
the market price of our ADSs. All of our outstanding ADSs are freely transferable without restriction or additional registration
under the Securities Act and are available for sale upon the expiration of the lock-up period ending 180 days after the pricing
of our initial public offering, subject to certain restrictions. Sales of these shares into the market could cause the market
price of our ADSs to decline.
If
securities or industry analysts do not publish research or publish inaccurate or unfavorable research about our business, the
market price for our ADSs and trading volume could decline.
The
trading market for our ADSs will depend in part on the research and reports that securities or industry analysts publish about
us or our business. If research analysts do not establish and maintain adequate research coverage or if one or more of the analysts
who covers us downgrades our ADSs or publishes inaccurate or unfavorable research about our business, the market price for our
ADSs would likely decline. If one or more of these analysts cease coverage of our company or fail to publish reports on us regularly,
we could lose visibility in the financial markets, which, in turn, could cause the market price or trading volume for our ADSs
to decline.
Uncertainty involving certain proposed transactions
that we have announced from time to time may adversely affect our business and the market price of our ADSs.
On January 21, 2021, our board of directors received
a preliminary non-binding proposal letter from Mr. Wei Wen, our chairman and chief executive officer, proposing a “going-private”
transaction. The board is in the process of evaluating this preliminary non-binding proposal as of the date of this annual report. This
proposed going-private transaction, once consummated, will result in our delisting from the Nasdaq Capital Market.
Our board intends to
form a special committee consisting of independent and disinterested directors to consider the proposal. Our board expects that the special
committee will retain independent advisors, including independent financial and legal advisors, to assist it in this process.
This proposed transaction, whether or not consummated,
may divert management focus, employee attention and resources from other strategic opportunities and from operational matters. In addition,
if we dispose of assets and pay a special dividend, we expect the market price of our ADSs to fall significantly. Uncertainty about the
future direction of our company may inhibit investors from buying our ADSs, which may reduce liquidity in the market for our ADSs. Also,
any developments in the proposed transaction, such as our entering into or terminating any definitive agreement, may increase volatility
of the trading price of our ADSs.
Techniques
employed by short sellers may drive down the market price of the ADSs.
Short
selling is the practice of selling securities that the seller does not own but rather has borrowed from a third party with the
intention of buying identical securities back at a later date to return to the lender. The short seller hopes to profit from a
decline in the value of the securities between the sale of the borrowed securities and the purchase of the replacement shares,
as the short seller expects to pay less in that purchase than it received in the sale. As it is in the short seller’s interest
for the price of the security to decline, many short sellers publish, or arrange for the publication of, negative opinions regarding
the relevant issuer and its business prospects in order to create negative market momentum and generate profits for themselves
after selling a security short. These short attacks have, in the past, led to selling of shares in the market.
Public
companies that have substantially all of their operations in China have been the subject of short selling. Much of the scrutiny
and negative publicity has centered on allegations of a lack of effective internal control over financial reporting resulting
in financial and accounting irregularities and mistakes, inadequate corporate governance policies or a lack of adherence thereto
and, in many cases, allegations of fraud. As a result, many of these companies are now conducting internal and external investigations
into the allegations and, in the interim, are subject to shareholder lawsuits and/or SEC enforcement actions.
It
is not clear what effect such negative publicity could have on us. If we were to become the subject of any unfavorable allegations,
whether such allegations are proven to be true or untrue, we could have to expend a significant amount of resources to investigate
such allegations and/or defend ourselves. While we would strongly defend against any such short seller attacks, we may be constrained
in the manner in which we can proceed against the relevant short seller by principles of freedom of speech, applicable state law
or issues of commercial confidentiality. Such a situation could be costly and time-consuming, and could distract our management
from growing our business. Even if such allegations are ultimately proven to be groundless, allegations against us could severely
impact our business operations, and any investment in the ADSs could be greatly reduced or even rendered worthless.
Because
we do not expect to pay dividends in the foreseeable future, you must rely on price appreciation of our ADSs for return on your
investment.
We
currently intend to retain most, if not all, of our available funds and any future earnings to fund the development and growth
of our business. As a result, we do not expect to pay any cash dividends in the foreseeable future. Therefore, you should not
rely on an investment in our ADSs as a source for any future dividend income.
Our
board of directors has complete discretion as to whether to distribute dividends, subject to applicable laws. In addition, our
shareholders may by ordinary resolution declare a dividend, but no dividends may exceed the amount recommended by our board of
directors. Even if our board of directors decides to declare and pay dividends, the timing, amount and form of future dividends,
if any, will depend on, among other things, our future results of operations and cash flow, our capital requirements and surplus,
the amount of distributions, if any, received by us from our subsidiaries, our financial condition, contractual restrictions and
other factors deemed relevant by our board of directors. Accordingly, the return on your investment in our ADSs will likely depend
entirely upon any future price appreciation of our ADSs. We cannot guarantee that our ADSs will appreciate in value or even maintain
the price at which you purchased the ADSs. You may not realize a return on your investment in our ADSs and you may even lose your
entire investment in our ADSs.
As
a “controlled company” under the Nasdaq Stock Market Rules, we may be exempt from certain corporate governance requirements
that could adversely affect our public shareholders.
Since
Mr. Wei Wen, our chairman of the board and chief executive officer, is the beneficial owner of a majority of the voting power
of our issued and outstanding share capital following, we qualify as a “controlled company” under the Nasdaq Stock
Market Rules. Under these rules a company of which more than 50% of the voting power is held by an individual, group or another
company is a controlled company and may elect not to comply with certain corporate governance requirements, including the requirement
that a majority of our directors be independent, as defined in the Nasdaq Stock Market Rules, and the requirement that our compensation
and nominating and corporate governance committees consist entirely of independent directors. Although we do not intend to rely
upon any such exemptions, we could elect to rely on any or all of these exemptions in the future. Should we choose to do so, so
long as we remain a controlled company relying on any of such exemptions and during any transition period following the time when
we are no longer a controlled company, you would not have the same protections afforded to shareholders of companies that are
subject to all of NASDAQ corporate governance requirements.
We
may be classified as a passive foreign investment company for United States federal income tax purposes, which could result in
adverse United States federal income tax consequences to United States investors in the ADSs or ordinary shares.
We
will be classified as a “passive foreign investment company,” or PFIC, if, in the case of any particular fiscal year,
either (1) 75.0% or more of our gross income for such year consists of certain types of passive income, or (2) 50.0% or more of
the average quarterly value of our assets during such year produce or are held for the production of passive income. Although
the law in this regard is unclear, we treat our affiliated entities as being owned by us for United States federal income tax
purposes, 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 operation in our financial
statements. Assuming that we are the owner of our affiliated entities for United States federal income tax purposes, and based
upon our historical and current income and assets, we do not believe that we were classified as a PFIC for the fiscal year ended
December 31, 2020, and we do not expect to be classified as a PFIC for the current fiscal year.
The
determination of whether we are or will become a PFIC will depend upon the composition of our income (which may differ from our
historical results and current projections) and assets and the value of our assets from time to time, including, in particular,
the value of our goodwill and other unbooked intangibles (which may depend upon the market value of our ADSs or ordinary shares
from time-to-time and may be volatile). Among other matters, if our market capitalization declines, we may be classified as a
PFIC for the current fiscal year or future fiscal years. It is also possible that the IRS, may challenge our classification or
valuation of our goodwill and other unbooked intangibles, which may result in our company being, or becoming classified as, a
PFIC for the current fiscal year or future fiscal years.
While
we do not expect to become a PFIC in the current fiscal year, the determination of whether we will be or become a PFIC may also
depend, in part, on how, and how quickly, we use our liquid assets and cash. Under circumstances where we retain significant amounts
liquid assets, or if our affiliated entities were not treated as owned by us for United States federal income tax purposes, our
risk of being classified as a PFIC may substantially increase. Because there are uncertainties in the application of the relevant
rules and PFIC status is a factual determination made annually after the close of each fiscal year, we cannot assure you that
we will not be a PFIC for the current fiscal year or any future fiscal year.
If
we are classified as a PFIC in any fiscal year, a U.S. Holder (as defined in “Item 10. Additional Information—E. Taxation—United
States Federal Income Taxation.”) may incur significantly increased United States federal income tax on gain recognized
on the sale or other disposition of the ADSs or ordinary shares and on the receipt of distributions on the ADSs or ordinary shares
to the extent such gain or distribution is treated as an “excess distribution” under the United States federal income
tax rules, and such holders may be subject to burdensome reporting requirements. Further, if we are classified as 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. For more information, see “Item 10. Additional
Information—E. Taxation—United States Federal Income Taxation.”
Our
memorandum and articles of association contains anti-takeover provisions that could have a material adverse effect on the rights
of holders of our Class A ordinary shares and ADSs.
Our
memorandum and articles of association contain provisions to limit the ability of others to acquire control of our company or
cause us to engage in change-of-control transactions. These provisions could have the effect of depriving our shareholders of
an opportunity to sell their shares at a premium over prevailing market prices by discouraging third parties from seeking to obtain
control of our company in a tender offer or similar transaction. For example, our board of directors has the authority, subject
to any resolution of the shareholders to the contrary, to issue preferred shares in one or more series and to fix their designations,
powers, preferences, privileges, and relative participating, optional or special rights and the qualifications, limitations or
restrictions, including dividend rights, conversion rights, voting rights, terms of redemption and liquidation preferences, any
or all of which may be greater than the rights associated with our Class A ordinary shares, in the form of ADS or otherwise. Preferred
shares could be issued quickly with terms calculated to delay or prevent a change in control of our company or make removal of
management more difficult. If our board of directors decides to issue preferred shares, the price of the ADSs may fall and the
voting and other rights of the holders of our Class A ordinary shares and ADSs may be materially and adversely affected.
Because
we are incorporated under Cayman Islands law and conduct our operations primarily in emerging markets, you may face difficulties
in protecting your interests, and your ability to protect your rights through U.S. courts may be limited.
We
are an exempted company incorporated under the laws of the Cayman Islands. Our corporate affairs are governed by our memorandum
and articles of association, the Companies Act (As Revised) of the Cayman Islands, or the Companies Act, and the common law of
the Cayman Islands. The rights of shareholders to take action against the directors, actions by minority shareholders and the
fiduciary responsibilities of our directors to us under Cayman Islands law are to a large extent governed by the common law of
the Cayman Islands. The common law of the Cayman Islands is derived in part from comparatively limited judicial precedent in the
Cayman Islands as well as from the common law of England, the decisions of whose courts are of persuasive authority, but are not
binding, on a court in the Cayman Islands. The rights of our shareholders and the fiduciary responsibilities of our directors
under Cayman Islands law are not as clearly established as they would be under statutes or judicial precedent in some jurisdictions
in the United States. In particular, the Cayman Islands has a less developed body of securities laws than the United States. Some
U.S. states, such as Delaware, have more fully developed and judicially interpreted bodies of corporate law than the Cayman Islands.
In addition, Cayman Islands companies may not have standing to initiate a shareholder derivative action in a federal court of
the United States.
There
is uncertainty as to whether the courts of the Cayman Islands would (1) recognize or enforce against us judgments of courts of
the United States based on certain civil liability provisions of U.S. securities laws, or (2) entertain
original actions brought in the Cayman Islands against us or our directors or officers that are predicated upon the federal securities
laws of the United States or the securities laws of any state in the United States.
Although
there is no statutory enforcement in the Cayman Islands of judgments obtained in the federal or state courts of the United States
(and the Cayman Islands are not a party to any treaties for the reciprocal enforcement or recognition of such judgments), the
courts of the Cayman Islands will, at common law, recognize and enforce a foreign money judgment of a foreign court of competent
jurisdiction without re-examination of the merits of the underlying disputes based on the principle that a judgment of a competent
foreign court imposes upon the judgment debtor an obligation to pay the liquidated sum for which judgment has been given provided
certain conditions are met. For such a foreign judgment to be enforced in the Cayman Islands, such judgment must be final and
conclusive and for a liquidated sum, and must not be in respect of taxes or a fine or penalty and not obtained in a manner and
is not of a kind the enforcement of which is, contrary to natural justice or the public policy of the Cayman Islands. However,
the Cayman Islands courts are unlikely to enforce a judgment obtained from the U.S. courts under civil liability provisions of
the U.S. federal securities law if such judgment is determined by the courts of the Cayman Islands to give rise to obligations
to make payments that are penal or punitive in nature. A Cayman Islands court may stay enforcement proceedings if concurrent proceedings
are being brought elsewhere.
In
addition, we conduct substantially all of our business operations in emerging markets, including China, and substantially all
of our directors and senior management are based in China. The SEC, U.S. Department of Justice and other authorities often have
substantial difficulties in bringing and enforcing actions against non-U.S. companies and non-U.S. persons, including company
directors and officers, in certain emerging markets, including China. Additionally, our public shareholders may have limited rights
and few practical remedies in emerging markets where we operate, as shareholder claims that are common in the United States, including
class action securities law and fraud claims, generally are difficult or impossible to pursue as a matter of law or practicality
in many emerging markets, including China. For example, in China, there are significant legal and other obstacles for the SEC,
the DOJ and other U.S. authorities to obtaining information needed for shareholder investigations or litigation. Although the
competent authorities in China may establish a regulatory cooperation mechanism with the securities regulatory authorities of
another country or region to implement cross-border supervision and administration, the regulatory cooperation with the securities
regulatory authorities in the United States has not been efficient in the absence of a mutual and practical cooperation mechanism.
In China, without the consent of the competent PRC securities regulators and relevant authorities, no organization or individual
may provide the documents and materials relating to securities business activities to foreign securities regulators.
As
a result of all of the above, our public shareholders may have more difficulty in protecting their interests in the face of actions
taken by management, members of the board of directors or large shareholders than they would as public shareholders of a company
incorporated in the United States.
Certain
judgments obtained against us by our shareholders may not be enforceable.
We
are a Cayman Islands exempted company and all of our assets are located outside of the United States. Substantially all of our
current operations are conducted in China. In addition, a majority of our current directors and officers are nationals and residents
of countries other than the United States. Substantially all of the assets of these persons are located outside the United States.
As a result, it may be difficult or impossible for you to bring an action against us or against these individuals in the United
States in the event that you believe that your rights have been infringed under the U.S. federal securities laws or otherwise.
Even if you are successful in bringing an action of this kind, the laws of the Cayman Islands and of China may render you unable
to enforce a judgment against our assets or the assets of our directors and officers.
We
are a foreign private issuer within the meaning of the rules under the Exchange Act, and as such we are exempt from certain provisions
applicable to United States domestic public companies.
Because
we are a foreign private issuer under the Exchange Act, we are exempt from certain provisions of the securities rules and regulations
in the United States that are applicable to U.S. domestic issuers, including:
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the
rules under the Exchange Act requiring the filing of quarterly reports on Form 10-Q or
current reports on Form 8-K with the SEC;
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the
sections of the Exchange Act regulating the solicitation of proxies, consents, or authorizations
in respect of a security registered under the Exchange Act;
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the
sections of the Exchange Act requiring insiders to file public reports of their stock
ownership and trading activities and liability for insiders who profit from trades made
in a short period of time; and
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the
selective disclosure rules by issuers of material nonpublic information under Regulation
FD.
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We
are required to file an annual report on Form 20-F within four months of the end of each fiscal year. In addition, we intend to
publish our results on a quarterly basis through press releases, distributed pursuant to the Nasdaq Stock Market Rules. Press
releases relating to financial results and material events will also be furnished to the SEC on Form 6-K. However, the information
we are required to file with or furnish to the SEC will be less extensive and less timely compared to that required to be filed
with the SEC by U.S. domestic issuers. As a result, you may not be afforded the same protections or information, which would be
made available to you, were you investing in a U.S. domestic issuer.
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 NASDAQ corporate governance listing standards; these practices may afford less
protection to shareholders than they would enjoy if we complied fully with NASDAQ corporate governance listing standards.
As
a Cayman Islands exempted company listed on NASDAQ, we are subject to NASDAQ corporate governance listing standards. However,
the Nasdaq Stock Market Rules permit a foreign private issuer like us to follow the corporate governance practices of its home
country. Certain corporate governance practices in the Cayman Islands, which is our home country, may differ significantly from
NASDAQ corporate governance listing standards. For instance, we are not required to: (1) have a majority of the board be independent;
(2) have a compensation committee or a nominating and corporate governance committee consisting entirely of independent directors;
or (3) have regularly scheduled executive sessions with only independent directors each year. We intend to rely on some of these
exemptions. As a result, you may not be provided with the benefits of certain corporate governance requirements of the NASDAQ
Capital Market.
Certain
corporate governance practices in the Cayman Islands, which is our home country, differ significantly from requirements for companies
incorporated in other jurisdictions such as the United States. To the extent we choose to follow home country practice with respect
to corporate governance matters, our shareholders may be afforded less protection than they otherwise would under rules and regulations
applicable to U.S. domestic issuers.
The
voting rights of holders of ADSs are limited by the terms of the deposit agreement, and you may not be able to exercise your right
to vote your Class A ordinary shares.
As
a holder of our ADSs, you will only be able to exercise the voting rights with respect to the underlying Class A ordinary shares
represented by your ADSs in accordance with the provisions of the deposit agreement. Under the deposit agreement, you must vote
by giving voting instructions to the depositary. Upon receipt of your voting instructions, the depositary will vote the underlying
Class A ordinary shares represented by your ADSs in accordance with these instructions. You will not be able to directly exercise
your right to vote with respect to the underlying Class A ordinary shares represented by your ADSs unless you withdraw such shares.
Under our memorandum and articles of association, the minimum notice period required for convening a general meeting is seven
calendar days. When a general meeting is convened, you may not receive sufficient advance notice to withdraw the underlying Class
A ordinary shares represented by your ADSs to allow you to vote with respect to any specific matter. If we ask for your instructions,
the depositary will notify you of the upcoming vote and will arrange to deliver our voting materials to you. We cannot assure
you that you will receive the voting materials in time to ensure that you can instruct the depositary to vote your shares. In
addition, the depositary and its agents are not responsible for failing to carry out voting instructions or for their manner of
carrying out your voting instructions. This means that you may not be able to exercise your right to vote and you may have no
legal remedy if the underlying Class A ordinary shares represented by your ADSs are not voted as you requested.
The
depositary for our ADSs gave us a discretionary proxy to vote our Class A ordinary shares underlying your ADSs if you do not vote
at shareholders’ meetings, except in limited circumstances, which could adversely affect your interests.
Under
the deposit agreement for the ADSs, if you do not vote, the depositary will give us a discretionary proxy to vote our underlying
Class A ordinary shares represented by your ADSs at shareholders’ meetings if:
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we
have timely provided the depositary with notice of meeting and related voting materials;
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we
have instructed the depositary that we wish to receive a proxy to vote uninstructed shares;
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we
have informed the depositary that we reasonably do not know any substantial opposition
as to a matter to be voted on at the meeting; or
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we
have informed the depositary that such matter to be voted on at the meeting is not materially
adverse to the interest of shareholders.
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The
effect of this discretionary proxy is that if you do not vote at shareholders’ meetings, you cannot prevent our underlying
Class A ordinary shares represented by your ADSs from being voted, except that we fail to meet the conditions described above.
This may make it more difficult for shareholders to influence the management of our company.
You
may not receive dividends or other distributions on our Class A ordinary shares and you may not receive any value for them, if
it is illegal or impractical to make them available to you.
The
depositary of our ADSs has agreed to pay to you the cash dividends or other distributions it or the custodian receives on ordinary
shares or other deposited securities underlying our ADSs, after deducting its fees and expenses. You will receive these distributions
in proportion to the number of Class A ordinary shares your ADSs represent. However, the depositary is not responsible if it decides
that it is unlawful or impractical to make a distribution available to any holders of ADSs. For example, it would be unlawful
to make a distribution to a holder of ADSs if it consists of securities that require registration under the Securities Act but
that are not properly registered or distributed under an applicable exemption from registration. The depositary may also determine
that it is not feasible to distribute certain property through the mail. Additionally, the value of certain distributions may
be less than the cost of mailing them. In these cases, the depositary may determine not to distribute such property. We have no
obligation to register under U.S. securities laws any ADSs, ordinary shares, rights or other securities received through such
distributions. We also have no obligation to take any other action to permit the distribution of ADSs, ordinary shares, rights
or anything else to holders of ADSs. This means that you may not receive distributions we make on our ordinary shares or any value
for them if it is illegal or impractical for us to make them available to you. These restrictions may cause a material decline
in the value of our ADSs.
ADSs
holders may not be entitled to a jury trial with respect to claims arising under the deposit agreement, which could result in
less favorable outcomes to the plaintiff(s) in any such action.
The
deposit agreement governing the ADSs representing our Class A ordinary shares provides that, to the fullest extent permitted by
law, ADS holders waive the right to a jury trial of any claim they may have against us or the depositary arising out of or relating
to our shares, the ADSs or the deposit agreement, including any claim under the U.S. federal securities laws.
If
we or the depositary opposed a jury trial demand based on the waiver, the court would determine whether the waiver was enforceable
based on the facts and circumstances of that case in accordance with the applicable state and federal law. To our knowledge, the
enforceability of a contractual pre-dispute jury trial waiver in connection with claims arising under the federal securities laws
has not been finally adjudicated by the United States Supreme Court. However, we believe that a contractual pre-dispute jury trial
waiver provision is generally enforceable, including under the laws of the State of New York, which govern the deposit agreement,
by a federal or state court in the City of New York, which has non-exclusive jurisdiction over matters arising under the deposit
agreement. In determining whether to enforce a contractual pre-dispute jury trial waiver provision, courts will generally consider
whether a party knowingly, intelligently and voluntarily waived the right to a jury trial. We believe that this is the case with
respect to the deposit agreement and the ADSs. It is advisable that you consult legal counsel regarding the jury waiver provision
before entering into the deposit agreement.
If
you or any other holders or beneficial owners of ADSs bring a claim against us or the depositary in connection with matters arising
under the deposit agreement or the ADSs, including claims under federal securities laws, you or such other holder or beneficial
owner may not be entitled to a jury trial with respect to such claims, which may have the effect of limiting and discouraging
lawsuits against us and/or the depositary. If a lawsuit is brought against us and/or the depositary under the deposit agreement,
it may be heard only by a judge or justice of the applicable trial court, which would be conducted according to different civil
procedures and may result in different outcomes than a trial by jury would have had, including results that could be less favorable
to the plaintiff(s) in any such action.
Nevertheless,
if this jury trial waiver provision is not permitted by applicable law, an action could proceed under the terms of the deposit
agreement with a jury trial. No condition, stipulation or provision of the deposit agreement or ADSs serves as a waiver by any
holder or beneficial owner of ADSs or by us or the depositary of compliance with any substantive provision of the U.S. federal
securities laws and the rules and regulations promulgated thereunder.
You
may experience dilution of your holdings due to inability to participate in rights offerings.
We
may, from time to time, distribute rights to our shareholders, including rights to acquire securities. Under the deposit agreement,
the depositary will not distribute rights to holders of ADSs unless the distribution and sale of rights and the securities to
which these rights relate are either exempt from registration under the Securities Act with respect to all holders of ADSs, or
are registered under the provisions of the Securities Act. The depositary may, but is not required to, attempt to sell these undistributed
rights to third parties, and may allow the rights to lapse. We may be unable to establish an exemption from registration under
the Securities Act, and we are under no obligation to file a registration statement with respect to these rights or underlying
securities or to endeavor to have a registration statement declared effective. Accordingly, holders of ADSs may be unable to participate
in our rights offerings and may experience dilution of their holdings as a result.
You
may be subject to limitations on transfer of your ADSs.
Your
ADSs are transferable on the books of the depositary. However, the depositary may close its books at any time or from time to
time when it deems expedient in connection with the performance of its duties. The depositary may close its books from time to
time for a number of reasons, including in connection with corporate events such as a right offering, during which time the depositary
needs to maintain an exact number of ADS holders on its books for a specified period. The depositary may also close its books
in emergencies, and on weekends and public holidays. The depositary may refuse to deliver, transfer or register transfers of our
ADSs generally when our share register or the books of the depositary are closed, or at any time if we or the depositary thinks
it is advisable to do so because of any requirement of law or of any government or governmental body, or under any provision of
the deposit agreement, or for any other reason.
ITEM
4. INFORMATION ON THE COMPANY
A. History
and development of the company
We
are an exempted company with limited liability incorporated in the Cayman Islands. We commenced our automobile group-purchase
facilitation business in 2010. We began our auto show business in the fourth quarter of 2016, and we expanded our auto shows to
tier-3 and below cities in 2017. We began the operation of our virtual dealership business in the second quarter of 2018.
We
conduct our business through our subsidiaries and consolidated affiliated entities in China. Over the past few years, we underwent
a series of restructurings. In particular:
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Incorporation
of the listing entity. In September 2012, we incorporated TuanChe Limited as a holding
company and proposed listing entity in the Cayman Islands.
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Incorporation
of Hong Kong and PRC subsidiaries. In October 2012, we established a wholly-owned
subsidiary in Hong Kong, TuanChe Information Limited. In January 2013, we also established
a wholly-owned subsidiary in China, TuanYuan Internet Technology (Beijing) Co., Ltd.,
or TuanYuan, through which we obtained control over TuanChe Internet Information Service
(Beijing) Co., Ltd., or TuanChe Internet, based on a series of contractual arrangements.
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Contractual
arrangements. Due to PRC legal restrictions on foreign ownership in value-added telecommunication services, we carry out our
business in China through our VIEs and their subsidiaries. In March 2013, we, through TuanYuan, entered into a series of contractual
arrangements with (1) TuanChe Internet, and (2) the shareholders of TuanChe Internet, to obtain effective control of TuanChe
Internet and its subsidiaries. These contractual arrangements, as revised from time to time, were most recently revised in September
2020. In June 2018, we, through Chema, entered into a series of contractual arrangements with (1) Tansuojixian, and (2) the
shareholders of Tansuojixian, to obtain effective control of Tansuojixian and its subsidiaries. In January 2020, in relation to our
acquisition of Longye, we, through Sangu Maolu, a wholly owned subsidiary in China, entered into a series of contractual
arrangements with (1) Drive New Media and Internet Drive Technology, and (2) their respective shareholders, to obtain effective
control of Drive New Media and Internet Drive Technology and their respective subsidiaries.
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Since
our incorporation of TuanChe Limited in 2012, we have raised approximately US$135.6 million in equity financing from our dedicated
group of investors:
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Series
A financing. In March 2013, we raised an aggregate of US$700,000 from the issuance
of 2,828,393 and 16,970,357 Series A preferred shares to K2 Evergreen Partners L.P. and
K2 Partners II L.P., respectively.
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Series
B financing. In September 2013, we raised an aggregate of US$5,564,856 from the issuance
of 4,142,781 and 8,285,562 Series B-1 preferred shares to K2 Evergreen Partners L.P.
and K2 Partners II L.P., respectively, and the issuance of 18,193,772 and 4,548,443 series
B-2 preferred shares to BAI GmbH and K2 Partners II L.P., respectively.
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Series
C financing. In August 2014, we raised an aggregate of US$23,658,593 from the issuance
of 3,427,812 Series C-1 preferred shares, 5,643,437 Series C-2 preferred shares to BAI
GmbH, and 27,765,278 Series C-2 preferred shares to Highland 9 — LUX
S.à.r.l. In September 2015, Highland 9 — LUX S.à.r.l. transferred
such Series C-2 preferred shares to Highland Capital Partners 9 Limited Partnership,
Highland Capital Partners 9-B Limited Partnership, and Highland Entrepreneurs’
Fund 9 Limited Partnership, and 483,702 Series C-2 preferred shares to China Equities
HK Limited.
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Series
C+ financing. In June 2017, we raised an aggregate of US$8,682,770 from the issuance
of in total 12,593,555 Series C+ preferred shares to Highland Capital Partners 9 Limited
Partnership, Highland Capital Partners 9-B Limited Partnership, Highland Entrepreneurs’
Fund 9 Limited Partnership, K2 Partners III Limited, K2 Family Partners Limited, BAI
GmbH, and AlphaX Partners Fund I, L.P. On December 21, 2015, we entered into a convertible
loan agreement with Lanxi Puhua Juli Equity Investment L.P. (“Lanxi Puhua”)
in the amount of RMB30.0 million. On August 18, 2017, we issued 6,261,743 Series C+ preferred
shares to Puhua Group Ltd, a company designated by Lanxi Puhua, at nominal value, pursuant
to the loan agreement and a share purchase agreement dated June 16, 2017.
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Convertible
note financing. In August 2017, we raised an aggregate principal amount of US$6,300,000
through issuing notes to AlphaX Partners Fund I, L.P., K2 Partners III Limited and K2
Family Partners Limited, and Hongtao Investment-I Ltd (formerly known as Eager Info Investments
Limited) pursuant to certain convertible note purchase agreements. In June 2018, the
convertible notes were converted into an aggregate of 3,965,043, 1,201,528 and 2,403,057
Series C-4 preferred shares, respectively, all at a conversion price of US$0.8322734
per share.
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Series
D-1 financing. In June 2018, we raised an aggregate of US$23,350,000 from the issuance
of 3,592,664 and 6,453,887 Series D-1 preferred shares to ACEE Capital Ltd. and Honour
Depot Limited, respectively.
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Series
D-2 financing. In September 2018, we raised US$50,000,000 from the issuance of 20,630,925
Series D-2 preferred shares to Beijing Z-Park Fund Investment Center (Limited Partner).
In October 2018, we raised US$2,300,000 from the issuance of 949,023 Series D-2 preferred
shares to Beijing Shengjing Fengtai Innovation Investment Center (Limited Partner).
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Initial
public offering. In November 2018, we completed an initial public offering of 2,600,000
ADSs, raising approximately US$15.0 million in net proceeds after deducting underwriting
commissions and the offering expenses payable by us.
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PRC
laws and regulations place certain restrictions on foreign investment in value-added telecommunication service businesses. We
conduct our operations in the PRC principally through our VIEs and their subsidiaries, collectively referred to as our consolidated
affiliated entities in this annual report. We have effective control over our consolidated affiliated entities through a series
of contractual arrangements among our WFOEs, our VIEs and their respective shareholders.
The
contractual arrangements, as described in more detail below, collectively allow us to:
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exercise
effective control over our consolidated affiliated entities;
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receive
substantially all of the economic benefits of our consolidated affiliated entities; and
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•
|
have
an exclusive call option to purchase all or part of the equity interests in and/or assets
of each of our VIEs when and to the extent permitted by PRC laws.
|
As
a result of these contractual arrangements, we are the primary beneficiary of our VIEs and their respective subsidiaries, and,
therefore, have consolidated the financial results of our consolidated affiliated entities in our consolidated financial statements
in accordance with U.S. GAAP.
We
listed our ADSs on the Nasdaq Capital Market under the symbol “TC” on November 20, 2018 and completed an initial public
offering of 2,600,000 ADSs on November 23, 2018, raising approximately US$15.0 million in net proceeds after deducting underwriting
commissions and the offering expenses payable by us.
On
January 21, 2021, our board of directors received a preliminary non-binding proposal letter from Mr. Wei Wen, our chairman and chief
executive officer, proposing a “going-private” transaction. The board is in the process of evaluating this non-binding proposal.
Our board intends to form a special committee consisting of independent and disinterested directors to consider the proposal.
Our board expects that the special committee will retain independent advisors, including independent financial and legal advisors, to
assist it in this process.
Our
principal executive offices are located at 9F, Ruihai Building, No. 21 Yangfangdian Road, Haidian District, Beijing 100038, People’s
Republic of China. Our registered office in the Cayman Islands is located at the offices of Osiris International Cayman Limited,
Suite #4-210, Governors Square, 23 Lime Tree Bay Avenue, PO Box 32311, Grand Cayman KY1-1209, Cayman Islands. The telephone number
of our principal executive offices is (+86-10) 6399-8902. Investors should contact us for any inquiries through the address and
telephone number of our principal executive office. Our agent for service of process in the United States is Cogency Global Inc.,
located at 10 E. 40th Street, 10th Floor, New York, N.Y. 10016, United States. Our principal website is tuanche.com.
For
information regarding our principal capital expenditures, see “Item 5. Operating and Financial Review and Prospects—B.
Liquidity and Capital Resources—Liquidity and Capital Resources.”
SEC maintains an Internet site, http://www.sec/gov,
which contains reports, proxy and information statements, and other information regarding us. We also maintain an Internet site, http://ir.tuanche.com/,
for investors’ information.
B. Business
Overview
We
currently operate primarily two highly synergistic businesses:
|
•
|
Offline
marketing solutions. We turn individual and isolated automobile purchase transactions
into large-scale collective purchase activities through our auto shows. By attracting
a large number of consumers, these events serve as integrated marketing solutions to
our industry customers, which include automakers, franchised dealerships, secondary dealers
and automotive service providers. We enable interactions between large numbers of participants
on both sides of a potential transaction, creating a “many-to-many” environment,
within a short period of time, thus enhancing the value we offer to both consumer and
industry customer participants of our offline events. In addition, we have developed
our special promotion event services to better support our industry customers in organizing
their special promotion events through a series of integrated services, including event
planning and executing, marketing training and onsite coaching.
|
|
•
|
Virtual
dealership services, online marketing services and others. We function as a virtual
dealership connecting automakers and franchised dealerships with secondary dealers by
providing a suite of services traditionally undertaken by franchised dealerships without
setting up permanent physical presence. Mostly directed at lower tier cities, these services
include distribution channel expansion services for automakers and sourcing services
for secondary dealers. In addition, we help our industry customers increase the efficiency
and effectiveness of their marketing campaigns through our online marketing services.
|
Our
business model features the integration of two complementary elements: our online platform and offline events. Our online platform
consists of our website tuanche.com, our official WeChat account, our WeChat mini-program, our mobile applications, and Cheshangtong,
our principal SaaS product. Together, these channels promote our offline events and serve as a consumer acquisition and management
tool for our offline events and for the secondary dealers using our virtual dealership services. Our offline events provide consumers
physical access to a broad selection of automobiles and serve as a gateway to useful data from consumer participants who have
not previously entered their information on our online platform. With our data analytics capabilities, these data enhance our
understanding of the automobile demand in various localities and continuously improve the effectiveness of our event planning.
We
complement our service offerings by collaborating with service and product providers in China’s automotive industry, such
as aftermarket service providers, financial institutions, and insurance companies. By extending our services beyond automobile
purchases, we offer consumers one-stop end-to-end shopping experience, establish ongoing relationships with consumers, and attract
new consumers who are contemplating automobile purchases. As our consumer base increases, more automakers and auto dealers are
incentivized to become our industry customers, which leads to a broader selection of automobiles and more favorable pricing terms
for our consumers, driving a significant self-reinforcing virtuous cycle. Meanwhile, our relationships with a growing number of
automakers, secondary dealers and consumers pave the way for our virtual dealership business, the success of which heavily depends
on securing sufficient automobile supplies and enlarging automobile distribution channels.
We
have a long operating history in China’s automotive industry and have achieved rapid growth since our inception in 2010.
In 2010, we began our group-purchase facilitation service where we gathered consumers interested in purchasing the same brands
and models through our online channels, and organized offline store visits to franchised dealerships carrying these brands and
models. Leveraging the network of franchised dealerships, we built through our group-purchase facilitation service and the operational
capabilities we accumulated through organizing offline events, we launched our auto show business in the last quarter of 2016.
In 2018, 2019 and 2020, we organized 851, 1,055 and 449 auto shows, respectively. In June 2018, we began offering virtual dealership
services to further penetrate the automotive industry. The total number of automobiles sales transactions we facilitated increased
was 347,398, 354,355 and 140,264 in 2018, 2019 and 2020, respectively. The total GMV of all automobile sales transactions we facilitated
was approximately RMB47.5 billion and RMB19.8 billion (US$3.0 billion) in 2019 and 2020, respectively. In January 2019, we commenced
our special promotion event services to better support our industry customers in organizing their special promotion events through
a series of integrated service offerings, including event planning and executing, marketing training and onsite coaching. We facilitated
207 special promotion events through our services in 2020.
Historically,
we generated our net revenues primarily through our offline events. Starting from 2018, we began to generate net revenue from
virtual dealership, online marketing services and others, which amounted to RMB21.6 million and RMB74.9 million (US$11.5 million)
in 2019 and 2020, respectively, representing 3.3% and 22.7% of our net revenues for the same periods, respectively. For a detailed
breakdown of our net revenues, see “Item 5. Operating and Financial Review and Prospects—A. Operating Results—Key
Components of Results of Operations—Net Revenues.”
Our
net revenues were RMB651.0 million, RMB644.8 million and RMB330.2 million (US$50.6 million) in 2018, 2019 and 2020, respectively.
Our net loss was RMB78.7 million, RMB251.3 million and RMB163.5 million (US$25.1 million) in 2018, 2019 and 2020, respectively.
Our net loss from continuing operations was RMB75.1 million, RMB251.3 million and RMB 163.5 million (US$25.1 million) in 2018,
2019 and 2020, respectively. Our adjusted EBITDA was RMB7.5 million, RMB(143.9) million and RMB(141.1) million (US$(21.6) million)
in 2018, 2019 and 2020, respectively. We recorded adjusted net loss of RMB(3.3) million, RMB140.3 million and RMB145.8 million
(US$22.3 million) in 2018, 2019 and 2020, respectively. For a detailed description of our non-GAAP measures, see “Item 5.
Operating and Financial Review and Prospects—A. Operating Results—Non-GAAP Financial Measures.” The significant
increase in our adjusted net loss from 2019 to 2020 was primarily due to increase in fair value loss of guarantee liability, share
based compensation expenses and impairment of investment in 2020. See “Item 5. Operating and Financial Review and Prospects—
A. Operating Results— Year Ended December 31, 2020 Compared to Year Ended December 31, 2019.”
Our
Business Model
We
are the first company in China to provide a scalable omni-channel automotive marketplace approach to automobile marketing and
distribution, according to the iResearch report. This business model features high sales conversion effectiveness and efficiency,
delivering a high and measurable return on investment for our industry customers relative to their overall marketing expenditures.
We offer marketing solutions by integrating our online platform and offline sales events. Our online platform, which consists
of our tuanche.com website, apps, official WeChat account, WeChat mini-programs, Cheshangtong, and other mobile outlets, serves
as a platform for consumer acquisition and management. Our offline events bring consumers, auto dealers, automakers, and automotive
service providers together to promote in-person interactions and direct comparisons across a broad selection of vehicles and related
service offerings. The integration of these two components is essential to our ability to offer comprehensive and efficient automobile
transaction experiences for all participants, including consumers, automakers, auto dealers, and automotive service providers.
The chart below illustrates our business model for our integrated marketing solutions:
Driven
by our existing marketing solutions, we launched virtual dealerships in order to help automakers and franchised dealerships expand
their distribution channels and to help secondary dealers enlarge their sourcing options and number of purchase orders. Our virtual
dealerships aim to fill the gap left by traditional franchised dealerships in tier-3 and below cities. The chart below illustrates
our current business model for our virtual dealership business:
Our
Consumers
We
use both online and offline channels to effectively attract automobile consumers to participate in our auto shows.
Online.
Our own online channels consist of our tuanche.com website, our mobile apps, our official WeChat account and WeChat mini-program.
As of December 31, 2020, we have created customized city homepages for over 308 cities around China, each targeting local consumers.
From January 1, 2016 to December 31, 2020, over 23.5 million consumers have entered their information on our online platform.
In 2018, 2019 and 2020, the average monthly unique visits to our online platform was 14.4 million, 13.6 million and 4.4 million,
respectively. When users access our website on their desktops or their mobile devices, or when they open our mobile apps or subscribe
to our official WeChat account, they will find information of upcoming auto shows across China. Users are prompted to enter their
names and cell phone numbers in order to gain free admission and a chance to win prizes at our offline events. Users may also
indicate the brand and model they prefer, which helps us better understand the potential needs of the consumer participants at
our offline events.
We
also utilize online channels owned by others to attract prospective consumer participants to our offline sales events, such as
search engines, social media, newsfeed apps, and online content aggregators. Recently, with the fast development in short-form
video apps, we began creating short-form video content that promotes our offline events.
In
2018, 2019 and 2020, we attracted approximately 6.8 million, 5.8 million, and 3.1 million consumers to sign up for our offline
events through our online channels, respectively.
Offline.
We work with various offline partners to attract participants to our offline events, such as traditional print media, television,
radio, and billboards in the streets and subway stations. We also rely on word-of-mouth referral by consumers who have participated
in our events in the past.
We
continue to evolve our marketing strategies as needed for different locations. For example, in lower tier cities, we have historically
spent more on offline consumer acquisition channels. However, with the rising popularity of smartphones in those smaller cities,
we are able to and will continue to convert offline traffic into online data by encouraging participants at our offline events
in tier-3 and below cities to scan our QR code and indicate their automobile purchase plans or preferences. Leveraging our big-data
technologies, we are able to analyze the data and gain a better understanding of users’ interests in a particular region,
which enables us to adjust our sales and marketing plans accordingly, maximizing our sales conversion rate during our offline
events.
Our
Industry Customers
Our
industry customers include a variety of businesses within China’s automotive industry, including automakers, franchised
dealerships, secondary dealers, aftermarket service providers and others providing automotive services, such as insurance companies
and financial institutions. We generate our net revenues primarily from our industry customers that pay for booth spaces at our
auto shows. We determine the amount we charge primarily based on locations and sizes of exhibition booths.
As
of December 31, 2020, we had served over 13,000 industry customers in China, covering over 110 domestic and international automobile
brands. We facilitated the sale of 140,264 automobiles for our industry customers in 2020, with a GMV of approximately RMB19.8
billion (US$3.0 billion). In 2018, our top 20 industry customers collectively contributed to approximately 12.0% of our total
net revenues from continuing operations with the largest customer accounting for approximately 2.0%. In 2019, our top 20 industry
customers collectively contributed to approximately 12.3% of our total net revenues from continuing operations with the largest
customer accounting for approximately 2.1%. In 2020, our top 20 industry customers collectively contributed to approximately 14.6%
of our total net revenues from continuing operations with the largest customer accounting for approximately 2.6%.
Our
Services
Offline
Marketing Solutions
Auto
shows
We
organize auto shows to create a many-to-many consumption environment for prospective local consumers. Our sales-oriented auto
shows aim at facilitating successful transactions in a highly efficient and effective manner. We enable industry customers to
display a large number of products within a short period of time at a reasonably low cost to an otherwise fragmented consumer
base. We charge participating industry customers for booth spaces, and the amount is determined by the locations and sizes of
their requested exhibition booths. Usually the larger the area an industry customer wishes to occupy, and the closer the location
is to the main entrance, the more we charge.
Traditionally,
due to inadequate information access, individual automobile consumers often encounter the hassle of bargaining and are rarely
confident that they have obtained an optimal price. To solve this problem, before each auto show, we pre-negotiate prices with
local participating dealerships and automakers, which then generally offer favorable prices to consumers who purchase automobiles
during our auto shows. Our industry customers typically offer the same price to every consumer at a particular auto show who purchases
the same brand and model, thus offering consumers transparent pricing. During 2020, consumers who placed purchase orders during
our offline events paid on average 4.9% less than the manufacturer suggested retail price. In addition, we also invite industry
customers other than auto dealers and automakers in order to provide consumers with value-added services and products, such as
insurance products, automobile accessories, and aftermarket services.
Our
organization of auto shows involves four phases: (1) annual planning, (2) event request initiation, (3) event planning, and (4)
event execution.
Annual
planning. At the beginning of each year, we plan the number of auto shows we target to organize in each region, and the cities
we plan to revisit and expand into. We also allocate budget for each region, which serves as a guideline for the specific event
requests and action plans.
Event
request initiation. Each auto show begins with our field employees filling out an event request. The requests outline the
basic information and budget breakdown of the auto shows. These requests are first reviewed by the regional supervisors who must
approve the plan before presenting them to the head of operations at our corporate headquarters. We involve regional supervisors
because they are familiar with local situations and can ensure that the request is appropriate for that particular locality. We
ultimately require the approval of our head of operations to make sure that our events nationwide are organized in an orderly
and coordinated fashion and are in line with our overall corporate budget and strategic operation plans.
Event
planning. After an event request passes the two-layered approval system, the field employees must submit specific action plans,
covering our coordination plans with venue, material and service providers, with industry customers and with public security authorities.
Our field employees must also indicate in the action plans the types of goods and services they need, which typically include
exhibition booths and supplies, event set-up services, and event promotion services. These action plans should also include information
on anticipated expenses to be paid to suppliers of these goods and services. Each action plan typically allows for miscellaneous
spending which is allocated to event-day contingencies.
Event
execution. After the action plans are reviewed and approved, the execution phase begins and our field employees start the
coordination processes. We reach out to venue providers and enter into appropriate leasing arrangements. We engage event set-up
service providers to design the layout of our auto shows and set-up procedures based on the number of industry customers we have
solicited. Generally we require our event set-up service providers to purchase insurance to cover unexpected accidents during
the auto shows. We place purchase orders for exhibition-related materials such as exhibition booth materials, water, food, and
banners. At the same time, we work with various online and offline channels to promote our events and maximize consumer attendance.
We
also concurrently coordinate with our industry customers. In general, we begin contacting industry customers 30 days before each
auto show to allow them sufficient time to arrange event-day logistics since they are responsible for transporting their own vehicles
or other merchandise and materials to the auto show venues. In 2016, we introduced the “TuanChe Carnival” auto show
model where we invited financial institutions, insurance companies, automotive service providers, car accessories manufacturers
and other household goods and services providers, besides automakers and auto dealers in an effort to create a one-stop shopping
experience for our consumer participants. We also invited provincial television and radio broadcasting media in order to gain
maximum exposure in the local communities.
We
also work with local public safety officials and hire security personnel through third-party security service providers to ensure
we comply with relevant regulations on public gatherings and prevent any public security related issues.
In
2018, 2019 and 2020, we hosted 851, 1,055 and 449 auto shows across 196, 233 and 172 cities in China, respectively. The map below
shows the cities where we organized at least one auto show as of December 31, 2020.
The
table below sets forth a breakdown of the number of cities where we have organized auto shows by city tiers in the periods indicated:
|
|
Year ended December 31,
|
|
|
|
2018
|
|
|
2019
|
|
|
2020
|
|
Tier-1 cities
|
|
|
4
|
|
|
|
4
|
|
|
|
4
|
|
Tier-2 cities
|
|
|
36
|
|
|
|
72
|
|
|
|
42
|
|
Tier-3 and below cities
|
|
|
156
|
|
|
|
157
|
|
|
|
126
|
|
Total
|
|
|
196
|
|
|
|
233
|
|
|
|
172
|
|
The
table below sets forth a breakdown of the number of cities where we have established operations by city tiers in the periods indicated:
|
|
Year ended December 31,
|
|
|
|
2018
|
|
|
2019
|
|
|
2020
|
|
Tier-1 cities
|
|
|
4
|
|
|
|
4
|
|
|
|
4
|
|
Tier-2 cities
|
|
|
37
|
|
|
|
37
|
|
|
|
33
|
|
Tier-3 and below cities
|
|
|
97
|
|
|
|
107
|
|
|
|
89
|
|
Total
|
|
|
138
|
|
|
|
148
|
|
|
|
126
|
|
Special
promotion event services
We
began to provide special promotion event services to our industry customers in January 2019 to better support our industry customers
in organizing their special promotion events. We primarily provide a series of integrated services, such as event planning and
executing, marketing training and onsite coaching, to support our industry customers’ special promotion events. In 2019
and 2020, we facilitated 627 and 207 special promotion events through our services, respectively. We typically generate net revenues
from industry customers by charging fixed service fees per event.
Virtual
Dealerships
We
commenced our virtual dealership business in June 2018, primarily serving automobile markets in tier-3 and below cities. We decided
to expand our business into lower tier cities because of attractive industry trends and market opportunities in those cities.
According to the iResearch report, large cities and lower tier cities are driven by different growth trends. Certain tier-1 cities
have set stringent quotas on automobile license plate ownership. In Beijing, for example, the Department of Motor Vehicles of
Beijing Traffic Management Bureau awards non-electric automobile license plates six times a year by random selection, and the
chance for an eligible individual non-electric automobile license plate applicant to obtain a license plate each time is only
one out of over 2,000. As a result, new automobile purchases are largely confined to existing automobile owners. With the increase
of disposable income of residents in lower tier cities, and the lack of car ownership restrictions, lower tier cities have seen
faster growth in automobile sales volumes.
In
those smaller cities, secondary dealers serve as the intermediary between local consumers and automobile supplies. In general,
secondary dealerships do not carry significant inventory but mainly market and solicit purchase orders from consumers, negotiate
prices and sales with franchised dealerships or automakers that carry inventory, and deliver the purchased automobiles to consumers.
Our
virtual dealership business currently offers the following values to automakers, franchised dealerships, and secondary dealers:
Sales
channels expansion. We expand the sales channels of automakers and franchised dealerships that carry inventory into tier-3
and below cities where they usually do not have an established distribution network. Our ability to do so depends on the secondary
dealer network we have established across the country by inviting them to attend our auto shows for free.
Automobile
inventory sourcing. We offer secondary dealers access to automobile inventory from automakers and franchised dealerships across
China. This reduces the amount of work secondary dealers must undertake to simply secure purchase orders from consumers and deliver
the vehicle to the consumer.
We
enter into various distribution agreements with automakers and franchised dealerships. When a consumer places a purchase order
with a secondary dealer within our virtual dealership network, we initiate the purchase request to the corresponding automaker
or franchised dealership on behalf of the secondary dealer upon receiving the written purchase request from the secondary dealer.
The automaker or franchised dealership then ships such automobile directly to the premise at or designated by the secondary dealer.
After completing a joint quality inspection on the automobile with us, the secondary dealer then delivers the automobile to the
end consumer and handles automobile registration related matters pursuant to its agreement with the end consumer.
By
contracts, we generally require secondary dealers to pay the full purchase price within a certain number of days after submitting
the written purchase request. We sometimes provide supply-chain financing support to secondary dealers to help them pay automakers.
Generally, we provide such support on the condition that secondary dealers have already secured sale orders from consumers. We
require secondary dealers to offer the automobiles as collaterals. The credit term is usually shorter than one month. After receiving
the full purchase price, we place purchase orders with automakers or franchised dealerships that carry the automobiles.
In
2019 and 2020, we facilitated the sales of over 1,878 and 377 automobiles through our virtual dealership services, respectively,
with a GMV of over RMB229.5 million and RMB29.1 million (US$4.5 million), respectively. Going forward, we plan to provide financing
referral services to secondary dealers which often face a shortage of cash because they need to pay the purchase price of the
automobiles before receiving full payment from the consumer. We will also expand our collaboration with aftermarket service providers
that offer consumers maintenance and repair services.
Other
Services
Group-purchase
facilitation
We
offer group-purchase facilitation services in select cities. We solicit groups of prospective automobile consumers who wish to
purchase automobiles of the same brands and models. We negotiate prices with various franchised dealerships in the city. Similar
to participants of our auto shows, consumers who subscribe to the same group enjoy the same price, which is usually lower than
what they would otherwise be able to bargain for in local franchised dealerships, due to our superior bargaining power generated
from the increased volume.
We
did not organize any group-purchase facilitation events in 2018, 2019 and 2020. We may organize group-purchase facilitation events in
the future upon the requests of auto dealers, although this line of business will not be our primary focus.
Online
marketing services
We
have developed our online marketing services since 2018, catering to the sales and marketing needs of automakers and auto dealers.
We work closely with a large network of online and offline media outlets, and have access to abundant flow of information due
to our social media resources. Leveraging our advanced search engine, our proprietary data analytical models and advanced digital
marketing system, we help industry customers target consumers in an efficient, precise and low-cost manner, maximizing their abilities
to acquire consumers and make sales. Our online marketing services primarily include (1) demand-side platform services, where
we either provide online advertising services on our website or provide advertising space resale services in collaboration with
third parties, such as search engines and other online advertising channels, and (2) marketing information services, through which
we provide industry customers with individual consumers’ demands information regarding their purchase preferences for automobiles
generated through our online channels upon consumers' consent.
Social
CRM cloud services
In
January 2020, we acquired Longye International Limited, a leading system developer that develops and implements social customer relationship
management cloud systems, or social CRM cloud systems, to provide social CRM services to the automotive industry in China. As of the
date of this annual report, our core social CRM service, Cheshangtong social CRM cloud system, has served 15,154 customers.
Referral
services
In October 2019, we commenced our referral services in collaboration
with a commercial bank, where we facilitate the bank in expanding its cooperation with our industry customers to grow its auto loan business.
We generate income from charging the bank service fees for approved loan applications.
Sales
and Marketing
We
believe our brand name is well-recognized across China’s automotive industry, thanks to the dedicated services of our sales
and marketing team. Our nationwide in-house sales team is mainly responsible for attracting automakers and auto dealers to attend
our offline events. As of December 31, 2020, we have established relationships with over 13,000 industry customers across China.
Our head sales office in Beijing is in charge of sales management, operational management and strategic decision-making. We also
have a dedicated marketing team responsible for both online and offline consumer acquisitions.
As
of December 31, 2020, we had 610 sales and marketing personnel across China. Depending on the size of the event, we assign two
to five salespersons to organize and supervise a particular auto show. Our sales and marketing team also organizes event-driven
marketing activities with industry-leading e-commerce platforms and various local governments.
Technology
We
rely on our technologies and IT infrastructure to achieve our operational goals. Our technology development strategies focus on
optimizing user experience and maximizing their willingness to participate in our offline events. Our big-data analytics technology
processes data and offers precise targeted industry analysis and projections. In particular, our big-data analytics technology
is capable of determining what brands and models are more popular in a particular city or among a certain consumer income level.
We then offer the information to our industry customers to better facilitate their understanding of the local market and help
them adjust their marketing efforts. We also offer technological support to our industry customers in their management of purchase
orders and other operational information in order to improve their operational efficiencies.
Intellectual
Property
Our
intellectual properties include trademarks, trademark applications related to our brands and software copyrights. We seek to protect
our intellectual properties through a combination of trademark and copyright protection laws in China and other jurisdictions,
as well as through confidentiality agreements and other measures.
As
of the date of this annual report, we hold 167 registered trademarks in China, including our “TuanChe” trademarks.
As of the same date, we have 116 registered domain names, including our main website domain names, tuanche.com, as well as 1 artwork
copyright and 81 software copyrights in China.
Facilities
Our
corporate headquarters are located in Beijing, China, where we lease office space with an area of approximately 4,443.1 square
meters as of December 31, 2020. In addition, we had strategically established field sales offices in 126 cities as of December
31, 2020 as support and local command centers for our auto shows in the nearby region. 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.
Our
servers are primarily hosted at internet data centers owned by major domestic internet data center providers. The hosting services
agreements typically have a one-year term. We believe that our current facilities are adequate and that we will be able to obtain
additional facilities, primarily through leasing, to accommodate any future expansion plans.
Competition
We
believe we are a leading omni-channel automotive marketplace in China. While our business model is both disruptive and unique,
we could be considered to compete with Autohome, Bitauto and various local auto show and automotive related event organizers.
Our virtual dealership competes with traditional franchised dealerships. We believe we are differentiated from our competitors
mainly for two reasons: (1) our events are more sales-oriented instead of information-oriented; and (2) our business model integrates
our online platform with offline events.
Employees
As
of December 31, 2020, we had 769 full-time employees. The following table sets forth the number of our full-time employees by
functions as of the dates indicated.
|
|
As of December 31, 2020
|
|
Functional Area
|
|
Number of employees
|
|
Sales and marketing
|
|
|
610
|
|
General and administrative
|
|
|
91
|
|
Research and development
|
|
|
68
|
|
Total
|
|
|
769
|
|
Our
success depends on our ability to attract, retain and motivate qualified employees. We believe that we maintain a good working
relationship with our employees, and we have not experienced any material labor disputes as of the date of this annual report.
None of our employees is represented by labor unions.
In
response to the significant impact of the COVID-19 pandemic, we have implemented measures to adjust the pace of our business expansion
and conserve resources, such as furlough arrangements and scaling back our recruitment budget and employee size. We may resort
to other cost cutting measures if the outbreak of COVID-19 and its impact persist or escalate. For more details, see “Item
3. Key Information—Risk Factors—Risks Related to Our Business and Industry—Our business operations have been
and may continue to be materially and adversely affected by the COVID-19 pandemic.”
Legal
Proceedings
From
time to time, we may be subject to various claims and legal actions that arise in the ordinary course of our business. We are
not currently subject to any threatened or ongoing legal proceedings that, in the opinion of our management, may have a material
adverse effect on our business, results of operations or financial condition.
Regulation
Regulations
Relating to Value-added Telecommunication Service
The
Telecommunications Regulations of PRC promulgated in September 2000 and amended in July 2014, February 2016 and June 2019 respectively
by the State Council and its related implementation rules, including the Catalog of Classification of Telecommunications Business
issued by the MIIT, categorize various types of telecommunications and telecommunications-related activities into basic or value-added
telecommunications services. The Administrative Measures on Telecommunications Business Operating promulgated in March 2009 and
most recently amended in July 2017 by MIIT set forth more specific provisions regarding the types of licenses required to operate
value-added telecommunications services, the qualifications and procedures for obtaining such licenses and the administration
and supervision of such licenses. Under these regulations, a commercial operator of value-added telecommunications services must
first obtain a license for value-added telecommunications business, or value-added telecommunications service license, from the
MIIT or its provincial level counterparts.
In
September 2000, the State Council promulgated the Administrative Measures on Internet Information Services, or the Internet Content
Measures, which was amended in January 2011. Under the Internet Content Measures, commercial internet information services operator
shall obtain a license for value-added telecommunications business. The Internet Content Measures also set out certain restrictions
on the provision of internet information services. For example, the internet information providers are prohibited from producing,
copying, publishing or distributing information that is humiliating or defamatory to others or that infringes the legal rights
of others. Furthermore, administration of mobile internet application information services is strengthened through the Regulations
for Administration of Mobile Internet Application Information Services, or the MIAIS Regulations, issued in June 2016 and effective
in August 2016. The MIAIS Regulations were enacted to regulate mobile application information services, or the App, the App providers
(including App owners or operators) and online App stores. App service providers are required to obtain relevant qualifications
pursuant to PRC laws and regulations.
Regulations
Relating to Foreign Investment in Value-added Telecommunication Companies
The
PRC Foreign Investment Law
On
March 15, 2019, the NPC approved 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. For more details, see “Item 3.
Key Information – Risks Related to our Corporate Structure – Uncertainties exist with respect to the interpretation
and implementation of the PRC Foreign Investment Law and how it may impact the viability of our current corporate structure, corporate
governance and business operations.”
On
December 26, 2019, the State Council issued the Implementation Regulation on the Foreign Investment Law, which came into effect
on 1 January 2020, The Implementation Regulation on the Foreign Investment Law further clarified relevant provisions of the Foreign
Investment Law. For example, it provides that the existing foreign-invested enterprises established before the effectiveness of
the Foreign Investment Law may change their organizational forms, organizational structures, etc. and go through the change of
registration procedures in accordance with the Foreign Investment Law and other relevant laws and regulations at any time prior
to January 1, 2025, after which the local branches of State Administration for Market Regulations, or the SAMR, shall stop processing
additional registration applications from the said enterprises, and disclose relevant information of such enterprises.
In
December 2019, the MOFCOM and the SAMR jointly issued the Measures for Reporting of Foreign Investment Information, or the Foreign
Investment Information Measures, which came into effect on January 1, 2020, and the Interim Administrative Measures for the Record-filing
of the Establishment and Modification of Foreign-invested Enterprises were suspended on the same date. Pursuant to the Foreign
Investment Information Measures, from January 1, 2020 on, the foreign investors carrying out investment activities directly or
indirectly in China and the relevant foreign-invested enterprises shall, through the Enterprise Registration System and the National
Enterprise Credit Information Publicity System operated by the SAMR, disclose their investment information to the competent authorities
by submitting various reports, including the reports related to their establishments, modifications and cancellations, and their
annual reports.
In
December 2020, the NDRC and the MOFCOM promulgated Measures for Security Review of Foreign Investment, which became effective
on January 18, 2021. The Foreign Investment Security Review Mechanism, or the Security Review mechanism, in charge of organization,
coordination and guidance of foreign investment security review is thereunder established. A working mechanism office shall be
established under the NDRC and led by the NDRC and the Ministry of Commerce to undertake routine work on the security review of
foreign investment. According to the Security Review Mechanism, foreign investment activities falling in the scope such as important
cultural products and services, important information technologies and internet products and services, important financial services,
key technologies and other important fields that concern state security while obtaining the actual control over the enterprises
invested in, a foreign investor or a party concerned in the PRC shall take the initiative to make a declaration to the working
mechanism office prior to making the investment.
Foreign
Investment in Value-added Telecommunication Companies
According
to the Provisions on the Administration of Foreign-Invested Telecommunications Enterprises issued by the State Council in December
2001 and amended in September 2008 and February 2016, respectively, foreign-invested value-added telecommunications enterprises
must be in the form of Sino-foreign equity joint ventures. The regulations restrict the ultimate capital contribution percentage
held by foreign investors in a foreign-invested value-added telecommunications enterprise to 50% or less and require the primary
foreign investor in a foreign-invested value-added telecommunications enterprise to have a good track record and operational experience
in the value-added telecommunications industry. Nevertheless, the Circular of the Ministry of Industry and Information Technology
on Liberalizing the Restrictions on Foreign Shareholding Percentages in Online Data Processing and Transaction Processing Business
(operational e-commerce business) promulgated by the MIIT, in June 2015, removes the restriction on foreign equity for “online
data processing and transaction processing businesses (operational e-commerce business).
In
July 2006, the Ministry of Information Industry (which was integrated into the MIIT with other governmental departments in March
2008), issued the Notice of the Ministry of Information Industry on Strengthening the Administration over Foreign Investment in
the Operation of Value-Added Telecommunications Business, or the MIIT Notice. According to the MIIT Notice, a foreign investor
in the telecommunications service industry must establish a foreign invested enterprise and apply for a telecommunications service
license. The MIIT Notice also requires that: (1) PRC domestic telecommunications enterprises must not, through any form, lease,
transfer or sell a telecommunications service license to a foreign investor, or provide resources, offices and working places,
facilities or other assistance to support illegal telecommunications services operations by a foreign investor; (2) value-added
telecommunications enterprises or their shareholders must directly own the domain names and trademarks used by such enterprises
in their provision of value-added telecommunications services; (3) each value-added telecommunications enterprise must have necessary
facilities for its approved business operations and maintain such facilities only in the regions covered by its license; and (4)
all value-added telecommunications enterprises are required to maintain network and internet security in accordance with the standards
set forth in relevant PRC regulations. If a license holder fails to comply with these requirements in the MIIT Notice and cure
any non-compliance, the Ministry of Information Industry or its local counterparts have the discretion to take measures against
such license holder, including revoking its value-added telecommunications service license.
Furthermore,
the Foreign Investment Catalog (as amended) classifies industries listed therein into two parts: encouraged category, and the
category subject to the special management measures for the entry of foreign investment, or the Negative List, which are further
divided into the restricted category and prohibited category. Industries not listed in the Foreign Investment Catalog (as amended)
are generally deemed to be in a fourth “permitted” category, and are generally open to foreign investment unless specifically
restricted by other PRC regulations. The Negative List, in a unified manner, lists the restrictive measures for the entry of foreign
investment. For example, some restricted industries must be operated in the form of Sino-foreign equity and/or cooperative joint
ventures, and for some restricted industries, Chinese partners are required to hold the majority interests in such joint ventures.
In addition, restricted category projects are subject to higher-level government approvals. In addition, foreign investors are
not allowed to invest in companies in industries listed in the prohibited category. For the industries not listed the Negative
List, the restrictive measures for the entry of foreign investment shall not apply in principle, and establishment of wholly foreign-owned
enterprises in such industries is generally allowed. The most recent updated version of Negative List, or the Negative List (2020
version), was promulgated by MOFCOM and NDRC in June 2020 and became effective in July 2020. The Negative List (2020 version)
expands the scope of permitted industries by foreign investment by reducing the number of industries that fall within the Negative
List where restrictions on the shareholding percentage or requirements on the composition of board or senior management still
exists. For example, the Negative List (2020 version) stipulates that the ultimate foreign equity ownership in a value-added telecommunications
services provider shall not exceed 50%, except for e-commerce business, domestic multi-party communications services business,
store-and-forward business and call center business, which may be 100% owned by foreign investors.
Our
business falls under value-added telecommunications services, which are under the “restricted category” in the Foreign
Investment Catalog (as amended).
Regulations
Relating to Security Administration of Large-scale Mass Activities and Temporary Urban Road Occupation
Pursuant
to the Regulation on Security Administration of Large-scale Mass Activities promulgated by the State Council in September 2007
which became effective in October 2007, large-scale mass activities as mentioned in such regulation refer to the following activities
that legal persons or other organizations hold for the public with the participants expected to reach 1,000 or more in any single
session: sports competition, concert, music concert and other art performances, exhibition, spot sale, etc. The undertaker of
large-scale mass activities, or the Undertaker, shall be responsible for the activity’s security, with the principal of
Undertaker serving as the person in charge of the security of large-scale mass activities. The Undertaker must apply for a security
permit for the large-scale mass activity with the competent public security bureau at least 20 days before the date when the activity
is held. For the large-scale mass activity having the expected number of participants larger than 1,000 but lower than 5,000,
such security permit shall be issued by the local public security bureau of the people’s government at the county level;
for the large-scale mass activity with expected number of participants over 5,000, such security permit shall be issued by the
local public security bureau of the people’s government at the level of cities with district or municipalities; in case
the large-scale mass activity crosses provinces, autonomous regions or municipalities, the security permit shall be issued by
the public security department of the State Council. The Undertaker shall not, without permission, alter the time, location, content
of a large-scale mass activity for which a security permit has been obtained, or enlarge its scale. Furthermore, the Undertaker
shall immediately stop admitting people if the number of people who have entered the activity venue reaches the approved limit.
In case that a public security accident or a security case occurs in the course of a large-scale mass activity, the principal
of Undertaker shall immediately initiate the emergency contingency plan and report to the public security department. Any violation
of the above provision may result in penalties, including but not limited to banning of such activities, fines, confiscation of
illegal gains or criminal liabilities.
In
additions, pursuant to the Regulations on Administration of Urban Roads promulgated in June 1996 and most recently amended in
March 2019 by the State Council, the temporary occupancy and use of urban roads due to extraordinary circumstances shall be approved
by the competent municipal engineering administrative department and the public security and traffic administrative department.
Such temporary occupancy and use with approval shall be carried out in conformity with the approved location, area and time limits,
without damaging the urban roads, and the road shall be restored to its original conditions upon the expiration of the approved
occupation and use duration. The Regulations on Administration of Urban Appearance and Environmental Sanitation promulgated in
June 1992 and most recently amended in March 2017 by the State Council also provides that, among other things, the building of
non-permanent structure or temporary preservation of materials due to extraordinary circumstances shall be approved by the competent
administrative department on urban appearance and environmental sanitation. Any violation of the above provisions may result in,
among others, correction order, fines or liability for damage.
Regulations
Relating to Automobile Sales
The
sales of new automobiles within the territory of PRC are principally governed by the Administrative Measures for the Automobile
Sales, or the Automobile Sales Measures, promulgated by the MOFCOM in April 2017, which became effective in July 2017. Pursuant
to the Automobile Sales Measures, the auto dealer shall submit its basic information to the National Automobile Circulation Information
Administration System of the MOFCOM for record-filing within 90 days after its establishment, update its filing via the system
within 30 days after its filed information is changed, and promptly submit the number and types of automobiles sold and other
information as required via such system. The Automobile Sales Measures further stipulate that, among other things, (1) automobile
suppliers and dealers shall sell automobiles, spare parts and other related products in conformity with relevant regulations and
standards, and shall refrain from the sale of products prohibited by applicable laws and regulations, (2) auto dealers shall,
in an appropriate manner, expressly indicate the prices of automobiles, spare parts and other related products as well as the
rates of charges for various services in their business premises, and shall not charge additional fees beyond the expressly indicated
prices, (3) auto dealers shall expressly indicate the quality assurance, warranty service and other after-sales service policies
of which customers should be aware in their business premises, (4) auto dealers selling household automobiles shall expressly
indicate the information of policies of reparation, replacement and return applicable to household automobiles in their business
premises; and (5) auto dealers shall maintain an updated and accurate record of information related to automobiles sold and the
customers with a record period of no less than 10 years. Any dealer found to be non-compliant with these requirements may potentially
be subject to correction order, warning and/or fines.
Regulations
Relating to Advertisements
According
to the PRC laws and regulations, companies that engage in advertising activities must obtain from the State Administration for
Industry and Commerce (which was integrated into the SAMR with other governmental departments in March 2018), or the SAIC, or
its local branches a business license which specifically includes operating an advertising business within its business scope.
The business license of an advertising company is valid for the duration of its existence, unless the license is suspended or
revoked due to a violation of any relevant law or regulation. PRC laws and regulations set forth certain content requirements
for advertisements in PRC including, among other things, prohibitions on false or misleading content, superlative wording, socially
destabilizing content or content involving obscenities, superstition, violence, discrimination or infringement of the public interest.
Advertisers, advertising agencies, and advertising distributors are required by PRC laws and regulations to ensure that the content
of the advertisements they prepare or distribute is true and in full compliance with applicable law. In providing advertising
services, advertising agencies and advertising distributors must review the supporting documents provided by advertisers for advertisements
and verify the content of the advertisements against these supporting documents before publishing.
In
July 2016, SAIC issued the Interim Measures for the Administration of Internet Advertising, or the Internet Advertising Measures,
pursuant to which internet advertisements refers to the commercial advertisement for direct or indirect marketing of goods or
services in the form of text, image, audio, video, or others means through websites, webpages, internet applications, or other
internet media. The Internet Advertising Measures specifically sets out the following requirements: (1) advertisements must be
identifiable and marked with the word “advertisement” to the extent that consumers are able to distinguish them from
non-advertisement information; (2) sponsored search results must be clearly distinguished from organic search results; (3) it
is forbidden to send advertisements or advertisement links by email without the recipient’s permission or induce internet
users to click on an advertisement in a deceptive manner; (4) pop-up advertisements must clearly display the close button so that
internet users can close the advertisement with one click; and (5) internet information service providers who do not participate
in the business activities of internet advertising but only provide internet information services for the internet advertisement
are also required to stop publishing illegal advertisement if they know or should have known that the advertising via their service
is illegal.
Violation
of these laws and regulations may result in penalties, including fines, confiscation of advertising income, orders to cease dissemination
of the advertisements and orders to publish an advertisement correcting the misleading information. In circumstances involving
serious violations, the SAIC or its local branches may revoke violators' licenses or permits for their advertising business operations.
Furthermore, advertisers, advertising agencies and advertising distributors may be subject to civil liability if they infringe
on the legal rights and interests of third parties.
Regulations
Relating to Internet Information Security and Privacy Protection
Internet
information in China is regulated from a national security standpoint. The Decisions on Preserving Internet Security was enacted
by the NPC, in December 2000 and was amended in August 2009, which subject violators to potential criminal punishment in China
for any effort to (1) gain improper entry into a computer or system of strategic importance; (2) disseminate politically disruptive
information; (3) leak state secrets; (4) spread false commercial information; or (5) infringe intellectual property rights. The
Ministry of Public Security of PRC, or the MPS, has promulgated measures that prohibit use of the internet in ways which, among
other things, result in a leak of state secrets or a spread of socially destabilizing content. If an internet information service
provider violates these measures, the MPS and its local branches may revoke its operating license and shut down its websites.
In
recent years, PRC government authorities have enacted laws and regulations on internet use to protect personal information from
any unauthorized disclosure. Under the Several Provisions on Regulating the Market Order of Internet Information Services, issued
by the MIIT in December 2011 and effective in March 2012, an internet information service provider may not collect any user personal
information or provide any such information to third parties without the consent of the 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’s personal information, and in case of any leak or likely leak of
the user’s personal information, the internet information service provider must take immediate remedial measures and, in
severe circumstances, immediately report to the telecommunications authority. In addition, pursuant to the Decision on Strengthening
the Protection of Online Information issued by the Standing Committee of the NPC in December 2012, the Order for the Protection
of Telecommunication and Internet User Personal Information issued by the MIIT in July 2013 and came into force in September 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. An internet information service provider must
also keep such information strictly confidential, and is further prohibited from divulging, tampering with or destroying any such
information, or selling or providing such information to other parties. An internet information service provider is required to
take technical and other measures to prevent the collected personal information from any unauthorized disclosure, damage or loss.
Any violation of these laws and regulations may subject the internet information service provider to warnings, fines, confiscation
of illegal gains, revocation of licenses, cancellation of filings, closedown of websites or even criminal liabilities.
Moreover,
pursuant to the Ninth Amendment to the Criminal Law issued by the Standing Committee of the NPC in August 2015 which 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, shall be subject to criminal penalty for the
result of (1) any dissemination of illegal information in large scale; (2) any severe effect due to the leakage of the client’s
information; (3) any serious loss of criminal evidence; or (4) other severe situation. Any individual or entity that (1) sells
or provides personal information to others in a way violating the applicable law, or (2) steals or illegally obtain any personal
information, shall be subject to criminal penalty in severe situation. In addition, the Interpretations of the Supreme People’s
Court and the Supreme People’s Procuratorate of the PRC on Several Issues Concerning the Application of Law in Handling
Criminal Cases of Infringing Personal Information, issued in May 2017 and effective in June 2017, clarified certain standards
for the conviction and sentencing of the criminals in relation to personal information infringement. In addition, the PRC General
Provisions of the Civil Law, promulgated in March 2017 and became effective in October 2017, required personal information of
individuals to be protected.
In
November 2016, the Standing Committee of the NPC released the Internet Security Law, which took effect in June 2017. The Internet
Security Law reiterated the requirements regarding collecting and using personal information, including, among others, (1) when
collecting or using personal information, network operators shall clearly indicate the purposes, methods and scope of the information
collection, the use of information collection, and obtain the consent of those from whom the information is collected; and (2)
network operators shall strictly preserve the privacy of user information they collect, and establish and maintain systems to
protect user privacy. The Internet Security Law further requires network operators to perform certain functions related to internet
security protection and the strengthening of network information management. For instance, under the Internet Security Law, network
operators of key information infrastructure generally shall, during their operations in the PRC, store the personal information
and important data collected and produced within the territory of the PRC.
In
January 2019, the Office of the Central Cyberspace Affairs Commission, the MIIT, the Ministry of Public Security, and the SAMR
jointly issued an Announcement of Launching Special Crackdown Against Illegal Collection and Use of Personal Information by Apps
to carry out special campaigns against mobile apps collecting and using personal information in violation of applicable laws and
regulations, which prohibits business operators from collecting personal information irrelevant to their services, or forcing
users to give authorization in a disguised manner. In November 2019, the Secretary Bureau of the Cyberspace Administration of
PRC, the MIIT, the Ministry of Public Security and the SAMR promulgated the Identification Method of Illegal Collection and Use
of Personal Information by App, which provides guidance for the regulatory authorities to identify the illegal collection and
use of personal information through mobile apps, for the app operators to conduct self-examination and self-correction, and for
other participants to voluntarily monitor compliance.
On December
15, 2019, the Provisions on Ecological Governance of Network Information Content was issued by the Cyberspace Administration of
China, which has come into effect on March 1, 2020. These provisions require network information content service platform to perform
its duties as the information content administrator, strengthen ecological governance of the network information contents of its
own platform, and foster a positive, healthy, progressive and amicable cyber culture.
The
MIIT issued the Notice on the Further Special Rectification of Apps Infringing upon Users’ Personal Rights and Interests
in July 2020, which requires that certain conducts of app service providers should be inspected, including, among others, (i)
collecting personal information without the user’s consent, collecting or using personal information beyond the necessary
scope of providing services, and forcing users to receive advertisements; (ii) requesting user’s permission in a compulsory
and frequent manner, or frequently launching third-parties apps; and (iii) deceiving and misleading users into downloading apps
or providing personal information. The notice also sets forth that the period for the regulatory specific inspection on apps and
that the MIIT will order the non-compliant entities to modify their business within five business days, or otherwise to make public
announcement to remove the apps from the app stores and impose other administrative penalties.
The
Civil Code of PRC, which was promulgated by the NPC in May 2020 and became effective in January 2021, provides that:
(i)
the personal information of a natural person shall be protected by law. Personal information shall refer to various types of information
recorded electronically or otherwise that can identify a specific natural person either alone or in combination with other information,
including the natural persons name, date of birth, identity document number, biometric information, residential address, phone
number, email address, health information, and location information;
(ii)
the processing of personal information shall include the collection, storage, use, processing, transmission, provision, and disclosure
of personal information. The processing of personal information shall be carried out pursuant to the principles of lawfulness,
appropriateness and necessity, and excessive processing shall not be allowed. In addition, the following conditions shall be satisfied:
(a) the consent of the natural person who is the owner of the personal information or his/her guardian shall be obtained, unless
otherwise prescribed by laws and administrative regulations; (b) the rules for information processing shall be made public; (c)
the purposes, methods and scope of information processing shall be made public; and (d) the provisions of laws and administrative
regulations and the agreements of both parties shall not be violated; and
(iii)
an information processor shall not divulge or tamper with the personal information it collects or stores; and, without the consent
of a natural person, the information processor shall not illegally provide others with the personal information of the natural
person, except for information that is rendered unrecoverable after processing and from which no specific individual may be identified.
An
information processor shall take technical and other necessary measures to ensure the security of the personal information it
collects and stores, and prevent information from being leaked, tampered with or lost; and, if personal information has been or
may be leaked, tampered with or lost, the information processor shall take remedial measures in a timely manner, inform the natural
persons concerned in accordance with relevant provisions, and report the situations to competent departments concerned.
Regulations
Relating to Consumer Rights Protection and Tort Liabilities
According
to the Laws on Protection of Consumers’ Rights and Interests of the PRC, which was latest amended in October 2013, if a
consumer’s legitimate rights and interests are infringed upon by the goods seller or service provider at a trade fair, such
customer may demand compensation from the infringing seller or service provider. If the trade fair is over, the customer may also
demand compensation from the undertaker of such trade fair, in which case the undertaker has the right to recover the compensation
from the infringing sellers or service providers afterwards.
The
Implementation Measures of the PBOC for Protecting Rights and Interests of Financial Consumers, or the Measures for Financial
Consumer Protection, promulgated by the PBOC on December 14, 2016 came into force on the same day. The Measures for Financial
Consumer Protection provided that banks and payment institutions shall follow the principles of voluntariness, equality, fairness
and integrity, conscientiously assume primary responsibilities for protecting the legitimate rights and interests of financial
consumers, and fulfill statutory obligations concerning financial consumer protection. They shall establish and improve internal
control systems for financial consumer protection. When handling consumer financial information, banks and payment institutions
shall follow the principles of legitimacy, justifiability and necessity, and obtain the explicit consent of financial consumers
or their guardians. The Measures for Financial Consumer Protection also require banks and payment institutions to protect the
personal financial information of consumers, including personal identification information, property information, account information,
credit information, financial transaction information and other information that reflects the conditions of a particular individual.
Regulations
on Anti-Monopoly Matters Related to Internet Platform Companies
The
PRC Anti-Monopoly Law, which took effect on August 1, 2008, prohibits monopolistic conducts such as entering into monopoly agreements,
abusing market dominance, and undertaking concentrations that may have the effect of eliminating or restricting competition. On
February 7, 2021, the Anti-Monopoly Commission of the State Council officially promulgated the Anti-Monopoly Guidelines for Internet
Platforms. The guidelines prohibit certain monopolistic conducts of internet platforms to protect market competition, safeguard
interests of users and operators who participate in internet platform economics, including without limitation, prohibiting platforms
with dominant position from abusing their market dominance (such as discriminating customers in terms of pricing and other transactional
conditions using big data and analytics, coercing counterparties into exclusivity arrangements, using technology methods to block
competitors’ interface, tying or attaching unreasonable trading conditions, compulsory collection of unnecessary user data).
In addition, the guidelines also reinforce the requirement of antitrust merger review for internet platform related transactions
to safeguard market competition.
Regulation
Related to Financial Lease
Pursuant
to the Administrative Measures of Supervision on Financial Leasing Enterprises formulated by the MOFCOM which became effective
on October 1, 2013 (the “Administrative Measures”), financial leasing enterprises shall not engage in deposits, loans,
entrusted loans or inter-bank borrowing and equity investment unless permission has been granted from relevant departments. The
Administrative Measures also contain regulatory provisions specifically focusing on sale-and-leaseback transactions. The leased
assets in sale-and-leaseback transactions must be properties that possess economic functions and produce continuous economic benefits.
A financial leasing enterprise shall give adequate consideration to and objectively evaluate assets leased back, set purchasing
prices for subject matter thereof with reference to reasonable pricing basis in compliance with accounting principles, and shall
not purchase any subject matter at a price in excess of the value thereof.
In
April 2018, the MOFCOM transferred the duties to promulgate rules and regulations on the operations and supervision of financial
leasing enterprises to the newly founded China Banking and Insurance Regulatory Commission. It is uncertain whether the change
of the authority may lead to changes in the interpretation and application of existing Administrative Measures or how any such
changes might affect financial leasing enterprises.
Regulations
Relating to Financing Guarantee
In
August 2017, the State Council promulgated the Regulations on the Supervision and Administration of Financing Guarantee Companies,
or the Financing Guarantee Regulations, which became effective on October 1, 2017. The Financing Guarantee Regulations define
“financing guarantee” as a guarantee provided for the debt financing (including but not limited to the extension of
loans or issuance of bonds), and set out that the establishment of a financing guarantee company or engagement in the financing
guarantee business without approval may result in several penalties, including but not limited to banning, an order to cease business
operation, confiscation of illegal gains, fines of up to RMB1,000,000 and criminal liabilities. The Financing Guarantee Regulations
also set forth that the outstanding guarantee liabilities of a financing guarantee company shall not exceed ten times of its net
assets, and that the outstanding guarantee liabilities of a financing guarantee company vis-à-vis the same guaranteed party
shall not exceed 10% of the net assets of the financing guarantee company, while the outstanding guarantee liabilities of a financing
guarantee company vis-à-vis the same guaranteed party and its affiliated parties shall not exceed 15% of its net assets.
In
April 2018, seven PRC regulatory agencies including the China Banking and Insurance Regulatory Commission, or the CBIRC, the National
Development and Reform Committee and the MIIT, jointly issued four supporting documents, or the CBIRC Circular 1, including Administration
Measures for the Permits to Conduct Financing Guarantee Business, Measures for the Calculation of Outstanding Financing Guarantee
Liabilities, Administration Measures for the Assets Ratio of Financing Guarantee Companies, and Guidelines to the Cooperation
by and between the Banking Financial Institutions and Financing Guarantee Companies, to set forth implementation measures of the
Financing Guarantee Regulations. These measures cover various aspects of business operations of financing guarantee companies,
including certain limits on outstanding guarantee liabilities and liability-to-asset ratio, and the requirements on cooperation
model with the banking financial institutions.
On
October 9, 2019, the CBIRC and other eight PRC regulatory agencies promulgated the Supplementary Provisions on the Supervision
and Administration of Financing Guarantee Companies, or the Financing Guarantee Supplementary Provisions. The Financing Guarantee
Supplementary Provisions provides that, among others, institutions providing services such as client recommendation and credit
assessment to various institutional funding partners shall not render any financing guarantee service, whether directly or in
disguised form, without the necessary approval.
In
July 2020, the CBIRC implemented the Commercial Banks Online Lending Measure to formulate the regulation regime for online lending
business conducted by commercial banks. For example, the Commercial Banks Online Lending Measures set several rules for commercial
banks to collaborate with external institutions on online lending, including: (i) commercial banks shall conduct pre-admission
assessments on cooperative external institutions and manage such external institutions by a name list; (ii) commercial banks shall
not accept any credit enhancement services directly or in disguised form, from third parties without qualification to provide
guarantee, credit insurance or guarantee insurance; (iii) the cooperative external institutions (except for an insurance company
or an institution with guarantee qualification) shall not charge any interest or expense to the borrower in any form; (iv) commercial
banks shall independently conduct the credit approval, contract execution and other core risk control business; (v) the collaboration
agreement between the commercial banks and the cooperative external institutions shall be executed in writing and specify the
cooperation scope, data confidentiality, transitional arrangement for change or termination of the matters under cooperation,
and the commitment of the external institutions for cooperating with the commercial bank in accepting the inspection by the banking
regulatory authorities; and (vi) the commercial banks shall fully disclose, in conspicuous place of relevant page, the information
of the cooperative external institutions, the information of the cooperative product, as well as rights and responsibilities of
the commercial bank and the cooperative external institutions. The Commercial Banks Online Lending Measures set forth a transitional
period of these measures, which is two years from the date on which the Commercial Banks Online Lending Measures is implemented.
The business newly increased in the transitional period shall comply with the requirement therein, and a plan to rectify the online
lending business within such transitional period shall be formulated and submitted to the banking regulatory authority within
one month from the implementation date.
In
February 2021, the CBIRC promulgated the Circular 24, which sets forth several requirements on the online lending business of
the commercial banks, including: (i) the commercial banks shall conduct the risk control measures independently and the core credit
assessment and risk control business are prohibited to be outsourced; (ii) except for the commercial banks which have no actual
business sites, mainly conduct online business and meet other requirements stipulated by the CBIRC, local commercial banks shall
conduct online lending within the jurisdiction where such commercial banks are registered; and (iii) with respect to the online
loan business conducted in cooperation with third-party institutions, the capital contribution of cooperative institutions shall
not be less than 30% in a single loan.
Regulations
Relating to Intellectual Property Rights
The
PRC has adopted comprehensive legislation governing intellectual property rights, including copyrights, patents, trademarks and
domain names.
Copyright.
Copyright in the PRC, including copyrighted software, is principally protected under the Copyright Law of the PRC, which was latest
amended in February 2010 and took effect in April 2010, or the Copyright Law, and related rules and regulations. A revised Copyright
Law was promulgated in November 2020 and will become effective in June 2021. Under the Copyright Law, the term of protection for
copyrighted software is 50 years.
Patent.
The Patent Law of the PRC that was latest amended in December 2008 and became effective in October 2009, or the Patent Law, provides
for patentable inventions, utility models and designs. A revised Patent Law was promulgated in October 2020 and will become effective
in June 2021. An invention or utility model for which patents may be granted shall have novelty, creativity and practical applicability.
The State Intellectual Property Office is responsible for examining and approving patent applications.
Trademark.
The Trademark Law of the PRC that was latest amended in April 2019 and took effect in November 2019, or the Trademark Law, and
its implementation rules protect registered trademarks. The PRC Trademark Office is responsible for the registration and administration
of trademarks throughout the PRC. The Trademark Law has adopted a “first-to-file” principle with respect to trademark
registration.
Domain
Name. Domain names are protected under the Administrative Measures on the Internet Domain Names promulgated by MIIT in August
2017, which became effective in November 2017, or the Domain Names Measures. MIIT is the major regulatory body responsible for
the administration of the PRC internet domain names. The Domain Names Measures has adopted a “first-to-file” principle
with respect to the registration of domain names.
Regulations
Relating to Tax
Enterprise
Income Tax
PRC
enterprise income tax is calculated based on taxable income, which is determined under (1) the PRC Enterprise Income Tax Law,
promulgated by the NPC and implemented in January 2008 and amended in December 2018, or the EIT Law, and (2) the implementation
rules to the EIT Law promulgated by the State Council in January 2008 and amended in April 2019. The EIT Law imposes a uniform
enterprise income tax rate of 25% on all resident enterprises in the PRC, including foreign-invested enterprises and domestic
enterprises, unless they qualify for certain exceptions. According to the EIT Law and its implementation rules, the income tax
rate of an enterprise that has been determined to be a high and new technology enterprise may be reduced to 15%.
In
addition, according to the EIT Law, enterprises registered in countries or regions outside the PRC but have their “de facto
management bodies” located within China may be considered as PRC resident enterprises and are therefore subject to PRC enterprise
income tax at the rate of 25% on their worldwide income. Though the implementation rules of the EIT Law define “de facto
management bodies” as “establishments that carry out substantial and overall management and control over the manufacturing
and business operations, personnel, accounting, properties, etc., of an enterprise,” the only detailed guidance currently
available for the definition of “de facto management body” as well as the determination and administration
of tax residency status of offshore-incorporated enterprises are set forth in the Notice Regarding the Determination of Chinese-Controlled
Overseas Incorporated Enterprises as PRC Tax Resident Enterprises on the Basis of De Facto Management Bodies promulgated by SAT
in April 2009, or SAT Circular 82, the Administrative Measures for Enterprise Income Tax of Chinese-Controlled Overseas Incorporated
Resident Enterprises (Trial Version) issued by the SAT in July 2011, or SAT Bulletin No. 45, and the Notice on Issues Related
To Implementation of Determination of Tax Resident Enterprise on the Basis of De Facto Management Bodies issued by the SAT in
January 2014, or SAT Bulletin No. 9, all of which provide guidance on the administration as well as the determination of the tax
residency status of a Chinese-controlled offshore-incorporated enterprise, defined as an enterprise that is incorporated under
the law of a foreign country or territory and that has a PRC company or PRC corporate group as its primary controlling shareholder.
According
to SAT Circular 82, a Chinese-controlled offshore-incorporated enterprise will be regarded as a PRC resident enterprise by virtue
of having its “de facto management body” in China and will be subject to PRC enterprise income tax on its global income
only if all of the following conditions are met:
|
•
|
the
senior management and core management departments in charge of the enterprise’s
daily operations function are mainly in the PRC;
|
|
•
|
financial
and human resources decisions of the enterprise are subject to determination or approval
by persons or bodies in the PRC;
|
|
•
|
the
enterprise’s major assets, accounting books, company seals, and minutes and files
of its board and shareholders’ meetings are located or kept in the PRC; and
|
|
•
|
50%
or more of the enterprise’s directors or senior management with voting right habitually
reside in the PRC.
|
SAT
Bulletin No. 45 further clarifies certain issues related to the determination of tax resident status and competent tax authorities.
It also specifies that when provided with a copy of Recognition of Residential Status from a resident Chinese-controlled offshore-incorporated
enterprise, a payer does not need to withhold income tax when paying certain PRC-sourced income such as dividends, interest and
royalties to such Chinese-controlled offshore-incorporated enterprise.
SAT
Bulletin No. 9 further provides that, among other things, an entity that is classified as a “PRC resident enterprise”
in accordance with the SAT Circular 82 shall file the application for classifying its status of residential enterprise with the
local tax authorities where its main domestic investors are registered. From the year in which the entity is determined as a “PRC
resident enterprise”, any dividend, profit and other equity investment gain shall be taxed in accordance with the EIT Law
and its implementing rules.
If
TuanChe Limited or any of our subsidiaries outside of China were to be considered a PRC “resident enterprise” under
the EIT Law, we will be subject to PRC enterprise income tax on our worldwide income at a uniform tax rate of 25.0%. 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 enterprise income tax purposes, such classification could result in unfavorable tax consequences to us and
our non-PRC shareholders and ADS holders.”
Income
Tax for Share Transfers
According
to the Public Notice Regarding Certain Enterprise Income Tax Matters on Indirect Transfer of Properties by Non-resident Enterprise,
or SAT Bulletin 7, promulgated by the SAT in February 2015, if a non-resident enterprise transfers the equity interests of a PRC
resident enterprise indirectly by transfer of the equity interests of an offshore holding company (other than a purchase and sale
of shares issued by a PRC resident enterprise in public securities market) without a reasonable commercial purpose, the PRC tax
authorities have the power to reassess the nature of the transaction and the indirect equity transfer will be treated as a direct
transfer. As a result, the gain derived from such transfer, which means the equity transfer price less the cost of equity, will
be subject to PRC withholding tax at a rate of up to 10%. Under the terms of SAT Bulletin 7, the transfer which meets all of the
following circumstances shall be directly deemed as having no reasonable commercial purposes: (1) over 75% of the value of the
equity interests of the offshore holding company are directly or indirectly derived from PRC taxable properties; (2) at any time
during the year before the indirect transfer, over 90% of the total properties of the offshore holding company are investments
within PRC territory, or in the year before the indirect transfer, over 90% of the offshore holding company’s revenue is
directly or indirectly derived from PRC territory; (3) the function performed and risks assumed by the offshore holding company
are insufficient to substantiate its corporate existence; or (4) the foreign income tax imposed on the indirect transfer is lower
than the PRC tax imposed on the direct transfer of the PRC taxable properties. In October 2017, SAT issued the Announcement of
the State Administration of Taxation on Issues Concerning the Withholding of Non-resident Enterprise Income Tax at Source, or
the SAT Bulletin 37, which, among others, repeals certain rules stipulated in SAT Bulletin 7 and became effective on December
1, 2017. The SAT Bulletin 37 further details and clarifies the tax withholding methods in respect of income of non-resident enterprises.
There
is uncertainty as to the application of SAT Bulletin 7. SAT Bulletin 7 may be determined by the PRC tax authorities to be applicable
to our prior private equity financing transactions that involved non-resident investors, if any of such transactions are determined
by the tax authorities to lack reasonable commercial purpose. As a result, we and our non-resident investors in such transactions
may become at risk of being taxed under SAT Bulletin 7, and we may be required to expend valuable resources to comply with SAT
Bulletin 7 or to establish that we should not be taxed under the general anti-avoidance rule of the EIT Law, which may have a
material adverse effect on our financial condition and results of operations.
Dividend
Withholding Tax
Pursuant
to the EIT 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 SAT on the Issues concerning the Application of the Dividend Clauses of Tax Agreements, or SAT Circular 81, promulgated
by the SAT in February 2009, a Hong Kong resident enterprise must meet the following conditions, among others, in order to enjoy
the reduced withholding tax: (1) it should be a company as provided in the tax treaty; (2) it must directly own the required percentage
of equity interests and voting rights in the PRC resident enterprise; and (3) it must have directly owned such percentage in the
PRC resident enterprise throughout the 12 months prior to receiving the dividends. In August 2015, the SAT promulgated the Administrative
Measures for Non-Resident Taxpayers to Enjoy Treatments under Tax Treaties, or SAT Circular 60, which became effective in November
2015 and was amended in June 2018. SAT 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. In February 2018, the SAT promulgated the
Notice on Issues Related to the “Beneficial Owner” in Tax Treaties, according to which when determining the applicant’s
status of the “beneficial owner” regarding tax treatments in connection with dividends in the tax treaties, several
factors, including without limitation, whether the applicant is obligated to pay more than 50% of its income in twelve months
to residents in third country or region, whether the business operated by the applicant constitutes the actual business activities,
and whether the counterparty country or region to the tax treaties does not levy any tax or grant tax exemption on relevant incomes
or levy tax at an extremely low rate, will be taken into account, and it will be analyzed according to the actual circumstances
of the specific cases. In October 2019, the SAT promulgated the Administrative Measures for Non-Resident Taxpayers to Enjoy Treatments
under Tax Treaties, or SAT Circular 35. SAT Circular 35 became effective on January 1, 2020 and superseded SAT Circular 60 on
the same date. Compared to SAT Circular 60, SAT Circular 35 provides that the nonresident enterprises and their withholding agents
are not required to submit the supporting documents for tax treaty benefits when performing tax filings. Instead, nonresident
enterprises and their withholding agents may retain such supporting documents themselves for the post-tax filing examinations
by the relevant tax authorities. If our Hong Kong subsidiary satisfies all the requirements under the tax arrangement and receives
approval from the relevant tax authority, 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—There
are significant uncertainties under the PRC enterprise income tax law relating to the withholding tax liabilities of our PRC subsidiaries,
and dividends payable by our PRC subsidiaries to our offshore subsidiaries may not qualify to enjoy certain treaty benefits.”
Regulations
Relating to Foreign Currency Exchange
Foreign
Currency Exchange
The
principal regulations governing foreign currency exchange in China are the Regulations of the People’s Republic of China
on Foreign Exchange Administration, promulgated by the State Council and amended in August 2008. Under these regulations, the
Renminbi is freely convertible for current account items, including the trade and service-related foreign exchange transactions
and other current exchange transactions, but not for capital account items, such as direct investments, loans, repatriation of
investments and investments in securities, unless the prior approval of the SAFE, is obtained and prior registration with SAFE
is made.
In
August 2008, the Notice of the General Affairs Department of the State Administration of Foreign Exchange on the Relevant Operating
Issues concerning the Improvement of the Administration of Payment and Settlement of Foreign Currency Capital of Foreign-invested
Enterprises, or SAFE Circular 142, was promulgated by the General Affairs Department of SAFE, which regulates the conversion by
foreign-invested enterprises of foreign currency capital into Renminbi by restricting how the converted Renminbi may be used.
SAFE Circular 142 requires that Renminbi converted from the foreign currency-denominated capital of a foreign-invested enterprise
may only be used for purposes within the business scope approved by the relevant government authority and may not be used to make
equity investments in PRC, unless specifically provided otherwise. SAFE further strengthened its oversight over the flow and use
of Renminbi funds converted from the foreign currency-denominated capital of a foreign-invested enterprise. The use of such Renminbi
may not be changed without approval from SAFE, and may not be used to repay Renminbi loans if the proceeds of such loans have
not yet been used. Any violation of SAFE Circular 142 may result in severe penalties, including substantial fines.
The
Notice of the State Administration of Foreign Exchange on Further Improving and Adjusting the Foreign Exchange Administration
Policies on Direct Investments was promulgated by SAFE in November 2012 and most recently amended in December 2019, and substantially
amends and simplifies the foreign exchange procedure. Pursuant to this circular, the opening of various special purpose foreign
exchange accounts, such as pre-establishment expense accounts, foreign exchange capital accounts and guarantee accounts, the reinvestment
of Renminbi proceeds by foreign investors in the PRC, and remittance of foreign exchange profits and dividends by a foreign-invested
enterprise to its foreign shareholders no longer require the approval or verification of SAFE, and multiple capital accounts for
the same entity may be opened in different provinces, which was not possible previously. In addition, according to the Notice
of the State Administration of Foreign Exchange on Issuing the Provisions on the Foreign Exchange Administration of Domestic Direct
Investment of Foreign Investors and the Supporting Documents promulgated by SAFE in May 2013 and most recently amended in December
2019, the administration by SAFE or its local branches over direct investment by foreign investors in the PRC shall be conducted
by way of registration and banks shall process foreign exchange business relating to the direct investment in the PRC based on
the registration information provided by SAFE and its branches.
In
July 2014, SAFE further reformed the foreign exchange administration system in order to satisfy and facilitate the business and
capital operations of foreign investment entities, and issued the Notice of the State Administration of Foreign Exchange on the
Pilot Reform of the Administrative Approach Regarding the Settlement of the Foreign Exchange Capitals of Foreign-Invested Enterprises
in Certain Areas, or SAFE Circular 36. This circular suspends the application of SAFE Circular 142 in certain areas and allows
a foreign-invested enterprise registered in such areas to use the Renminbi capital converted from foreign currency registered
capital for equity investments within the PRC if the approved principal business of the foreign-invested enterprise includes investment
or it complies with certain foreign exchange procedures.
In
March 2015, SAFE released the Notice of the State Administration of Foreign Exchange on Reforming the Administrative Approach
Regarding the Settlement of the Foreign Exchange Capitals of Foreign-invested Enterprises, or SAFE Circular 19, effective in June
2015 and amended in December 2019, which has made certain adjustments to some regulatory requirements on the settlement of foreign
exchange capital of foreign-invested enterprises, lifted some foreign exchange restrictions under SAFE Circular 142, and annulled
SAFE Circular 142 and SAFE Circular 36. However, SAFE Circular 19 continues to, prohibit foreign-invested enterprises from, among
other things, using Renminbi fund converted from its foreign exchange capitals for expenditure beyond its business scope, providing
entrusted loans or repaying loans between non-financial enterprises.
In
June 2016, SAFE issued the Notice of the State Administration of Foreign Exchange on Reforming and Standardizing the Administrative
Provisions on Capital Account Foreign Exchange Settlement, or SAFE Circular 16, which took effect on the same day. Compared to
SAFE Circular 19, SAFE Circular 16 provides that, in addition to foreign exchange capital, foreign debt funds and proceeds remitted
from foreign listings should also be subject to the discretional foreign exchange settlement. In addition, it also lifted the
restriction, that foreign exchange capital under the capital accounts and the corresponding Renminbi capital obtained from foreign
exchange settlement should not be used for repaying the inter-enterprise borrowings (including advances by the third party) or
repaying bank loans in Renminbi that have been sub-lent to the third party.
In
January 2017, SAFE promulgated the Circular on Further Improving Reform of Foreign Exchange Administration and Optimizing Genuineness
and Compliance Verification, or SAFE Circular 3, which stipulates several capital control measures with respect to the outbound
remittance of profit from domestic entities to offshore entities, including (1) under the principle of genuine transaction, banks
shall check board resolutions regarding profit distribution, the original version of tax filing records and audited financial
statements; and (2) domestic entities shall hold income to account for previous years’ losses before remitting profits.
Moreover, pursuant to SAFE Circular 3, domestic entities shall make detailed explanations of the sources of capital and utilization
arrangements, and provide board resolutions, contracts and other proof when completing the registration procedures in connection
with an outbound investment.
In
April 2020, SAFE promulgated the Circular on Optimizing Foreign Exchange Administration to Support the Development of Foreign-related
Business, or SAFE Circular 8, which promoted the nationwide reform of facilitating the payments of incomes under the capital accounts.
Pursuant to SAFE Circular 8, under the prerequisite of ensuring true and compliant use of funds and compliance and complying with
the prevailing administrative provisions on use of income from capital projects, enterprises which satisfy the criteria are allowed
to use income under the capital account, such as capital funds, foreign debt and overseas listing, etc., for domestic payment,
without the need to provide proof materials for veracity to the bank beforehand for each transaction.
Foreign
Exchange Registration of Overseas Investment by PRC Residents
In
July 2014, SAFE promulgated the Notice of the State Administration of Foreign Exchange on the Administration of Foreign Exchange
Involved in Overseas Investment, Financing and Roundtrip Investment Conducted by Residents in China via Special-Purpose Companies,
or SAFE Circular 37, which replaced the former circular commonly known as SAFE Circular 75 promulgated by SAFE in October 2005.
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 an 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.
In
February 2015, SAFE released the Notice of the State Administration of Foreign Exchange on Further Simplifying and Improving the
Policies of Foreign Exchange Administration Applicable to Direct Investment, or SAFE Circular 13, which has amended SAFE Circular
37 by requiring PRC residents or entities to register with qualified banks rather than SAFE or its local branch in connection
with their establishment or control of the special purpose vehicle. However, remedial registration applications made by PRC residents
that previously failed to comply with the SAFE Circular 37 continue to fall under the jurisdiction of the relevant local branch
of SAFE .
Share
Option Rules
Pursuant
to SAFE Circular 37, PRC residents who participate in share incentive plans in overseas non-publicly-listed companies may submit
applications to SAFE or its local branches for the foreign exchange registration with respect to offshore special purpose companies.
In addition, under the Notice of the State Administration of Foreign Exchange on Issues Related to Foreign Exchange Administration
in Domestic Individuals Participation in Equity Incentive Plans of Companies Listed Abroad issued by SAFE in February 2012, or
the SAFE Circular 7, PRC residents who are granted shares or share options by companies listed on overseas stock exchanges under
share incentive plans are required to (1) register with SAFE or its local branches, (2) retain a qualified PRC agent, which may
be a PRC subsidiary of the overseas listed company or another qualified institution selected by the PRC subsidiary, to conduct
SAFE registration and other procedures with respect to the share incentive plans on behalf of the participants, and (3) retain
an overseas institution to handle matters in connection with their exercise of share options, purchase and sale of shares or interests
and funds transfers. In addition, the PRC agent is required to amend the SAFE registration with respect to the stock incentive
plan if there is any material change to the share incentive plan, the PRC agent or the overseas entrusted institution or other
material changes. The PRC agents must, on behalf of the PRC residents who have the right to exercise the employee share options,
apply to SAFE or its local branches for an annual quota for the payment of foreign currencies in connection with the PRC residents’
exercise of the employee share options. The foreign exchange proceeds received by the PRC residents from the sale of shares under
the stock incentive plans granted and dividends distributed by the overseas listed companies must be remitted into the bank accounts
in the PRC opened by the PRC agents before distribution to such PRC residents.
Regulations
Relating to Dividend Distribution
Under
our current corporate structure, our Cayman Islands holding company may rely on dividend payments from our PRC subsidiaries, which
is a wholly foreign-owned enterprise incorporated in China, to fund any cash and financing requirements we may have. Under PRC
laws and regulations, wholly foreign-owned enterprises in the PRC may pay dividends only out of accumulated profits, after setting
aside annually at least 10% of accumulated after-tax profits as statutory reserve fund, if any, unless these reserves have reached
50% of the registered capital of the enterprises. A wholly foreign-owned enterprise may allocate a portion of its after-tax profits
to discretionary surplus fund at its discretion. These statutory reserve funds and discretionary surplus funds may not be distributed
as cash dividends. Profit of a wholly foreign-owned enterprise shall not be distributed before the losses thereof for the previous
accounting years have been made up. Profits retained from prior fiscal years may be distributed together with distributable profits
from the current fiscal year.
Regulations
Relating to M&A and Overseas Listings
Six
PRC regulatory agencies, including the CSRC, jointly adopted the Regulations on Mergers and Acquisitions of Domestic Enterprises
by Foreign Investors, which became effective in September 2006 and was amended in June 2009, or the M&A Rules. Foreign investors
shall comply with the M&A Rules when they purchase equity interests of a domestic company or subscribe 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 and purchase, through such enterprise, any assets of a domestic company
and operate such assets; 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, require offshore special purpose
vehicles formed for overseas listing purposes through acquisitions of PRC domestic companies and controlled by PRC companies or
individuals, to obtain the approval of the CSRC prior to publicly listing their securities on an overseas stock exchange.
Regulations
Relating to Employment
Pursuant
to the Labor Law of PRC, promulgated by the Standing Committee of NPC in July 1994 and amended in December 2018, or the Labor
Law, and the Labor Contract Law of PRC, promulgated by Standing Committee of the NPC in June 2007 and amended in December 2012,
or the Labor Contract Law, employers must execute written employment contracts with full-time employees. If an employer fails
to enter into a written employment contract with an employee for more than a month but less than a year from the date on which
the employment relationship is established, the employer must rectify the situation by entering into a written employment contract
with the employee and pay the employee twice the employee’s salary for the period from the day following the lapse of one
month from the date of establishment of the employment relationship to the day prior to the execution of the written employment
contract. If an employer fails to conclude a written labor contract with a worker within one year as of the date when it employs
the worker, it shall be deemed to have concluded an open-ended labor contract with the latter. All employers must compensate their
employees with wages equal to at least the local minimum wage. Violations of the Labor Law and the Labor Contract Law may result
in fines and other administrative sanctions, and serious violations may result in criminal liabilities.
Enterprises
in China are required by the Social Insurance Law of PRC promulgated by the Standing Committee of the NPC in October 2010 which
became effective in July 2011 and amended in 2018, or the Social Insurance Law, the Regulations on Management of Housing Provident
Fund released by the State Council in March 2002 and amended in March 2019, and other related rules 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, an on-the-job 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. Failure to make adequate contributions to various employee benefit plans may be subject
to fines and other administrative sanctions. 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 0.05% per day, as the case may be. If the employer still fails to rectify the failure to make social
insurance contributions within the deadline, it may be subject to a fine ranging from one to three times the amount overdue. According
to the Regulations on Management of Housing Fund, an enterprise that fails to make housing fund contributions may be ordered to
rectify the noncompliance and pay the required contributions within a stipulated deadline; otherwise, an application may be made
to a local court for compulsory enforcement.
C.
Organizational Structure
The
following diagram illustrates our corporate structure, including our principal subsidiaries and affiliated entities, as of the date of
this annual report:
|
(1)
|
Mr.
Zhiwen Lan, Mr. Jianchen Sun, Mr. Qiuhua Xu, Mr. Xingyu Du, Mr. Zijing Zhou, Mr. Zhen Ye, and Lanxi Puhua Juli Equity Investment L.P.
hold a 1.1226%, 15.2170%, 0.9972%, 13.2840%, 0.0973%, 0.5836%, and 2.7000% equity interest in TuanChe Internet, respectively.
|
|
(2)
|
Tianjin Hengyuan Chuangxin Automobile Sales Co., Ltd. and Tengzhou Guochuang
Automobile Sales & Service Co., Ltd. are in the process of deregistration as of the date of this annual report.
|
The
following table sets out the details of our subsidiaries, affiliated entity and schools/subsidiaries held by our affiliated entity
that are significant to us.
Subsidiaries
|
|
Place of
Incorporation
|
|
Ownership
Interest
|
|
TuanChe Information Limited (“TuanChe Information”)
|
|
Hong Kong
|
|
|
100
|
%
|
TuanYuan Internet Technology (Beijing) Co., Ltd. (“TuanYuan”)
|
|
PRC
|
|
|
100
|
%
|
Longye International Limited
|
|
Cayman Islands
|
|
|
100
|
%
|
Long Ye Information Technology Limited
|
|
Hong Kong
|
|
|
100
|
%
|
Beijing Sangu Maolu Information Technology Co., Ltd. (“Sangu Maolu”)
|
|
PRC
|
|
|
100
|
%
|
Chema Technology (Beijing) Co.,
Ltd. (“Chema”)
|
|
PRC
|
|
|
100
|
%
|
Major VIEs
|
|
Place of
Incorporation
|
|
Ownership
Interest
|
|
TuanChe Internet Information Service (Beijing) Co., Ltd. (“TuanChe Internet”)
|
|
PRC
|
|
|
100
|
%
|
Best Cars Limited (“Best Cars”)
|
|
British Virgin Islands
|
|
|
100
|
%
|
Shenzhen Drive New Media Co., Ltd. (“Drive New Media”)
|
|
PRC
|
|
|
100
|
%
|
Beijing Internet Drive Technology Co., Ltd. (“Internet Drive Technology”)
|
|
PRC
|
|
|
100
|
%
|
Tansuojixian Technology (Beijing) Co., Ltd (“Tansuojixian”)
|
|
PRC
|
|
|
100
|
%
|
Major subsidiaries of VIEs
|
|
Place of
Incorporation
|
|
Ownership
Interest
|
|
TuanChe (Beijing) Automobile Sales & Service Co., Ltd. (“TuanChe Automobile”)
|
|
PRC
|
|
|
100
|
%
|
Beijing GuoHeng Chuangxin Automobile Sales & Service Co., Ltd. (“GuoHeng Chuangxin”)
|
|
PRC
|
|
|
100
|
%
|
Tengzhou GuoChuang Automobile Sales & Service Co., Ltd. (“GuoChuang Automobile”)
|
|
PRC
|
|
|
100
|
%
|
Tianjin Hengyuan Chuangxin Automobile Sales Co., Ltd. (“Tianjin Hengyuan”)
|
|
PRC
|
|
|
100
|
%
|
Our
Contractual Arrangements
PRC laws and regulations place certain restrictions
on foreign investment in value-added telecommunication service businesses. We conduct our operations in the PRC principally through TuanChe
Internet, Drive New Media, Internet Drive Technology and Tansuojixian, which are our variable interest entities, or our VIEs, and their
subsidiaries, collectively referred to as our consolidated affiliated entities in this annual report. We have entered into a series of
contractual arrangements, through TuanYuan, Sangu Maolu or Chema (as applicable), or our WFOEs, with each of our VIEs and their respective
shareholders, respectively, which enable us to:
|
•
|
exercise
effective control over each of our consolidated affiliated entities;
|
|
•
|
receive
substantially all of the economic benefits of our consolidated affiliated entities; and
|
|
•
|
have
an exclusive call option to purchase all or part of the equity interests in and/or assets
of each of our VIEs when and to the extent permitted by PRC laws.
|
As
a result of these contractual arrangements, we are the primary beneficiary of our consolidated affiliated entities, and, therefore,
have consolidated their financial results in our consolidated financial statements in accordance with U.S. GAAP.
Below
is a summary of the currently effective contractual arrangements by and among our VIEs, WFOEs and their respective shareholders.
Exclusive
Business Cooperation Agreement
Pursuant
to the exclusive business cooperation agreement between each of our VIEs and the applicable WFOE, the respective WFOE has the
exclusive right to provide or designate any third party to provide, among other things, comprehensive business support, technical
support and consulting services to our VIEs. In exchange, VIEs pay service fees to the respective WFOE in an amount determined
at such WFOE’s discretion. Without the prior written consent of the applicable WFOE, our VIEs cannot accept any consulting
and/or services provided by or establish similar cooperation relationship with any third party. Such WFOE owns the exclusive intellectual
property rights created as a result of the performance of this agreement. The agreement shall remain effective unless unilaterally
terminated by such WFOE with a written notice or pursuant to other provisions of the agreement, whereas our VIEs do not have any
right to unilaterally terminate the exclusive business cooperation agreement.
Exclusive
Call Option Agreement
Under
the exclusive call option agreement among the applicable WFOE, each of our VIEs and their respective shareholders, each of the
shareholders of our VIEs irrevocably granted such WFOE a right to purchase, or designate a third party to purchase, all or any
part of their equity interests in our VIEs at a purchase price equal to the lowest price permissible by the then-applicable PRC
laws and regulations at such WFOE’s sole and absolute discretion to the extent permitted by PRC law. The shareholders of
our VIEs shall promptly give all considerations they received from the exercise of the options to our WFOEs (as applicable). Without
the applicable WFOE’s prior written consent, our VIEs and their respective shareholders shall not enter into any major contract
except for those entered in the daily business operations. Without the applicable WFOE’s prior written consent, our VIEs
and their respective shareholders shall not sell, transfer, license or otherwise dispose of any of our VIEs’ assets or allow
any encumbrance of any assets. Our VIEs shall not be dissolved or liquidated without the written consent by the applicable WFOE.
This agreement shall remain in effect and our VIEs do not have any right to unilaterally terminate the exclusive call option agreement.
Equity
Pledge Agreement
Under
the equity interest pledge agreement among the applicable WFOE, each of our VIEs and their respective shareholders, our VIEs’
shareholders pledged all of their equity of our VIEs to WFOEs as security for performance of the obligations of our VIEs and their
respective shareholders under the exclusive call option agreement, the exclusive business cooperation agreement and the powers
of attorney. If any of the specified events of default occurs, the respective WFOE may exercise the right to enforce the pledge
immediately. Such WFOE may transfer all or any of its rights and obligations under the equity pledge agreement to its designee(s)
at any time. The equity pledge agreement is binding on our VIEs’ shareholders and their successors. The equity pledge agreement
shall remain in effect and our VIEs do not have any right to unilaterally terminate the equity interest pledge agreement.
Powers
of Attorney
Pursuant
to the powers of attorney executed by the shareholders of our VIEs, each of them irrevocably authorized the applicable WFOE to
act on their respective behalf as exclusive agent and attorney, with respect to all rights of shareholders concerning all the
equity interest held by each of them in our VIEs, including but not limited to the right to attend shareholder meetings on behalf
of such shareholder, the right to exercise all shareholder rights and the voting rights (including the right to sell, transfer,
pledge and dispose of all or a portion of the equity interests held by such shareholder), and the right to appoint legal representatives,
directors, supervisors and chief executive officers and other senior management.
In
the opinion of Shihui Partners, our PRC legal counsel, the contractual arrangements among WFOEs, Our VIEs and their respective
shareholders are valid, binding and enforceable under applicable PRC law currently in effect, except that the equity pledge under
that certain equity pledge agreement would not be deemed validly created until they are registered with the competent governmental
authorities. However, Shihui Partners has also advised us that there are substantial uncertainties regarding the interpretation
and application of current or future PRC laws and regulations and there can be no assurance that the PRC government will ultimately
take a view that is consistent with the opinion of our PRC legal counsel. For a description of the risks related to our corporate
structure, see “Item 3. Key Information—D. Risk Factors—Risks Related to Our Corporate Structure.”
Spousal
Consent Letters
Pursuant to the spousal consent letters, each of
the spouses of the individual shareholders of our VIEs unconditionally and irrevocably agrees that the equity interest in our VIEs held
by and registered in the name of her respective spouse will be disposed of pursuant to the relevant equity pledge agreement, the exclusive
call option agreement and the powers of attorney. In addition, each of them agrees not to assert any rights over the equity interest in
our VIEs held by his or her respective spouse. In addition, in the event that any of them obtains any equity interest in our VIEs held
by her respective spouse for any reason, such spouse agrees to be bound by similar obligations and agreed to enter into similar contractual
arrangements.
D. Property,
plants and equipment
See
“Item 4. Information on the Company—B. Business Overview—Facilities.”
ITEM
5. 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 consolidated financial statements and their related notes included in this annual report. This report contains forward-looking
statements. See “Item 5. Operating and Financial Review and Prospects—G. Safe Harbor on Forward-Looking Statements.”
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. We caution you that our businesses and financial performance are subject to substantial
risks and uncertainties.
A. Operating
Results
Overview
We
believe we are a leading omni-channel automotive marketplace in China. We provide a scalable omni-channel automotive marketplace
approach to automobile marketing and distribution. We offer marketing solutions by integrating our online platform and offline
sales events. In 2018, 2019 and 2020, we hosted 851, 1,055 and 449 auto shows across 196, 233 and 172 cities in China, respectively.
Our auto shows offered a total of 27,008, 29,063 and 14,341 booth spaces in 2018, 2019 and 2020, respectively. The total number
of automobile sales transactions we facilitated was 354,355 and 140,264 in 2019 and 2020, respectively, with a total GMV of approximately
RMB47.5 billion and RMB19.8 billion (US$3.0 billion) in the same year, respectively.
Historically,
we generated our net revenues primarily through our offline events. Our net revenues were RMB651.0 million, RMB644.8 million and
RMB330.2 million (US$50.6 million) in 2018, 2019 and 2020, respectively. Our net loss was RMB78.7 million, RMB251.3 million and
RMB 163.5 million (US$25.1 million) in 2018, 2019 and 2020, respectively. Our net loss from continuing operations was RMB75.1million,
RMB251.3 million and RMB163.5 million (US$25.1 million) in 2018, 2019 and 2020, respectively. Our adjusted EBITDA was RMB7.5 million,
RMB(143.9) million and RMB(141.1) million (US$(21.6) million) in 2018, 2019 and 2020, respectively. We recorded adjusted net profit
of RMB3.3 million in 2018 and adjusted net loss of RMB140.3 million in 2019 and RMB145.8 million (US$22.3 million) in 2020. For
a detailed description of our non-GAAP measures, see “—Non-GAAP Financial Measures.”
General
Factors Affecting Our Results of Operations
We
operate in China’s automotive industry, and our results of operations and financial condition are significantly affected
by general factors driving this industry. With the increase in disposable income for automobile consumers, especially in lower
tier cities, and declining automobile prices, automobiles have become more affordable to Chinese consumers. The urbanization of
China’s population has led to infrastructure development, which makes automobiles a more desirable solution for short-distance
traveling. In particular, tier-3 and below cities are experiencing, and are expected to continue to experience, a faster growth
rate than tier-1 and tier-2 cities in terms of new automobile sales volume. New automobile sales volume in tier-3 and below cities
is expected to grow at a CAGR of 7.3% from 2017 to 2022, much higher than the CAGR of 0.3% over the same period in tier-1 and
tier-2 cities, according to the iResearch report.
In 2020, we faced continuing macroeconomic and industry-wide headwinds.
In addition, as a result of the government-mandated quarantine measures to contain the virus spread, we cancelled all offline events such
as auto shows and special promotion events previously scheduled in February and March 2020, and held very few offline events in the first
half of 2020, although the number of offline events picked up in the second half of 2020 as the pandemic was gradually contained in China.
Depending on the development of the COVID-19 pandemic and the government’s responsive measures, we may continue to face cancellation
of offline events, which could materially and adversely affect our operating and financial performance. Furthermore, as the business operations
of our industry customers have also been severely disrupted, we have experienced a delay in collecting our accounts receivable since the
COVID-19 outbreak, which could materially and adversely affect our liquidity. In response to the significant impact of the COVID-19 pandemic,
we have adopted more prudent strategies regarding hiring, selling and marketing and business expansion with the aim of optimizing the
efficiency of our geographic coverage and refining our cost structures in anticipation of the overall market stagnation in the near future.
For example, we implemented measures to adjust the pace of our business expansion and conserve resources, such as furlough arrangements
and scaling back our recruitment budget and employee size, in 2020. We may resort to additional cost cutting measures including re-implementation
of furlough arrangements if the outbreak of COVID-19 and its impact persist or escalate. We are closely monitoring the status of the COVID-19
pandemic to timely adjust our strategies. For more details, see “Item 3. Key Information—Risk Factors—Risks Related
to Our Business and Industry—Our business operations have been and may continue to be materially and adversely affected by the COVID-19
pandemic.”
In
addition to general economic conditions and industry factors, we believe the following company-specific factors have had, and
will continue to have, a significant impact on our results of operations.
Specific
Factors Affecting Our Results of Operations
While
our business is influenced by general factors affecting China’s automotive industry, we believe our results of operations
are more directly affected by company specific factors, including the following:
Scale
of Our Business
The
scale of our business, including the number of offline events we organize, the number of cities in which we operate, the number
of automobile sales transactions we facilitate, and the number of industry customers we serve, has a significant impact on our
results of operations. In 2018, 2019 and 2020, we organized 851, 1,055 and 449 auto shows, respectively. In June 2018, we began
our virtual dealership business to further penetrate the automotive industry. The total number of automobiles sales transactions
we facilitated increased significantly from 347,398 in 2018 to 354,355 in 2019, and further to 140,264 in 2020. The total number
of industry customers we served through our various service offerings increased from 8,281 in 2018 to 8,313 in 2019, and further
to 6,555 in 2020. As of December 31, 2018, 2019 and 2020, our sales operations cover 138, 148 and 126 cities across China, respectively.
Our scale in terms of industry customer size, the number of auto shows we host, the number of cities in which we operate, and
the number of automobiles sold during our offline events has enabled us to generate a substantial amount of net revenues and to
lower our average fixed costs such as selling and administrative overheads. Our scale has also enabled us to establish an extensive
network of industry customers, which is critical to our ability to expand the variety of services we offer and solidify our market
leadership.
Pricing
Our
ability to maintain or potentially increase the service fees we charge our industry customers directly impacts our results of
operations. We generate net revenues from our offline events by charging participating industry customers for booth spaces. Our
net revenues for our auto show business is the product of the number of paying industry customers we attract for each auto show,
the amount we charge each of those industry customers and the number of auto shows we host, while our net revenues for our special
promotion event services depend on the number of special promotion events we facilitate, the amount we charge the industry customers
for each event and, in some cases, the number of automobiles we sell and our commissions for each automobile sold in the offline
events. While for most of our offline events our pricing is not based on the number of successful transactions, we believe our
ability to bring a steady stream of purchase orders increases our industry customers’ stickiness and propensity to continue
using our services, which is crucial to our ability to maintain and raise overall booth space prices while retaining industry
customers as we increase the scale of our offline events nationwide. In the long run, we expect to maintain and increase the prices
for our booth spaces in our auto shows in all cities where we organize auto shows. However, as we expand into an increasing number
of tier-3 and below cities where booth space price levels are generally lower than tier-1 and tier-2 cities, we may experience
decline in overall price per booth at our auto shows.
For
our virtual dealership business, the amount of commission we charge secondary dealers is directly related to our results of operations.
We plan to offer secondary dealers technical and operational support in addition to automobile sales facilitation in an effort
to enhance secondary dealers’ reliance on us, which will enable us to achieve an optimal pricing level in the future. In
January 2020, we completed the acquisition of Longye, whose flagship software product Cheshangtong will improve our customers’
capabilities in consumer acquisition and management, which we believe will improve their reliance on and stickiness to our services.
Operational
Efficiency
Our
ability to maintain and enhance operational efficiency for our offline events directly impacts our results of operations. We depend
on our standardized event planning and operating procedures and we rely on our employees’ skills and know-how to carry out
those procedures in light of varying local conditions. As we expand the scale of our offline events and tap into new service offerings
and regions, our ability to enhance operational efficiency by improving our standardized operating procedures will be crucial
in controlling our cost of sales and improving our gross margin, and our ability to streamline our corporate functions and improve
our administrative efficiency will contribute to a slower growth rate in our operating expenses compared to that in our net revenues.
Consumer
Acquisition
Consumer
acquisition affects our results of operations in two ways. On one hand, a large, high-quality, and engaged consumer base is attractive
to our industry customers seeking to sell automobiles and related automotive services. On the other hand, high consumer acquisition
efficiency enables us to control our selling and marketing expenses, which mainly consist of event promotion expenses and sales
employee compensation. As our business expands in scale and as our reputation grows, we expect to continue to improve our consumer
acquisition efficiency by increasing word-of-mouth referrals and negotiating more favorable terms with our various online and
offline channels.
Seasonality
We
generally experience effects of seasonality primarily due to the consumption habits of Chinese automobile consumers. For example,
we generally organize fewer offline events and generate less net revenues during the first quarter of each year than any of the
other three quarters due to the effect of the Chinese New Year holidays when consumers tend to stay home with their families.
In contrast, we may experience higher net revenues growth during the last quarter of each year than any of the other three quarters
when consumers increase their purchasing activities in preparation for the coming holiday season, subject to industry-wide and
macroeconomic uncertainties beyond our control, such as general marketing conditions and government incentives or restrictions.
Non-Commercial
Contingencies
Due
to the nature of our business, certain contingencies and non-commercial factors, such as weather conditions and number of weekends
during a specific period, may also affect our results of operations. We host many of our offline events outdoors throughout the
year. Severe weather conditions may force us to cancel pre-scheduled outdoor events and lower the level of industry customer attendance
at the affected events, negatively impacting our net revenues. Further, our efforts to manage such weather contingencies, such
as securing backup indoor venues or setting up temporary facilities, will lead to increased set-up and venue rental cost, which
may negatively impact our gross profit and overall results of operations.
Because
we generally organize offline events during weekends in order to maximize consumer attendance, the number of weekends in a particular
period could affect the net revenues and our overall results of operations for that period. For example, because September 29
and 30, 2018 were converted into working days by regulation, there was one fewer weekend in the three months ended September 30,
2018 compared to the preceding quarter, which negatively impacted the number of auto shows we hosted and the net revenues we generated.
Our
offline events may also be halted as a result of any public health crisis. As the COVID-19 pandemic has become largely under control
in China, since the end of May 2020, the Company has gradually resumed offline operations in some cities, with the pace of recovery
subject to the ongoing development of the COVID-19 pandemic and the associated government guidance. Recent development of the
COVID-19 pandemic in China, such as the cases reported in Hebei province in the first quarter of 2021, continues to generate uncertainties
over the Company’s business, results of operations, financial condition and cash flows. Furthermore, as the business operations
of industry customers have also been disrupted by the COVID-19 pandemic, the Company continues to experience delays in collecting
accounts receivables from these customers and recorded an increased bad debt expense due to liquidity issues of certain customers.]
For more information, see “Item 3. Key Information—Risk Factors—Risks Related to Our Business and Industry—Our
business operations have been and may continue to be materially and adversely affected by the COVID-19 pandemic.”
Critical
Accounting Policies
We
prepared the consolidated financial statements in accordance with U.S. GAAP. When reviewing our financial statements, you should
consider our selection of critical accounting policies, our judgments and other uncertainties affecting our applications of those
policies and the sensitivity of reported results to changes of such policies, judgments and uncertainties. We believe the following
accounting policies involve the most significant judgments and estimates used in the preparation of our financial statements.
You should read the following descriptions of critical accounting policies, judgments and estimates in conjunction with our consolidated
financial statements and other disclosures included in this annual report.
Principles
of Consolidation
The consolidated financial statements include the financial statements of ours, our subsidiaries’, VIEs and subsidiaries of VIEs
for which we are the primary beneficiary.
Subsidiaries are those entities in which we, directly
or indirectly, controls more than one half of the voting power, has the power 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 the board of directors, or has the power to govern the financial
and operating policies of the investee under a statute or agreement among the shareholders or equity holders.
A consolidated VIE is an entity in which we, or
our subsidiary, through contractual arrangements, has the power to direct the activities that most significantly impact the entity's economic
performance, bears the risks of and enjoys the rewards normally associated with ownership of the entity, and therefore we and our subsidiary
are the primary beneficiary of the entity.
All
transactions and balances among the we, our subsidiaries, VIEs, and subsidiaries of VIEs have been eliminated upon consolidation.
Discontinued
Operations
A component of
a reporting entity or a group of components of a reporting entity that are disposed or meet the criteria to be classified as held
for sale, such as the management, having the authority to approve the action, commits to a plan to sell the disposal group, should
be reported in discontinued operations if the disposal represents a strategic shift that has (or will have) a major effect on an
entity’s operations and financial results. Discontinued operations are reported when a component of an entity comprising
operations and cash flows that can be clearly distinguished, operationally and for financial reporting purposes, from the rest of
the entity is classified as held for disposal or has been disposed of, if the component either (1) represents a strategic shift or
(2) have a major impact on an entity’s financial results and operations. In the consolidated statements of operations and
comprehensive loss, result from discontinued operations is reported separately from the income and expenses from continuing
operations and prior periods are presented on a comparative basis. Cash flows for discontinuing operations are presented separately
in Note 3. In order to present the financial effects of the continuing operations and discontinued operations, revenues and
expenses arising from intra-group transactions are eliminated except for those revenues and expenses that are considered to continue
after the disposal of the discontinued operations.
Revenue
Recognition
We
adopted ASC Topic 606, "Revenue from Contracts with Customers" for all periods presented. Consistent with the criteria
of Topic 606, we recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects
the consideration to which the entity expects to receive in exchange for those goods or services using the five steps defined
under ASC Topic 606.
We determine our revenue recognition through the following steps:
• identification of the contract, or contracts, with a customer;
•
identification of the performance obligations in the contract;
• determination of the transaction price;
• allocation
of the transaction price to the performance obligations in the contract; and
• recognition of revenue when, or as, the Group satisfies
a performance obligation
We
assess our revenue arrangements against specific criteria in order to determine if we are acting as principal or agent. Revenue is recognized upon transfer of control
of promised goods or services to a customer.
Revenue
is recorded net of Value Added Tax (“VAT”) and related surcharges collected from customers, which are subsequently
remitted to government authorities.
Offline marketing services
revenue
Auto
show revenue
Our
online website and offline infrastructure allow us to organize auto shows, which aim at facilitating transactions between consumers
and industry customers that includes auto dealers, automakers and automotive service providers. We charge a fixed admission fee per
auto show event to our industry customers for arranging, decorating and providing booth space at auto shows. We have identified
one performance obligation for the transaction, providing a decorated venue for auto dealers, automakers and automotive service
providers, as the individual service promised in auto show contracts are not distinct individually. As we have control of the auto
show services and discretion in establishing the price of auto show admission fee to auto dealers, automakers and other automotive
service providers, we are considered to be a principal in accordance with ASC 606. The auto shows revenue is recognized on a
straight-line basis over the period of the contract, which is usually from two days to four days, when the services are
provided.
Special
promotion event service revenue
We
provide integrated services to support industry customers’ special promotion events during a specific period, which include
event planning and execution, marketing training and onsite coaching. We charge a fixed service fee per special promotion event. We
have identified one performance obligation, as the individual service promised in service contracts are not distinct individually.
As we have control of the special promotion event services and discretion in establishing the price of services fees to industry
customers, we are considered to be a principal in accordance with ASC 606. Revenue generated from the special promotion event
services is recognized on a straight-line basis over the period of the contract, which is usually one week, when
the services are provided.
Virtual
dealership, online marketing services and others
Virtual
Dealership revenue
We operate a virtual dealership by connecting automakers or franchised dealerships with secondary dealers whereby we purchase cars on
behalf of the secondary dealers from the automakers or franchised dealerships. We charge a commission fee at a pre-agreed percentage of
the car costs to the secondary dealers. As we have neither inventory risk nor the discretion to establish the cost of cars to secondary
dealers, it is considered to be an agent in accordance with ASC 606. The virtual dealership commission revenue is recognized upon the
secondary dealers’ acceptance of the delivery of cars from automakers or franchised dealerships.
Online marketing services
revenue
Our online marketing services revenue primarily include (i) live streaming promotion events services, (ii) customer referral services,
(iii) marketing information services and (iv) demand-side platform services.
We
commenced our live streaming promotion events services from the first quarter of 2020, holding promotion events on the live
streaming platform of Zhejiang Tmall Technology Co., Ltd. ( “Tmall”), which aim at facilitating
transactions between consumers and industry customers that includes auto dealers, automakers and automotive service providers. We
charge a fixed admission fee per live streaming promotion event from its industry customers for arranging, decorating and providing
the platform. As we have control of the services and discretion in establishing the price of live streaming promotion admission fee
to auto dealers, automakers and other automotive service providers, it is considered to be a principal in accordance with ASC 606.
The live streaming promotion events revenue is recognized on a straight-line basis over the period of the contract, which is usually
one week, when the services are provided.
We also commenced our customer referral
services from the first quarter of 2020 by referring our industry customers to Beijing Baidu Netcom Science Technology Co., Ltd.
("Baidu") to use the membership services of a Baidu’s auto content distribution platform. We charged Baidu a fixed
rate commission fee based on the membership fee amount for the services rendered. Revenues are recognized at point-in-time when
the industry customers successfully register as a membership of Baidu’s auto content distribution platform. In accordance with
ASC 606, we recognize the commission fees at net basis, as we are acting as an agent and have neither inventory risk nor the
discretion to establish prices.
For the marketing information services, we generate
consumers’ demand information through our online channels and provides to the industry customers upon consumers' consent. The marketing
information service fee is charged based on the quantity of consumers’ demand information delivered. Revenue is recognized at a
point in time upon the delivery of such consumers’ demand information.
The demand-side platform services generate revenue through (1) online advertising services and (2) advertising space resale services.
For the advertising services, we provide advertising spaces on the website to customers and recognize the service fees received as revenue
on a straight-line basis over the period of the service period. Under the advertising space resale services, we purchase advertising spaces
wholesale from suppliers such as search engines and other online advertising channels and resell those spaces to the customers. The customers
pay us a membership fee to access these spaces. We recognize the membership fee on a straight-line basis over the membership period, which
is usually one year. Because we do not have discretion over the price of advertisement charged by suppliers, who are the primary obligors
for providing the advertising services, revenue from advertising space resale services is recognized on a net basis.
Other revenue
In October 2019, we commenced our auto loan
referral services in collaboration with a commercial bank. The referral services provided to the bank include (i) referral services
and (ii) periodic guarantee for the following certain time periods: (a) from the date of loan issuance
by the commercial bank to the consumer to the date when the consumer’s vehicle mortgage registration is completed; the
mortgage registration procedures should be completed within 120 days after the loan issuance; (b) no overdue of more than 30 days
for any of the first 3 monthly repayment. The periodic guarantee, within the scope of ASC 815, Derivatives and Hedging, is
recorded at fair value at inception of the loans. Referral services revenue is recognized at a point in time upon the delivery of
the services. As we are neither the primary obligor nor have the discretion to establish prices, we are considered to be an
agent in accordance with ASC 606 and recognized at net basis.
On January 13, 2020, we completed the acquisition of Longye, a Software-as-a-Service
(“SaaS”) company who mainly provides subscription and support services to industry customers, including auto dealers, automakers
and automotive service provider, with access to cloud services, software licenses and related support and updates during the term of the
arrangement. Cloud services allow industry customers to use our multi-tenant software without taking possession of the software. We initially
record the subscription and support services fee as deferred revenue upon reception and then recognize the revenue on a straight-line
basis over the service period, which is usually from one year to five years. As we have control of the subscription and support services
and discretion in establishing the price of subscription and support services fee to auto dealers, automakers and other automotive service
providers, we are considered to be a principal in accordance with ASC 606. The subscription and support services revenue is recognized
on a straight-line basis over the period of the contract when the services are provided.
Long-term
investments
In
accordance with ASU 2016-01, for investments in equity instruments which we do not have significant influence and whose fair value
is not readily determinable, we apply the cost less impairment method accounting (“measurement alternative”). Gain or losses are realized
when such investment is sold or when dividends are declared or payments are received. We assess our equity investments for
other-than-temporary impairment by considering factors including, but not limited to, current economic and market conditions, the
operating performance of the companies including current earnings trends, and other company-specific information such as financing
rounds.
Investments
in entities in which we can exercise significant influence but does not own a majority equity interest or control are accounted
for using the equity method of accounting in accordance with ASC topic 323 Investments-Equity Method and Joint Ventures. We adjust
the carrying amount of equity method investment for its share of the income or losses of the investee and reports the recognized
income or losses in the consolidated statements of operations and comprehensive loss. Our share of the income or losses of an
investee are based on the shares of common stock and in-substance common stock held by us.
Warrant
On
October 31, 2017, we issued a warrant to purchase Series C-2 convertible redeemable preferred shares of the Company in connection
with the debt financing, which is classified as a liability and treated as upfront issuance costs based on the estimated fair
value of the warrant at issuance date. Subsequently, changes in the fair value of the warrant for Series C-2 convertible redeemable
preferred shares is recorded in the consolidated statements of operations and comprehensive loss. The upfront issuance costs are
amortized over the term of the debt financing.
As of December 31, 2018, 2019 and 2020, upfront issuance costs of RMB0.7 million, nil and nil were included in other non-current assets,
respectively.
Taxation
Income
taxes
Current
income taxes are provided on the basis of income/(loss) 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.
Deferred income tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences
between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and any tax
loss and tax credit carry forwards. Deferred income tax assets and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect
on deferred income tax assets and liabilities of a change in tax rates or tax laws is recognized in the consolidated statements
of operations and comprehensive loss in the period the change in tax rates or tax laws is enacted. A valuation allowance is provided
to reduce the amount of deferred income tax assets if it is considered more likely than not that some portion or all of the deferred
income tax assets will not be realized.
Uncertain
tax positions
In
order to assess uncertain tax positions, we apply a more likely than not threshold and a two-step approach for the tax position
measurement and financial statement recognition. Under the two-step approach, the first step is to evaluate the tax position for
recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will
be sustained, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit
as the largest amount that is more than 50% likely of being realized upon settlement. We recognize interest and penalties, if
any, under accrued expenses and other current liabilities on our consolidated balance sheet and under other expenses in our consolidated
statements of operations and comprehensive loss. We did not have any significant unrecognized uncertain tax positions as of and
for the years ended December 31, 2018, 2019 and 2020.
Share-based
Compensation
Share
based compensation expenses arise from share-based awards, including share options for the purchase of ordinary shares and restricted
shares. We account for share-based awards granted to employees in accordance with ASC 718 Compensation—Stock Compensation
and share-based awards granted to nonemployee in accordance with ASC 505. For share options for the purchase of ordinary shares
granted to employees determined to be equity classified awards, the related share-based compensation expenses are recognized in
the consolidated financial statements based on their grant date fair values which are calculated using the binomial option pricing
model. The determination of the fair value is affected by the share price as well as assumptions regarding a number of complex
and subjective variables, including the expected share price volatility, actual and projected employee share option exercise behavior,
risk-free interest rates and expected dividends. The fair value of the ordinary shares is assessed using the income approach/discounted
cash flow method, with a discount for lack of marketability, given that the shares underlying the awards were not publicly traded
at the time of grant. Share-based compensation expenses are recorded net of actual forfeitures using straight-line method during
the service period requirement, such that expenses are recorded only for those share-based awards that are expected to ultimately
vest.
Share-based
compensation expenses for share options granted to nonemployees are measured at fair value at the earlier of the performance
commitment date or the date service is completed, and recognized over the period during which the service is provided. We apply
the guidance in ASC 505-50 to measure share options granted to nonemployees based on the then-current fair value at each reporting
date.
If
a share-based award is modified after the grant date, we evaluate for such modifications in accordance with ASC 718 Compensation—Stock
Compensation and if the modification is determined to be a probable-to-probable (Type 1) modification, additional compensation
expenses are recognized in an amount equal to the excess of the fair value of the modified equity instrument over the fair value
of the original equity instrument immediately before modification. The additional compensation expenses are recognized immediately
on the date of modification or over the remaining requisite service period, depending on the vesting status of the award.
Non-GAAP
Financial Measures
To
supplement our consolidated financial statements which are presented in accordance with U.S. GAAP, we also use adjusted EBITDA
and adjusted net loss/profit as additional non-GAAP financial measures. We present these non-GAAP financial measures because they
are used by our management to evaluate our operating performance. We also believe that these non-GAAP financial measures provide
useful information to investors and others in understanding and evaluating our consolidated results of operations in the same
manner as our management and in comparing financial results across accounting periods and to those of our peer companies.
We
define adjusted EBITDA as net loss excluding depreciation and amortization, interest (expenses)/income, net, fair value loss of
warrant, fair value loss of guarantee liability, share-based compensation expenses and impairment of investment. We define adjusted
net loss/profit as net loss excluding fair value loss of warrant, fair value loss of guarantee liability, share-based compensation
expenses and impairment of investment. We believe that adjusted EBITDA and adjusted net loss/profit provide useful information to
investors and others in understanding and evaluating our operating results. These non-GAAP financial measures adjust for the impact
of items that we do not consider indicative of the operational performance of our business and should not be considered in isolation
or construed as an alternative to net loss or any other measure of performance or as an indicator of our operating performance.
Investors are encouraged to compare the historical non-GAAP financial measures with the most directly comparable GAAP measures.
Adjusted EBITDA and adjusted net loss/profit presented here may not be comparable to similarly titled measures presented by other
companies. Other companies may calculate similarly titled measures differently, limiting their usefulness as comparative measures to
our data. We encourage investors and others to review our financial information in its entirety and not rely on a single financial
measure.
The
following tables set forth a reconciliation of our adjusted EBITDA and adjusted net loss/profit to net loss for the years indicated.
|
|
For the year ended December 31,
|
|
|
|
2018
|
|
|
2019
|
|
|
2020
|
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
US$
|
|
|
|
(in thousands)
|
|
Net loss
|
|
|
(78,700
|
)
|
|
|
(251,299
|
)
|
|
|
(163,478
|
)
|
|
|
(25,056
|
)
|
Add:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
1,060
|
|
|
|
3,483
|
|
|
|
7,109
|
|
|
|
1,090
|
|
Interest expense, net
|
|
|
3,146
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Subtract:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income, net
|
|
|
—
|
|
|
|
7,020
|
|
|
|
2,409
|
|
|
|
369
|
|
EBITDA
|
|
|
(74,494
|
)
|
|
|
(254,836
|
)
|
|
|
(158,778
|
)
|
|
|
(24,335
|
)
|
Add:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value loss of warrant
|
|
|
3,843
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Fair value loss of guarantee liability
|
|
|
—
|
|
|
|
—
|
|
|
|
233
|
|
|
|
36
|
|
Share-based compensation expenses
|
|
|
78,133
|
|
|
|
109,968
|
|
|
|
17,448
|
|
|
|
2,674
|
|
Impairment of investment
|
|
|
—
|
|
|
|
1,000
|
|
|
|
—
|
|
|
|
—
|
|
Adjusted EBITDA
|
|
|
7,482
|
|
|
|
(143,868
|
)
|
|
|
(141,097
|
)
|
|
|
(21,625
|
)
|
|
|
For the year ended December 31,
|
|
|
|
2018
|
|
|
2019
|
|
|
2020
|
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
US$
|
|
Net loss
|
|
|
(78,700
|
)
|
|
|
(251,299
|
)
|
|
|
(163,478
|
)
|
|
|
(25,056
|
)
|
Add:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value loss of warrant
|
|
|
3,843
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Fair value loss of guarantee liability
|
|
|
—
|
|
|
|
—
|
|
|
|
233
|
|
|
|
36
|
|
Share-based compensation expenses
|
|
|
78,133
|
|
|
|
109,968
|
|
|
|
17,448
|
|
|
|
2,674
|
|
Impairment of investment
|
|
|
—
|
|
|
|
1,000
|
|
|
|
—
|
|
|
|
—
|
|
Adjusted net profit/(loss)
|
|
|
3,276
|
|
|
|
(140,331
|
)
|
|
|
(145,797
|
)
|
|
|
(22,346
|
)
|
Key
Components of Results of Operations
Net
Revenues
We
generate net revenues primarily from (1) offline marketing services and (2) virtual dealership, online marketing services and
other services. In 2018, 2019, and 2020, our net revenues were RMB651.0 million, RMB644.8 million and RMB330.2 million (US$50.6million),
respectively. The following table sets forth the breakdown of our total net revenues, both in absolute amounts and as a percentage
of total net revenues, for the years indicated.
|
|
For the year ended December 31,
|
|
|
|
2018
|
|
|
2019
|
|
|
2020
|
|
|
|
RMB
|
|
|
%
|
|
|
RMB
|
|
|
%
|
|
|
RMB
|
|
|
US$
|
|
|
%
|
|
|
|
(in thousands, except for percentages)
|
|
Net revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Offline marketing services
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Auto show
|
|
|
644,252
|
|
|
|
99.0
|
|
|
|
603,407
|
|
|
|
93.6
|
|
|
|
250,481
|
|
|
|
38,388
|
|
|
|
75.9
|
|
Special promotion events
|
|
|
—
|
|
|
|
—
|
|
|
|
19,772
|
|
|
|
3.1
|
|
|
|
4,851
|
|
|
|
743
|
|
|
|
1.4
|
|
Virtual dealership, online marketing services and others
|
|
|
6,761
|
|
|
|
1.0
|
|
|
|
21,594
|
|
|
|
3.3
|
|
|
|
74,896
|
|
|
|
11,478
|
|
|
|
22.7
|
|
Total net revenues
|
|
|
651,013
|
|
|
|
100.0
|
|
|
|
644,773
|
|
|
|
100.0
|
|
|
|
330,228
|
|
|
|
50,609
|
|
|
|
100.0
|
|
Offline
marketing services revenue
Our
offline marketing services revenue primarily consists of revenues from auto shows and special promotion events.
Auto
shows
We typically generate net revenues from industry
customers that pay for booth spaces in our auto shows. In 2018, 2019, and 2020, net revenues generated from our auto shows were RMB644.3
million, RMB603.4 million and RMB250.5 million (US$38.4 million), respectively, representing 99.0%, 93.6% and 75.9% of our net revenues
for the same periods, respectively.
Special
promotion event services
We
began to provide special promotion event services to our industry customers in January 2019 to better support them in organizing
their special promotion events. We primarily provide a series of integrated services, such as event planning and executing, marketing
training and onsite coaching. In 2020, we facilitated 207 special promotion events through our services. We typically generate
net revenues by charging industry customers fixed service fees per event. In 2020, net revenues from special promotion events
were RMB4.9 million (US$0.7 million), representing 1.4% of our total net revenues.
Virtual
dealership, online marketing services and others
We began our virtual dealership business in June
2018. We also conducted our online marketing services throughout 2019 and 2020. We generated net revenues primarily from these services
of approximately RMB21.6 million and RMB74.9 million (US$11.5 million) in 2019 and 2020, respectively. We expect that our net revenues
from our virtual dealership business will experience significant growth in the next few years, and will make a meaningful contribution
to our overall net revenues in the future.
Cost
of Revenues
Our
cost of revenues consists of (1) venue set-up costs, (2) venue rental costs, (3) security costs, (4) direct labor costs, and (5)
other direct costs. The following table sets forth the components of cost of revenues, both in absolute amount and as a percentage
of net revenues for the years indicated.
|
|
For the year ended December 31,
|
|
|
|
2018
|
|
|
2019
|
|
|
2020
|
|
|
|
RMB
|
|
|
%
|
|
|
RMB
|
|
|
%
|
|
|
RMB
|
|
|
US$
|
|
|
%
|
|
|
|
(in thousands, except for percentages)
|
|
Net revenues
|
|
|
651,013
|
|
|
|
100.0
|
|
|
|
644,773
|
|
|
|
100.0
|
|
|
|
330,228
|
|
|
|
50,609
|
|
|
|
100.0
|
|
Cost of revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Venue set-up costs
|
|
|
76,621
|
|
|
|
11.8
|
|
|
|
61,736
|
|
|
|
9.6
|
|
|
|
24,725
|
|
|
|
3,789
|
|
|
|
7.5
|
|
Venue rental costs
|
|
|
66,718
|
|
|
|
10.3
|
|
|
|
77,134
|
|
|
|
12.0
|
|
|
|
33,734
|
|
|
|
5,170
|
|
|
|
10.2
|
|
Security costs
|
|
|
7,326
|
|
|
|
1.1
|
|
|
|
9,071
|
|
|
|
1.4
|
|
|
|
3,706
|
|
|
|
568
|
|
|
|
1.1
|
|
Direct labor costs
|
|
|
7,364
|
|
|
|
1.1
|
|
|
|
9,767
|
|
|
|
1.5
|
|
|
|
10,357
|
|
|
|
1,587
|
|
|
|
3.1
|
|
Other direct costs
|
|
|
25,340
|
|
|
|
3.9
|
|
|
|
28,833
|
|
|
|
4.4
|
|
|
|
16,279
|
|
|
|
2,495
|
|
|
|
5.0
|
|
Total cost of revenues
|
|
|
183,369
|
|
|
|
28.2
|
|
|
|
186,541
|
|
|
|
28.9
|
|
|
|
88,801
|
|
|
|
13,609
|
|
|
|
26.9
|
|
Venue
set-up costs
We
engage third-party service providers to assemble exhibition booths and coordinate maintenance issues with participating industry
customers. In exchange, we pay these service providers service fees, which we recognize as venue set-up costs after the relevant
services are rendered. Our venue set-up costs were RMB76.6 million, RMB61.7 million and RMB24.7 million (US$3.8 million) in 2018,
2019 and 2020, respectively.
Venue
rental costs
We
use venues owned by third-party property owners for our auto shows and pay these property owners rental fees which we recognize
as venue rental costs at the end of the rental period. The amount of rent primarily depends on the venue’s location and
size. Our venue rental costs were RMB66.7 million, RMB77.1 million and RMB33.7 million (US$5.2 million) in 2018, 2019 and 2020,
respectively.
Security
costs
To
comply with regulatory requirements on public gatherings and to ensure the safety of participants at our offline events and of
the merchandise on display, we hire security personnel through third-party security service providers and in some cases set up
security checkpoints to ensure that our offline event venues are free from harmful or dangerous substances and are in compliance
with laws and regulations. We recognize the payments we make to such security personnel and to set up the security checkpoints
as security costs, which were RMB7.3 million, RMB9.1 million and RMB3.7 million (US$568.0 thousand) in 2018, 2019 and 2020, respectively.
Direct
labor costs
We
assign our own field employees to each of our offline events who are responsible for handling event-day logistics and contingencies.
We recognize the salaries and benefits we pay to those employees as direct labor costs. In 2018, 2019 and 2020, our direct labor
costs were RMB7.4 million, RMB9.8 million and RMB10.4 million (US$1.6 million), respectively.
Other
direct costs
Other
direct costs primarily include costs related to the planning and organization of our offline events, such as meals, package deliveries,
and telecommunications. In 2018, 2019 and 2020, our other costs were RMB25.3 million, RMB28.8 million and RMB16.3 million (US$2.5
million), respectively.
Gross
Profit
As
a result of the foregoing, our gross profit was RMB467.6 million, RMB458.2 million and RMB241.4 million (US$37.0 million) in 2018,
2019 and 2020, respectively, and our gross profit margin was 71.8%, 71.1% and 73.1% in 2018, 2019 and 2020, respectively.
Operating
Expenses
Our
operating expenses consist of selling and marketing expenses, general and administrative expenses, and research and development
expenses. The following table sets forth the components of operating expenses, in absolute amounts and as a percentage of net
revenues, for the years indicated.
|
|
For the year ended December 31,
|
|
|
|
2018
|
|
|
2019
|
|
|
2020
|
|
|
|
RMB
|
|
|
%
|
|
|
RMB
|
|
|
%
|
|
|
RMB
|
|
|
US$
|
|
|
%
|
|
|
|
(in thousands, except for percentages)
|
|
Net revenues
|
|
|
651,013
|
|
|
|
100.0
|
|
|
|
644,773
|
|
|
|
100.0
|
|
|
|
330,228
|
|
|
|
50,609
|
|
|
|
100.0
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling and marketing expenses
|
|
|
432,059
|
|
|
|
66.4
|
|
|
|
572,040
|
|
|
|
88.7
|
|
|
|
279,665
|
|
|
|
42,861
|
|
|
|
84.7
|
|
General and administrative expenses
|
|
|
84,360
|
|
|
|
13.0
|
|
|
|
103,890
|
|
|
|
16.1
|
|
|
|
98,820
|
|
|
|
15,145
|
|
|
|
29.9
|
|
Research and development expenses
|
|
|
19,262
|
|
|
|
3.0
|
|
|
|
43,339
|
|
|
|
6.7
|
|
|
|
34,267
|
|
|
|
5,252
|
|
|
|
10.4
|
|
Total operating expenses
|
|
|
535,681
|
|
|
|
82.4
|
|
|
|
719,269
|
|
|
|
111.5
|
|
|
|
412,752
|
|
|
|
63,258
|
|
|
|
125.0
|
|
Selling
and marketing expenses
Our
selling and marketing expenses consist primarily of (1) advertising and promotion expenses, which entail expenditures related
to online and offline promotion of our business, (2) sales staff compensation, (3) transportation expenses incurred by our sales
staff and field sales office rental expenses, and (4) call center expenses. We expect that our selling and marketing expenses
will continue to increase as we further expand into new markets and service offerings and as we enhance our brand recognition.
The following table sets forth the components of our selling and marketing expenses, in absolute amounts and as a percentage of
net revenues, for the years indicated.
|
|
For the year ended December 31,
|
|
|
|
2018
|
|
|
2019
|
|
|
2020
|
|
|
|
RMB
|
|
|
%
|
|
|
RMB
|
|
|
%
|
|
|
RMB
|
|
|
US$
|
|
|
%
|
|
|
|
(in thousands, except for percentages)
|
|
Net revenues
|
|
|
651,013
|
|
|
|
100.0
|
|
|
|
644,773
|
|
|
|
100.0
|
|
|
|
330,228
|
|
|
|
50,609
|
|
|
|
100.0
|
|
Selling and marketing expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Advertising and promotion expense
|
|
|
260,245
|
|
|
|
40.0
|
|
|
|
291,192
|
|
|
|
45.2
|
|
|
|
156,594
|
|
|
|
23,999
|
|
|
|
47.4
|
|
Sales staff compensation
|
|
|
125,468
|
|
|
|
19.3
|
|
|
|
243,331
|
|
|
|
37.7
|
|
|
|
103,786
|
|
|
|
15,906
|
|
|
|
31.4
|
|
Transportation and rental expenses
|
|
|
6,249
|
|
|
|
1.0
|
|
|
|
2,753
|
|
|
|
0.4
|
|
|
|
2,634
|
|
|
|
404
|
|
|
|
0.8
|
|
Call center expenses
|
|
|
19,750
|
|
|
|
3.0
|
|
|
|
20,153
|
|
|
|
3.1
|
|
|
|
10,766
|
|
|
|
1,650
|
|
|
|
3.3
|
|
Others
|
|
|
20,347
|
|
|
|
3.1
|
|
|
|
14,611
|
|
|
|
2.3
|
|
|
|
5,885
|
|
|
|
902
|
|
|
|
1.8
|
|
Total selling and marketing expenses
|
|
|
432,059
|
|
|
|
66.4
|
|
|
|
572,040
|
|
|
|
88.7
|
|
|
|
279,665
|
|
|
|
42,861
|
|
|
|
84.7
|
|
General
and administrative expenses
General
and administrative expenses consist primarily of (1) administrative staff compensation, (2) professional service expenses, (3)
office expenses, and (4) others, including allowance of doubtful accounts. The following table sets forth the components of general
and administrative expenses, in absolute amounts and as a percentage of net revenues, for the years indicated.
|
|
For the year ended December 31,
|
|
|
|
2018
|
|
|
2019
|
|
|
2020
|
|
|
|
RMB
|
|
|
%
|
|
|
RMB
|
|
|
%
|
|
|
RMB
|
|
|
US$
|
|
|
%
|
|
|
|
(in thousands, except for percentages)
|
|
Net revenues
|
|
|
651,013
|
|
|
|
100.0
|
|
|
|
644,773
|
|
|
|
100.0
|
|
|
|
330,228
|
|
|
|
50,609
|
|
|
|
100.0
|
|
General and administrative expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Administrative staff compensation
|
|
|
61,997
|
|
|
|
9.5
|
|
|
|
59,444
|
|
|
|
9.2
|
|
|
|
36,752
|
|
|
|
5,632
|
|
|
|
11.1
|
|
Professional service expenses
|
|
|
10,412
|
|
|
|
1.6
|
|
|
|
12,209
|
|
|
|
1.9
|
|
|
|
10,509
|
|
|
|
1,611
|
|
|
|
3.2
|
|
Office expenses
|
|
|
4,856
|
|
|
|
0.8
|
|
|
|
9,240
|
|
|
|
1.4
|
|
|
|
13,365
|
|
|
|
2,048
|
|
|
|
4.0
|
|
Others
|
|
|
7,095
|
|
|
|
1.1
|
|
|
|
22,997
|
|
|
|
3.6
|
|
|
|
38,194
|
|
|
|
5,854
|
|
|
|
11.6
|
|
Total general and administrative expenses
|
|
|
84,360
|
|
|
|
13.0
|
|
|
|
103,890
|
|
|
|
16.1
|
|
|
|
98,820
|
|
|
|
15,145
|
|
|
|
29.9
|
|
Taxation
Cayman
Islands
We
are incorporated in the Cayman Islands. Under the current law of the Cayman Islands, we are not subject to income or capital gains
tax. In addition, dividend payments are not subject to withholding tax in the Cayman Islands.
Hong
Kong
Commencing
from the year of assessment 2018/2019, the first HK$2.0 million of profits earned by the Group’s subsidiaries incorporated
in Hong Kong will be taxed at half the current tax rate (i.e., 8.25%) while the remaining profits will continue to be taxed at
the existing 16.5% tax rate. Payments of dividends by the subsidiary to the Company are not subject to withholding tax in Hong
Kong.
PRC
Our
subsidiaries and consolidated affiliated entities in China are companies incorporated under PRC law and, as such, are subject
to PRC enterprise income tax on their taxable income in accordance with the relevant PRC income tax laws. Pursuant to the modified
PRC Enterprise Income Tax Law, a uniform 25% enterprise income tax rate is generally applicable to both foreign-invested enterprises
and domestic enterprises, except where a special preferential rate applies. The enterprise income tax is calculated based on the
entity’s global income as determined under PRC tax laws and accounting standards. Preferential tax treatments are granted
to enterprises qualified as high and new technology enterprise, or HNTE. In 2018, our subsidiary TuanYuan and consolidated affiliated
entity TuanChe Internet were accredited as HNTEs and are entitled to the preferential enterprise income tax rate of 15% from 2018
to 2020, if TuanYuan and TuanChe Internet successfully meet the criteria of HNTE each year. In 2019, our consolidated affiliated
entity Drive New Media were accredited as HNTEs and are entitled to the preferential enterprise income tax rate of 15% from 2019
to 2021, if Drive New Media successfully meet the criteria of HNTE each year. See “Item 3. Key Information—D. Risk
Factors—Risks Related to Our Business and Industry—Failure to renew or retain any preferential tax treatments that
are available in China could adversely affect our results of operations and financial condition.”
Our
subsidiaries and consolidated affiliated entities in China are subject to value-added tax at a rate of 6% on the services they
provide, less any deductible value-added tax they have already paid or borne. Our subsidiaries and consolidated affiliated entities
in China are also subject to surcharges on value-added tax payments in accordance with PRC law.
As
a Cayman Islands holding company, we may receive dividends from our PRC subsidiaries. The PRC Enterprise Income Tax Law and its
implementing rules provide that dividends paid by a PRC entity to a non-resident enterprise for income tax purposes is subject
to PRC withholding tax at a rate of 10%, subject to reduction by an applicable tax treaty with China. 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 may be 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 SAT Circular 81, a Hong Kong resident enterprise must meet the following conditions, among others, in order to apply the reduced
withholding tax rate: (1) it must be a company as provided in the tax treaty; (2) it must directly own the required percentage
of equity interests and voting rights in the PRC resident enterprise; and (3) it must have directly owned such required percentage
in the PRC resident enterprise throughout the 12 months prior to receiving the dividends. In August 2015, the SAT promulgated
the Administrative Measures for Non-Resident Taxpayers to Enjoy Treatment under Tax Treaties, or SAT Circular 60, which became
effective in November 2015. SAT 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. 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 the necessary forms and supporting documents when performing tax filings, which
will be subject to post-tax filing examinations by the relevant tax authorities. In October 2019, the SAT promulgated the Administrative
Measures for Non-Resident Taxpayers to Enjoy Treatments under Tax Treaties, or SAT Circular 35. SAT Circular 35 became effective
on January 1, 2020 and superseded SAT Circular 60 on the same date. Compared to SAT Circular 60, SAT Circular 35 provides that
the nonresident enterprises and their withholding agents are not required to submit the supporting documents for tax treaty benefits
when performing tax filings. Instead, nonresident enterprises and their withholding agents may retain such supporting documents
themselves for the post-tax filing examinations by the relevant tax authorities. Accordingly, TuanChe Information Limited and
Long Ye Information Technology Limited, our Hong Kong subsidiaries, may be able to benefit from the 5% withholding tax rate for
the dividends it receives from our PRC subsidiaries, if it satisfies the conditions prescribed under SAT Circular 81 and other
relevant tax rules and regulations. However, according to SAT Circular 81 and SAT Circular 35, 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.
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%,
which could result in unfavorable tax consequences to us and our non-PRC shareholders. 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 enterprise
income tax purposes, such classification could result in unfavorable tax consequences to us and our non-PRC shareholders and ADS
holders.”
Results
of Operations
The
following table sets forth a summary of our consolidated results of operations for the years indicated. You should read this information
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 the results that may be expected for any future years or periods.
|
|
Year Ended December 31,
|
|
|
|
2018
|
|
|
2019
|
|
|
2020
|
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
US$
|
|
|
|
(in thousands, except for share and per share data)
|
|
Summary Consolidated Statements of Operations and Comprehensive Loss
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Revenues
|
|
|
651,013
|
|
|
|
644,773
|
|
|
|
330,228
|
|
|
|
50,609
|
|
Cost of revenues
|
|
|
(183,369
|
)
|
|
|
(186,541
|
)
|
|
|
(88,801
|
)
|
|
|
(13,609
|
)
|
Gross profit
|
|
|
467,644
|
|
|
|
458,232
|
|
|
|
241,427
|
|
|
|
37,000
|
|
Total operating expenses
|
|
|
(535,681
|
)
|
|
|
(719,269
|
)
|
|
|
(412,752
|
)
|
|
|
(63,258
|
)
|
Net loss from continuing operations
|
|
|
(75,088
|
)
|
|
|
(251,299
|
)
|
|
|
(163,478
|
)
|
|
|
(25,056
|
)
|
Net loss from discontinued operations
|
|
|
(3,612
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Net loss
|
|
|
(78,700
|
)
|
|
|
(251,299
|
)
|
|
|
(163,478
|
)
|
|
|
(25,056
|
)
|
Accretion to pre-IPO preferred shares redemption value
|
|
|
(35,066
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Comprehensive loss attributable to the TuanChe Limited’s shareholders
|
|
|
(110,365
|
)
|
|
|
(242,224
|
)
|
|
|
(169,887
|
)
|
|
|
(26,038
|
)
|
Comprehensive loss attributable to non-controlling interest
|
|
|
—
|
|
|
|
(659
|
)
|
|
|
(444
|
)
|
|
|
(68
|
)
|
Net loss attributable to the TuanChe Limited’s ordinary shareholders per share from continuing operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
(0.90
|
)
|
|
|
(0.85
|
)
|
|
|
(0.54
|
)
|
|
|
(0.08
|
)
|
Diluted
|
|
|
(0.90
|
)
|
|
|
(0.85
|
)
|
|
|
(0.54
|
)
|
|
|
(0.08
|
)
|
Net loss attributable to the TuanChe Limited’s ordinary shareholders per share from discontinuing operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
(0.03
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Diluted
|
|
|
(0.03
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Weighted average number of ordinary shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
121,938,427
|
|
|
|
294,922,074
|
|
|
|
304,439,440
|
|
|
|
304,439,440
|
|
Diluted
|
|
|
121,938,427
|
|
|
|
294,922,074
|
|
|
|
304,439,440
|
|
|
|
304,439,440
|
|
Non-GAAP Financial Data (1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA
|
|
|
7,482
|
|
|
|
(143,868
|
)
|
|
|
(141,097
|
)
|
|
|
(21,625
|
)
|
Adjusted net profit/(loss)
|
|
|
3,276
|
|
|
|
(140,331
|
)
|
|
|
(145,797
|
)
|
|
|
(22,346
|
)
|
(1)
See “—Non-GAAP Financial Measures.”
Year
Ended December 31, 2020 Compared to Year Ended December 31, 2019
Net
Revenues
Our
net revenues from continuing operations decreased by 48.8% from RMB644.8 million in 2019 to RMB330.2 million (US$50.6 million)
in 2020, primarily due to a sharp decrease in offline marketing services revenue including auto shows and special promotion events
as a result of Covid-19 impacts.
|
•
|
Net
revenues from auto show services decreased by 58.5% from RMB603.4 million in 2019 to
RMB250.5 million (US$38.4 million) in 2020, primarily due to the adverse impacts of the
COVID-19 pandemic. In 2019 and 2020, we organized 1,055 and 449 auto shows in 233 and
172 cities, offering a total of 29,063 and 14,341 booths, respectively.
|
|
•
|
Net
revenues from special promotion event services decreased by 75.5% from RMB19.8 million
in 2019 to RMB4.9 million (US$0.7 million) in 2020, primarily due to the adverse impacts
of the COVID-19 pandemic. In 2019 and 2020, we facilitated 627 and 207 special promotion
events for our industry customers, respectively.
|
|
•
|
Net revenues from our virtual dealership business, online marketing
services and others increased by 246.8% from approximately RMB21.6 million in 2019 to RMB74.9 million (US$11.5 million) in 2020, primarily
due to our continuous expansion of live streaming events and collaboration with Baidu Youjia and Webank.
|
Cost
of Revenues
Our
cost of revenues decreased by 52.4% from RMB186.5 million in 2019 to RMB 88.8 million (US$13.6 million) in 2020, primarily due
to the following reasons.
|
•
|
Our
venue set-up costs decreased by 60.0% from RMB61.7 million in 2019 to RMB24.7 million
(US$3.8 million) in 2020, primarily due to a decrease in the number of auto shows we
organized and set up from 1,055 in 2019 to 449 in 2020.
|
|
•
|
Our
venue rental costs decreased by 56.3% from RMB77.1 million in 2019 to RMB33.7 million
(US$5.2 million) in 2020, primarily due to a decrease in the number of auto shows we
organized and set up from 1,055 in 2019 to 449 in 2020.
|
|
•
|
Our
security costs decreased by 59.1% from RMB9.1 million in 2019 to RMB3.7 million (US$0.6
million) in 2020, primarily due to the decrease in the number of our auto shows. To ensure
the safety of our auto show participants, we typically hire security personnel from third-party
security companies to maintain the event-day orders of our offline events. Based on our
past experience in operating auto shows, we are able to ensure the safety of our auto
shows while hiring fewer security personnel per show. We also began to utilize our own
employees to handle certain security related matters, which led to a decrease in the
amount of security related costs paid to third-party security companies.
|
|
•
|
Our
direct labor costs increased by 6.0% from RMB9.8 million in 2019 to RMB10.4 million (US$1.6 million) in 2020, primarily due to an increase in the labor costs associated with the consolidation of Cheshangtong’s financial results following
the acquisition in January, 2020, partially offset by a decrease in the labor costs associated with fewer auto shows we hosted in 2020.
|
Gross
Profit
As
a result of the foregoing, our gross profit from continuing operations decreased by 47.3% from RMB458.2 million in 2019 to RMB241.4
million (US$37.0 million) in 2020.
Operating
Expenses
Selling
and marketing expenses
Our selling and marketing expenses decreased by
51.1% from RMB572.0 million in 2019 to RMB279.7 million (US$42.9 million) in 2020, primarily due to the decreases in staff compensation
and promotion expenses as a result of resource conservation during the COVID-19 pandemic measures and reduced volume of offline events.
Our advertising and promotion expenses decreased
by 46.2% from RMB291.2 million in 2019 to RMB156.6 million (US$24.0 million) in 2020, primarily due to our decreased advertising and promotion
activities, which is in line with the decline in the number of outdoor events we held during 2020 as a result of the COVID-19 pandemic
and policy alternations regarding macroeconomics in China The number of cities where we have established sales operations increased from
148 as of December 31, 2019 to 129 as of December 31, 2020.
Our
sales staff compensation expenses decreased by 57.3% from RMB243.3 million in 2019 to RMB103.8 million (US$15.9 million) in 2020, primarily
due to a decrease in the payout of commission to sales personnel as a result of decreased sales activities during the COVID-19
pandemic.
Our
call center expenses decreased by 46.6% from RMB20.2 million in 2019 to RMB10.8 million (US$1.7 million) in 2020, primarily due
to the decreased utilization of call center services a result of a decreased number of offline events.
Our selling and marketing expenses as a percentage
of total net revenues decreased from 88.7% in 2019 to 84.7% in 2020, primarily because the selling and marketing expenses declined in
line with the total net revenue.
General
and administrative expenses
Our
general and administrative expenses decreased by 4.9% from RMB103.9 million in 2019 to RMB98.8 million (US$15.1 million) in 2020, primarily
due to the decrease in staff compensation expenses as a result of resource conservation during the COVID-19 pandemic. General and administrative
expenses, as a percentage of total net revenues, increased from 16.1% in 2019 to 29.9% in 2020, primarily due to (1) allowance for doubtful
accounts and (2) the sharp decrease in net revenues outpacing the decrease in general and administrative expenses. We closely monitor the collection of our accounts receivable and record allowance for doubtful accounts against aged
accounts receivable and specifically identified non-recoverable amounts. We may record additional allowances amid economic downturn or
deteriorated financial condition of our customers that may result in impairment of their ability to make payments.
Research
and Development Expenses
Our
research and development expenses decreased by 20.9% from RMB43.3 million to RMB34.3 million (US$5.3 million), primarily due to
the decrease in staff compensation expenses as a result of the decrease in headcount of research and development departments.
Operating
Loss
As
a result of the foregoing, our operating loss decreased by 34.4% from RMB261.0 million in 2019 to RMB171.3 million (US$26.3 million)
in 2020.
|
|
For the year ended December 31,
|
|
|
|
2019
|
|
|
2020
|
|
|
|
(in thousands, except for percentages)
|
|
|
|
RMB
|
|
|
%
|
|
|
RMB
|
|
|
US$
|
|
|
%
|
|
Net revenues
|
|
|
644,773
|
|
|
|
100.0
|
|
|
|
330,228
|
|
|
|
50,609
|
|
|
|
100.0
|
|
Loss from continuing operations
|
|
|
(261,037
|
)
|
|
|
(40.5
|
)
|
|
|
(171,325
|
)
|
|
|
(26,258
|
)
|
|
|
(51.9
|
)
|
Other Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income, net
|
|
|
7,020
|
|
|
|
1.1
|
|
|
|
2,409
|
|
|
|
369
|
|
|
|
0.7
|
|
Exchange loss
|
|
|
(661
|
)
|
|
|
(0.1
|
)
|
|
|
(25
|
)
|
|
|
(4
|
)
|
|
|
(0.0
|
)
|
Investment (loss)/income
|
|
|
(917
|
)
|
|
|
(0.1
|
)
|
|
|
933
|
|
|
|
143
|
|
|
|
0.3
|
|
Fair value change of warrant
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Impairment of investment
|
|
|
(1,000
|
)
|
|
|
(0.2
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Others, net
|
|
|
5,296
|
|
|
|
0.8
|
|
|
|
3,498
|
|
|
|
536
|
|
|
|
1.1
|
|
Income Tax Expense:
|
|
|
—
|
|
|
|
—
|
|
|
|
1,032
|
|
|
|
158
|
|
|
|
0.3
|
|
Net loss from continuing operations
|
|
|
(251,299
|
)
|
|
|
(39.0
|
)
|
|
|
(163,478
|
)
|
|
|
(25,056
|
)
|
|
|
(49.5
|
)
|
Net loss from discontinued operations
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Net loss
|
|
|
(251,299
|
)
|
|
|
(39.0
|
)
|
|
|
(163,478
|
)
|
|
|
(25,056
|
)
|
|
|
(49.5
|
)
|
Others,
net included in other expenses primarily include government grants, VAT refund and bank rebates, partially offset by bank charges
in connection with our Cayman bank accounts.
We
adjust the amount of warrant liability based on its fair value, and record any increase and decrease in its fair value as losses
and gains in our consolidated statement of operations.
Net
Loss
As
a result of the foregoing, we had net loss of RMB251.3 million and RMB163.5 million (US$25.1 million) in 2019 and 2020, respectively.
Year
Ended December 31, 2019 Compared to Year Ended December 31, 2018
Net
Revenues
Our
net revenues from continuing operations decreased by 1.0% from RMB651.0 million in 2018 to RMB644.8 million in 2019, primarily
due to the decrease in our net revenues from our auto show business as a result of the market stagnation of China’s automobile
industry.
|
•
|
Net
revenues from auto show services decreased by 6.3% from RMB644.3 million in 2018 to RMB603.4
million in 2019, primarily due to the decrease in the service fees we charged our industry
customers to attract and retain them amid the market slowdown in China. In 2018 and 2019,
we organized 851 and 1,055 auto shows in 196 and 233 cities, offering a total of 27,008
and 29,063 booths, respectively.
|
|
•
|
In
2019, we commenced our special promotion event services and facilitated 627 special promotion
events for our industry customers. We generated RMB19.8 million in net revenues, representing
3.1% of our total net revenues for the same year.
|
|
•
|
Net
revenues from our virtual dealership business, online marketing services and others increased
significantly from approximately RMB6.8 million in 2018 to RMB21.6 million in 2019, primarily
due to the increase in the number of automobiles sales transactions we facilitated through
our virtual dealership business from 961 with a GMV of over RMB94.5 million in 2018 to
1,878 with a GMV of RMB229.5 million in 2019.
|
Cost
of Revenues
Our
cost of revenues increased by 1.7% from RMB183.4 million in 2018 to RMB186.5 million in 2019, primarily due to the following reasons.
|
•
|
Our
venue set-up costs decreased by 19.4% from RMB76.6 million in 2018 to RMB61.7 million
in 2019. Although the number of auto shows we organized and set up increased from 851
in 2018 to 1,055 in 2019, we managed to lower the venue set-up costs for each auto show,
benefiting from economies of scale.
|
|
•
|
Our
venue rental costs increased by 15.6% from RMB66.7 million in 2018 to RMB77.1 million
in 2019, generally in line with the increase in the number of our auto shows.
|
|
•
|
Our
security costs increased by 23.8% from RMB7.3 million in 2018 to RMB9.1 million in 2019,
primarily due to the increase in the number of our auto shows. To ensure the safety of
our auto show participants, we typically hire security personnel from third-party security
companies to maintain the event-day orders of our offline events. Based on our past experience
in operating auto shows, we are able to ensure the safety of our auto shows while hiring
fewer security personnel per show. We also began to utilize our own employees to handle
certain security related matters, which led to a decrease in the amount of security related
costs paid to third-party security companies.
|
|
•
|
Our
direct labor costs increased by 32.6% from RMB7.4 million in 2018 to RMB9.8 million in
2019, primarily due to the increased number of field employees, driven by (1) an increase
in the number of auto shows we organized from 851 in 2018 to 1,055 in 2019, and (2) the
deployment of our own employees to handle certain security related event-day matters.
|
Gross
Profit
As
a result of the foregoing, our gross profit from continuing operations decreased by 2.0% from RMB467.6 million in 2018 to RMB458.2
million in 2019.
Operating
Expenses
Selling
and marketing expenses
Our
selling and marketing expenses increased by 32.4% from RMB432.1 million in 2018 to RMB572.0 million in 2019, primarily due to
the increases in our advertising and promotion expenses and sales staff compensation expenses.
Our
advertising and promotion expenses increased by 11.9% from RMB260.2 million in 2018 to RMB291.2 million in 2019, primarily driven
by the number of cities covered by our offline events. In order to gain consumer awareness and establish business relationships
with local industry customers, we incur additional selling and marketing expenses when we expand into a new city. The number of
cities where we have established sales operations increased from 138 as of December 31, 2018 to 148 as of December 31, 2019.
Our
sales staff compensation expenses increased by 93.9% from RMB125.5 million in 2018 to RMB243.3 million in 2019, primarily (1)
driven by the increase in salaries and benefits for our sales staff, and to a lesser extent, (2) driven by the increase in our
share-based compensation in connection with our sales employees during 2019. Excluding the effect of share-based compensation,
our sales staff compensation expenses would have increased by 97.0% from RMB84.1 million in 2018 to RMB165.7 million in 2019.
Our
call center expenses increased by 2.0% from RMB19.8 million in 2018 to RMB20.2 million in 2019. Since 2018, we have significantly
enhanced our collaboration with third party call center service providers to proactively communicate with consumers who have signed
up for our offline events and inform them of the automobile brands and automotive services these consumers will have access to
during the events. We believe that the personal follow-up communications contributed to higher consumer attendance at our offline
events, which in turn increased the attractiveness of our offline events to our industry customers. We will continue to invest
in technologies to facilitate our communications with potential consumers in an effort to reduce our call center expenses.
Our
selling and marketing expenses as a percentage of total net revenues increased from 66.4% in 2018 to 88.7% in 2019. This is primarily
due to significantly increased salaries and benefits for our sales staff.
General
and administrative expenses
Our
general and administrative expenses increased by 23.2% from RMB84.4 million in 2018 to RMB103.9 in 2019, primarily due to the
increases in (1) allowance for doubtful accounts, (2) office expenses, and (3) professional service expenses. General and administrative
expenses, as a percentage of total net revenues, increased from 13.0% in 2018 to 16.1% in 2019, primarily due to the significant
increase in allowance for doubtful accounts. We closely monitor the collection of our accounts receivable and record allowance
for doubtful accounts against aged accounts receivable and specifically identified non-recoverable amounts. We may record additional
allowances amid economic downturn or deteriorated financial condition of our customers that may result in impairment of their
ability to make payments.
Research
and Development Expenses
Our
research and development expenses increased significantly from RMB19.3 million to RMB43.3 million, primarily due to the increase
in salaries and benefits for our research and development personnel driven by an increased headcount in line with our business
expansion and our strengthened research and development efforts.
Operating
Loss
As
a result of the foregoing, our operating loss increased significantly from RMB68.0 million in 2018 to RMB261.0 million in 2019.
|
|
For the year ended December 31,
|
|
|
|
2018
|
|
|
2019
|
|
|
|
|
|
|
|
|
|
|
(in thousands, except for percentages)
|
|
|
|
RMB
|
|
|
%
|
|
|
RMB
|
|
|
|
|
|
%
|
|
Net revenues
|
|
|
651,013
|
|
|
|
100.0
|
|
|
|
644,773
|
|
|
|
|
|
|
|
100.0
|
|
Loss from continuing operations
|
|
|
(68,037
|
)
|
|
|
(10.5
|
)
|
|
|
(261,037
|
)
|
|
|
|
|
|
|
(40.5
|
)
|
Other Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest (expenses)/income, net
|
|
|
(3,146
|
)
|
|
|
(0.5
|
)
|
|
|
7,020
|
|
|
|
|
|
|
|
1.1
|
|
Exchange gain/(loss)
|
|
|
1,063
|
|
|
|
0.2
|
|
|
|
(661
|
)
|
|
|
|
|
|
|
(0.1
|
)
|
Investment loss
|
|
|
(660
|
)
|
|
|
—
|
|
|
|
(917
|
)
|
|
|
|
|
|
|
(0.1
|
)
|
Fair value change of warrant
|
|
|
(3,843
|
)
|
|
|
(0.6
|
)
|
|
|
—
|
|
|
|
|
|
|
|
—
|
|
Impairment of investment
|
|
|
—
|
|
|
|
—
|
|
|
|
(1,000
|
)
|
|
|
|
|
|
|
(0.2
|
)
|
Others, net
|
|
|
(465
|
)
|
|
|
(0.1
|
)
|
|
|
5,296
|
|
|
|
|
|
|
|
0.8
|
|
Net loss from continuing operations
|
|
|
(75,088
|
)
|
|
|
(11.5
|
)
|
|
|
(251,299
|
)
|
|
|
|
|
|
|
(39.0
|
)
|
Net loss from discontinued operations
|
|
|
(3,612
|
)
|
|
|
(0.1
|
)
|
|
|
—
|
|
|
|
|
|
|
|
—
|
|
Net
loss
|
|
|
(78,700
|
)
|
|
|
(12.1
|
)
|
|
|
(251,299
|
)
|
|
|
|
|
|
|
(39.0
|
)
|
Others,
net included in other expenses primarily include government grants, VAT refund and bank rebates, partially offset by bank charges
in connection with our Cayman bank accounts.
We
adjust the amount of warrant liability based on its fair value, and record any increase and decrease in its fair value as losses
and gains in our consolidated statement of operations.
Net
Loss
As
a result of the foregoing, we had net loss of RMB78.7 million and RMB251.3 million in 2018 and 2019, respectively.
Accretion
to Pre-IPO Preferred Shares Redemption Value
We
have issued various preferred shares and record the fair value of preferred shares as mezzanine equity. Pursuant to the preferred
share purchase agreements, shareholders have the right to convert those preferred shares into our ordinary shares upon a successful
public offering. This right to convert has a fair market value independent from the preferred shares themselves. We record accretion
to pre-IPO preferred shares redemption value over the period between preferred share issuance and the earliest redemption date.
We record the accretions against retained earnings, or in the absence of retained earnings, against additional paid-in capital.
Once additional paid-in capital has been exhausted, we record additional charges by increasing the accumulated deficit.
Redemption
rights arise out of issuance of preferred shares. Therefore, the value of such redemption rights correlates with the changes in
the number of preferred shares we have issued. Our accretion to pre-IPO preferred shares redemption value decreased from RMB35.1
million in 2018 to nil in 2019 as no redemption of preferred shares took place in 2019.
B. Liquidity
and Capital Resources
Liquidity
and Capital Resources
Our principal sources of liquidity have been cash generated from
operations, the issuance of preferred shares, incurrence of convertible loans and proceeds from our initial public offering.
As of December 31, 2018, 2019 and 2020, we had
RMB578.6 million, RMB193.9 million and RMB109.9 million (US$16.8 million), respectively, in cash and cash equivalents. As of December
31, 2018, 2019 and 2020, we held a cash balance of RMB504.2 million, RMB109.1 million and RMB53.2 million (US$8.2 million) denominated
in U.S. dollars, respectively. As of the same dates, we held a cash balance of RMB74.4 million, RMB84.8 million and RMB56.7 million (US$8.7
million) denominated in RMB, respectively, representing 12.9%, 43.7% and 51.6% of our total cash and cash equivalents, respectively. We
had time deposits of RMB69.8 million and RMB45.7 million (US$7.0 million) as of December 31, 2019 and 2020, respectively, and no time
deposits as of December 31, 2018. We believe that our current cash and cash equivalents, time deposits and anticipated cash flow from
operations will be sufficient to meet our anticipated cash needs from operations and other commitments for at least the next 12 months
from the date of this annual report, taking into consideration the impact of the COVID-19 pandemic on our business and operations.
We have incurred recurring operating losses since
its inception, including net losses of RMB78.7 million, RMB251.3 million and RMB165.3 million for the years ended December 31, 2018, 2019
and 2020, respectively. Net cash used in operating activities was RMB53.3 million, RMB161.8 million and RMB88.9 million for the years
ended December 31, 2018, 2019 and 2020, respectively. Accumulated deficit was RMB718.7 million and RMB881.7 million as of December 31,
2019 and 2020, respectively. As of December 31, 2020, we had a net current asset of RMB135.2 million (US$20.7 million).
We intend to finance our operations from our current
available working capital and cash generated from operating activities. In response to the impact of COVID-19 in 2020, we implemented
measures to adjust the pace of our business expansion and conserve resources, such as furlough arrangements and scaling back our recruitment
budget and employee size to control our operating expenses and reduce cash used in operating activities. With the easing of the COVID-19
pandemic and the relaxation of the related precautionary government-imposed quarantine measures, we are gradually resuming our daily business
operations and recruitment pace.
However, regional outbreaks of COVID-19 may still
subject our business, results of operations, financial condition and cash flows to uncertainties, and we may resort to additional costs
cutting measures including re-implementation of furlough arrangements if the outbreak of COVID-19 and its impact persist or escalate.
Furthermore, as the business operations of our industry customers have also been severely disrupted, we continue to experience delays
in collecting our accounts receivable since the COVID-19 outbreak, which could materially and adversely affect our liquidity.
We continue to explore opportunities to grow our business. However,
we have not yet achieved a business scale that is able to generate a sufficient level of revenues to achieve net profit and positive cash
flows from operating activities, and we expect the operating losses and negative cash flows from operations will continue for the foreseeable
future. While we have sufficient cash for the next twelve months from the date of this annual report, if we are unable to grow the business
to achieve economies of scale in the future, it will become even more difficult for us to sustain a sufficient source of cash to cover
our operating costs. We plan to raise additional capital, including among others, obtaining debt financing, to support our future operation.
There can be no assurance, however, that we will be able to obtain additional financing on terms acceptable to us, in a timely manner,
or at all. See “Item 3. Key Information—D. Risk Factors—Risks Related to Our Business and Industry—We may need
additional capital, and we may be unable to obtain such capital in a timely manner or on acceptable terms, or at all.”
The
following table sets forth a summary of our cash flows for the years indicated.
|
|
For the year ended
December 31,
|
|
|
|
2018
|
|
|
2019
|
|
|
2020
|
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
US$
|
|
|
|
(in thousands)
|
|
Net cash used in operating activities
|
|
|
(53,338
|
)
|
|
|
(161,806
|
)
|
|
|
(88,854
|
)
|
|
|
(13,618
|
)
|
Net cash (used in)/generated from investing activities
|
|
|
(20,746
|
)
|
|
|
(187,548
|
)
|
|
|
37,698
|
|
|
|
5,777
|
|
Net cash generated from/(used in) financing activities
|
|
|
562,126
|
|
|
|
(37,245
|
)
|
|
|
(63
|
)
|
|
|
(10
|
)
|
Effect of exchange rate effect on cash and cash equivalents
|
|
|
12,713
|
|
|
|
3,490
|
|
|
|
(4,485
|
)
|
|
|
(687
|
)
|
Net increase/(decrease) in cash, cash equivalents and restricted cash
|
|
|
500,755
|
|
|
|
(383,109
|
)
|
|
|
(55,704
|
)
|
|
|
(8,538
|
)
|
Cash and cash equivalents, and restricted cash at beginning of the period
|
|
|
77,803
|
|
|
|
578,558
|
|
|
|
195,449
|
|
|
|
29,954
|
|
Cash and cash equivalents, and restricted cash at end of the period
|
|
|
578,558
|
|
|
|
195,449
|
|
|
|
139,745
|
|
|
|
21,416
|
|
Operating
Activities
Cash
used in operating activities was RMB88.9 million (US$13.6 million) in 2020. In 2020, the difference between our cash used in operating
activities and our net loss of RMB163.5 million (US$25.1 million) resulted primarily from (1) share based compensation of RMB17.4
million (US$2.7 million), (2) allowance of doubtful accounts of RMB13.7 million (US$2.1 million), (3) an impairment of prepayment
and other current assets of RMB16.6 million (US$2.5 million), (4) an increase in accounts payable of RMB16.0 million (US$2.4 million)
and (5) an increase in advance from customers of RMB15.3 million (US$2.3 million), partially offset by (1) a decrease in salary
and welfare benefits payable of RMB16.0 million (US$2.5 million) and (2) an increase in accounts receivable of RMB7.4 million
(US$1.1 million).
Cash
used in operating activities was RMB161.8 million in 2019. In 2019, the difference between our cash used in operating activities
and our net loss of RMB251.3 million resulted primarily from (1) share based compensation of RMB110.4 million, (2) allowance of
doubtful accounts of RMB13.7 million, and (3) an increase in salary and welfare benefits payable of RMB19.2 million, partially
offset by (1) an increase in accounts receivable of RMB30.5 million, (2) an increase in prepayment and other current assets of
RMB24.1 million, and (3) a decrease in advance from customers of RMB9.9 million.
Cash
used in operating activities was RMB53.3 million in 2018. In 2018, the difference between our cash used in operating activities
and our net loss of RMB78.7 million resulted primarily from (1) an increase in prepayment and other current assets of RMB50.4
million, (2) an increase in accounts receivable of RMB44.3 million, (3) an decrease in other taxes payable of RMB4.5 million,
partially offset by (1) share-based compensation of RMB78.1 million, (2) an increases in current liabilities other than tax payable
of RMB37.4 million, (3) change in fair value of warrant of RMB3.8 million and (4) interest expense – net of RMB2.1 million.
Investing
Activities
Net
cash generated from investing activities was RMB37.7 million (US$5.8 million) in 2020, primarily due to (1) cash of RMB166.2 million
(US$25.5 million) received from maturity of time deposits, and (2) cash of RMB20.8 million (US$3.2 million) received from short-term
investment, partially offset by placement of time deposits of RMB141.0million (US$21.6 million).
Net
cash used in investing activities was RMB187.5 million in 2019, primarily due to (1) cash payment of RMB99.1 million for a bridge
loan, (2) cash payment of RMB69.8 million for time deposits, and (3) purchase of property, equipment and software, and other non-current
assets of RMB13.2 million.
Net
cash used in investing activities was RMB20.7 million in 2018, primarily due to purchase of computers for our employees, and long-term
investments in a company in the automobile industry in exchange for 5% of its shares.
Financing
Activities
Net
cash used in financing activities was RMB63 thousand (US$10 thousand) in 2020, which was the interest paid for short-term borrowings
of RMB3.0 million (US$0.5 million).
Net
cash used in financing activities was RMB37.2 million in 2019, primarily due to (1) repurchase of restricted shares from employees
of RMB26.2 million, and (2) stock repurchase from the secondary market of RMB13.7 million.
Net
cash generated from financing activities was RMB562.1 million in 2018, primarily due to (1) proceeds from issuance of Series D-1
and D-2 convertible redeemable preferred shares of RMB511.0 million, and (2) proceeds from our initial public offering of RMB103.4
million, partially offset by repayment of various loans of RMB81.8 million.
Indebtedness
For
details of our outstanding short-term and long-term borrowings as of December 31, 2018, 2019 and 2020 see Note 12 to the consolidated
financial statements included in this annual report.
Holding
Company Structure
TuanChe
Limited is a holding company with no material operations of its own. We conduct our operations primarily through our subsidiaries
and our consolidated affiliated entities in China. As a result, our ability to pay dividends depends upon dividends paid by our
subsidiaries and fees paid by our consolidated affiliated entities. If our subsidiaries or any newly formed subsidiaries 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 subsidiaries in China are permitted to pay dividends to us only out of their retained earnings, if any, as determined
in accordance with the Accounting Standards for Business Enterprise as promulgated by the Ministry of Finance of the PRC, or PRC
GAAP. Under PRC law, each of our PRC subsidiaries and our consolidated affiliated entities is required to set aside at least 10%
of its after-tax profits each year, if any, to fund a statutory surplus reserve until such reserve reaches 50% of its registered
capital. In addition, our wholly foreign-owned subsidiary in China and our consolidated affiliated entities may allocate a portion
of its after-tax profits based on PRC accounting standards to a discretionary surplus fund at its discretion. Although the statutory
reserves can be used, among other ways, to increase the registered capital and eliminate future losses in excess of retained earnings
of the respective companies, the statutory reserve funds are not distributable as cash dividends.
As
an offshore holding company, we are permitted under PRC laws and regulations to provide funding from the proceeds of our offshore
fundraising activities to our PRC subsidiaries only through loans or capital contributions, and to our consolidated affiliated
entity only through loans, in each case subject to the satisfaction of the applicable government registration and approval requirements.
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 offering to make loans to or make additional capital contributions
to our PRC subsidiaries and consolidated affiliated entities, which could materially and adversely affect our liquidity and our
ability to fund and expand our business.” As a result, there is uncertainty with respect to our ability to provide prompt
financial support to our subsidiaries and consolidated affiliated entities in China when needed.
C 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.”
D. Trend
Information
Other
than as disclosed elsewhere in this annual report, we are not aware of any trends, uncertainties, demands, commitments or events
for the 2020 that are reasonably likely to have a material adverse effect on our net revenue, income, profitability, liquidity
or capital resources, or that caused the disclosed financial information to be not necessarily indicative of future operating
results or financial condition.
E. Off-Balance
Sheet Arrangements
We
have not entered into any financial guarantees or other commitments to guarantee the payment obligations of any third parties.
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 in our consolidated financial statements. Furthermore, we do not have any retained or contingent interest
in assets transferred to an unconsolidated entity that serves as credit, liquidity or market risk support to such entity. We do
not have any variable interest in any unconsolidated entity that provides financing, liquidity, market risk or credit support
to us or engages in leasing, hedging or product development services with us.
F. Tabular
Disclosure of Contractual Obligations
Contractual
Obligations
We
lease office spaces under non-cancelable operating lease agreements, which expire at various dates through December 2024. As of
December 31, 2020, future minimum payments under non-cancelable operating lease agreements were as follows:
|
|
|
Payment due by period
|
|
|
|
Total
|
|
Less than 1
year
|
|
|
1-3 years
|
|
|
More than 3
years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(RMB in thousands)
|
Office spaces(1)
|
|
|
10,446
|
|
|
6,030
|
|
|
|
3,868
|
|
|
|
548
|
|
(1)
Represents minimum payments under non-cancelable operating lease agreements related to our office spaces.
G. Safe
Harbor
This
annual report contains forward-looking statements that reflect our current expectations and projections of future events. You
can identify these forward-looking statements by words or phrases such as “may,” “will,” “expect,”
“anticipate,” “aim,” “estimate,” “intend,” “plan,” “believe,”
“likely to,” “potential,” “continue” or other similar expressions. We have based these forward-looking
statements largely on our current expectations and projections of future events that we believe may affect our financial condition,
results of operations, business strategy and financial needs. These forward-looking statements include, but are not limited to,
statements about:
|
•
|
our
goals and strategies;
|
|
•
|
our
ability to retain and increase the number of customers;
|
|
•
|
our
future business development, financial condition and results of operations;
|
|
•
|
expected
changes in our net revenues, costs or expenditures;
|
|
•
|
our
ability to manage and expand the sales network and other aspects of our operations;
|
|
•
|
our
projected markets and growth in markets;
|
|
•
|
our
potential need for additional capital and the availability of such capital;
|
|
•
|
competition
in our industry;
|
|
•
|
relevant
government policies and regulations relating to our industry;
|
|
•
|
general
economic and business conditions globally and in China;
|
|
•
|
the
length and severity of the recent COVID-19 pandemic and its impact on our business and
industry;
|
|
•
|
our
use of the proceeds from our initial public offering; and
|
|
•
|
assumptions
underlying or related to any of the foregoing.
|
You
should read this annual report and the documents that we refer to and have filed as exhibits to this annual report completely
and with the understanding that our actual future results may be materially different from and worse than what we expect. Moreover,
new risk factors and uncertainties emerge from time to time and it is not possible for our management to predict all risk factors
and uncertainties, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination
of factors, may cause actual results to differ materially from those contained in any forward-looking statements. We qualify all
of our forward-looking statements by these cautionary statements.
This
annual report also contains certain data and information that we obtained from various government and private publications, including
the iResearch report. Statistical data in these publications also include projections based on a number of assumptions. Failure
of the market to grow at the projected rate may have a material adverse effect on our business and the market price of the ADSs.
In addition, projections or estimates about our business and financial prospects involve significant risks and uncertainties.
Furthermore, if any one or more of the assumptions underlying the market data are later found to be incorrect, actual results
may differ from the projections based on these assumptions. You should not place undue reliance on these forward-looking statements.
The
forward-looking statements made in this annual report relate only to events or information as of the date on which the statements
are made in this annual report. Except as required by law, we undertake no obligation to update or revise publicly any forward-looking
statements, whether as a result of new information, future events or otherwise, after the date on which the statements are made
or to reflect the occurrence of unanticipated events. Comparisons of results for current and any prior periods are not intended
to express any future trends or indications of future performance, unless specifically expressed as such, and should only be viewed
as historical data. You should read this annual report and the documents that we refer to in this annual report and have filed
as exhibits to the registration statement, of which this annual report is a part, completely and with the understanding that our
actual future results may be materially different from what we expect.