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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 20-F

(Mark One)

REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR 12(g) OF THE SECURITIES EXCHANGE ACT OF 1934

OR

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2021.

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

OR

SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Date of event requiring this shell company report . . . . . . . . . . . . . . . . . . .

For the transition period from            to

Commission file number: 001-38752

360 DigiTech, Inc.

(Exact Name of Registrant as Specified in Its Charter)

N/A

(Translation of Registrant’s Name Into English)

Cayman Islands

(Jurisdiction of Incorporation or Organization)

7/F Lujiazui Finance Plaza

No. 1217 Dongfang Road

Pudong New Area, Shanghai 200122

People’s Republic of China

(Address of Principal Executive Offices)

Alex Xu, Chief Financial Officer

7/F Lujiazui Finance Plaza

No. 1217 Dongfang Road

Pudong New Area, Shanghai 200122

People’s Republic of China

Phone: +86 10 5244 7655

Email: alex_xu@360shuke.com

(Name, Telephone, Email and/or Facsimile number and Address of Company Contact Person)

Securities registered or to be registered pursuant to Section 12(b) of the Act:

Title of each class

    

Trading Symbol (s)

    

Name of each exchange on which registered

American depositary shares, each
representing two Class A ordinary shares

QFIN

The Nasdaq Global Select Market

Class A ordinary shares, par value
US$0.00001 per share*

The Nasdaq Global Select Market*

*Not for trading, but only in connection with the listing on the Nasdaq Global Select Market of American depositary shares.

Securities registered or to be registered pursuant to Section 12(g) of the Act:

None

(Title of Class)

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:

None

(Title of Class)

Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report:

As of December 31, 2021, there were 310,486,975 ordinary shares issued and outstanding, par value US$0.00001 per share, being the sum of 270,666,389 class A ordinary shares (excluding 4,946,043 class A ordinary shares issued to the depositary bank and reserved for future exercise or vesting of share incentive awards) and 39,820,586 class B ordinary shares.

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

 Yes    No

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

 Yes    No

Note — Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 from their obligations under those Sections.

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

 Yes    No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

 Yes    No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer

Accelerated filer

Non-accelerated filer

Emerging growth company

If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards† provided pursuant to Section 13(a) of the Exchange Act.  

† The term “new or revised financial accounting standard” refers to any update issued by the Financial Accounting Standards Board to its Accounting Standards Codification after April 5, 2012.

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

 Yes    No

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

U.S. GAAP

International Financial Reporting Standards as issued
by the International Accounting Standards Board

Other

If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow.

 Item 17    Item 18

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

 Yes    No

(APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST FIVE YEARS)

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.

 Yes    No

TABLE OF CONTENTS

Page

INTRODUCTION

1

FORWARD-LOOKING STATEMENTS

3

PART I.

4

ITEM 1 IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS

4

ITEM 2 OFFER STATISTICS AND EXPECTED TIMETABLE

4

ITEM 3 KEY INFORMATION

4

ITEM 4 INFORMATION ON THE COMPANY

71

ITEM 4A UNRESOLVED STAFF COMMENTS

103

ITEM 5 OPERATING AND FINANCIAL REVIEW AND PROSPECTS

103

ITEM 6 DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES

125

ITEM 7 MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS

137

ITEM 8 FINANCIAL INFORMATION

140

ITEM 9 THE OFFER AND LISTING

141

ITEM 10 ADDITIONAL INFORMATION

142

ITEM 11 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

153

ITEM 12 DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES

154

PART II.

157

ITEM 13 DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES

157

ITEM 14 MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS

157

ITEM 15 CONTROLS AND PROCEDURES

157

ITEM 16A AUDIT COMMITTEE FINANCIAL EXPERT

158

ITEM 16B CODE OF ETHICS

158

ITEM 16C PRINCIPAL ACCOUNTANT FEES AND SERVICES

159

ITEM 16D EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES

159

ITEM 16E PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS

159

ITEM 16F CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT

159

ITEM 16G CORPORATE GOVERNANCE

160

ITEM 16H MINE SAFETY DISCLOSURE

160

ITEM 16I DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS

160

PART III.

161

ITEM 17 FINANCIAL STATEMENTS

161

ITEM 18 FINANCIAL STATEMENTS

161

ITEM 19 EXHIBITS

161

SIGNATURES

163

INTRODUCTION

Unless otherwise indicated and except where the context otherwise requires, references in this annual report to:

“360 DigiTech,” “we,” “us,” “our company” and “our” are to 360 DigiTech, Inc. and its subsidiaries, and, in the context of describing our operations and consolidated financial information, our VIEs in China and their respective subsidiaries;
“ADSs” are to our American depositary shares, each of which represents two class A ordinary shares;
“Shanghai Qibutianxia” are to Shanghai Qibutianxia Information Technology Co., Ltd., which was formerly known as Beijing Qibutianxia Technology Co., Ltd.;
“China” or the “PRC” are to the People’s Republic of China, excluding, for the purposes of this annual report only, Hong Kong, Macau and Taiwan;
“class A ordinary shares” are to our class A ordinary shares, par value US$0.00001 per share;
“class B ordinary shares” are to our class B ordinary shares, par value US$0.00001 per share;
“inception” are to the date of our inception, July 25, 2016;
“Fuzhou Financing Guarantee” are to Fuzhou 360 Financing Guarantee Co., Ltd.;
“Fuzhou Microcredit” are to Fuzhou 360 Online Microcredit Co., Ltd.;
“ordinary shares” or “Ordinary Shares” are to our class A ordinary shares and class B ordinary shares, par value US$0.00001 per share;
“our VIEs” are to Shanghai Qiyu, Fuzhou Financing Guarantee and Shanghai Financing Guarantee;
“our WFOE” are to Shanghai Qiyue Information Technology Co., Ltd.;
“360 Group” are to 360 Security Technology Inc. and its controlled affiliates;
“RMB” and “Renminbi” are to the legal currency of China;
“Shanghai Financing Guarantee” are to Shanghai 360 Financing Guarantee Co., Ltd.;
“Shanghai Qiyu” are to Shanghai Qiyu Information Technology Co., Ltd.; and
“US$,” “U.S. dollars,” “$” and “dollars” are to the legal currency of the United States.

In addition, unless the context indicates otherwise, for the discussion of our business references in this annual report to:

“delinquency rate by vintage” are to (i) the total amount of principal for all loans in a vintage that become delinquent, less (ii) the total amount of recovered past due principal for all loans in the same vintage, and divided by (iii) the total initial principal amount of loans in such vintage;
“capital-light loans” are to loans facilitated under our capital-light loan facilitation model, for which we take no or limited credit risk;
“capital-heavy loans” are to loans originated or facilitated under credit-driven services, including off-balance-sheet capital heavy loans and on-balance-sheet loans, for which we take substantially all credit risk;

1

“Credit-Tech” are to credit technology, which refers to advanced or innovative technologies, business models or operational solutions that empower and enhance credit services, such as loan facilitation services, by improving efficiency and quality.
“delinquent loan collection rate” are to a percentage, which is equal to the difference obtained by using one minus a fraction, the numerator of which is the ending balance of M2 loans of the given month and the denominator of which is the beginning balance of M1 loans of such month. M0, M1 and M2 loans here are defined as loans that are not delinquent, delinquent for one month and delinquent for two months, respectively;
“loan facilitation volume” or “loan origination volume” is to the total principal amount of loans facilitated or originated through our platform during the given period;
“90 day+ delinquency rate” is to the outstanding principal balance of on- and off-balance sheet loans that are 91 to 180 calendar days past due as a percentage of the total outstanding principal balance of on- and off-balance sheet loans across our platform as of a specific date. Loans that are charged-off and loans under “ICE” are not included in the delinquency rate calculation;
“outstanding loan balance” are to the total amount of principal outstanding for loans facilitated or originated through our platform at the end of each period, excluding loans delinquent for more than 180 days unless the content specifically provides otherwise;
“repeat borrower contribution” or “loan origination contributed by repeat borrowers” for a given period are to (i) the principal amount of loans borrowed during that period by borrowers who had historically made at least one successful drawdown, divided by (ii) the total loan facilitation volume through our platform during that period; and
“users with approved credit lines” are to the total number of users who had submitted their credit applications and were approved with a credit line at the end of each period.

2

FORWARD-LOOKING STATEMENTS

This annual report contains forward-looking statements that relate to our current expectations and views of future events. These statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from those expressed or implied by the forward-looking statements. These statements are made under the “safe harbor” provisions of the U.S. Private Securities Litigations Reform Act of 1995.

You can identify some of these forward-looking statements by words or phrases such as “may,” “will,” “expect,” “anticipate,” “aim,” “estimate,” “intend,” “plan,” “believe,” “is/are likely to,” “potential,” “continue” or other similar expressions. We have based these forward-looking statements largely on our current expectations and projections about future events that we believe may affect our financial condition, results of operations, business strategy and financial needs. These forward-looking statements include statements relating to:

our goals and strategies;
our future business development, financial conditions and results of operations;
the expected growth of the Credit-Tech industry in China;
our expectations regarding demand for and market acceptance of our Credit-Tech products;
our expectations regarding keeping and strengthening our relationships with borrowers, financial institution partners, data partners and other parties we collaborate with;
competition in our industry; and
relevant government policies and regulations relating to our industry.

You should read this annual report and the documents that we refer to in this annual report and have filed as exhibits to this annual report completely and with the understanding that our actual future results may be materially different from what we expect. Other sections of this annual report discuss factors which could adversely impact our business and financial performance. Moreover, we operate in an evolving environment. New risk factors emerge from time to time and it is not possible for our management to predict all risk factors, 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.

You should not rely upon forward-looking statements as predictions of future events. 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.

3

PART I.

ITEM 1 IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS

Not applicable.

ITEM 2 OFFER STATISTICS AND EXPECTED TIMETABLE

Not applicable.

ITEM 3 KEY INFORMATION

Our Holding Company Structure and Contractual Arrangements with our Consolidated Affiliated Entities

360 DigiTech, Inc. is not a Chinese operating company but rather a Cayman Islands holding company that does not conduct business directly and has no equity ownership in its consolidated affiliated entities. We conduct our operations in China through (i) our PRC subsidiaries and (ii) our VIEs with which we have maintained contractual arrangements. PRC laws and regulations restrict and impose conditions on foreign investment in internet-based businesses, such as the distribution of online information. For example, foreign investors are generally not allowed to own more than 50% of the equity interests in a value-added telecommunications service provider in accordance with the Special Management Measures for the Access of Foreign Investment (Negative List) and other applicable laws and regulations. We are a Cayman Islands company and our PRC subsidiaries are considered foreign-invested enterprises. Accordingly, we operate certain of our businesses in China through our VIEs, and rely on contractual arrangements among our PRC subsidiaries, our VIEs and the nominee shareholders of our VIEs to control the business operations of our VIEs. Revenues contributed by our VIEs accounted for 93%, 97% and 92% of our total net revenue for the years of 2019, 2020 and 2021, respectively. As used in this annual report, “we,” “us,” “our company,” “our,” or “360 DigiTech,” refers to 360 DigiTech, Inc., its subsidiaries, and, in the context of describing our operations and consolidated financial information, our VIEs and their subsidiaries in China, including but not limited to Shanghai Qiyu, Fuzhou Financing Guarantee and Shanghai Financing Guarantee. Investors in our ADSs are not purchasing equity interest in our VIEs in China but instead are purchasing equity interest in a holding company incorporated in the Cayman Islands.

A series of contractual agreements, including (i) powers of attorney, equity pledge agreements and loan agreements, which provide us with effective control over our VIEs in China, (ii) exclusive consultation and service agreements, which allow us to receive economic benefits from our VIEs in China, and (iii) exclusive option agreements, which provide us with the option to purchase the equity interests in, and assets of, our VIEs. Terms contained in each set of contractual arrangements with our VIEs and their respective shareholders are substantially similar. For more details of these contractual arrangements, see “Item 4. Information on the Company—C. Organizational Structure—Contractual Arrangements with our VIEs and Their Shareholder.”

However, the contractual arrangements may not be as effective as direct ownership in providing us with control over our VIEs and we may incur substantial costs to enforce the terms of the arrangements. All of these contractual arrangements are governed by and interpreted in accordance with PRC law, and disputes arising from these contractual arrangements between us and our VIEs will be resolved through arbitration in China. Accordingly, these contracts would be interpreted in accordance with PRC law and any disputes arising from these contracts would be resolved in accordance with PRC legal procedures. These arrangements have not been tested in arbitral tribunals or courts. The legal system in the PRC is not as developed as in some other jurisdictions, such as the United States, and the uncertainties involved in it could limit our ability to enforce these contractual arrangements. Further, there are very few precedents and little formal guidance as to how contractual arrangements in the context of a VIE should be interpreted or enforced under PRC law. There remain significant uncertainties regarding the ultimate outcome of such arbitration should legal action become necessary. See “Item 3. Key Information—D. Risk Factors—Risks Related to Our Corporate Structure—We may rely on contractual arrangements with our VIEs and the shareholders of our VIEs for all of our business operations, which may not be as effective as direct ownership in providing operational control” and “Item 3. Key Information—D. Risk Factors—Risks Related to Our Corporate Structure—Any failure by our VIEs or the shareholders of our VIEs to perform their obligations under our contractual arrangements with them would have a material adverse effect on our business.”

4

There are also substantial uncertainties regarding the interpretation and application of current and future PRC laws, regulations and rules regarding the status of the rights of our Cayman Islands holding company with respect to its contractual arrangements with our VIEs and its nominee shareholders. It is uncertain whether any new PRC laws or regulations relating to variable interest entity structures will be adopted or if adopted, what they would provide. If we or any of our VIEs is found to be in violation of any existing or future PRC laws or regulations, or fail to obtain or maintain any of the required permits or approvals, the relevant PRC regulatory authorities would have broad discretion to take action in dealing with such violations or failures. If the PRC government deems that our contractual arrangements with our VIEs do not comply with PRC regulatory restrictions on foreign investment in the relevant industries, or if these regulations or the interpretation of existing regulations change or are interpreted differently in the future, we could be subject to severe penalties or be forced to relinquish our interests in those operations. Our holding company, our PRC subsidiaries and VIEs, and investors of our company face uncertainty about potential future actions by the PRC government that could affect the enforceability of the contractual arrangements with our VIEs and, consequently, significantly affect the financial performance of our consolidated affiliated entities and our company as a whole. For a detailed description of the risks associated with our corporate structure, please refer to risks disclosed under “Item 3. Key Information—D. Risk Factors—Risks Related to Our Corporate Structure.”

We face various risks and uncertainties related to doing business in China. Our business operations are primarily conducted in China, and we are subject to complex and evolving PRC laws and regulations. For example, we face risks associated with regulatory approvals on offshore offerings, anti-monopoly regulatory actions, and oversight on cybersecurity and data privacy, as well as the lack of inspection by the Public Company Accounting Oversight Board, or the PCAOB, on our auditors, which may impact our ability to conduct certain businesses, accept foreign investments, or list on a United States or other foreign exchange. These risks could result in a material adverse change in our operations and the value of our ADSs, significantly limit or completely hinder our ability to continue to offer securities to investors, or cause the value of such securities to significantly decline. On December 16, 2021, the PCAOB issued a report to notify the SEC of its determination that the PCAOB is unable to inspect or investigate completely registered public accounting firms headquartered in mainland China and Hong Kong. The PCAOB identified our auditor as one of the registered public accounting firms that the PCAOB is unable to inspect or investigate completely. Under the Holding Foreign Companies Accountable Act, or the HFCAA, 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. In addition, on June 22, 2021, the U.S. Senate passed a bill which would reduce the number of consecutive non-inspection years required for triggering the prohibitions under the HFCAA from three years to two. On February 4, 2022, the U.S. House of Representatives passed a bill which contained, among other things, an identical provision. If this provision is enacted into law, the number of consecutive non-inspection years required for triggering the prohibitions under the HFCAA would be reduced from three years to two. The delisting of our ADSs, or the threat of their being delisted, may materially and adversely affect the value of your investment. These risks could result in a material adverse change in our operations and the value of our ADSs, significantly limit or completely hinder our ability to continue to offer securities to investors, or cause the value of such securities to significantly decline or become worthless. For a detailed description of risks related to doing business in China, “Item 3.D. Key Information—Risk Factors—Risks Related to Doing Business in China.”

PRC government’s significant authority in regulating our operations and its oversight and control over offerings conducted offshore by, and foreign investment in, China-based issuers could significantly limit or completely hinder our ability to offer or continue to offer securities to investors. Implementation of industry-wide regulations in this nature may cause the value of such securities to significantly decline or become worthless. For more details, see “Item 3. Key Information—D. Risk Factors—Risks Related to Doing Business in China—The PRC government’s significant oversight and discretion over our business operation could result in a material adverse change in our operations and the value of our ADSs.”

Risks and uncertainties arising from the legal system in China, including risks and uncertainties regarding the enforcement of laws and quickly evolving rules and regulations in China, could result in a material adverse change in our operations and the value of our ADSs. For more details, see “Item 3. Key Information—D. Risk Factors—Risks Related to Doing Business in China—Uncertainties in the interpretation and enforcement of PRC laws and regulations could limit the legal protections available to us.”

5

Permissions Required from the PRC Government Authorities for Our Operations

We conduct our business primarily through our subsidiaries, our VIEs and their subsidiaries in China. Our operations in China are governed by PRC laws and regulations. As of the date of this annual report, our PRC subsidiaries, our VIEs or their subsidiaries have obtained the requisite licenses and permits from the PRC government authorities that are material for the business operations of our holding company, our PRC subsidiaries and our VIEs in China, including, among others, financing guarantee business license owned by Fuzhou Financing Guarantee and Shanghai Financing Guarantee, value-added telecommunications license owned by Shanghai Qiyu, the incorporation approval of Fuzhou Microcredit. Given the uncertainties of interpretation and implementation of relevant laws and regulations and the enforcement practice by relevant government authorities, we may be required to obtain additional licenses, permits, filings or approvals for the functions and services of our platform in the future. For more detailed information, see “Item 3. Key Information—D. Risk Factors—Risks Related to Doing Business in China—We may be adversely affected by the complexity, uncertainties and changes in PRC regulation of internet-related businesses and companies, and any lack of requisite approvals, licenses or permits applicable to our business may have a material adverse effect on our business and results of operations.”

Furthermore, we and our VIEs may be required to obtain permissions from or complete the filing procedures with the China Securities Regulatory Commission, or the CSRC, and may be required to go through cybersecurity review by the Cyberspace Administration of China, or the CAC, in case of any future issuance of securities to foreign investors. Any failure to obtain or delay in obtaining such approval or completing such procedures would subject us to sanctions by the CSRC, CAC or other PRC regulatory authorities. These regulatory authorities may impose fines and penalties on our operations in China, limit our ability to pay dividends outside of China, limit our operating privileges in China, delay or restrict the repatriation of the proceeds from our offshore offerings into China or take other actions that could materially and adversely affect our business, financial condition, results of operations, and prospects, as well as the trading price of our ADSs. See “Item 3. Key Information—D. Risk Factors—Risks Related to Doing Business in China—The PRC government’s significant oversight and discretion over our business operation could result in a material adverse change in our operations and the value of our ADSs,” and “Item 3. Key Information—D. Risk Factors—Risks Related to Doing Business in China—The approval of and filing with the CSRC or other PRC government authorities may be required if we conduct offshore offerings in the future, and, if required, we cannot predict whether or for how long we will be able to obtain such approval or complete such filing.”

Cash and Asset Flows through Our Organization

360 DigiTech, Inc. is a holding company with no material operations of its own. We conduct our operations in China primarily through our subsidiaries and VIEs in China. As a result, although other means are available for us to obtain financing at the holding company level, 360 DigiTech, Inc.’s ability to pay dividends to the shareholders and to service any debt it may incur may depend upon dividends paid by our PRC subsidiaries and service fees paid by our VIEs.

If any of our subsidiaries incurs debt on its own behalf in the future, the instruments governing such debt may restrict its ability to pay dividends to 360 DigiTech, Inc. In addition, our PRC subsidiaries are permitted to pay dividends to 360 DigiTech, Inc. only out of their retained earnings, if any, as determined in accordance with PRC accounting standards and regulations. Further, our PRC subsidiaries and consolidated variable interest entities are required to make appropriations to certain statutory reserve funds or may make appropriations to certain discretionary funds, which are not distributable as cash dividends except in the event of a solvent liquidation of the companies. For more details, see “Item 5. Operating and Financial Review and Prospects—B. Liquidity and Capital Resources—Holding Company Structure.” For risks relating to the fund flows of our operations in China, see “Item 3. Key Information—D. Risk Factors—Risks Related to Doing Business in China—We may rely on dividends and other distributions on equity paid by our PRC subsidiaries to fund any cash and financing requirements we may have, and any limitation on the ability of our PRC subsidiaries to make payments to us could have a material adverse effect on our ability to conduct our business.”

6

Under PRC laws and regulations, our PRC subsidiaries and consolidated variable interest entities are subject to certain restrictions with respect to paying dividends or otherwise transferring any of their net assets to us. Remittance of dividends by a wholly foreign-owned enterprise out of China is also subject to examination by the banks designated by the State Administration of Foreign Exchange, or the SAFE, and payment of withholding tax. As a result of these PRC laws and regulations, amounts restricted include paid-in capital, capital reserve and statutory reserves of the PRC entities of our company’s which is RMB2,615.9 million, RMB2,740.4 million and RMB8,283.6 million (US$1,299.9 million) as of December 31, 2019, 2020 and 2021, respectively. Our PRC subsidiaries, our VIEs and their subsidiaries generate their revenue primarily in Renminbi, which is not freely convertible into other currencies. As a result, any restriction on currency exchange may limit the ability of our PRC subsidiaries to pay dividends to us. In addition, under the Enterprise Income Tax Law of the PRC, or the EIT Law, and its implementation rules, profits of a FIE generated in or after 2008 that are distributed to its immediate holding company outside Mainland China are subject to withholding tax at a rate of 10%, unless the foreign holding company’s jurisdiction of incorporation has a tax treaty with China that provides for a reduced rate of withholding tax. For example, a holding company in Hong Kong, subject to approval of the PRC local tax authority, will be eligible to a 5% withholding tax rate under the Arrangement Between the PRC and the Hong Kong Special Administrative Region on the Avoidance of Double Taxation and Prevention of Fiscal Evasion with Respect to Taxes on Income and Capital if such holding company is considered to be a non-PRC resident enterprise and holds at least 25% of the equity interests in the PRC FIE distributing the dividends. However, if the Hong Kong holding company is not considered to be the beneficial owner of such dividends under applicable PRC tax regulations, such dividend will remain subject to withholding tax at a rate of 10%. See also “Item 3. Key Information—D. Risk Factors— Risks Related to Doing Business in China— Governmental control of currency conversion may limit our ability to utilize our cash balance effectively and affect the value of your investment,” and “Item 5. Operating And Financial Review And Prospects—B. Liquidity and Capital Resources—Holding Company Structure.” Our PRC subsidiaries have not paid dividends and will not be able to pay dividends until any of them generates accumulated profits and meets the requirements for statutory reserve funds.

Under PRC law, 360 DigiTech, Inc. may provide funding to our PRC subsidiaries only through capital contributions or loans, and to our VIEs only through loans, subject to satisfaction of applicable government registration and approval requirements. 360 DigiTech, Inc. has extended loans to our PRC subsidiaries and VIEs since 2018. The related cash flows include: (i) a net repayment of RMB29.2 million and RMB67.2 million by PRC subsidiaries in 2019 and 2020, respectively, and a net funding of RMB51.7 million (US$8.1 million) to PRC subsidiaries in 2021; and (ii) a net repayment of RMB229.5 million, RMB3.6 million and RMB205.5 million (US$32.2 million) by VIEs in 2019, 2020 and 2021, respectively.

Our VIEs may transfer cash to our relevant WFOE by paying service fees according to the exclusive consultation and service agreements. Our VIEs agree to pay our WFOE service fees, the amount of which are subject to adjustment at our WFOE’s sole discretion taking into consideration of the complexity of the services, the actual cost that may be incurred for providing such services, as well as the value and comparable price on the market of the service provided, among others. Our WFOE would have the exclusive ownership of all the intellectual property rights created as a result of the performance of the exclusive consultation and service agreement, to the extent permitted by applicable PRC laws. In 2019, 2020 and 2021, service fees charged and paid to our WFOE by our VIEs in China amounted to RMB4.3 million, RMB89.7 million and RMB5,001.9 million (US$784.9 million), respectively. In 2019, 2020 and 2021, service fees charged and paid to our other PRC subsidiaries by our VIEs in China amounted to nil, RMB286.4 million and RMB616.5 million (US$96.7 million), respectively.

In 2019 and 2020, our VIEs in China extended loans to our PRC subsidiaries with a net cash outflow of RMB40.2 million and RMB20.0 million, respectively. In 2021, our PRC subsidiaries paid up the outstanding loans and started to extend loans to our VIEs in China with a net cash outflow of RMB3,658.3 million (US$574.0 million). In 2019, 2020 and 2021, the total amount of service fees charged and paid to our VIEs in China by our PRC subsidiaries under the shared service agreement was RMB4.6 million, RMB20.3 million and RMB258.2 million (US$40.5 million), respectively.

In 2019, 2020 and 2021, no assets other than cash flows discussed above were transferred through our organization.

7

In November 2021, our board of directors approved a dividend of US$0.14 per ordinary share, or US$0.28 per ADS, for the third fiscal quarter of 2021, which has been paid on January 18, 2022 to shareholders of record as of the close of business on December 15, 2021. In March 2022, our board of directors approved a dividend of US$0.13 per ordinary share, or US$0.26 per ADS, for the fourth fiscal quarter of 2021, which will be paid on May 13, 2022 to shareholders of record as of the close of business on April 6, 2022. We intend to declare and distribute a recurring cash dividend every fiscal quarter, starting from the third fiscal quarter of 2021, at an amount equivalent to approximately 15% to 20% of our company’s net income after tax for such quarter based upon our operations and financial conditions, and other relevant factors, subject to adjustment and determination by the board of directors of 360 DigiTech, Inc. Since we currently have sufficient cash at 360 DigiTech, Inc. to pay dividends, we intend to reinvest undistributed profits of our subsidiaries in our operations in China. See “Item 8. Financial Information—A. Consolidated Statements and Other Financial Information—Dividend Policy.” For PRC and United States federal income tax considerations of an investment in our ADSs, see “Item 10. Additional Information—E. Taxation.”

For purposes of illustration, the following discussion reflects the hypothetical taxes that might be required to be paid within Mainland China, assuming that we determine to pay a dividend from PRC subsidiaries to overseas entities in the future:

    

Taxation Scenario(1)

 

(Statutory Tax and Standard Rates)

 

Hypothetical pre-tax earnings(2)

 

100

%

Tax on earnings at statutory rate of 25%(3)  

 

(25)

%

Net earnings available for distribution

 

75

%

Withholding tax at standard rate of 10%  

 

(7.5)

%

Net distribution to Parent/Shareholders

 

67.5

%

Notes:

(1) For purposes of this example, the tax calculation has been simplified. The hypothetical book pre-tax earnings amount, not considering book to tax adjustment, is assumed to equal taxable income in China.
(2) Assume all the profits of VIEs could be distributed to the PRC subsidiaries in a tax free manner.
(3) Certain of our subsidiaries and VIEs and their subsidiaries qualifies for a 15% preferential income tax rate in China. However, such rate is subject to qualification, is temporary in nature, and may not be available in a future period when distributions are paid. For purposes of this hypothetical example, the table above reflects a maximum tax scenario under which the full statutory rate would be effective.

A.          Selected Financial Data

Our Selected Combined and Consolidated Financial Data

The following selected consolidated statements of operations data for the years ended December 31, 2019, 2020 and 2021, selected consolidated balance sheet data as of December 31, 2020 and 2021 and selected consolidated cash flow data for the years ended December 31, 2019, 2020 and 2021 have been derived from our audited consolidated financial statements included elsewhere in this annual report. Our selected combined and consolidated balance sheets data as of December 31, 2017, 2018 and 2019 and the selected combined and consolidated statements of operations data and cash flow data for the year ended December 31, 2017 and 2018 have been derived from our audited combined and consolidated financial statements not included in this annual report. Our combined and consolidated financial statements are prepared and presented in accordance with U.S. GAAP.

8

You should read the summary combined and consolidated financial information in conjunction with our combined and consolidated financial statements and related notes and “Item 5. Operating and Financial Review and Prospects” included elsewhere in this annual report. Our historical results are not necessarily indicative of our results expected for future periods.

Years Ended December 31,

2017

2018

2019

2020

2021

    

RMB

    

RMB

    

RMB

    

RMB

    

RMB

    

US$

(in thousands, except for per share data)

Selected Combined and Consolidated Statements of Operations Data:

Net revenue

 

  

 

  

 

  

 

  

Credit driven services(1)

703,747

4,170,271

8,013,391

11,403,675

10,189,167

1,598,902

Loan facilitation and servicing fees-capital heavy

 

647,350

3,807,242

6,273,131

 

4,596,555

 

2,326,027

 

365,004

Financing income

 

50,966

267,844

1,309,616

 

2,184,180

 

2,184,128

 

342,737

Revenue from releasing of guarantee liabilities

 

331

25,169

285,407

 

4,506,935

 

5,583,135

 

876,116

Other services fees

 

5,100

70,016

145,237

 

116,005

 

95,877

 

15,045

Platform services(1)

84,397

276,747

1,206,456

2,160,279

6,446,478

1,011,593

Loan facilitation and servicing fees-capital light

58,348

814,581

1,826,654

5,677,941

890,993

Referral services fees

84,397

211,087

375,551

265,300

620,317

97,341

Other services fees

7,312

16,324

68,325

148,220

23,259

Total net revenue

 

788,144

4,447,018

9,219,847

 

13,563,954

 

16,635,645

 

2,610,495

Operating costs and expenses:(2)

 

 

 

 

Facilitation, origination and servicing

 

121,821

666,067

1,083,372

 

1,600,564

 

2,252,157

 

353,413

Funding costs

14,437

71,617

344,999

595,623

337,426

52,950

Sales and marketing

 

345,576

1,321,950

2,851,519

 

1,079,494

 

2,090,374

 

328,025

General and administrative

 

45,852

560,702

428,189

 

455,952

 

557,295

 

87,452

Provision for loans receivable

 

12,406

44,474

486,991

 

698,701

 

965,419

 

151,495

Provision for financial assets receivable

 

16,273

53,989

166,176

 

312,058

 

243,946

 

38,280

Provision for accounts receivable and contract assets

 

21,180

83,707

230,280

 

237,277

 

324,605

 

50,938

Provision for contingent liabilities

4,794,127

3,078,224

483,041

Expense on guarantee liabilities

734,730

Total operating costs and expenses

 

577,545

2,802,506

6,326,256

 

9,773,796

 

9,849,446

 

1,545,594

Income from operations

 

210,599

1,644,512

2,893,591

 

3,790,158

 

6,786,199

 

1,064,901

Interest income (expense), net

 

2,422

10,026

(41,707)

 

77,169

 

126,256

 

19,812

Foreign exchange (loss) gain

 

(2,563)

(24,875)

 

101,534

 

35,549

 

5,578

Investment income

10,115

1,587

Other income, net

 

22

7,696

140,278

 

112,884

 

64,590

 

10,136

Income before income tax expense

 

213,043

1,659,671

2,967,287

 

4,081,745

 

7,022,709

 

1,102,014

Income tax expense

 

(48,178)

(466,360)

(465,983)

 

(586,036)

 

(1,258,196)

 

(197,438)

Net income

 

164,865

1,193,311

2,501,304

 

3,495,709

 

5,764,513

 

904,576

Net loss attributable to non-controlling interests

 

291

 

897

 

17,212

 

2,701

Deemed dividend

 

(3,097,733)

 

 

 

Net income (loss) attributable to ordinary shareholders of the Company

164,865

(1,904,422)

2,501,595

3,496,606

5,781,725

907,277

Net income (loss) per ordinary share attributable to ordinary shareholders of 360 DigiTech, Inc.

 

 

 

 

Basic

 

0.83

(9.39)

8.66

 

11.72

 

18.82

 

2.95

Diluted

 

0.83

(9.39)

8.31

 

11.40

 

17.99

 

2.82

Net income (loss) per ADSs attributable to ordinary shareholders of 360 DigiTech, Inc.

Basic

1.66

(18.78)

17.32

23.44

37.64

5.90

Diluted

1.66

(18.78)

16.62

22.80

35.98

5.64

Weighted average shares used in calculating net income (loss) per ordinary share

 

 

 

 

Basic

 

198,347,168

202,751,277

288,827,604

 

298,222,207

 

307,265,600

 

307,265,600

Diluted

 

198,347,168

202,751,277

300,938,470

 

306,665,099

 

321,397,753

 

321,397,753

Notes:

(1) Starting from 2019, we report revenue streams in two categories—credit driven services and platform services, to provide more relevant information. We also revised the comparative period presentation to conform to current period classification.

9

(2) Share-based compensation expenses were allocated as follows:

Years Ended December 31,

2017

2018

2019

2020

2021

    

RMB

    

RMB

    

RMB

    

RMB

    

RMB

    

US$

(in thousands, except for per share data)

Facilitation origination and servicing

150,177

55,601

72,192

75,209

11,802

Sales and marketing

15,700

6,805

 

8,164

 

12,340

 

1,936

General and administrative

441,504

188,022

 

220,805

 

166,373

 

26,108

Total

607,381

250,428

 

301,161

 

253,922

 

39,846

The following table presents our selected combined and consolidated balance sheet data as of the dates indicated.

Years Ended December 31,

2017

2018

2019

2020

2021

RMB

    

RMB

    

RMB

    

RMB

    

RMB

    

US$

(in thousands)

Selected Combined and Consolidated Balance Sheets Data:

Current assets:

 

  

 

  

 

  

 

  

Cash and cash equivalents

468,547

 

1,445,802

2,108,123

 

4,418,416

 

6,116,360

 

959,790

Restricted cash

487,882

 

567,794

1,727,727

 

2,355,850

 

2,643,587

 

414,836

Security deposit prepaid to third-party guarantee companies

 

795,700

932,983

 

915,144

 

874,886

 

137,289

Accounts receivable and contract assets, net

327,103

 

1,791,745

2,332,364

 

2,394,528

 

3,097,254

 

486,027

Financial assets receivable, net

270,122

 

1,193,621

1,912,554

 

3,565,482

 

3,806,243

 

597,283

Loans receivable, net

1,192,307

 

811,433

9,239,565

 

7,500,629

 

9,844,481

 

1,544,814

Total current assets

3,017,566

 

7,342,019

19,503,488

 

21,876,042

 

27,757,223

 

4,355,712

Land use rights, net

1,018,908

159,889

Total non-current assets

81,792

 

7,716

852,113

 

2,511,263

 

5,747,772

 

901,951

Total assets

3,099,358

 

7,349,735

20,355,601

 

24,387,305

 

33,504,995

 

5,257,663

Current liabilities:

  

 

  

 

 

 

Payable to investors of the consolidated trusts-current

536,906

 

300,341

4,423,717

 

3,117,634

 

2,304,518

 

361,629

Guarantee liabilities-stand ready

300,942

 

1,399,174

2,212,125

 

4,173,497

 

4,818,144

 

756,072

Guarantee liabilities-contingent

734,730

3,543,454

3,285,081

515,501

Income tax payable

115,325

432,066

1,056,219

1,227,314

624,112

97,937

Total current liabilities

2,365,209

 

2,893,781

9,667,187

 

13,384,508

 

14,143,186

 

2,219,374

Payable to investors of the consolidated trusts-noncurrent

3,442,500

1,468,890

4,010,597

629,350

Total non-current liabilities

15,758

3,473,684

1,521,707

4,145,200

650,472

Total shareholder’s equity

734,149

 

4,440,196

7,214,730

 

9,481,090

 

15,216,609

 

2,387,817

Total liabilities and equity

3,099,358

 

7,349,735

20,355,601

 

24,387,305

 

33,504,995

 

5,257,663

Note:

(1) We adopted ASU 2014-09, Revenue from Contracts with Customers (Topic 606) and all subsequent ASUs that modified ASC 606 on a full retrospective basis in 2018, and the related balances as of December 31, 2017 have been restated accordingly.

10

The following table presents our selected combined and consolidated cash flow data for the years ended December 31, 2017, 2018, 2019, 2020 and 2021.

Years Ended December 31,

2017

2018

2019

2020

2021

    

RMB

    

RMB

    

RMB

    

RMB

    

RMB

    

US$

(in thousands, except for per share data)

Summary Combined and Consolidated Cash Flow Data:

Net cash (used in)/provided by operating activities

 

(110,974)

285,116

 

2,973,075

 

5,325,810

 

5,789,700

 

908,530

Net cash (used in)/provided by investing activities

 

(1,204,269)

327,649

 

(8,860,441)

 

892,770

 

(6,064,328)

 

(951,625)

Net cash provided/(used in) by financing activities

 

2,265,499

457,430

 

7,707,858

 

(3,282,400)

 

2,263,720

 

355,227

Net increase in cash and cash equivalents

 

950,256

1,057,167

 

1,822,254

 

2,938,416

 

1,985,681

 

311,596

Cash, cash equivalents, and restricted cash at the beginning of year

 

6,173

956,429

 

2,013,596

 

3,835,850

 

6,774,266

 

1,063,030

Cash, cash equivalents, and restricted cash at the end of year

 

956,429

2,013,596

 

3,835,850

 

6,774,266

 

8,759,947

 

1,374,626

We present our financial results in RMB. We make no representation that any RMB or U.S. dollar amounts could have been, or could be, converted into U.S. dollars or RMB, as the case may be, at any particular rate, or at all. The RPC government imposes control over its foreign currency reserves in part through direct regulation of the conversion of RMB into foreign exchange and through restrictions on foreign trade. Unless otherwise noted, all translations from Renminbi to U.S. dollars and from U.S. dollars to Renminbi in this annual report were made at a rate of RMB6.3726 to US$1.00, the noon buying rate as of December 30, 2021.

Financial Information Related to Our Consolidated Variable Interest Entities

The following table presents the condensed consolidated schedule of financial position, results of operations and cash flow data for our Company, our consolidated VIEs and other subsidiaries as of the dates or for the periods presented, as the case may be.

Selected Condensed Consolidated Statements of Income Information

    

For the Year Ended December 31, 2021

VIEs

    

The Company

    

Subsidiaries

    

Eliminations

    

Consolidated Total

(RMB in thousands)

Total net revenues

 

15,657,693

 

 

6,646,999

 

(5,669,047)

 

16,635,645

Total operating costs and expenses

 

14,025,365

 

51,233

 

1,187,973

 

(5,415,125)

 

9,849,446

Income (loss) from operations

 

1,632,328

 

(51,233)

 

5,459,026

 

(253,922)

 

6,786,199

Income (loss) before income tax expense

 

1,821,437

 

(56,749)

 

5,511,943

 

(253,922)

 

7,022,709

Net income (loss)

 

1,314,343

 

(56,749)

 

4,760,841

 

(253,922)

 

5,764,513

Net income (loss) attributable to ordinary shareholders of the Company

 

1,331,597

 

(56,749)

 

4,760,799

 

(253,922)

 

5,781,725

For the Year Ended December 31, 2020

VIEs

The Company

Subsidiaries

Eliminations

Consolidated Total

    

(RMB in thousands)

Total net revenues

    

13,146,052

    

    

1,325,096

    

(907,194)

    

13,563,954

Total operating costs and expenses

 

10,080,665

 

16,453

 

282,711

 

(606,033)

 

9,773,796

Income (loss) from operations

 

3,065,387

 

(16,453)

 

1,042,385

 

(301,161)

 

3,790,158

Income (loss) before income tax expense

 

3,334,648

 

(4,030)

 

1,052,288

 

(301,161)

 

4,081,745

Net income (loss)

 

2,848,966

 

(4,030)

 

951,934

 

(301,161)

 

3,495,709

Net income (loss) attributable to ordinary shareholders of the Company

 

2,848,966

 

(4,030)

 

952,831

 

(301,161)

 

3,496,606

11

    

For the Year Ended December 31, 2019

VIEs

    

The Company

    

Subsidiaries

    

Eliminations

    

Consolidated Total

(RMB in thousands)

Total net revenues

 

8,596,654

 

 

632,146

 

(8,953)

 

9,219,847

Total operating costs and expenses

 

5,810,090

 

12,922

 

261,770

 

241,474

 

6,326,256

Income (loss) from operations

 

2,786,564

 

(12,922)

 

370,376

 

(250,427)

 

2,893,591

Income (loss) before income tax expense

 

2,859,300

 

(12,248)

 

370,662

 

(250,427)

 

2,967,287

Net income (loss)

 

2,426,948

 

(12,248)

 

337,031

 

(250,427)

 

2,501,304

Net income (loss) attributable to ordinary shareholders of the Company

 

2,426,948

 

(12,248)

 

337,322

 

(250,427)

 

2,501,595

Selected Condensed Consolidated Balance Sheets Information

    

As of December 31, 2021

    

VIEs

    

The Company

    

Subsidiaries

    

Eliminations

    

Consolidated Total

(RMB in thousands)

Cash and cash equivalents

 

4,605,851

 

7,117

 

1,503,392

 

 

6,116,360

Restricted cash

 

2,643,587

 

 

 

 

2,643,587

Security deposit prepaid to third-party guarantee companies

 

874,886

 

 

 

 

874,886

Accounts receivable and contract assets, net

 

2,350,775

 

 

969,953

 

 

3,320,728

Financial assets receivable, net

 

4,404,208

 

 

 

 

4,404,208

Loans receivable, net

 

12,703,830

 

 

 

 

12,703,830

Land use rights, net

 

1,018,908

 

 

 

 

1,018,908

Intercompany receivables

 

2,493,660

 

1,711,633

 

4,823,879

 

(9,029,172)

 

Investments in subsidiaries and VIEs

 

 

14,032,928

 

1,399,998

 

(15,432,926)

 

Total assets

 

33,145,997

 

15,761,812

 

9,059,284

 

(24,462,098)

 

33,504,995

Payable to investors of the consolidated trusts-current

 

2,304,518

 

 

 

 

2,304,518

Guarantee liabilities-stand ready

 

4,818,144

 

 

 

 

4,818,144

Guarantee liabilities-contingent

 

3,285,081

 

3,285,081

 

  

 

  

 

  

Income tax payable

 

449,553

 

 

174,559

 

 

624,112

Payable to investors of the consolidated trusts-noncurrent

 

4,010,597

 

 

 

 

4,010,597

Intercompany payables

 

6,493,367

 

 

2,535,805

 

(9,029,172)

 

Total liabilities

 

23,790,132

 

557,949

 

2,969,477

 

(9,029,172)

 

18,288,386

Total equity

 

9,355,865

 

15,203,863

 

6,089,807

 

(15,432,926)

 

15,216,609

12

    

As of December 31, 2020

    

VIEs

    

The Company

    

Subsidiaries

    

Eliminations

    

Consolidated Total

(RMB in thousands)

Cash and cash equivalents

3,709,740

 

19,560

 

689,116

 

 

4,418,416

Restricted cash

2,355,850

 

 

 

 

2,355,850

Security deposit prepaid to third-party guarantee companies

915,144

 

 

 

 

915,144

Accounts receivable and contract assets, net

2,624,294

 

 

78,171

 

 

2,702,465

Financial assets receivable, net

4,125,931

 

 

84,877

 

 

4,210,808

Loans receivable, net

7,553,042

 

 

35,272

 

 

7,588,314

Intercompany receivables

1,315,646

 

1,593,585

 

912,129

 

(3,821,360)

 

Investments in subsidiaries and VIEs

 

7,940,534

 

900,000

 

(8,840,534)

 

Total assets

24,615,835

 

9,564,894

 

2,868,470

 

(12,661,894)

 

24,387,305

Payable to investors of the consolidated trusts-current

3,117,634

 

 

 

 

3,117,634

Guarantee liabilities-stand ready

4,173,497

 

 

 

 

4,173,497

Guarantee liabilities-contingent

3,543,454

 

 

 

 

3,543,454

Income tax payable

1,151,275

 

 

76,039

 

 

1,227,314

Payable to investors of the consolidated trusts-noncurrent

1,468,890

 

 

 

 

1,468,890

Intercompany payables

2,411,185

 

 

1,410,175

 

(3,821,360)

 

Total liabilities

17,104,312

 

84,316

 

1,538,947

 

(3,821,360)

 

14,906,215

Total equity

7,511,523

 

9,480,578

 

1,329,523

 

(8,840,534)

 

9,481,090

    

As of December 31, 2019

VIEs

    

The Company

    

Subsidiaries

    

Eliminations

    

Consolidated Total

    

(RMB in thousands)

    

    

    

    

Cash and cash equivalents

 

1,829,395

 

6,905

 

271,823

 

 

2,108,123

Restricted cash

 

1,727,727

 

 

 

 

1,727,727

Security deposit prepaid to third-party guarantee companies

 

932,983

 

 

 

 

932,983

Accounts receivable and contract assets, net

 

2,133,339

 

 

218,533

 

 

2,351,872

Financial assets receivable, net

 

1,824,008

 

 

147,816

 

 

1,971,824

Loans receivable, net

 

9,238,242

 

 

1,323

 

 

9,239,565

Intercompany receivables

 

1,016,899

 

1,624,749

 

75,385

 

(2,717,033)

 

Investments in subsidiaries and VIEs

 

 

5,566,792

 

900,000

 

(6,466,792)

 

Total assets

 

20,755,954

 

7,219,025

 

1,564,447

 

(9,183,825)

 

20,355,601

Payable to investors of the consolidated trusts-current

 

4,423,717

 

 

 

 

4,423,717

Guarantee liabilities-stand ready

 

2,106,211

 

 

105,914

 

 

2,212,125

Guarantee liabilities-contingent

 

734,730

 

 

 

 

734,730

Income tax payable

 

1,035,887

 

 

20,332

 

 

1,056,219

Payable to investors of the consolidated trusts-noncurrent

 

3,442,500

 

 

 

 

3,442,500

Intercompany payables

 

1,670,984

 

 

1,046,049

 

(2,717,033)

 

Total liabilities

 

14,663,006

 

5,583

 

1,189,315

 

(2,717,033)

 

13,140,871

Total equity

 

6,092,948

 

7,213,442

 

375,132

 

(6,466,792)

 

7,214,730

Selected Condensed Consolidated Cash Flows Information

    

For the Year Ended December 31, 2021

VIEs

    

The Company

    

Subsidiaries

    

Eliminations

    

Consolidated Total

(RMB in thousands)

    

    

    

    

    

Net cash provided by (used in) operating activities

 

1,273,002

 

(25,552)

 

4,542,250

 

 

5,789,700

Net cash (used in) provided by investing activities

 

(6,047,434)

 

(153,778)

 

(3,675,260)

 

3,812,144

 

(6,064,328)

Net cash provided by (used in) financing activities

 

5,958,279

 

169,291

 

(51,706)

 

(3,812,144)

 

2,263,720

13

    

For the Year Ended December 31, 2020

VIEs

    

The Company

    

Subsidiaries

    

Eliminations

    

Consolidated Total

(RMB in thousands)

    

    

    

    

    

Net cash provided by (used in) operating activities

 

4,935,904

 

(1,679)

 

391,585

 

 

5,325,810

Net cash provided by (used in) investing activities

 

932,141

 

(70,776)

 

(59,350)

 

90,755

 

892,770

Net cash (used in) provided by financing activities

 

(3,364,319)

 

86,305

 

86,369

 

(90,755)

 

(3,282,400)

    

For the Year Ended December 31, 2019

VIEs

    

The Company

    

Subsidiaries

    

Eliminations

    

Consolidated Total

(RMB in thousands)

    

    

    

    

    

Net cash provided by (used in) operating activities

 

2,839,085

 

(33,600)

 

167,590

 

 

2,973,075

Net cash (used in) provided by investing activities

 

(8,899,002)

 

(294,330)

 

(1,654)

 

334,545

 

(8,860,441)

Net cash provided by (used in) financing activities

 

7,940,466

 

(3,080)

 

105,017

 

(334,545)

 

7,707,858

B.          Capitalization and Indebtedness

Not applicable.

C.          Reasons for the Offer and Use of Proceeds

Not applicable.

D.          Risk Factors

Summary of Risk Factors

An investment in our ADSs involves significant risks. Below is a summary of material risks we face, organized under relevant headings. These risks are discussed more fully below in this Item 3. Key Information—D. Risk Factors.

Risks Related to Our Business and Industry

Risks and uncertainties related to our business include, but not limited to, the following:

The Credit-Tech industry is rapidly evolving, which makes it difficult to effectively assess our future prospects;
We are subject to uncertainties surrounding regulations and administrative measures of the loan facilitation business. If any of our business practices are deemed to be non-compliant, our business, financial condition and results of operations would be adversely affected;
We are subject to uncertainties surrounding regulations and administrative measures of microcredit business and financing guarantee business. If any of our business practices are deemed to be non-compliant, our business, financial condition and results of operations would be adversely affected;
We are subject to uncertainties surrounding regulations and administrative measures of credit reporting business. If any of our business practices are deemed to be non-compliant, our business, financial condition and results of operations would be materially and adversely affected;
The pricing of loans originated or facilitated through our platform may be deemed to exceed interest rate limits imposed by regulations;
Our transaction process may result in misunderstanding among our borrowers;
We are subject to credit cycles and the risk of deterioration of credit profiles of borrowers;
Fraudulent activity on our platform could negatively impact our operating results, brand and reputation and cause the use of our loan products and services to decrease;

14

We rely on our proprietary risk management model in assessing the creditworthiness of our borrowers and the risks associated with loans. If our model is flawed or ineffective, or if we otherwise fail or are perceived to fail to manage the default risks of loans originated or facilitated through our platform, our reputation and market share would be materially and adversely affected, which would severely impact our business and results of operations;
We rely on our risk management team to establish and execute our risk management policies. If our risk management team or key members of such team were unable or unwilling to continue in their present positions, our business may be severely disrupted;
Our business is subject to complex and evolving PRC laws and regulations regarding data privacy and cybersecurity, many of which are subject to change and uncertain interpretation. Any changes in these laws and regulations have caused and could continue to cause changes to our business practices and increase costs of operations, and any security breaches or our actual or perceived failure to comply with such laws and regulations could result in claims, penalties, damages to our reputation and brand, declines in user growth or engagement, or otherwise harm our business, results of operations and financial condition;
If we are unable to maintain or increase the volume of loans originated or facilitated through our platform, our business and results of operations will be adversely affected; and
Our access to sufficient and sustainable funding at reasonable costs cannot be assured. If we fail to maintain collaboration with our financial institution partners or to maintain sufficient capacity to originate loans to our borrowers, our reputation, results of operations and financial condition may be materially and adversely affected.

Risks Related to Our Corporate Structure

Risks and uncertainties related to our corporate structure include, but not limited to, the following:

We are a Cayman Islands holding company with no equity ownership in our VIEs and we conduct our operations in China through (i) our PRC subsidiaries and (ii) our VIEs, with which we have maintained contractual arrangements. Investors in our ADSs thus are not purchasing equity interest in our VIEs in China but instead are purchasing equity interest in a Cayman Islands holding company. If the PRC government finds that the agreements that establish the structure for operating our business do not comply with PRC laws and regulations, or if these regulations or their interpretations change in the future, we could be subject to severe penalties or be forced to relinquish our interests in those operations. Our holding company, our PRC subsidiaries, our VIEs, and investors of our company face uncertainty about potential future actions by the PRC government that could affect the enforceability of the contractual arrangements with our VIEs and, consequently, significantly affect the financial performance of our VIEs and our company as a whole. The PRC regulatory authorities could disallow the VIEs structure pursuant to the new regulations promulgated by the PRC government, which would likely result in a material adverse change in our operations, and our Class A ordinary shares or our ADSs may decline significantly in value;
We rely on contractual arrangements with our VIEs and the shareholders of our VIEs for all of our business operations, which may not be as effective as direct ownership in providing operational control;
Any failure by our VIEs or the shareholders of our VIEs to perform their obligations under our contractual arrangements with them would have a material adverse effect on our business;
The registered shareholders of our VIEs may have potential conflicts of interest with us, which may materially and adversely affect our business and financial condition;
Contractual arrangements in relation to our VIEs 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 financial condition and the value of your investment; and
We may lose the ability to use and enjoy assets held by our VIEs that are material to the operation of our business if the entity goes bankrupt or becomes subject to a dissolution or liquidation proceeding.

15

Risks Related to Doing Business in China

We are also subject to risks and uncertainties relating to doing business in China in general, including, but not limited to, the following:

The PCAOB is currently unable to inspect our auditor in relation to their audit work performed for our financial statements and the inability of the PCAOB to conduct inspections over our auditor deprives our investors with the benefits of such inspections;
Our ADSs will be prohibited from trading in the United States under the Holding Foreign Companies Accountable Act, or the HFCAA, in 2024 if the PCAOB is unable to inspect or fully investigate auditors located in China, or as early as 2023 if proposed changes to the law are enacted. The delisting of our ADSs, or the threat of their being delisted, may materially and adversely affect the value of your investment;
The PRC government’s significant oversight and discretion over our business operation could result in a material adverse change in our operations and the value of our ADSs;
Uncertainties in the interpretation and enforcement of PRC laws and regulations could limit the legal protections available to us;
Changes in China’s economic, political or social conditions or government policies could have a material adverse effect on our business and results of operations; and
The approval of and filing with the CSRC or other PRC government authorities may be required if we conduct offshore offerings in the future, and, if required, we cannot predict whether or for how long we will be able to obtain such approval or complete such filing.

Risks Related to our ADSs

In addition to the risks described above, we are subject to general risks relating to our ADSs and Class A ordinary shares, including, but not limited to, the following:

The market price for our ADSs may be volatile;
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;
Although we adopted regular quarterly dividend policy in 2021, we cannot assure you that our existing dividend policy will not change in the future or the amount of dividends that you may receive, neither can we guarantee that we will have sufficient profits, reserves set aside from profits or otherwise funds to justify and enable dividend declaration and payment in compliance with laws for any fiscal quarter and, therefore, you may need to rely on price appreciation of our ADSs as the sole source for return on your investment; and
Our dual class share structure 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.

16

Risks Related to Our Business and Industry

The Credit-Tech industry is rapidly evolving, which makes it difficult to effectively assess our future prospects.

The Credit-Tech industry in the PRC is in a developing stage. The regulatory framework for this market is also evolving and may remain uncertain for the foreseeable future. In addition, the Credit-Tech industry in China has not witnessed a full credit cycle. The market players in the industry, including us, are inexperienced in responding to the change of market situations effectively and maintaining steady business growth when the industry enters a different stage. In addition, we cannot assure you that a contraction in the availability of funds will not happen at later stages of the credit cycle. As such, we may not be able to sustain our historical growth rate in the future.

You should consider our business and prospects in light of the risks and challenges we encounter or may encounter given the rapidly evolving market in which we operate, along with our limited operating history. These risks and challenges include our ability to, among other things:

offer competitive products and services;
broaden our prospective borrower base;
increase the utilization of our products by existing borrowers as well as new borrowers;
maintain and enhance our relationship and business collaboration with our partners;
maintain low delinquency rates of loans facilitated or originated by us;
develop and maintain cooperative relationships with financial institution partners to secure sufficient, diversified, cost-efficient funding to the drawdown requests;
continue to develop, maintain and scale our platform and sustain our historical growth rates;
continue to develop and improve the effectiveness, accuracy and efficiency of our proprietary credit assessment and risk management technology;
navigate a complex and evolving regulatory environment;
improve our operational efficiency and profitability;
attract, retain and motivate talented employees to support our business growth;
enhance our technology infrastructure to support the growth of our business and maintain the security of our system and the confidentiality of the information provided and utilized across our system;
navigate economic conditions and fluctuation; and
defend ourselves against legal and regulatory actions, such as actions involving intellectual property or privacy claims.

17

We are subject to uncertainties surrounding regulations and administrative measures of the loan facilitation business. If any of our business practices are deemed to be non-compliant, our business, financial condition and results of operations would be adversely affected.

The law and regulations governing the loan facilitation business are evolving, and substantial uncertainties exist with respect to their interpretation and implementation. Uncertainties and changes in regulatory environment may increase our cost of operation, limit our options of product offerings or even change our business model fundamentally. We have experienced, and may from time to time be required to make adjustments to our operations in order to maintain compliance with changes in laws, regulations and policies. An example is the promulgation of the Notice on Regulating and Rectifying “Cash Loan” Business, or Circular 141, and related regulations. Circular 141 provides that a banking financial institution that offers cash loans through loan facilitation is prohibited from (i) accepting credit enhancement or other similar services from third parties that lack requisite licenses to provide guarantees; (ii) outsourcing credit assessment, risk management and other key functions to a loan facilitation operator; and (iii) allowing the loan facilitation operator to charge any interest or fees from the borrower. If a financial institution violates the aforementioned rules and provisions, the regulatory authorities may pursue compulsory enforcement, suspend its business, cancel its qualifications, or supervise the rectifications. In extremely serious circumstances, such financial institution’s business license may be revoked. For a discussion of Circular 141, please see “Item 4. Information on the Company—B. Business Overview—Regulation—Regulation on Online Finance Services Industry—Regulations on the business of loans facilitation.”

On the basis of Circular 141, the Interim Measures for Administration of Internet Loans Issued by Commercial Banks, or the Internet Loans Interim Measures, provides for more comprehensive and specific provisions on the cooperation between a banking financial institution and a loan facilitation operator. In addition to prohibiting a banking financial institution from outsourcing its credit assessment and risk management functions, the Internet Loans Interim Measures also provide that “core risk management functions such as credit granting approval and contract conclusion shall be independently and effectively carried out by the commercial bank.” For a discussion of Internet Loans Interim Measures, please see “Item 4. Information on the Company—B. Business Overview—Regulation—Regulation on Online Finance Services Industry—Regulations on the business of loans facilitation.”

Furthermore, the Supplementary Provisions on the Supervision and Administration of Financing Guarantee Companies, or the Supplementary Financing Guarantee Provisions, require that institutions providing services including customer recommendation and credit assessment for various lending institutions shall not provide, directly or in a disguised form, financing guarantee services without prior approval. For the companies engaging in financing guarantee business without the relevant financing guarantee license, the regulatory authorities shall cease such companies’ operation and properly make settlement for existing business contracts. For a discussion of the Supplementary Financing Guarantee Provisions, please see “ Item 4. Information on the Company—B. Business Overview—Regulation—Regulations on Financing Guarantee.”

Before the promulgation of Circular 141, we followed the market practice in preparing agreements used in our loan originations and facilitations. In response to certain requirements under Circular 141 and the Internet Loans Interim Measures, we have made several adjustments to our collaboration model with certain financial institution partners. However, we may still be deemed to violate Circular 141, the Supplementary Financing Guarantee Provisions, the Internet Loans Interim Measures or other relevant rules in the following aspects of our business:

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Guarantee practice. We neither collect guarantee fees from our institutional funding partners, nor take providing guarantees as our main operating business. Historically, certain of our PRC subsidiaries that had not obtained the financing guarantee license provided guarantees or other credit enhancement services to certain financial institution partners, which could be deemed to violate Circular 141 and the Supplementary Financing Guarantee Provisions. We have ceased such practice and we did not provide any guarantees or other credit enhancement services to our financial institution partners that did not have the relevant guarantee license for loans facilitated through our platform in 2021. Currently, third-party guarantee companies or our own licensed guarantee company provides guarantee service to our financial institution partners, and we at the same time, provide back-to-back guarantees for external guarantee companies. As advised by our PRC legal counsel, the third-party guarantee model is not prohibited by Circular 141, because we are not providing guarantee to banking financial institutions. We have also consulted with local authorities which have expressed the same opinion. However, in the absence of authoritative interpretation of Circular 141, we cannot assure you that all the PRC regulatory authorities will have the same view as our PRC legal counsel on this issue. Moreover, given the lack of further interpretations, the exact definition and scope of “providing financing guarantee business in a disguised form” under the Supplementary Financing Guarantee Provisions is unclear. Therefore, we cannot be certain that our new model will not be determined to be in violation of the Supplementary Financing Guarantee Provisions. For additional information on potential risk related to compliance with the leverage ratio limits for financing guarantee business, please see “—We are subject to uncertainties surrounding regulations and administrative measures of microcredit business and financing guarantee business. If any of our business practices are deemed to be non-compliant, our business, financial condition and results of operations would be adversely affected.”
Payment. We have adopted a new payment flow model and applied it to our cooperation with all financial institution partners. Under the new payment flow model, borrowers directly make payments to our financial institution partners, who will then pay us our service fee. In certain cases, some financial institution partners further engage us and a third-party payment system service provider to together arrange payment clearance, pursuant to which borrowers first repay to a third-party payment system and we work together with the payment system service provider to split the total repayment amount to the portions that financial institution partners and we are each entitled to. We do not charge any fees from borrowers under the new payment flow model. As advised by our PRC counsel, such new payment model does not violate Circular 141 or the Internet Loans Interim Measures. However, in the absence of authoritative interpretation of Circular 141 and given substantial uncertainties regarding the interpretation and application of current or future PRC laws and regulations, we cannot assure you that PRC regulatory authorities will ultimately take a view that is consistent with our PRC legal counsel.
Product pricing. In accordance with the evolution of regulatory environments, we have lowered the annual percentage rates, or APR, on loans that we facilitate, as well as our internal rate of return, or IRR, based on which the APR is calculated. We may further adjust the APR and IRR from time to time as a result of changes in regulations or our business strategies. If we are unable to keep up with the evolution of regulations and maintain compliance or are deemed to price loans at a rate that exceed the regulatory limits, we could be ordered to suspend, rectify or terminate our practices or operations, subject to cancellation of qualifications, or ordered to relinquish the excessive portion of the interest income. If any of these occurs, our business, financial condition, results of operations and our cooperation with financial institution partners could be materially and adversely affected as a result. For additional information on potential risks associated with loan product pricing, please see “—The pricing of loans originated or facilitated through our platform may be deemed to exceed interest rate limits imposed by regulations.”

Circular 141 has no retrospective effect on the loan facilitation business conducted prior to the issuance of Circular 141 as advised by our PRC legal counsel, and we believe that loans we originated or facilitated prior to the issuance of Circular 141 or under our existing collaboration agreements executed prior to the issuance of Circular 141 are not subject to its jurisdiction. However, we cannot rule out the possibility that government authorities would still consider our guarantee practice, payment model, product pricing or other aspects of our business to be in violation of Circular 141 and there can be no assurance that the PRC government authorities will ultimately take a view that is consistent with our PRC legal counsel. To the extent that any aspect of our products or services is deemed to be non-compliant with any requirements of the relevant PRC laws and regulations, we may need to further adjust our current practices within a limited time period and, as a result, our business operations may be negatively impacted.

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In addition, our risk management assistance to banks mainly depends on the evaluation of information regarding personal credit status, which may be deemed as a “data-driven risk management model,” a model that regulations such as Circular 141 demand to be adopted with care and caution. We may also be deemed to engage in credit reporting business or credit reporting function services by the PRC authorities, and may be required to obtain an individual credit reporting license or pursue other avenues to ensure compliance pursuant to the Credit Reporting Measures. If such assistance is prohibited, it may affect the subsequent collaboration between us and our financial institution partners. If we are prohibited from conducting our credit assessment, our operation will be adversely affected. See also “—We are subject to uncertainties surrounding regulations and administrative measures of the credit reporting business. If any of our business practices are deemed to be non-compliant, our business, financial condition and results of operations would be materially and adversely affected.”

Further, if our financial institution partners cease to fund the loans, either on a temporary basis to await more clarity on the new regulatory environment, or on a permanent basis for non-compliance concerns, our operation will be adversely impacted. If fewer financial institutions are willing to fund the loans, the competition for funding may become more intense, and the cost of funding may increase, which may adversely impact our results of operations.

Besides, in April 2021, we and 12 other major financial technology platforms were invited to meet with the People’s Bank of China, or the PBOC, China Banking and Insurance Regulatory Commission, or the CBIRC, the CSRC, the SAFE and other financial regulators to discuss the operations and compliance practice of these platfroms’ internet financial businesses in China. We have been making rectifications and adjustments to our operations to address the issues discussed during the meeting and results of our self-examination according to the guidance provided by the regulators. Our rectification results remain subject to the regulators’ final review, and we cannot assure you that the measures we have taken and rectifications we have made will satisfy the requirements from the regulators. To the extent that our rectification efforts are deemed not sufficient or unsatisfactory to the regulators, we may face further rectification orders or other administrative actions, in which case our business and operations may be materially and negatively affected.

We are subject to uncertainties surrounding regulations and administrative measures of microcredit business and financing guarantee business. If any of our business practices are deemed to be non-compliant, our business, financial condition and results of operations would be adversely affected.

A small portion of loans originated on our platform are funded by Fuzhou Microcredit, the subsidiary of Shanghai Qiyu, one of our VIEs. We also provide financing guarantees to our financial institution partners through our financing guarantee subsidiaries for some loans we facilitate. As a result, we are subject to a complex and evolving body of regulations in relation to these businesses.

On August 2, 2017, the PRC State Council promulgated the Regulations on the Supervision and Administration of Financing Guarantee Companies, which became effective on October 1, 2017. The regulations set forth that the outstanding guarantee liabilities of a financing guarantee company shall not exceed ten times its net assets, and that the balance of outstanding guarantee liabilities for the same guaranteed party shall not exceed 10% of a financing guarantee company’s net assets, while the balance of outstanding guarantee liabilities for the same guaranteed party and its affiliated parties shall not exceed 15% of a financing guarantee company’s net assets.

On September 16, 2020, the CBIRC issued the Notice on Strengthening the Supervision and Management of Microcredit Companies, or Circular 86. Adopted to regulate the operations of microcredit companies, Circular 86 provides that the total funding amount obtained by a microcredit company through bank loans, shareholder loans and other non-standard financing instruments shall not exceed such company’s net assets. In addition, the total funding amount obtained by a microcredit company through the issuance of bonds, asset securitization products and other instruments of standardized debt assets shall not exceed four times of its net assets. Local financial regulatory authorities may further lower the leverage limits mentioned above.

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On November 2, 2020, the CBIRC and the PBOC published the Interim Measures for the Administration of Online Microcredit Business (Draft for Comments), or the Online Microcredit Draft, adding new requirements to online microcredit business. In particular, the Online Microcredit Draft, among other things, strengthens the condition for licensing and other approvals for conducting online microcredit business. Pursuant to the Online Microcredit Draft, to the extent a microcredit company engages in online microcredit business, said business shall mainly be carried out within the provincial-level administrative region to which its place of registration belongs, and shall not operate beyond such region without the approval of the banking regulator under the State Council. On December 31, 2021, the PBOC issued the Regulations on Local Financial Supervision and Administration (Draft for Comments), which reaffirms that local financial organizations (including microcredit companies and financing guarantee companies) are required to operate business within the area approved by the local financial regulatory authority, and are not allowed to conduct business across provinces in principle.

Fuzhou Microcredit has obtained the approval to operate microcredit businesses from the competent supervising authority, which allows Fuzhou Microcredit to conduct microcredit businesses through the internet. As of the date of this annual report, Fuzhou Microcredit had increased its registered capital to RMB5 billion. However, if the Online Microcredit Draft were to be adopted in its current form, Fuzhou Microcredit may need to obtain the legal approval of the banking regulator under the State Council in order to engage in online microcredit business across provincial-level administrative regions. The rules for licensing or approvals for cross-province online micro credit business is yet to be formulated as of the date of this annual report. We cannot assure you that, if the authorities later promulgate such rules, Fuzhou Microcredit, Fuzhou Financing Guarantee or Shanghai Financing Guarantee will be qualified for such licenses or approvals in accordance with the requirements thereunder. From time to time, we may need additional licenses to operate our business. Failure to obtain, renew, or retain requisite licenses, permits or approvals may adversely affect our ability to conduct or expand our business.

Furthermore, Fuzhou Microcredit is subject to the laws, regulations, policies and measures in Fuzhou in respect of registered capital and of loan-to-capital and other leverage ratios, among other things, and our financing guarantee companies are subject to the supervision of local financial authorities in Fuzhou and Shanghai and other jurisdictions where their branch offices are located. While we have not been subject to any regulatory penalties as of the date of this annual report in connection with such microcredit and financing guarantee companies’ business practices, we may be subject to regulatory warnings, correction orders, condemnation and fines and may be required to further adjust our business if any of our microcredit and financing guarantee companies is deemed to have violated national, provincial or local laws and regulations or regulatory orders and guidance.

We are subject to uncertainties surrounding regulations and administrative measures of credit reporting business. If any of our business practices is deemed to be non-compliant, our business, financial condition and results of operations would be materially and adversely affected.

The PRC government has adopted several regulations governing personal credit reporting businesses. These regulations include the Regulation for the Administration of Credit Reporting Industry, enacted by the State Council and became effective in March 2013, and the Management Rules on Credit Agencies, issued by the People’s Bank of China, or the PBOC, in the same year. According to the Regulation for the Administration of Credit Reporting Industry, “credit reporting business” refers to the gathering, organizing, preserving and processing of credit information on organizations such as enterprises and public service units and individuals, as well as distribution of such information to information users, and a “credit reporting agency” refers to credit reporting entity established in accordance with law and mainly engaged in credit reporting business. Entities or individuals engaging in individual credit reporting business shall obtain a license from the PBOC. Entities engaged in personal credit reporting business without such approval may be subject to penalties, including suspension of business activities, confiscation of gains related to individual credit reporting business and the imposition of a fine of RMB50,000 to RMB500,000 or criminal liability.

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On September 27, 2021, the PBOC issued the Administrative Measures for Credit Reporting Business, or the Credit Reporting Measures, which took effect on January 1, 2022. The Credit Reporting Measures define “credit information” to include “basic information, borrowing and lending information and other relevant information legally collected in the offering of services of finance or other activities for purposes of identifying and judging the credit standing of businesses and individuals, as well as result of analysis and evaluation based on the aforesaid information,” and define “credit reporting business” as the collection, collation, keeping and processing of credit information and provision of such information to information users. The Credit Reporting Measures applies to entities that carry out credit reporting business and “activities relating to credit reporting business” in China. Separately, entities providing “services of credit reporting function” in the name of “credit information service, credit service, credit evaluation, credit rating, credit repair, among others” are also subject to the Credit Reporting Measures. Credit Reporting Measures provides for an 18-month grace period from its effectiveness date for organizations that engage in credit investigation business to obtain the credit reporting business license and comply with its other provisions. The Credit Reporting Measures is new and significant uncertainties exist with respect to its interpretation and implementation. For example, the Credit Reporting Measures does not directly deny the legitimacy of existing data analytics or precision marketing service providers in the financial service industry, nor does it provide a clear guidance or implementation rules on how and when these providers, if deemed to be conducting credit reporting business, could apply for required licenses or otherwise comply with the Credit Reporting Measures. Therefore, we cannot rule out the possibility that some aspects of our business may subsequently be deemed as incompliant and be required to be ceased or adjusted in a way that is adverse to our business and prospects. The lack of clear guidance under, and the uncertainty associated with, the Credit Reporting Measures may also result in substantial compliance cost incurred by us.

In addition, on July 7, 2021, the Credit Information System Bureau of PBOC further issued a notice, or the Notice Relating to Disconnecting Direct Connection, to 13 internet platforms including us, requiring the internet platforms to achieve a complete “disconnected direct connection” between personal information and financial institutions, meaning that the flow of personal information from internet platforms that collect such information to financial institutions is prohibited.

In order to meet the requirements of the Credit Reporting Measures and the Notice Relating to Disconnecting Direct Connection, we may be required to obtain an individual credit reporting business license or involve a third-party licensed institution to ensure compliance, which may incur significant costs and expenses to address the requirements and to make necessary changes to our internal policies and practices, including but not limited to obtaining an individual credit reporting business license, or collaborating with a licensed credit reporting agency. According to the Notice Relating to Disconnecting Direct Connection, the Credit Reporting Measures and other related laws and regulations, any failure or perceived failure by us to obtain the license from PBOC for personal credit reporting business may subject us to an order to cease business operation, confiscation of illegal gains, fines of up to RMB500,000, or even criminal liabilities, which could have an adverse effect on our business, financial condition and results of operations.

The pricing of loans originated or facilitated through our platform may be deemed to exceed interest rate limits imposed by regulations.

Circular 141 requires online platforms, microcredit companies and other entities to charge synthetic fund costs, including the interest and fees paid by the borrowers, in compliance with the rules provided by the Supreme People’s Court, and such costs shall be within the legally allowed annualized interest rate for private lending. According to the Provisions of the Supreme People’s Court on Several Issues concerning the Application of Law in the Trial of Private Lending Cases promulgated on September 1, 2015, in the event that the sum of the annualized interest that lenders charge and the fees we and our financial institution partners charge exceeds the 24% limit, and borrowers refused to pay the portion that exceeds the 24% limit, PRC courts would not uphold our request to demand the portion of the fees that exceeds the 24% limit from such borrowers. If the sum of the annual interest that lenders charge and the fees we and our financial institution partners charge exceeds 36%, the portion that exceeds the 36% limit is invalid. The Supreme People’s Court issued the Several Opinions on Further Strengthening the Judicial Work in the Finance Sector in August 2017, which provides that in the context of peer-to-peer lending, if an online lending information intermediary and a lender intentionally collude to evade the interest rate ceiling as set out by the law through disguising loan interest as loan facilitation service fees, then such arrangements shall be declared invalid. On July 22, 2020, the Supreme People’s Court and the National Development and Reform Commission, or the NDRC, jointly released the Opinions on Providing Judicial Services and Safeguards for Accelerating the Improvement of the Socialist Market Economic System for the New Era, or the Opinions. The Opinions set out that if the interest and fees, including interest, compound interest, penalty interest, liquidated damages and other fees, claimed by one party to the loan contract exceed the upper limit under judicial protection, the claim will not be supported by the court, and if the parties to the loan disguise the financing cost in an attempt to circumvent the upper limit, the rights and obligations of all parties to the loan will be determined by the actual loan relationship.

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On August 20, 2020, the Supreme People’s Court issued the Decision on Amending the Provisions of the Supreme People’s Court on Several Issues Concerning the Application of Law in the Trial of Private Lending Cases, or the Judicial Interpretation Amendment, which was revised on January 1, 2021 and amended the upper limit of private lending interest rates under judicial protection. According to the Judicial Interpretation Amendment, if the service fees or other fees that we charge are deemed to be loan interest or fees related to loans (inclusive of any default rate and default penalty and any other fee), in the event that the sum of the annualized interest that lenders charge and fees we and our financial institution partners charge exceeds four times the one-year Loan Prime Rate at the time of the establishment of the agreement, or the Quadruple LPR Limit, borrowers may refuse to pay the portion that exceeds the Quadruple LPR Limit. In that case, PRC courts will not uphold our request to demand the payment of fees that exceed the Quadruple LPR Limit from such borrowers. If borrowers have paid the fees that exceed the Quadruple LPR Limit, such borrowers may request us to refund the portion exceeding the Quadruple LPR Limit and the PRC courts may uphold such requests. The aforementioned one-year Loan Prime Rate refers to the one-year loan market quoted interest rate issued by the National Bank Interbank Funding Center on the 20th of each month starting from August 20, 2019, and the one-year loan market quoted interest rate issued by the National Bank Interbank Funding Center on April 20, 2022 was 3.7%. We cannot assure you that the one-year loan market quoted interest rate and the Quadruple LPR Limit will not decrease further in the future.

On December 29, 2020, the Supreme People’s Court issued the Reply to Issues Concerning the Scope of Application of the New Judicial Interpretation on Private Lending, or the Supreme People’s Court Reply, which clarified that seven types of local financial organizations, including micro-credit companies, financing guarantee companies, regional equity markets, pawnshops, financing lease companies, commercial factoring companies and local asset management companies under the regulation of local financial regulatory authorities, are financial institutions established upon approval by financial regulatory authorities. The Judicial Interpretation Amendment is not applicable to disputes arising from their engagement in relevant financial businesses.

Although the Judicial Interpretation Amendment and the Supreme People’s Court Reply provide that they do not apply to licensed financial institutions, including micro-credit companies that conduct loan and Credit-Tech business, there remain uncertainties in the interpretation and implementation of the Judicial Interpretation Amendment, including whether licensed financial institutions may be subject to its jurisdiction under Circular 141 or in certain circumstances, the basis of the calculation formula used to determine the interest limit, the scope of inclusion of related fees and insurance premiums, as well as inconsistencies between the standard and level of enforcement by different PRC courts. We cannot assure you that there will not be interpretations of the Judicial Interpretation Amendment expanding its jurisdiction to cover licensed financial institutions, nor can we guarantee that there will not be any changes to the detailed calculation formula used to determine the interest limit, that our future fee rates will not be lowered as a result of the Quadruple LPR Limit, or that the Quadruple LPR Limit will not be applied to our historical and legacy products where the related dispute cases are accepted by PRC courts of first instance on or after August 20, 2020. In such cases, we and our financial institution partners may be required to repay certain borrowers if our historical and legacy loan products are deemed to have violated the applicable laws and regulations concerning the limit of lending interest and fee rates. Our business, results of operations and financial condition may therefore be materially and adversely affected by the implementation of the Judicial Interpretation Amendment.

In addition to rules, opinions and decisions issued by the PRC courts, we and our financial institution partners are also subject to regulatory agencies’ requirements, supervision or guidance. We have lowered the IRR on loans we facilitate and may further adjust the IRR from time to time as a result of changes in regulations or our business strategies. Currently, we adhere to the pricing policy that no loan should have an IRR exceeding 36%. As of December 31, 2021, the IRRs for all of loans are under 36%, and the outstanding balance of loans with an IRR exceeding 24% amounted to RMB62.1 billion (US$9.7 billion), representing 43.7% of all the outstanding balance of our loans, compared to RMB61.0 billion and 66.2%, respectively, as of December 31, 2020. If we are unable to keep up with the evolvement of regulations and maintain compliance or are deemed to price loans at a rate that exceeds the regulatory limits, we could be ordered to suspend, rectify or terminate our practices or operations, subject to cancellation of qualifications, or ordered to relinquish the excessive portion of the interest income. If any of these occurs, our business, financial condition, results of operations and our cooperation with financial institution partners could be materially and adversely affected. See also “—We are subject to uncertainties surrounding regulations and administrative measures of the loan facilitation business. If any of our business practices are deemed to be non-compliant, our business, financial condition and results of operations would be adversely affected.”

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Our transaction process may result in misunderstanding among our borrowers.

Our paperless transaction process is facilitated primarily on our mobile platform. While such transaction process is streamlined and convenient, it involves certain inherent risks. Our borrowers may not read the electronic agreements closely, which may result in misunderstanding of certain terms and conditions. Furthermore, information in our product promotion materials and our app may result in misunderstanding among our borrowers and be deemed misleading. For instance, we utilize the internal rate of return methodology to calculate the total interest and service fees to be paid by borrowers and to determine the APR on our loan product. Despite the fact that we have disclosed our fee structure in the agreements with our borrowers and display on our mobile platform how service fees are calculated using the internal rate of return and the annualized composite rate, they may overlook or misunderstand such service fees, interest rates and other fees, and calculate the APR, total interest and service fees utilizing a different methodology, which may result in misunderstanding of our fee structure. If the government authorities and the courts determine that the interest rate disclosed in our product promotion and our app is misleading, the courts may support the borrower’s request to rescind the agreement or determine a lower interest and service fee to be paid by the borrower, and we may be subject to fines and penalties by the courts and government authorities for the misleading promotion. In addition, such misunderstanding may arouse negative publicity and complaints among our borrowers, harm our brand name and reputation and in turn hurt our ability to retain and attract borrowers, which could have a material adverse effect on our business, financial condition and results of operations.

We are subject to credit cycles and the risk of deterioration of credit profiles of borrowers.

Our business is subject to credit cycles associated with the volatility of the general economy. If economic conditions deteriorate, we may face an increased risk of default or delinquency of borrowers, which will result in lower returns or even losses. In the event that the creditworthiness of our borrowers deteriorates or we cannot track the deterioration of their creditworthiness, the criteria we use for the analysis of borrower credit profiles may be rendered inaccurate, and our risk management system may be subsequently rendered ineffective. This in turn may lead to higher default rates and adversely impact our results of operations.

In addition, any deterioration in our borrowers’ creditworthiness, or any increase in our delinquency rate will also discourage our financial institution partners from cooperating with us. If our financial institution partners choose to adopt a tight credit approval and drawdown funding policy, our ability to secure funding will be materially restricted.

Fraudulent activity on our platform could negatively impact our operating results, brand and reputation and cause the use of our loan products and services to decrease.

We are subject to the risk of fraudulent activity associated with borrowers and parties handling borrower or institutional funding partner information. Our resources, technologies and fraud detection tools may be insufficient to accurately detect and prevent fraud. Even if we identify a fraudulent borrower and reject his/her credit application, such borrower may re-apply by using fraudulent information. We may fail to identify such behavior, despite our measures to verify personal identification information provided by borrowers. Furthermore, we may not be able to recoup funds underlying transactions made in connection with fraudulent activities. A significant increase in fraudulent activities could negatively impact our brands and reputation, discourage financial institution partners from collaborating with us, reduce the number of transactions originated or facilitated from borrowers and lead us to take additional steps to reduce fraud risk, which could increase our costs. High profile fraudulent activity could even lead to regulatory intervention and may divert our management’s attention and cause us to incur additional expenses and costs.

We rely on our proprietary risk management model in assessing the creditworthiness of our borrowers and the risks associated with loans. If our model is flawed or ineffective, or if we otherwise fail or are perceived to fail to manage the default risks of loans originated or facilitated through our platform, our reputation and market share would be materially and adversely affected, which would severely impact our business and results of operations.

Our ability to attract borrowers to, and build trust in, our platform is significantly dependent on our ability to effectively evaluate borrowers’ credit profiles and the likelihood of default based on our Argus Intelligent Risk Management Engine, or the Argus Engine. This model may be flawed or ineffective in processing the immense data and providing an accurate report. It may not adjust itself to the changes in the data patterns or macroeconomic situations. In addition, it may be breached, manipulated or otherwise compromised.

If any of the foregoing were to occur in the future, our financial institution partners may try to rescind their affected investments or decide not to invest in loans, or borrowers may seek to revise the terms of their loans or reduce the use of our platform for financing.

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Meanwhile, as our Argus Engine becomes more familiar to the public and fraudulent borrowers become better educated regarding the industry practice, it is possible that despite the iterative development of our anti-fraud and credit-scoring algorithm, our model becomes outdated and ineffective in detecting new fraud schemes or making accurate credit assessments. If that happens, our ability to control our delinquency rate will become substantially limited, which will adversely impact our operation and financial status.

We rely on our risk management team to establish and execute our risk management policies. If our risk management team or key members of such team were unable or unwilling to continue in their present positions, our business may be severely disrupted.

We rely on our risk management team to continuously iterate and train our Argus Engine, which is the center of the establishment and execution of our risk management policies. Although our Argus Engine is equipped with machine learning capability and conducts self-learning and self-development all based on the data we have, we still rely on our risk management team to spot and fix potential errors and flaws in our Argus Engine. Meanwhile, the Credit-Tech market changes quickly and we may need to adjust our risk management principles from time to time to control our loss rate while securing a stable increase in our borrowers and satisfying returns for our financial institution partners. We rely on our risk management team to closely monitor the change in the market and our business, and update our risk management principles accordingly, which will be then used to train our Argus Engine. If our risk management team or key members of such team were unable or unwilling to continue in their present positions, we may have to incur additional time and monetary cost to find a replacement to our risk management team that fits us, and our result of business operation and financial status may be adversely and severely impacted.

Our business is subject to complex and evolving PRC laws and regulations regarding data privacy and cybersecurity, many of which are subject to change and uncertain interpretation. Any changes in these laws and regulations have caused and could continue to cause changes to our business practices and increase costs of operations, and any security breaches or our actual or perceived failure to comply with such laws and regulations could result in claims, penalties, damages to our reputation and brand, declines in user growth or engagement, or otherwise harm our business, results of operations and financial condition.

Our platform collects, stores and processes certain personal and other sensitive data from our borrowers for the purpose of providing our services, such as name, identity number and phone number. We have obtained the explicit consents from our borrowers to use their personal information within the scope of authorization and we have taken technical measures to protect the security of such personal information and prevent personal information from being divulged, damaged or lost. However, we face risks inherent in handling and protecting personal data. In particular, we face a number of challenges relating to data from transactions and other activities on our platform, including:

protecting the data in and hosted on our system, including against attacks on our system by outside parties or fraudulent behavior or improper use by our employees;
addressing concerns related to privacy and sharing, safety, security and other factors; and
complying with applicable laws, rules and regulations relating to the collection, use, storage, transfer, disclosure and security of personal information, which are subject to change and new interpretations, including any requests from regulatory and government authorities relating to such data.

In general, we expect that data security and data protection compliance will receive greater attention and focus from regulators, both domestically and globally, as well as continued or greater public scrutiny and attention going forward, which could increase our compliance costs and subject us to heightened risks and challenges associated with data security and protection. If we are unable to manage these risks, or if we are accused of failing to comply with such laws and regulations, we could become subject to corrective orders, penalties, including fines, suspension of business, websites, or applications, and revocation of required licenses, and our reputation and results of operations could be materially and adversely affected.

Recently, regulatory authorities in China have enhanced data protection and cybersecurity regulatory requirements, many of which are subject to change and uncertain interpretation. These laws continue to develop, and the PRC government may adopt further rules, restrictions and clarifications in the future. Moreover, different PRC regulatory bodies, including the Standing Committee of the NPC, the Ministry of Industry and Information Technology, or the MIIT, the CAC, the Ministry of Public Security, or the MPS, and the State Administration for Market Regulation, or the SAMR, have enforced data privacy and protections laws and regulations with varying standards and applications. See “Item 4. Information on the Company—B. Business Overview—Regulation—Regulations on Information Security and Privacy Protection.” The following are non-exhaustive examples of certain recent PRC regulatory activities in this area:

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Cybersecurity

The PRC Cybersecurity Law, which became effective in June 2017, created China’s first national-level data protection framework for “network operators.” It is a relatively new law and subject to interpretations and clarifications by the regulator. It requires, among other things, that network operators take security measures to protect the network from unauthorized interference, damage and unauthorized access and to prevent data from being divulged, stolen or tampered with. Network operators are also required to collect and use personal information in compliance with the principles of legitimacy, properness and necessity, and strictly collect and use personal information within the scope of authorization by the subject of such personal information unless otherwise prescribed by laws or regulations. Significant financial, managerial and human resources are required to comply with such legal requirements, enhance information security and address any issues caused by security failures. Even if our security measures are in compliance, we nonetheless face the risk of security breaches or similar disruptions. Due to the data assets we have, our platform is an attractive target and potentially vulnerable to cyberattacks, computer viruses, physical or electronic break-ins or similar disruptions. Because techniques used to sabotage or obtain unauthorized access to systems evolve continuously and frequently and generally are not recognized until they are launched against a target, we may be unable to anticipate these techniques or to implement adequate preventative counter-measures. In addition to advances in technology, an increased level of sophistication and diversity of our products and services, an increased level of expertise of hackers, new discoveries in the field of cryptography or other risks can result in the compromise or breach of our websites or our apps. If security measures are breached because of third-party action, employee error, malfeasance or otherwise, or if design flaws in our technology infrastructure are exposed and exploited, user data or personal information could be stolen or misused, which could expose us to penalties or other administrative actions, time-consuming and expensive litigation and negative publicity, materially and adversely affect our business and reputation and deter potential users from using our products and financial institution partners from cooperating with us, any of which would have a material adverse impact on our results of operations, financial condition and business prospects.

Data Security

In June 2021, the Standing Committee of the NPC promulgated the Data Security Law, which took effect in September 2021. The Data Security Law, among other things, provides for security review procedure for data-related activities that may affect national security. It also introduces a data classification and hierarchical protection system based on the importance of data in terms of economic and social development, as well as the degree of harm it will cause to national security, public interests, or legitimate rights and interests of individuals or organizations when such data is tampered with, destroyed, leaked, or illegally acquired or used. Appropriate level of protection measures are required to be taken for each respective category of data. In addition, the Data Security Law also provides that any organization or individual within the territory of the PRC shall not provide any foreign judicial body or law enforcement body with any data stored within the territory of the PRC without the approval of the competent PRC government authorities. A series of regulations, guidelines and other measures have been and are expected to be adopted to implement the requirements created by the PRC Data Security Law. For example, in July 2021, the State Council promulgated the Regulations on Protection of Critical Information Infrastructure, which became effective on September 1, 2021. Pursuant to this regulation, a “critical information infrastructure” is defined as key network facilities or information systems of critical industries or sectors, such as public communication and information service, energy, transportation, water conservation, finance, public services, e-government affairs and national defense science, the damage, malfunction or data leakage of which may endanger national security, people’s livelihoods and the public interest. In December 2021, the CAC, together with other authorities, jointly promulgated the Cybersecurity Review Measures, which became effective on February 15, 2022 and replaces its predecessor regulation. Pursuant to the Cybersecurity Review Measures, critical information infrastructure operators that procure internet products and services or that carry out data processing activities must be subject to a cybersecurity review if their activities affect or may affect national security. The Cybersecurity Review Measures further stipulate that network platform operators that hold personal information of over one million users shall apply with the Cybersecurity Review Office for a cybersecurity review before any public offering at a foreign stock exchange. As of the date of this annual report, no detailed rules or implementation rules have been issued by any authority and we have not been informed that we are a “critical information infrastructure operator” by any government authority. However, the exact scope of “critical information infrastructure operators” under the current regulatory regime remains unclear, and the PRC government authorities may have wide discretion in the interpretation and enforcement of the applicable laws. Therefore, it is uncertain whether we would be deemed to be a “critical information infrastructure operator” under PRC law. If we are deemed a “critical information infrastructure operator” under the PRC cybersecurity laws and regulations, we may be subject to obligations in addition to those with which we are currently obligated to comply.

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On October 29, 2021, the CAC published the Outbound Data Transfer Security Assessment Measures (Draft for Comments) (the “Draft Outbound Data Transfer Security Assessment Measures”), which specify that data processors who intend to provide important data and personal information that are collected and generated in the operation within the territory of the PRC to overseas shall be subject to security assessment with the CAC. Under the current Draft Outbound Data Transfer Security Assessment Measures, an entity must apply for a CAC security assessment if it processes personal information of over one million individuals and outbound transfers personal information, or if it has cumulatively outbound transferred personal information of more than 100,000 individuals or sensitive personal information of more than 10,000 individuals. The Draft Outbound Data Transfer Security Assessment Measures further stipulate the process and requirements for the security assessment. As of the date of this annual report, the Draft Outbound Data Transfer Security Assessment Measures has not been formally adopted. However, it remains uncertain how the PRC government authorities will regulate companies under such circumstances if the Draft Outbound Data Transfer Security Assessment Measures are fully implemented as-is. It is also unclear what constitutes “outbound data transfer”. These bring more uncertainties with respect to the application and enforcement of the draft measures, and we may be subject to such outbound data security assessment with the CAC. We will closely monitor and assess any relevant legislative and regulatory development and prepare for a security assessment when necessary.
In November 2021, the CAC released the Measures of Regulations on the Network Data Security Administration (Draft for Comments), or the Draft Regulations on Network Data Security. The Draft Regulations on Network Data Security define “data processors” as individuals or organizations that can make autonomous decisions regarding the purpose and the manner of their data processing activities such as data collection, storage, utilization, transmission, publication and deletion. In accordance with the Draft Regulations on Network Data Security, data processors shall apply for a cybersecurity review for certain activities, including, among other things, (i) the listing abroad of data processors that process the personal information of more than one million users; (ii) merger, reorganization or division of internet platform operators that have acquired a large number of data resources related to national security, economic development or public interests affects or may affect national security; (iii) listing in Hong Kong which affects or may affect national security; or (iv) any data processing activity that affects or may affect national security. However, there have been no clarifications from the relevant authorities as of the date of this annual report as to the standards for determining whether an activity is one that “affects or may affect national security.” In addition, the Draft Regulations on Network Data Security requires that data processors that process “important data” or are listed overseas must conduct an annual data security assessment by itself or authorize a data security service provider to do so, and submit the assessment report of the preceding year to the municipal cybersecurity department by the end of January each year. As of the date of this annual report, the Draft Regulations on Network Data Security has not been formally adopted, and their respective provisions and anticipated adoption or effective date may be subject to change with substantial uncertainty.

Personal Information and Privacy

The Anti-monopoly Guidelines for the Platform Economy Sector published by the Anti-monopoly Committee of the State Council, effective on February 7, 2021, prohibits collection of user information through coercive means by online platform operators.
In August 2021, the Standing Committee of the NPC promulgated the Personal Information Protection Law, which took effect on November 1, 2021. The Personal Information Protection Law provides the protection requirements for processing personal information, and specifies the rules for processing sensitive personal information, which refers to personal information that, once leaked or illegally used, may easily cause harm to the dignity of natural persons or cause harm to a person’s safety or property, including information on biometric characteristics, religious beliefs, specific identities, medical health, financial accounts, individual location tracking and others, as well as personal information of minors under the age of 14. It also enhances the punishment for illegal processing of personal information and consolidated various previously promulgated rules with respect to personal information rights and privacy protection. We update our privacy policies from time to time to meet the latest regulatory requirements of PRC government authorities and adopt technical measures to protect data and ensure cybersecurity in a systematic way. Nonetheless, the Personal Information Protection Law elevates the protection requirements for personal information processing, and many specific requirements of this law remain to be clarified by the CAC, other regulatory authorities, and courts in practice. We may be required to make further adjustments to our business practices to comply with the personal information protection laws and regulations and any changes in the enforcement or interpretation of such laws and regulations.

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On September 17, 2021, the CAC, together with eight other government authorities, jointly issued the Guidelines on Strengthening the Comprehensive Regulation of Algorithms for Internet Information Services. The guidelines provide that daily monitoring of data use, application scenarios, and effects of algorithms shall be carried out by relevant regulators, and such relevant regulators shall conduct security assessments of algorithms. The guidelines also provide that an algorithm filing system shall be established, and classified security management of algorithms shall be promoted. On December 31, 2021, the CAC, the MIIT, the Ministry of Public Security, and the SAMR jointly promulgated the Administrative Provisions on Internet Information Service Algorithm-Based Recommendation, which took effect on March 1, 2022. The Administrative Provisions on Internet Information Service Algorithm-Based Recommendation, among others, (i) implement classification and hierarchical management for algorithm-based recommendation service providers based on various criteria, (ii) require algorithm-based recommendation service providers to inform users of their provision of algorithm-based recommendation services in a conspicuous manner, and publicize the basic principles, purpose intentions, and main operating mechanisms of algorithm-based recommendation services in an appropriate manner, and (iii) require such service providers to provide users with options that are not specific to their personal profiles, or convenient options to cancel algorithmic recommendation services. We will closely monitor the regulatory development and adjust our business operations from time to time to comply with the regulations over algorithm-based recommendation.

Many of the data- and data privacy-related laws and regulations are relatively new and certain concepts thereunder remain subject to interpretation by the regulators. If any data that we possess belongs to data categories that are or may become subject to heightened scrutiny, we may be required to adopt stricter measures for protection and management of such data. The Cybersecurity Review Measures and the Draft Regulations on Network Data Security remain unclear on whether the relevant requirements will be applicable to companies that, like us, are already listed in the United States. We cannot predict the impact of the Cybersecurity Review Measures and the Draft Regulations on Network Data Security, if any, at this stage, and we will closely monitor and assess any developments in the rule-making process. If the Cybersecurity Review Measures and the enacted version of the Draft Regulations on Network Data Security mandate clearance of cybersecurity review and other specific actions to be taken by issuers like us, we may face uncertainties as to whether these additional procedures can be completed by us timely, or at all, which may subject us to government enforcement actions and investigations, fines, penalties, suspension of our non-compliant operations, or removal of our app from the relevant application stores, and materially and adversely affect our business and results of operations.  As of the date of this annual report, we have not been involved in any formal investigations on cybersecurity review made by the CAC on such basis.

In general, compliance with the existing PRC laws and regulations, as well as additional laws and regulations that PRC legislative and regulatory bodies may enact in the future, related to cybersecurity, data security and personal information protection, may be costly and result in additional expenses to us, and subject us to negative publicity, which could harm our reputation and business operations. There are also uncertainties with respect to how such laws and regulations will be implemented and interpreted in practice. In light of the fact that laws and regulations on cybersecurity, data privacy and personal information protection are evolving and uncertainty remains with respect to their interpretation and implementation, we cannot guarantee that we will be able to maintain full compliance at all times, or that our existing user information protection system and technical measures will be considered sufficient. Any non-compliance or perceived non-compliance with these laws, regulations or policies may lead to warnings, fines, investigations, lawsuits, confiscation of illegal gains, revocation of licenses, cancellation of filings or listings, closedown of websites, removal of apps and suspension of downloads, price drops in our securities or even criminal liabilities against us by government agencies or other individuals. For example, in July 2021, our 360 Jietiao app was temporarily taken offline by the CAC for the purpose of optimizing product design and offering enhanced user data privacy protection, during which period new downloads were suspended. Our 360 Jietiao app was restored to app stores for downloads in August 2021, and this temporary suspension did not result in a material adverse impact on our business operations. However, we cannot assure you that the authorities will not require further system and data privacy protection enhancements in the future as technologies, standards and regulatory environments continue to evolve, in which case our operations may be interrupted or adversely affected. In addition, our launch of new products or services or other actions that we take in the future may subject us to additional laws, regulations, or other government scrutiny.

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Credit and other information that we receive from third parties about borrowers may be inaccurate or may not accurately reflect the borrower’s creditworthiness, which may compromise the accuracy of our credit assessment.

For the purpose of credit assessment, we obtain from prospective borrowers and third parties certain information of the prospective borrowers, which may not be complete, accurate or reliable. The credit score assigned to a borrower may not reflect that particular borrower’s actual creditworthiness because the credit score may be based on outdated, incomplete or inaccurate borrower information. We currently cannot reliably determine whether borrowers have outstanding loans through other online platforms at the time they obtain a loan from us even though we adopt certain investigation measures. This creates the risk that a borrower may borrow money through our platform in order to pay off loans on other online platforms and vice versa. If a borrower incurs additional debt before fully repaying any loan such borrower takes out on our platform, the additional debt may impair the ability of that borrower to make repayments on his or her loan. In addition, the additional debt may adversely affect the borrower’s creditworthiness generally and could result in the financial distress or insolvency of the borrower. Meanwhile, if the price of the quality data on which we run our algorithms increases, we may not get access to the quality information at the same cost in the future. We may be forced to run our algorithms on fewer quality data, iterate our algorithms or pay more for quality information in the future, each adversely affecting our results of operations.

If we are unable to maintain or increase the volume of loans originated or facilitated through our platform, our business and results of operations will be adversely affected.

The loan facilitation volume through our platform has grown rapidly since our inception, and the total amount of loans originated or facilitated through our platform was RMB930.3 billion (US$146.0 billion) as of December 31, 2021. To maintain the high growth momentum of our platform, we must continuously increase the loan facilitation volume by retaining current borrowers and attracting more borrowers, which in turn depends on our ability to acquire borrowers and to offer a diversified loan product portfolio at reasonable cost that addresses the capital needs of consumers and micro- and small-business owners and other corporate borrowers in consumption and other life and business settings. We intend to continue to dedicate significant resources to our borrower acquisition efforts, and develop and refine our loan products. If there are insufficient qualified loan requests, our financial institution partners may consider withdrawing from our collaboration or lowering their funding commitments to us. If there are insufficient funding commitments, borrowers may be unable to obtain capital through our platform and may turn to other sources for their borrowing needs.

The overall volume may be affected by several factors, including our brand recognition and reputation, the interest rates offered to borrowers relative to the market rates, the efficiency of our credit underwriting process, availability of our financial institution partners, the macroeconomic environment and other factors. In connection with the introduction of new products or response to general economic conditions, we may also impose more stringent borrower qualifications to ensure the quality of loans on our platform, which may negatively affect the growth of our loan origination volume. If we are unable to attract qualified borrowers or if borrowers do not continue to participate in our platform at the current rates, we might be unable to increase our loan origination volume and revenues as we expect, and our business and results of operations may be adversely affected.

If our collaboration with 360 Group is terminated or otherwise becomes limited, restricted, curtailed, less effective or more expensive in any way, or if we cannot benefit from the brand recognition, business ecosystem or research and development capabilities of 360 Group as we do, our business may be adversely affected.

We have established a strategic partnership with 360 Group, one of our affiliates, and we collaborate across multiple areas of our business. This strategic partnership has contributed to the growth of our revenue, particularly in the early stage of our business, and we believe that it will continue to contribute to the growth of our revenue. We have entered into a framework collaboration agreement with 360 Group, setting out the terms of collaboration, especially those related to research and development, user traffic support, and trademark licensing. See “Item 7. Major Shareholders and Related Party Transactions—Related Party Transactions—Transactions with 360 Group.” In particular, we have been authorized by 360 Group to use its brand “360,” which allows us to benefit from 360 Group’s strong brand recognition in certain aspects of our business, such as borrower acquisition, at the early stage of our development. In addition, we have been able to collaborate with 360 Group in certain research and development initiatives, which to some extent shortens our technology development cycle. Further, as the strategic partner of 360 Group, we benefit from its business ecosystem as well. For example, our collaboration with Kincheng Bank, whose largest shareholder is 360 Group, provides us with opportunity to explore and experiment innovative cooperation arrangements with potential financial institution partners.

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We cannot assure you that we will continue to receive the same level of support from 360 Group on the same or more favorable terms and conditions, or renew our collaboration agreements at all, upon expiration of the agreement terms, neither can we guarantee that our collaboration with 360 Group will not be terminated by 360 Group or otherwise become limited, less effective or more expensive, which are subject to many factors beyond our control, such as legal requirements and 360 Group’s business condition, plans and strategies. For example, as 360 Group is a public company listed on the Shanghai Stock Exchange in China, it is subject to relevant PRC regulations and exchange rules, which may impact its ability to collaborate with us pursuant to the terms we desire. It came to our attention that, in May 2020, The Bureau of Industry and Security (BIS) of the U.S. Department of Commerce amended the Export Administration Regulations (EAR) by adding twenty-four entities, including two affiliates of 360 Group to the Entity List. As a result, exports or reexports from the U.S. and in-country transfers in the U.S. to these two affiliates of 360 Group will face additional license requirements, and the availability of most license exceptions is limited. Currently, the inclusion of these two affiliates of 360 Group into the Entity List has not had a material adverse effect on our collaboration with 360 Group or on us. However, we cannot rule out the possibility that additional restrictions of different nature may be imposed on 360 Group or its affiliates in light of the changes in international trade policies and rising political tensions between the U.S. and China in the past few years. See also “Risks Related to Doing Business in China—Changes in international trade policies and rising political tensions, particularly between the U.S. and China, may adversely impact our business and operating results.” If we are unable to receive the same level of support from 360 Group, or our collaboration with 360 Group is terminated or otherwise becomes limited, restricted, curtailed, less effective or more expensive in any way, or if we cannot benefit from the brand recognition, business ecosystem or research and development capabilities of 360 Group as we do, our business may be adversely affected, especially in the aspects of cost and efficiency of borrower acquisition.

Our access to sufficient and sustainable funding at reasonable costs cannot be assured. If we fail to maintain collaboration with our financial institution partners or to maintain sufficient capacity to originate loans to our borrowers, our reputation, results of operations and financial condition may be materially and adversely affected.

The growth and success of our future operations depend on the availability of adequate funding to meet borrowers’ demands for loans on our platform. To maintain sufficient and sustainable funding to meet borrower demands, we need to keep expanding the network and securing a stable stream of funds from our funding partners.

The availability of funding from our financial institutional partners depends on many factors, some of which are beyond our control. Changes in the macroeconomic environment may impact the funding costs and the terms of our agreements with financial institution partners, and we may not be able to obtain sufficient and sustainable funding from them if the funding cost increases significantly. In addition, our competitors in the Credit-Tech industry may offer better terms to attract financial institutions away from us. We may not be able to maintain long-term business relationships with financial institution partners in this evolving market. For the year of 2021, our top five financial institution partners contributed around 45.5% of total funding for the loans we facilitated. Our financial institution partners typically agree to provide funding to our borrowers who meet their predetermined criteria, subject to their credit approval process. These agreements have fixed terms of typically one year. In addition, while our borrowers’ loan requests are usually approved if they fall within the parameters set and agreed upon by us and our financial institution partners, our financial institution partners may implement additional requirements in their approval process outside of our monitoring and control. Thus, there is no assurance that our financial institution partners could provide reliable, sustainable and adequate funding, because they could either decline to fund borrower loans facilitated on our platform or decline to renew or renegotiate their participation in the funding programs.

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In addition, if PRC laws and regulations impose more restrictions on our collaboration with financial institution partners, these financial institution partners will become more selective in choosing collaboration partners, which may drive up the funding costs and the competition among online lending platforms to collaborate with a limited number of financial institution partners. Pursuant to Internet Loans Interim Measures and the Circular of the General Office of the China Banking and Insurance Regulatory Commission on Further Standardizing the Internet Loans Business of Commercial Banks, or the Internet Loans Circular, regional banks that carry out internet lending business shall serve local customers, and are not allowed to conduct the internet lending business beyond the local administrative area of their registered place, except those who have no physical business branch, conducting business primarily online as well as meeting the other conditions prescribed by the CBIRC. However, given the lack of exact definition regarding the regional banks in the existing laws and regulations, there are uncertainties as to how such laws, regulations and rules will be interpreted and implemented. If regional banks are restricted from funding loans nationwide, our funding costs may increase as a result, and to the extent we fail to effectively match them with sufficient local borrowers, we may lose them as funding sources. In each case, our results of operations and profitability could be materially and adversely impacted. Furthermore, if the PRC government issues any laws and regulations that restrict or prohibit our collaboration with our financial institution partners, our collaboration with our financial institution partners may have to be terminated or suspended, which may materially and adversely affect our business, financial condition and results of operations. For example, on December 31, 2021, the PBOC issued the Measures for Administration of Online Marketing of Financial Products (Draft for comments), which regulate online marketing of financial products by financial institutions or internet platform operators engaged by such financial institutions. Pursuant to this draft, financial institutions shall not engage other entities or individuals to carry out internet marketing of financial products unless otherwise provided or authorized by laws and regulations. The draft also prohibits third-party online platform operators from being involved in the sale of financial products or participating in the income sharing of financial business in a disguised way without the approval of financial regulatory authorities. If these measures were to be adopted in the current form, we may no longer be able to display financial products in current format on our mobile app to conduct online marketing, which may have a material adverse impact on our business, results of operations and future prospects.

While we have made efforts to diversify funding sources, we cannot assure you that such efforts would be successful or funding sources for the loans we facilitate will remain or become increasingly diversified in the future. If we become dependent on a small number of financial institution partners and any of them decide to not collaborate with us, change the commercial terms to the extent unacceptable to our borrowers or limit the funding available on our platform, such constraints may materially limit our ability to facilitate loans and adversely affect our borrower experience. Any of these occurrences could materially and adversely affect our business, financial condition, results of operations and cash flow.

Furthermore, we partner with Kincheng Bank, whose largest shareholder is 360 Group, across a full spectrum of services. Our collaboration with Kincheng Bank provides us the opportunities to explore and experiment innovative cooperation arrangements with potential financial institution partners. As of December 31, 2021, Kincheng Bank is our second largest funding partner by outstanding loan balance. If Kincheng Bank is acquired by a third party not affiliated with us, or if its business, financial conditions or reputation deteriorates, we may not be able to maintain our current collaboration with it on reasonable terms or at all.

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If our business arrangements with certain financial institution partners were deemed to violate PRC laws and regulations, our business and results of operations could be materially and adversely affected.

We have secured certain funding from financial institution partners through the channel of trusts and asset management plans in collaboration with certain trust companies and asset management companies.

According to our cooperative arrangement with trust companies and asset management companies, each trust and asset management plan had a specified term. Institutional funding partners invested in such trusts or asset management plans in the form of trust or asset management units, which entitled the institutional funding partner to the return on investment with each unit. We were designated as the service provider for the trusts and asset management plans. If a credit application was approved, credit drawdown would be funded by the trusts to borrowers directly subject to the independent credit review of such trusts. These trusts and asset management plans were identified as the lender under the loan agreements with our borrowers. The trust and asset management plan remitted to the financial institution partners investment returns pursuant to the terms of the trust and plan that reflected funds initially provided by the financial institution partners. The investment gains would be distributed to the trust based on the actual loan interest. The trust company or asset management company, as appropriate, was responsible for administering the trust and was paid a service fee.

In 2021, trusts with total assets of RMB8.8 billion were set up to invest solely in loans on our platform. For the majority of trusts, we are considered the primary beneficiary of the trusts and thus consolidate such trusts’ assets, liabilities, results of operations and cash flows. Although we have not been part of the fund-raising process by the trusts, we cannot assure you that our provision of services to the trusts will not be viewed by the PRC regulators as violating any laws or regulations. If we are prohibited from cooperating with trust companies, our access to sustainable funding may be adversely impacted, which may further increase the funding cost of our loans and affect our results of operations.

If our attempts to explore alternative funding initiatives were deemed to violate PRC laws and regulations, our business could be materially and adversely affected.

We have and expect to continue exploring alternative funding initiatives, including through standardized capital instruments such as the issuance of asset-backed securities, or ABS. We have been approved to list a total of RMB27 billion of ABS on the Shanghai Stock Exchange and Shenzhen Stock Exchange and already issued RMB10.5 billion as of December 31, 2021. Pursuant to the relevant PRC laws and regulations, an institution is entitled to establish an ABS scheme as a credit originator for such scheme on the condition that it has legitimate ownership to the underlying transferred assets that are able to generate independent and predictable cash flow in compliance with relevant laws and regulations. However, the initiators of any potential ABS scheme with whom we work are required to be financial institutions and they are subject to a variety of laws and regulations in the PRC, such as Administrative Provisions on the Asset Securitization Business of Securities Companies and the Subsidiaries of Fund Management Companies and Measures for the Supervision and Administration of Pilot Projects of Credit Asset Securitization of Financial Institutions. The laws and regulations applicable to ABS are still developing, and it remains uncertain as to the application and interpretation of such laws and regulations, particularly relating to the rapidly evolving Credit-Tech industry in which we operate. In addition, we rely on trust companies and other parties we collaborate with to secure the successful issuance of the ABS. If our collaboration with such parties is interrupted or affected, our ability to utilize the remaining approved quota of issuing such ABS may be materially limited. If our attempts to issue ABS under the current quota is limited, or our attempts to seek further approval on additional quota in ABS is rejected, our capability to secure funding with lower comprehensive cost may be limited, and our business and financial condition may be adversely impacted.

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The subsidiary of our VIE that conducts online microcredit business may not be able to provide a sufficient amount to fund the growth of our business. In addition, the regulatory regime and practice with respect to online microcredit companies are evolving and subject to uncertainty.

In March 2017, Fuzhou Microcredit, a subsidiary of our VIE, which is licensed to conduct microcredit business, was established. It has obtained the approval of the relevant competent local authorities to fund loans. However, we may not be able to obtain the regulatory approvals to increase the authorized amounts or to establish additional online microcredit companies to fulfill our future growth needs.

Pursuant to the Online Microcredit Draft, if adopted in its current form, microcredit companies which engaged in online microcredit business with the approval of the competent regulators prior to the effectiveness of these measures and regulations shall fully meet the requirements of its various provisions within one year from the date of effectiveness of these measures and regulations. The regulators shall, in accordance with these measures and regulations, re-approve online microcredit business qualifications. Furthermore, Fuzhou Microcredit may need to increase the registered capital and obtain the legal approval of the banking regulator under the State Council in order to engage in online microcredit business across provincial level administrative regions. Failure to obtain, renew, or retain requisite licenses, permits or approvals may adversely affect our ability to conduct or expand our business.

Government authorities have issued certain laws and regulations to regulate the organization and business activities of online microcredit companies. However, due to the lack of a detailed interpretation of such laws and regulations and the fact that laws and regulations with respect to the online microcredit companies are in the flux and continually evolving, there are uncertainties as to how such laws and regulations will be interpreted and implemented and whether there will be new laws or regulations providing for additional requirements and restrictions on online microcredit companies. We cannot assure you that the existing practice of our microcredit company will be deemed to be in full compliance with all such laws and regulations that are currently in place or may be enacted or interpreted to apply to us in the future. If any of the practice of Fuzhou Microcredit is deemed incompliant or if any new laws or regulations are enacted or promulgated that provide for requirements different from our current practice, we may need to adjust the approach we conduct our business and incur additional compliance cost, which may have a negative impact on our business, results of operations and financial condition.

If we fail to promote and maintain our brand in an effective and cost-efficient way, our business and results of operations may be harmed.

The Credit-Tech industry is still new to borrowers in China. Prospective borrowers may not be familiar with this market and may have difficulty distinguishing our products from those of our competitors. Convincing prospective borrowers of the value of our products is critical to increasing the number of transactions for borrowers and to the success of our business. We believe that developing and maintaining awareness of our brand effectively is critical to attracting and retaining borrowers. This, in turn, depends largely on the effectiveness of our borrower acquisition strategy, our marketing efforts, our collaboration with financial institution partners and the success of the channels we use to promote our platform. If any of our current borrower acquisition strategies or marketing channels become less effective, more costly or no longer feasible, we may not be able to attract new borrowers in a cost-effective manner or convert potential borrowers into active borrowers. Our collaboration with market-leading channel partners is essential to our borrower acquisition efforts. If such collaboration ceases or becomes less effective, for reasons attributable either to us or to our channel partners, we may face instant borrower acquisition pressure, and may need to incur additional costs to replace such partners for borrower acquisition, if we could replace them at all. Besides, if some of our channel partners were acquired or controlled by the competitors of 360 Group, our collaboration with such channel partners may be limited or severely and adversely impacted. We may not find new partners to replace our original ones.

Our efforts to build our brand have caused us to incur expenses, and it is likely that our future marketing efforts will require us to incur additional expenses. These efforts may not result in increased operating revenue in the immediate future or any increases at all, and even if they do, any increases in operating revenue may not offset the expenses incurred. If we fail to successfully promote and maintain our brand cost-effectively, our results of operations and financial condition would be adversely affected, and our ability to grow our business may be impaired.

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If our financial institution partners fail to comply with applicable anti-money laundering and anti-terrorist financing laws and regulations, our business and results of operations could be materially and adversely affected.

In collaboration with our financial institution partners and payment companies, we have adopted various policies and procedures, such as internal controls and “know-your-customer” procedures, for anti-money laundering purposes. The Fintech Guidelines purport, among other things, to require internet financial service providers, including us, to comply with certain anti-money laundering requirements, including:

the establishment of a borrower identification program;
the monitoring and reporting of the suspicious transaction;
the preservation of borrower information and transaction records; and
the provision of assistance to the public security department and judicial authority in investigations and proceedings in relation to anti-money laundering matters.

There is no assurance that our anti-money laundering policies and procedures will protect us from being exploited for money laundering purposes or that we will be deemed to be in compliance with applicable anti-money laundering implementing rules, if and when adopted, in light of the anti-money laundering obligations proposed to be imposed on us by the Fintech Guidelines. Any new requirement under money laundering laws could increase our costs and may expose us to potential sanctions if we fail to comply.

In addition, we rely on our third-party service providers, in particular, payment companies that handle the transfer of the repayment, to have their own appropriate anti-money laundering policies and procedures. If any of our third-party service providers fails to comply with applicable anti-money laundering laws and regulations, our reputation could suffer and we could become subject to regulatory intervention, which could have a material adverse effect on our business, financial condition and results of operations.

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We have not been subject to fines or other penalties, or suffered business or other reputational harm, as a result of actual or alleged money laundering or terrorist financing activities in the past. However, our policies and procedures may not be completely effective in preventing other parties from using us, any of our financial institution partners or payment processors as a conduit for money laundering (including illegal cash operations) or terrorist financing without our knowledge. If we were to be associated with money laundering (including illegal cash operations) or terrorist financing, our reputation could suffer and we could become subject to regulatory fines, sanctions or legal enforcement, including being added to any “blacklists” that would prohibit certain parties from engaging in transactions with us, all of which could have a material adverse effect on our financial condition and results of operations. Even if we, our financial institution partners and payment processors comply with the applicable anti-money laundering laws and regulations, we, our financial institution partners and payment processors may not be able to fully eliminate money laundering and other illegal or improper activities in light of the complexity and the secrecy of these activities. Any negative perception of the industry, such as that arises from any failure of other Credit-Tech service providers to detect or prevent money laundering activities, even if factually incorrect or based on isolated incidents, could compromise our image, undermine the trust and credibility we have established and negatively impact our financial condition and results of operations.

We need to engage guarantee companies to provide credit enhancement or additional comfort to our financial institution partners, and we recognize guarantee liability for accounting purposes. If we fail to source and engage a guarantee company to our financial institution partners’ satisfaction at a reasonable price, our collaboration with our financial institution partners will deteriorate, and our results of operations may be adversely and severely impacted. If our guarantee liability recognition fails to address our current status, we may face unexpected changes to our financial conditions.

To comply with Circular 141, we have engaged guarantee companies to provide credit enhancement to our financial institution partners upon their request, and two of our VIEs, Fuzhou Financing Guarantee and Shanghai Financing Guarantee, have obtained the license of conducting guarantee service. Even though we use licensed guarantee companies of our own to provide service to our financial institution partners, we may continue to engage third-party insurance companies or guarantee companies to satisfy the needs of our business. We cannot, however, assure you that our guarantee companies could provide satisfactory service to our financial institution partners from time to time, or that we will always be able to source and engage guarantee companies to our financial institution partners’ satisfaction. If we fail to source and engage guarantee companies to our financial institution partners’ satisfaction at a reasonable price, our collaboration with our financial institution partners will deteriorate or even be suspended, and our results of operations will be materially and adversely affected. It is also possible that we have to pay a service fee to the third-party guarantee company that exceeds the reasonable market price, which will materially and adversely affect our results of operations.

As we provide either guarantee deposit to our financial institution partners, or back-to-back guarantee to the third-party guarantee companies, we recognize guarantee liability at fair value from the accounting perspective, which incorporates the expectation of potential future payments under the guarantee and take into both non-contingent and contingent aspects of the guarantee. We have established an evaluation process designed to determine the adequacy of our impairment allowances and guarantee liabilities. While this evaluation process uses historical and other objective information, it is also dependent on our subjective assessment based upon our estimates and judgment. Actual losses are difficult to forecast, especially if such losses stem from factors beyond our historical experience. Given that the Credit-Tech market is rapidly evolving, and is subject to various factors beyond our control, such as shifting trends in the market, regulatory framework, and overall economic conditions, we may not be able to accurately forecast the delinquency rate of our current target borrower base due to the lack of sufficient data. Therefore, our actual delinquency rate may be higher than we expected. If our credit risk assessment and expectations differ from actual circumstances or if the quality of the loans originated or facilitated by us deteriorates, our guarantee liabilities may be insufficient to absorb actual credit losses and we may need to set aside additional provisions, which could have a material adverse effect on our business, financial condition and results of operations.

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If our loan products do not achieve sufficient market acceptance, our financial results and competitive position will be harmed.

We have devoted significant resources to and will continue to put an emphasis on upgrading and marketing our existing loan products and enhancing its market awareness. We may also incur expenses and expend resources up front to develop and market new loan products and financial services that incorporate additional features, improve functionality or otherwise make our platform more attractive to borrowers. New loan products and financial services must achieve high levels of market acceptance in order for us to recoup our investments in developing and marketing them. To achieve market acceptance, it is essential for us to maintain and enhance our ability to match and recommend suitable financial products for our borrowers, the effectiveness of our curation process and our ability to provide relevant and timely content to meet changing borrower needs. If we are unable to respond to changes in borrower preference and deliver satisfactory and distinguishable borrower experience, borrowers and prospective borrowers may switch to competing platforms or obtain financial products directly from their providers. As a result, borrower access to and borrower activity on our platform will decline, our services and solutions will be less attractive to financial service providers and our business, financial performance and prospects will be materially and adversely affected.

Our existing and new loan products and financial services could fail to attain sufficient market acceptance for many reasons, including:

borrowers may not find the features of our loan products, such as the prices and credit limits, competitive or appealing;
we may fail to predict market demand accurately and provide loan products that meet this demand in a timely fashion;
borrowers and financial institution partners using our platforms may not like, find useful or agree with the changes we make;