UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM
(Mark One)
OR
For the fiscal year ended
OR
For the transition period from to
OR
Date of event requiring this shell company report
Commission file number:
(Exact name of Registrant as specified in its charter) |
N/A |
(Translation of Registrant’s name into English) |
(Jurisdiction of incorporation or organization) |
(Address of principal executive offices) |
Telephone: + |
Email: |
(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 |
| Name of each exchange on which registered |
| The Nasdaq Stock Market LLC | |||
| The Nasdaq Stock Market LLC ( |
* | 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 issued and 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.
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
☒
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 ⌧
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.
⌧
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).
⌧
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 ◻ | 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.
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:
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).
(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
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2 | ||
3 | ||
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3 | ||
52 | ||
79 | ||
80 | ||
106 | ||
114 | ||
117 | ||
118 | ||
118 | ||
132 | ||
133 | ||
135 | ||
135 | ||
Material Modifications to the Rights of Security Holders and Use of Proceeds | 135 | |
135 | ||
136 | ||
136 | ||
137 | ||
Purchases of Equity Securities by the Issuer and Affiliated Purchasers | 137 | |
137 | ||
137 | ||
137 | ||
137 | ||
137 | ||
137 | ||
138 | ||
143 | ||
i
INTRODUCTION
Unless otherwise indicated or the context otherwise requires:
| ● | we changed our fiscal year end from December 31 to March 31 in April 2020 and filed a transition report on Form 20-F covering the three-month period from January 1, 2020 through March 31, 2020, or the Transition Period. Prior to such transition report on Form 20-F, we filed an annual report on Form 20-F covering the fiscal year ended December 31, 2019. Unless otherwise noted, all references to years are to the calendar year from January 1 to December 31 and references to our fiscal year or years are to the fiscal year or years which, prior to the Transition Period, ended December 31, and from and after the Transition Period, ended March 31. For the avoidance of doubt, “fiscal year of 2021” refer to the year ended March 31, 2021; |
| ● | “ADSs” refer to the American depositary shares, each of which represents three Class A ordinary shares, par value US$0.0001 each; |
| ● | “Check Auto” refer to our proprietary car inspection system; |
| ● | “China” or “PRC” refer to the People’s Republic of China, excluding, for the purpose of this annual report only, Taiwan, Hong Kong, and Macau; |
| ● | “GMV” refer to gross merchandise value of used cars as measured by gross selling price of used cars, excluding service fees and interests (if any) charged; |
| ● | “NPS” refer to net percentages of promoters for our products and services (those who are willing to keep buying and refer us to others) against detractors (those who are not satisfied with and complain about our offerings); |
| ● | “ordinary shares” refer to our Class A and Class B ordinary shares, par value US$0.0001 per share; |
| ● | “senior convertible preferred shares” refer to our senior convertible preferred shares, which can be convertible into our Class A ordinary shares on a one-for-one basis, par value US$0.0001. For the avoidance of doubt, the calculations of ownership and voting power in this annual report are made assuming that all the senior convertible preferred shares are converted into Class A ordinary shares on a one-for-one basis; |
| ● | “RMB” and “Renminbi” refer to the legal currency of China, which is our reporting currency; |
| ● | “shares” refer to our ordinary shares and, where applicable, our senior convertible preferred shares, par value US$0.0001 per share; |
| ● | “US$,” “U.S. dollars,” “$,” and “dollars” refer to the legal currency of the United States; |
| ● | “Uxin” or “our platform” refer to our platform primarily for buying and selling used cars, which primarily consisted of vehicle sales businesses under our new inventory owning model for the fiscal year of 2021; |
| ● | “Our WFOEs” refer to our wholly-owned subsidiaries in China; |
| ● | “Our VIEs” refer to our variable interest entities, which are Youxin Internet (Beijing) Information Technology Co., Ltd. or Youxin Hulian, and Youxin Yishouche (Beijing) Information Technology Co., Ltd., or Yishouche; and |
| ● | “we,” “us,” “our company” and “our” refer to Uxin Limited, our Cayman Islands holding company, and its subsidiaries, and its consolidated affiliated entities in the PRC. |
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 RMB6.5518 to US$1.00, the exchange rate on as of March 31, 2021 set forth in the H.10 statistical release of the
1
Board of Governors of the Federal Reserve System. We make no representation that any Renminbi or U.S. dollar amounts could have been, or could be, converted into U.S. dollars or Renminbi, as the case may be, at any particular rate, or at all.
FORWARD-LOOKING INFORMATION
This annual report on Form 20-F contains forward-looking statements that reflect our current expectations and views of future events. These statements are made under the “safe harbor” provisions of the U.S. Private Securities Litigation Reform Act of 1995. You can identify these forward-looking statements by terminology 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 and financial trends that we believe may affect our financial condition, results of operations, business strategy and financial needs. These forward-looking statements include statements relating to, among other things:
| ● | our goals and strategies; |
| ● | our ability to provide customers with high-quality used cars and other related products; |
| ● | our ability to provide quality services and compete effectively; |
| ● | our ability to effectively manage risks, including credit risks and fraud risks; |
| ● | our future business development, financial condition and results of operations; |
| ● | expected changes in our revenues, costs, expenses or expenditures; |
| ● | the expected growth of, and trends in, the market for our services; |
| ● | our expectations regarding demand for and market acceptance of our services; |
| ● | competition in our industry; |
| ● | relevant government policies and regulations relating to our industry; |
| ● | public health crisis, such as the COVID-19 pandemic, MERS, SARS, H1N1 flu, H7N9 flu, and avian flu; and |
| ● | general economic and business conditions in China and globally. |
We would like to caution you not to place undue reliance on these forward-looking statements and you should read these statements in conjunction with the risk factors disclosed in “Item 3. Key Information—D. Risk Factors.” Those risks are not exhaustive. We operate in an evolving environment. New risks emerge from time to time and it is impossible 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 from those contained in any forward-looking statement. We do not undertake any obligation to update or revise the forward-looking statements except as required under applicable law. You should read this annual report and the documents that we reference in this annual report completely and with the understanding that our actual future results may be materially different from what we expect.
2
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
| A. | Selected Financial Data |
We changed our fiscal year end from December 31 to March 31 in April 2020. The selected consolidated statements of comprehensive loss data for the years ended December 31, 2018 and 2019, the three months ended March 31, 2020, and the fiscal year ended March 31, 2021, the selected consolidated balance sheets data as of March 31, 2020 and March 31, 2021, and selected consolidated cash flow data for the years ended December 31, 2018 and 2019, the three months ended March 31, 2020, and the fiscal year ended March 31, 2021 have been derived from our audited consolidated financial statements, which are included in this annual report beginning on page F-1. The selected consolidated statements of comprehensive loss data and selected consolidated cash flow data for the years ended December 31, 2016 and 2017, and selected consolidated balance sheets data as of December 31, 2016, 2017, 2018 and 2019 have been derived from our audited consolidated financial statements which are not included in this annual report. Our consolidated financial statements are prepared and presented in accordance with U.S. GAAP. Our historical results do not necessarily indicate results expected for any future periods. You should read this Selected Financial Data section together with our consolidated financial statements and the related notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this annual report.
In July 2019, September 2019 and April 2020, we entered into a binding term sheet, definitive agreements and supplemental agreements, respectively, with Golden Pacer, a limited liability company incorporated and existing under the laws of the Cayman Islands that operates a leading financial technology platform in China, to divest our loan facilitation related business. In April 2020, we entered into supplemental agreements with Golden Pacer to modify and supplement certain terms and conditions in connection with the divestiture (these agreements are collectively referred to as “Loan facilitation transaction agreements”). Pursuant to the Loan facilitation transaction agreements, we divested our entire 2C intra-regional business and ceased to provide loan facilitation related guarantee services in connection with our 2C cross-regional business (which became the sole component of our 2C business following the divestiture and is currently referred to as “2C online transaction business”) since November 2019. In addition, we have divested the assets and liabilities in relation to our historically-facilitated loans for XW Bank to Golden Pacer as one of the pre-conditions for the transaction. As a result, assets and liabilities related to the historically-facilitated loans for XW Bank were reclassified on a net basis as net assets transferred on our consolidated balance sheet as of December 31, 2019, and results of operations related to the divested business were reported as loss from discontinued operations in the consolidated statements of comprehensive loss. The transactions contemplated under the Loan facilitation transaction agreements closed upon the signing of the supplemental agreements in April 2020.
In addition, we entered into definitive agreements with Beijing Hengtai Boche Auction Co. Ltd., or Boche, in January 2020 to divest our salvage car related business. Assets and liabilities associated with the divestiture of the salvage car related business were reclassified as assets and liabilities held for sale on our consolidated balance sheet as of December 31, 2019. Due to the insignificance of the salvage car business to our overall business, the divested business did not meet the criteria of discontinued operations and the results of operations were not presented as discontinued operations. The transaction with Boche closed in January 2020.
In March 2020, we entered into definitive agreements with 58.com to divest our B2B online used car auction business (which constituted the core of our 2B business). Liabilities associated with the divestiture were reclassified as liabilities held for sale on our consolidated balance sheet as of December 31, 2019 and March 31, 2020. Results of operations related to the divested 2B business were reported as loss from discontinued operations in the consolidated statements of comprehensive loss. The transaction with 58.com closed in April 2020.
In September 2020, we shifted to an inventory-owning model where we build-up and sell our own inventory of used cars.
3
Unless indicated otherwise, the discussion of our financial data in this annual report relates to continuing operations only. The following table presents our selected consolidated statements of comprehensive loss data for the years ended December 31, 2016, 2017, 2018 and 2019, the three months ended March 31, 2019 and 2020, and the fiscal year ended March 31, 2021:
For the Three Months Ended | For the Fiscal Year Ended | |||||||||||||||
For the Year Ended December 31, | March 31, | March 31, | ||||||||||||||
2016 | 2017 | 2018 | 2019 | 2019 | 2020 | 2021 | ||||||||||
| RMB |
| RMB |
| RMB |
| RMB |
| RMB |
| RMB |
| RMB |
| US$ | |
| (Unaudited) | |||||||||||||||
| (in thousands, except for share data) | |||||||||||||||
Selected Consolidated Statements of Comprehensive Loss Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues(1): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail vehicle sales |
| — |
| — |
| — |
| — |
| — |
| — |
| 463,547 |
| 70,751 |
Wholesale vehicle sales |
| — |
| — |
| — |
| — |
| — |
| — |
| 51,249 |
| 7,822 |
Commission revenue |
| — |
| — |
| 203,158 |
| 711,362 |
| 148,840 |
| 48,038 |
| 41,939 |
| 6,401 |
Value-added service revenue |
| — |
| — |
| 166,482 |
| 636,046 |
| 135,475 |
| 40,456 |
| 35,248 |
| 5,380 |
Others |
| 135,298 |
| 309,133 |
| 289,450 |
| 240,623 |
| 51,476 |
| 15,367 |
| 65,425 |
| 9,986 |
Total Revenues |
| 135,298 |
| 309,133 |
| 659,090 |
| 1,588,031 |
| 335,791 |
| 103,861 |
| 657,408 |
| 100,340 |
Cost of revenues(2) |
| (57,972) |
| (92,735) |
| (418,852) |
| (689,292) |
| (156,372) |
| (110,714) |
| (673,711) |
| (102,828) |
Gross profit |
| 77,326 |
| 216,398 |
| 240,238 |
| 898,739 |
| 179,419 |
| (6,853) |
| (16,303) |
| (2,488) |
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing(2) |
| (149,489) |
| (179,328) |
| (1,488,699) |
| (1,184,997) |
| (345,673) |
| (189,503) |
| (339,013) |
| (51,743) |
Research and development(2) |
| — |
| — |
| (124,513) |
| (140,006) |
| (32,634) |
| (31,176) |
| (74,137) |
| (11,316) |
General and administrative(2) |
| (569,845) |
| (389,072) |
| (1,070,419) |
| (402,040) |
| (86,970) |
| (74,926) |
| (277,925) |
| (42,420) |
Gains/(losses) from guarantee liabilities |
| 1,983 |
| 1,840 |
| (4,414) |
| (194,385) |
| (9,188) |
| — |
| — |
| — |
Provision for credit losses |
| (3,012) |
| (38,075) |
| (40,626) |
| (271,372) |
| — |
| (1,939,570) |
| (91,593) |
| (13,980) |
Total operating expenses |
| (720,363) |
| (604,635) |
| (2,728,671) |
| (2,192,800) |
| (474,465) |
| (2,235,175) |
| (782,668) |
| (119,459) |
Other operating income |
| — |
| — |
| — |
| 1,925 |
| — |
| 56,043 |
| 246,346 |
| 37,600 |
Loss from continuing operations |
| (643,037) |
| (388,237) |
| (2,488,433) |
| (1,292,136) |
| (295,046) |
| (2,185,985) |
| (552,625) |
| (84,347) |
Interest income |
| 1,482 |
| 2,234 |
| 24,554 |
| 14,958 |
| 1,990 |
| 3,081 |
| 45,140 |
| 6,890 |
Interest expenses |
| (66) |
| (199) |
| (63,880) |
| (112,587) |
| (26,493) |
| (29,029) |
| (95,953) |
| (14,645) |
Other income |
| 2,643 |
| 4,248 |
| 23,721 |
| 71,142 |
| 25,140 |
| 2,420 |
| 15,672 |
| 2,392 |
Other expenses |
| (4,544) |
| (3,808) |
| (25,568) |
| (36,569) |
| (4,751) |
| (10,118) |
| (7,890) |
| (1,204) |
Foreign exchange gains/(losses) |
| 769 |
| (627) |
| (8,232) |
| 4,247 |
| (799) |
| (388) |
| (15,887) |
| (2,425) |
Fair value change of derivative liabilities |
| (116,056) |
| (885,821) |
| 1,185,090 |
| — |
| — |
| — |
| — |
| — |
Gain from disposal of investment, net |
| — |
| — |
| — |
| 28,257 |
| — |
| — |
| — |
| — |
Impairment of long-term investment |
| — |
| — |
| — |
| (37,775) |
| — |
| — |
| — |
| — |
Gain from disposal of subsidiaries |
| — |
| — |
| — |
| — |
| — |
| 179,020 |
| — |
| — |
Inducement charge |
| — |
| — |
| — |
| — |
| — |
| — |
| (121,056) |
| (18,477) |
Loss from continuing operations before income tax expense |
| (758,809) |
| (1,272,210) |
| (1,352,748) |
| (1,360,463) |
| (299,939) |
| (2,040,999) |
| (732,599) |
| (111,816) |
Income tax (expense)/benefit |
| (64) |
| (211) |
| (1,644) |
| 2,554 |
| (1,556) |
| (326) |
| (33) |
| (5) |
Equity in (losses)/income of affiliates |
| (9,637) |
| 3,597 |
| 2,631 |
| 30,231 |
| 5,956 |
| 6,940 |
| 15,657 |
| 2,390 |
Net loss from continuing operations, net of tax |
| (768,510) |
| (1,268,824) |
| (1,351,761) |
| (1,327,678) |
| (295,539) |
| (2,034,385) |
| (716,975) |
| (109,431) |
Less: net loss attributable to non-controlling interests shareholders |
| (35,181) |
| (25,202) |
| (15,771) |
| (1,452) |
| (445) |
| (5,383) |
| (9) |
| (1) |
Net loss from continuing operations, attributable to UXIN LIMITED |
| (733,329) |
| (1,243,622) |
| (1,335,990) |
| (1,326,226) |
| (295,094) |
| (2,029,002) |
| (716,966) |
| (109,430) |
Discontinued operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss)/income from discontinued operations before income tax |
| (622,675) |
| (1,478,615) |
| (173,583) |
| (659,458) |
| 22,977 |
| (455,177) |
| 295,744 |
| 45,139 |
Income tax expense |
| (1,741) |
| (359) |
| (12,941) |
| (2,992) |
| (12,422) |
| — |
| — |
| — |
Net (loss)/income from discontinued operations, net of tax |
| (624,416) |
| (1,478,974) |
| (186,524) |
| (662,450) |
| 10,555 |
| (455,177) |
| 295,744 |
| 45,139 |
Net (loss)/income from discontinued operations, attributable to UXIN LIMITED |
| (624,416) |
| (1,478,974) |
| (186,524) |
| (662,450) |
| 10,555 |
| (455,177) |
| 295,744 |
| 45,139 |
Net loss |
| (1,392,926) |
| (2,747,798) |
| (1,538,285) |
| (1,990,128) |
| (284,984) |
| (2,489,562) |
| (421,231) |
| (64,292) |
Less: net loss attributable to non-controlling interests shareholders |
| (35,181) |
| (25,202) |
| (15,771) |
| (1,452) |
| (445) |
| (5,383) |
| (9) |
| (1) |
Net loss attributable to UXIN LIMITED |
| (1,357,745) |
| (2,722,596) |
| (1,522,514) |
| (1,988,676) |
| (284,539) |
| (2,484,179) |
| (421,222) |
| (64,291) |
Accretion on redeemable preferred shares |
| (421,346) |
| (555,824) |
| (318,951) |
| — |
| — |
| — |
| — |
| — |
Deemed contribution from preferred shareholders |
| 3,428 |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
Deemed dividend to preferred shareholders |
| — |
| (587,564) |
| (544,773) |
| — |
| — |
| — |
| — |
| — |
Deemed dividend from preferred shareholders |
| — |
| 92,779 |
| — |
| — |
| — |
| — |
| — |
| — |
Net loss attributable to ordinary shareholders |
| (1,775,663) |
| (3,773,205) |
| (2,386,238) |
| (1,988,676) |
| (284,539) |
| (2,484,179) |
| (421,222) |
| (64,291) |
Net loss |
| (1,392,926) |
| (2,747,798) |
| (1,538,285) |
| (1,990,128) |
| (284,984) |
| (2,489,562) |
| (421,231) |
| (64,292) |
Foreign currency translation, net of tax nil |
| (3,252) |
| 43,406 |
| 4,818 |
| (17,976) |
| 6,027 |
| 40,028 |
| 110,983 |
| 16,939 |
Total comprehensive loss |
| (1,396,178) |
| (2,704,392) |
| (1,533,467) |
| (2,008,104) |
| (278,957) |
| (2,449,534) |
| (310,248) |
| (47,353) |
Less: total comprehensive loss attributable to non-controlling interests shareholders |
| (31,438) |
| (27,861) |
| (22,359) |
| (1,558) |
| (445) |
| (3,927) |
| (9) |
| (1) |
Total comprehensive loss attributable to UXIN LIMITED |
| (1,364,740) |
| (2,676,531) |
| (1,511,108) |
| (2,006,546) |
| (278,512) |
| (2,445,607) |
| (310,239) |
| (47,352) |
Net loss attributable to ordinary shareholders |
| (1,775,663) |
| (3,773,205) |
| (2,386,238) |
| (1,988,676) |
| (284,539) |
| (2,484,179) |
| (421,222) |
| (64,291) |
Weighted average number of ordinary shares used in computing net loss per share, basic |
| 49,174,850 |
| 49,318,860 |
| 477,848,763 |
| 886,613,598 |
| 881,704,014 |
| 888,460,868 |
| 1,100,650,208 |
| 1,100,650,208 |
Weighted average number of ordinary shares used in computing net loss per share, diluted |
| 49,174,850 |
| 49,318,860 |
| 477,848,763 |
| 886,613,598 |
| 881,704,014 |
| 888,460,868 |
| 1,330,913,033 |
| 1,330,913,033 |
Net (loss)/income per share for ordinary shareholders, basic |
|
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|
|
|
—Continuing operations |
| (23.41) |
| (46.52) |
| (4.60) |
| (1.50) |
| (0.33) |
| (2.28) |
| (0.65) |
| (0.10) |
—Discontinued operations |
| (12.70) |
| (29.99) |
| (0.39) |
| (0.75) |
| 0.01 |
| (0.51) |
| 0.27 |
| 0.04 |
Net (loss)/income per share for ordinary shareholders, diluted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
—Continuing operations |
| (23.41) |
| (46.52) |
| (4.60) |
| (1.50) |
| (0.33) |
| (2.28) |
| (0.65) |
| (0.10) |
—Discontinued operations |
| (12.70) |
| (29.99) |
| (0.39) |
| (0.75) |
| 0.01 |
| (0.51) |
| 0.22 |
| 0.03 |
| (1) | The presentation of revenue components changed in the fiscal year of 2021 to reflect the changes of our business model since September 2020. Please see “Item 4. Information on the Company—B. Business Overview” for more detailed discussion. |
| (2) | Share-based compensation in the amount of RMB226.4 million, RMB165.9 million, RMB1,052.0 million, RMB100.3 million, negative RMB32.6 million and negative RMB19.1 million (US$2.9 million) in 2016, 2017, 2018, 2019, the three months ended March 31, 2020 and the fiscal year ended March 31, 2021, respectively, was charged to cost of revenues, sales and marketing expenses, research and development expenses, and general and administrative expenses. |
4
The following table presents our selected consolidated balance sheets data as of December 31, 2016, 2017, 2018, 2019, March 31, 2020 and March 31, 2021:
As of December 31, | As of March 31, | |||||||||||||
2016 | 2017 | 2018 | 2019 | 2020 | 2021 | |||||||||
| RMB |
| RMB |
| RMB |
| RMB |
| RMB |
| RMB |
| US$ | |
| (in thousands, except for share data) | |||||||||||||
Selected Consolidated Balance Sheets Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
| 332,259 |
| 291,973 |
| 800,997 |
| 478,200 |
| 342,504 |
| 192,605 |
| 29,397 |
Restricted cash |
| 705,854 |
| 1,617,230 |
| 1,011,705 |
| 706,988 |
| 454,931 |
| 41,114 |
| 6,275 |
Advance to sellers |
| 45,774 |
| 246,287 |
| 692,714 |
| 288,550 |
| 132,526 |
| — |
| — |
Financial lease receivables, net |
| 413,462 |
| 438,693 |
| 294,511 |
| 121,820 |
| 15,048 |
| — |
| — |
Total assets |
| 2,317,979 |
| 5,298,913 |
| 7,349,390 |
| 5,383,096 |
| 2,647,331 |
| 1,233,533 |
| 188,276 |
Convertible notes, current |
| — |
| — |
| 1,188,192 |
| 324,644 |
| 375,449 |
| — |
| — |
Short-term borrowings |
| 204,068 |
| 426,783 |
| 624,588 |
| 263,425 |
| 119,069 |
| 79,560 |
| 12,143 |
Total liabilities |
| 1,986,194 |
| 5,059,894 |
| 4,977,747 |
| 4,917,976 |
| 4,991,978 |
| 3,229,388 |
| 492,903 |
Total Mezzanine equity |
| 4,775,637 |
| 8,420,644 |
| — |
| — |
| — |
| — |
| — |
Total shareholders’ (deficit)/equity |
| (4,443,852) |
| (8,181,625) |
| 2,371,643 |
| 465,120 |
| (2,344,647) |
| (1,995,855) |
| (304,627) |
Capital Stock |
| 30 |
| 30 |
| 575 |
| 581 |
| 581 |
| 733 |
| 112 |
Number of outstanding ordinary shares |
| 49,318,860 |
| 49,318,860 |
| 880,659,899 |
| 887,617,391 |
| 887,667,457 |
| 1,112,431,559 |
| 1,112,431,559 |
The following table presents our selected consolidated statements of cash flow data for the years ended December 31, 2016, 2017, 2018, 2019, the three months ended March 31, 2019 and 2020, and the fiscal year ended March 31, 2021:
For the Three Months Ended | For the Fiscal Year Ended | |||||||||||||||
For the Year Ended December 31, | March 31, | March 31, | ||||||||||||||
| 2016 |
| 2017 |
| 2018 |
| 2019 |
| 2019 |
| 2020 |
| 2021 | |||
| RMB |
| RMB |
| RMB |
| RMB |
| RMB |
| RMB |
| RMB |
| US$ | |
| (Unaudited) | |||||||||||||||
| (in thousands) | |||||||||||||||
Selected Consolidated Statements of Cash Flow Data |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in operating activities |
| (661,210) |
| (1,834,243) |
| (2,281,333) |
| (1,194,101) |
| (188,061) |
| (411,271) |
| (1,122,308) |
| (171,299) |
Net cash generated from / (used in) investing activities |
| 576,083 |
| (586,843) |
| (1,078,617) |
| (484,254) |
| (6,645) |
| 159,898 |
| 443,016 |
| 67,618 |
Net cash (used in) / generated from financing activities |
| (133,001) |
| 3,288,842 |
| 4,274,052 |
| 73,630 |
| (127,066) |
| (165,519) |
| 130,317 |
| 19,891 |
Effect of exchange rate changes on cash, cash equivalents and restricted cash |
| 6,464 |
| 3,334 |
| (9,278) |
| 960 |
| (11,983) |
| 4,065 |
| (14,741) |
| (2,250) |
Net (decrease)/increase in cash, cash equivalents and restricted cash |
| (211,664) |
| 871,090 |
| 904,824 |
| (1,603,765) |
| (333,755) |
| (412,827) |
| (563,716) |
| (86,040) |
Cash, cash equivalents and restricted cash at beginning of the year/(period) |
| 1,249,777 |
| 1,038,113 |
| 1,730,001 |
| 1,812,702 |
| 1,812,702 |
| 1,185,188 |
| 797,435 |
| 121,712 |
Cash, cash equivalents and restricted cash at end of the year/(period) |
| 1,038,113 |
| 1,730,001 |
| 1,812,702 |
| 1,185,188 |
| 1,256,356 |
| 797,435 |
| 233,719 |
| 35,672 |
B.Capitalization and Indebtedness
Not applicable.
C.Reasons for the Offer and Use of Proceeds
Not applicable.
5
D.Risk Factors
Summary of Risk Factors
Investing in the ADSs involves significant risks. You should carefully consider all of the information in this annual report before making an investment in the ADSs. Below please find a summary of the principal risks we face, organized under relevant headings.
Risks Related to Our Business and Industry
Risks and uncertainties related to our business and industry include, but are not limited to, the following:
| ● | If we fail to provide a differentiated and superior customer experience, the size of our customer base and the number of transactions on our platform could decline, and our business would be materially and adversely affected; |
| ● | Failure to maintain or enhance customer trust in us could damage our reputation, reduce or slowdown the growth of our customer base, which could harm our business, financial condition and results of operations; |
| ● | Our business, operating results and financial condition have been and may continue to be adversely affected by the ongoing COVID-19 pandemic; |
| ● | We face intense competition, which may lead to loss of market share, reduced service fees and revenue, increased expenses, departures of qualified employees, and disputes with competitors; |
| ● | We are not profitable and have negative cash flows from operations, which may continue in the future; |
| ● | If we are unable to effectively manage our growth or implement our business strategies, our business, results of operations and financial condition may be materially and adversely affected; |
| ● | Failure to acquire attractive inventory, whether because of supply, competition, or other factors, may have a material adverse effect on our business, sales, and results of operations; |
| ● | Failure to expeditiously sell our inventory could have a material adverse effect on our business, sales, and results of operations; |
| ● | We work with third-party service providers and business partners. Actions of third parties are outside of our control and could materially and adversely affect our reputation, business, financial condition and results of operations; |
| ● | We rely, in part, on our marketing efforts for customer acquisition and achieving higher level of brand recognition. If we fail to conduct our marketing activities effectively and efficiently, our business could be harmed; and |
| ● | We collect, process, store and use personal information and other data, and any actual or perceived failure to protect such information and data could damage our reputation and brand and harm our business and results of operations. |
Risks Related to Our Corporate Structure
Risks and uncertainties related to our corporate structure include, but are not limited to, the following:
| ● | If the PRC government finds that the agreements that establish the structure for operating some of our operations in China do not comply with PRC regulations relating to the relevant industries, or if these regulations or the interpretation of existing regulations change in the future, we could be subject to penalties or be forced to relinquish our interests in those operations; |
| ● | We have entered into contractual arrangements with our VIEs and their shareholders for a portion of our business operations, which may not be as effective as direct ownership in providing operational control; and |
6
| ● | Our business may be significantly affected by the draft Foreign Investment Law and the newly adopted Foreign Investment Law. |
Risks Related to Doing Business in China
Risks and uncertainties related to doing business in China include, but are not limited to, the following:
| ● | Changes in China’s economic, political or social conditions or government policies could have a material adverse effect on our business and operations; |
| ● | Uncertainties in the interpretation and enforcement of Chinese laws and regulations could limit the legal protections available to us; |
| ● | Our business is susceptible to changes in government policies, including policies on automobile purchases, ownership, taxation, vehicle title transfers, and used car transactions across regions and provinces. Failure to adequately respond to such changes could adversely affect our business; |
| ● | You may experience difficulties in effecting service of legal process, enforcing foreign judgments or bringing actions in China against us or our management named in the annual report based on foreign laws; and |
| ● | Our ADSs may be delisted under the Holding Foreign Companies Accountable Act if the PCAOB is unable to inspect auditors who are located in China. The delisting of our ADSs, or the threat of their being delisted, may materially and adversely affect the value of your investment. Additionally, the inability of the PCAOB to conduct inspections deprives our investors with the benefits of such inspections. |
Risks Related to Our ADSs
Risks and uncertainties related to our ADSs include, but are not limited to, the following:
| ● | The trading price of the ADSs is likely to be volatile, which could result in substantial losses to investors; |
| ● | Our dual-class share structure with different voting rights will limit your ability to influence corporate matters and could discourage others from pursuing any change of control transactions that holders of our Class A ordinary shares and ADSs may view as beneficial; |
| ● | The dual-class structure of our ordinary shares may adversely affect the trading market for our ADSs; |
| ● | If securities or industry analysts do not publish research or reports about our business, or if they adversely change their recommendations regarding the ADSs, the market price for the ADSs and trading volume could decline; and |
| ● | The sale or availability for sale of substantial amounts of the ADSs could adversely affect their market price. |
Risks Related to Our Business and Industry
If we fail to provide a differentiated and superior customer experience, the size of our customer base and the number of transactions on our platform could decline, and our business would be materially and adversely affected.
Providing a differentiated and superior online used car transaction experience for our customers, including both consumers and businesses, is critical to our business. Our ability to provide a high-quality customer experience depends on a number of factors, including:
| ● | our ability to provide customers with high-quality used cars and other related products; |
| ● | our ability to improve our existing service offerings and upgrade our platform; |
| ● | our ability to meet the diverse needs of our customers with ongoing innovation and new service offerings; |
7
| ● | our ability to maintain and improve operating efficiency, customer experience of online transactions and service quality of our offline networks and personnel; |
| ● | our ability to leverage technology and data to improve our services; |
| ● | our ability to adequately train and manage our employees; and |
| ● | our ability to effectively ensure the quality of services provided by our third-party service providers on our platform. |
We cannot guarantee that we can provide a differentiated and superior experience to our customers as our business continues to evolve. Our failure to do so would materially and adversely affect our business, financial condition and results of operations.
Failure to maintain or enhance customer trust in us could damage our reputation, reduce or slowdown the growth of our customer base, which could harm our business, financial condition and results of operations.
Our reputation as a trusted nationwide online used car dealer is critical to our success. If we fail to maintain a high level of customer trust in our goods and services, our business, financial condition and results of operations could be materially and adversely affected.
We work with third-party service providers to serve consumers and fulfill the transactions made on our platform, such as car delivery, title transfer and warranty services, which are the key to earn customer trust. If we fail to maintain a high level of customer satisfaction or fail to properly manage these services, our business, financial condition and results of the operations would be adversely affected. We provide trainings to our third-party service providers and require them to act in line with our operating and customer servicing standards. However, if these third-party service providers fail to maintain a high level of performance consistent with our requirements, the level of customer satisfaction and trust we enjoy may be harmed, and our business, financial condition and results of the operations may be adversely affected.
We have received in the past, and we may continue to receive in the future, communications or complaints alleging that cars listed on our platform or sold by us are defective or inconsistent with the information provided on our platform, or the services provided by our third-party service providers are unsatisfactory to our customers. The information we include in our car listings is collected and maintained by us, which may not be accurate or complete due to human error, technological issues or misconduct.
Our business, operating results and financial condition have been and may continue to be adversely affected by the ongoing COVID-19 pandemic.
The COVID-19 pandemic has continued to spread across the world and has created unique global and industry-wide challenges. COVID-19 has resulted in quarantines, travel restrictions, and the temporary closure of facilities in China and many other countries. New COVID-19 variants have also emerged in a few countries, potentially extending the period where COVID-19 will negatively impact the global economy.
Substantially all of our revenues and our workforce are concentrated in China. Consequently, our results of operations and financial performance may be adversely affected, to the extent that COVID-19 exerts long-term negative impact on the Chinese economy. The disruption of COVID-19 to business activities in China has been eliminated to a large extent, however, it is still difficult to predict how COVID-19 will impact our business in the near term. We have taken a series of measures in response to the ongoing pandemic to protect our employees, including, among others, including supporting our employees to participate in vaccination programs in accordance with the latest national and local policy, and we likely will have to adopt similar measures if new COVID-19 variants strike in a future wave.
8
The COVID-19 pandemic has severely affected the used car industry with disruptions impacting the industry’s infrastructure and supply chains since January 2020. Throughout February and early March 2020, the majority of local used car markets and dealerships in China were closed and unable to resume operations. Logistics and delivery of used cars were also impacted by the closure of roads and highways in many regions across China. Title transfers were also hindered as local vehicle registration and management bureaus either remained closed or yet to resume full operations. All of these factors created considerable barriers to used car purchase and fulfillment, which has severely disrupted our business operations during the first quarter of 2020 and continued to weigh on our results until the date of this annual report. In addition, borrowers’ ability or willingness to repay their auto loans may also be negatively affected by general economic downturns. As the impact of the pandemic are being fully considered in the credit loss assessment under the new accounting standard effective on January 1, 2020, a significant provision for credit losses and losses from guarantee liabilities have been provided for the first quarter of 2020 associated with our historically-facilitated loans that were not transferred to Golden Pacer as part of the divestiture of our loan facilitation related business.
The extent of the impact on our results due to COVID-19 will depend on, to a large extent, future developments and new information that may emerge regarding the duration and severity of COVID-19 and the actions taken by government authorities and other entities to contain COVID-19 or treat the infection, almost all of which are beyond our control. While many of the restrictions on movement within China have been relaxed as of the date of this annual report, there is great uncertainty as to the future progress of the disease. Although China’s economy has been gradually recovering in the past few months, and the used car market has been slowly picking up since April 2020 as the industry’s infrastructure and supply chain started to resume operations, the impact of the pandemic may continue to create significant challenges and uncertainties for the market environment as the COVID-19 pandemic is still evolving and its full impact will depend on future developments.
We face intense competition, which may lead to loss of market share, reduced service fees and revenue, increased expenses, departures of qualified employees, and disputes with competitors.
We face intense competition in the used car industry both online and offline. Our competitors may have significantly more resources than we do, including financial, technological, marketing and others and may be able to devote greater resources to the development and promotion of their platforms and services. As a result, they may have deeper relationships with auto financing partners and other third-party service providers than we do. This could allow them to develop new services, adapt more quickly to changes in technology and to undertake more extensive marketing campaigns, which may render our platform less attractive to consumers and businesses and cause us to lose market share. Moreover, intense competition in the markets we operate in may reduce our gross profit margin for vehicle sales, lower our service fees, increase our operating expenses and capital expenditures, and lead to departures of our qualified employees. We may also be harmed by negative publicity instigated by our competitors, regardless of its validity. We are currently subject to an ongoing unfair competition claim, and we have encountered and may in the future continue to encounter other disputes with our competitors, including lawsuits involving claims asserted under intellectual property laws, unfair competition laws and defamation which may adversely affect our business and reputation. Failure to compete with current and potential competitors could materially harm our business, financial condition and our results of operations.
We are not profitable and have negative cash flows from operations, which may continue in the future.
We have not been profitable since our inception in 2011. We incurred net losses from continuing operations of RMB1,351.8 million, RMB1,327.7 million, RMB2,034.4 million and RMB717.0 million (US$109.4 million) in 2018, 2019, the three months ended March 31, 2020 and the fiscal year ended March 31, 2021, respectively. In addition, we had negative cash flow from operating activities of RMB2,281.3 million, RMB1,194.1 million, RMB411.3 million and RMB1,122.3 million (US$171.3 million) in 2018, 2019, the three months ended March 31, 2020 and the fiscal year ended March 31, 2021, respectively. We may continue to make significant investments including in sales and marketing, to further develop and expand our business and these investments may not result in an increase in revenue or positive cash flow on a timely basis, or at all.
We may incur substantial losses and negative cash flow in the future for a number of reasons, including decreasing demand or slower than expected increase in demand for used cars and our services, increasing competition, weakness in the automotive retail industry in general, as well as other risks discussed herein, and we may incur unforeseen expenses, or encounter difficulties, complications and delays in generating revenue or achieving profitability. If our revenues decrease, we may not be able to reduce our costs and expenses proportionally in a timely manner because many of our costs and expenses are fixed. In addition, if we reduce our costs and expenses, we may limit our ability to acquire customers and grow our revenues. Accordingly, we may not be able to achieve profitability and we may continue to incur significant losses in the future.
9
If we are unable to effectively manage our growth or implement our business strategies, our business, results of operations and financial condition may be materially and adversely affected.
Our business and prospects depend in part on our ability to effectively manage our growth or implement our growth strategies. As part of our business strategies, we intend to increase our penetration in existing markets and expand into new geographic markets. Our experience in the markets in which we currently operate may not be applicable to other parts of China. We may not be able to leverage our experience to expand into new geographic markets in China. As a result, our expansion and monetization strategies, including sales and marketing efforts designed to attract more consumers and businesses, may not be successful. Furthermore, expanding into new geographical markets will require us to hire additional employees to cover these markets. We will incur additional compensation and benefit costs, office rental expenses and other costs, as well as experience additional strain on our managerial resources. If we are unable to successfully expand and generate sufficient revenues to cover our increased costs and expenses, our business, financial condition and results of operations may be materially and adversely affected.
Moreover, our business upgrade and expansion may lead to new challenges and risks. As a result, we need to continuously expand and enhance our infrastructure and technology, and improve our operational and financial systems, procedures and internal controls. We also need to train, manage and motivate our employees. In addition, we need to maintain and expand our relationships with our customers, third-party service providers and other third parties. We cannot assure you that our personnel, infrastructure, systems, procedures and controls will be adequate to support our operations. Effectively managing our growth is dependent on a number of other factors, including our ability to:
| ● | providing high quality and value-for-money used vehicles; |
| ● | continue to improve our existing full-range car purchasing service and customer’s satisfaction; |
| ● | launch new services and develop cross-selling opportunities; |
| ● | stabilize our costs and expenses and enhance our efficiency; |
| ● | achieve success with respect to our Inspection and Reconditioning Center, or IRC, in Xi’an; |
| ● | recruit and retain skilled and experienced employees; |
| ● | strengthen relationships with our business partners; |
| ● | enhance our risk management and internal control; |
| ● | upgrade our technology and continue to innovate; and |
| ● | maintain and enhance the network effects of our platform. |
If we fail to effectively manage our growth or implement our business strategies, our business, results of operations and financial condition may be materially and adversely affected.
Failure to acquire attractive inventory, whether because of supply, competition, or other factors, may have a material adverse effect on our business, sales, and results of operations.
Since September 2020, we have shifted to an inventory-owning model where we build-up and sell our own inventory of used cars. By switching to and adopting the inventory-owning model, our vehicle supply channels are expanded to include consumers who intend to sell their existing cars, 4S shops, corporate clients and auction platforms. The transformation of our business model has enabled us to obtain better control over order flow and supply chain management, which further strengthens our ability to maximize customer value through our dedicated approach: offering quality value-for-money used cars alongside best-in-class purchasing services. However, there can be no assurance that the supply of high-quality value-for-money used vehicles will be sufficient to meet our needs. A reduction in the availability of or access to sources of desirable inventory could have a material adverse effect on our business, sales and results of operations.
10
Additionally, we evaluate and predict mechanical soundness, consumer desirability and relative value as prospective inventory. If we fail to properly assess vehicle condition before we purchase them, it could adversely affect our ability to acquire desirable inventory. Our ability to source vehicles could also be affected by competition, both from new and used vehicle dealers directly and through other online used-car trading platforms. In addition, we remain dependent on others to sell us used vehicles, and there can be no assurance of an adequate supply of such vehicles on terms that are attractive to us.
Failure to expeditiously sell our inventory could have a material adverse effect on our business, sales, and results of operations.
Our purchases of used vehicles for building our own inventory are largely based on projected demand, which was primarily determined based on the then existing market condition. If our projections turn out to be inaccurate or actual sales are materially less than our forecasts, we would experience an over-supply of used vehicle inventory, which will generally cause downward pressure on our sales prices and margins and increase our average days to sale. If we have excess inventory or our average days to sale increases, we may be unable to liquidate such inventory at prices that allow us to meet margin targets or to recover our costs, which could have a material adverse effect on our results of operations.
We work with third-party service providers and business partners. Actions of third parties are outside of our control and could materially and adversely affect our reputation, business, financial condition and results of operations.
We work with third-party service providers to serve consumers and fulfill the transactions made on our platform, such as auto financing, car delivery, title transfers, and other after-sales services. We carefully select our third-party service providers and business partners, but we are not able to control their actions. If these third parties fail to perform as we expect, experience difficulty meeting our requirements or standards, fail to conduct their business ethically, fail to provide satisfactory services to our customers, receive negative press coverage, violate applicable laws or regulations, breach the agreements with us, or if the agreements we have entered into with the third parties are terminated or not renewed, our business and reputation could be damaged. In addition, if such third-party service providers cease operations, temporarily or permanently, face financial distress or other business disruptions, increase their fees, or if our relationships with them deteriorate, we could suffer from increased costs, be involved in legal or administrative proceedings with or against our third-party service providers and experience delays in providing customers with similar services until we find or develop a suitable alternative. In addition, if we are unsuccessful in identifying high-quality partners, or establishing cost-effective relationships with them, or effectively managing these relationships, our business and results of operations would be materially and adversely affected.
We rely, in part, on our marketing efforts for customer acquisition and achieving higher level of brand recognition. If we fail to conduct our marketing activities effectively and efficiently, our business could be harmed.
We may continue to invest substantial financial and other resources in marketing initiatives to grow our customer base. We currently carry out our marketing activities mainly by acquiring traffic through a combination of online channels with the goal of attracting more visitors to our platform. We face intense competition from our competitors who may have greater marketing resources than we do. If we fail to conduct our marketing activities effectively and efficiently, or if our traffic acquisition efforts and marketing campaigns are not successful, our growth, results of operations and financial condition could be materially and adversely affected.
Negative media coverage related to our business, regardless of its validity, could adversely affect our business, financial position and results of operations.
Negative news or media coverage of our business, our employees, our third-party service providers and business partners, our directors and management or our shareholders, including, without limitation, alleged failure to comply with applicable laws and regulations, alleged fraudulent car listings, alleged misrepresentation by our sales consultants or third-party service providers, breach of data security, failure to protect user privacy, inappropriate business practices, disclosure of inaccurate operating data, negative information on blogs and social media websites, regardless of their validity, could damage our reputation. If we fail to correct or mitigate misinformation or negative information about us, including information spread through social media or traditional media channels, customer trust in us may be undermined, which would have a material adverse effect on our business, results of operations and financial condition.
11
Our limited operating history in certain of our services and the rapid evolution of our business model make it difficult for investors to evaluate our business and prospects.
Our limited operating history in our services and the rapid evolution of our business model mean that our historical growth is not necessarily indicative of our future performance. We cannot assure you that our new product and service offerings will achieve the expected results or we will be able to achieve similar results or grow at the same rate as we did in the past. As our business and China’s used car industry continue to develop, we may adjust our product and service offerings or modify our business model. For example, starting from early 2018, we have started to fulfill online used car transactions for consumers, which we previously referred to as “2C cross-regional business”. With our online used-car-buying product and service offerings, we enable consumers to buy used cars online without the need to go to offline dealerships or see the actual car when making the purchase. In addition, we entered into a binding term sheet, definitive agreements and supplemental agreements, in July 2019, September 2019 and April 2020, respectively, with Golden Pacer to divest our loan facilitation related business. Pursuant to the series of agreements, we divested our entire 2C intra-regional business in which we facilitated offline used car transactions between consumers and dealers in local used car marketplaces, and ceased to provide loan facilitation related guarantee services in connection with our 2C online transaction business since November 2019. We also divested our salvage car related business to Boche in January 2020 as well as our 2B business to 58.com pursuant to definitive agreements we entered into in March 2020. The transaction with Golden Pacer closed upon the signing of the supplemental agreements in April 2020, and the transactions with Boche and 58.com closed in January 2020 and April 2020, respectively. We have shifted to an inventory-owning model since September 2020, when we build-up and sell our own inventory. In addition, our first inspection and reconditioning center (IRC) in Xi’an was put into operation in March 2021. Such developments or adjustments may not achieve expected results and may have a material and adverse impact on our financial condition and results of operations.
The price of used cars sold on our platform and the fees we charge may fluctuate or decline in the future, and any material decrease in such price and fees would harm our business, financial condition and results of operations.
We have started to build-up our own inventory since September 2020. Since then, most of our revenues are derived from vehicle sales. Before we built our own inventory, most of our revenues are derived from the fees we charge from transactions on our platform, such as commission fee and value-added service fee from our 2C business. Prior to the divestiture of our 2B business, we also generated transaction facilitation service fee from the 2B business. Maintaining and growing our revenues depends on a number of factors, including:
| ● | our ability to offer high-quality value-for-money used cars to our customers; |
| ● | our ability to deliver satisfactory online used car transaction experience to our customers; |
| ● | our ability to attract consumers to our platform; |
| ● | the average unit price of used cars sold on our platform, which may decrease if we adjust down the price range of used cars available on our platform or enter into lower-tier city markets, or as a result of declining selling prices of new cars; |
| ● | our ability to foster relationships with third-party service providers to provide services through our platform at attractive terms and prices to us and our customers; and |
| ● | fluctuation in other macro-economic changes. |
Any failure to adequately and promptly address any of these risks and uncertainties would materially and adversely affect our business and results of operations.
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Failure to obtain certain filings, approvals, licenses, permits and certificates required for our business operations may materially and adversely affect our business, financial condition and results of operations.
Certain of our PRC subsidiaries and VIEs used to engage in business activities that are not within their registered business scope. As of the date of this annual report, we are not aware of any action, claim, or investigation being conducted or threatened by the State Administration for Market Regulation (formerly known as the State Administration for Industry and Commerce), or the SAMR or its local branches with respect to such business activities. While we have ceased conducting such business activities, we cannot rule out the possibility that our past practice could be interpreted by the SAMR as “doing business beyond the business scope” and subject us to enforcement actions such as confiscation of any illegal gains, or imposition of fines.
In addition, pursuant to relevant laws and regulations, as some of our PRC subsidiaries and VIEs are regarded as operators of used car marketplaces and used car related business, these entities are required to complete filing with the Ministry of Commerce of the PRC, or the MOFCOM, at provincial level. Although we are in the process of preparing the filings, we may not be able to complete such filings in certain locations since the relevant authorities in those areas do not accept such filing application in practice due to the lack of local implementation rules and policies in such respects. We plan to submit our application as soon as the relevant governmental authorities are ready to accept our filing application. However, there is no assurance we will be able to complete the filing in a timely manner, or at all. Failure to comply with the filing requirements may subject our business to restriction, which would have an adverse impact on our business and results of operations.
In addition, it is required by PRC laws and regulations for companies responsible for the construction projects to prepare environmental impact report, environmental impact statement, or environmental impact registration form based on the different level of potential environmental impact of the projects. The environmental impact reports (required if potentially serious environmental impact) and the environmental impact statements (required if potentially mild environmental impact) are subject to review and approval by the governmental authority and failure to satisfy such requirements may subject one to discontinuation of the construction projects, fines of 1% to 5% of the total investment in the projects or an order of restoration. The environmental impact registration forms (required if very little environmental impact where environmental impact assessment is not necessary) are required to be filed with competent authority and failure to satisfy such requirement may subject one to fines up to RMB50,000. We do not regularly conduct construction projects in the ordinary course of our business. However, some of our projects, including the building and overall decoration of our transaction centers from time to time, could be recognized as construction projects where a timely filing or submission for approval is required and failure to do so may subject us to fines and other enforcement actions as mentioned above.
In addition, certain of our PRC subsidiaries and VIEs used to engage in Internet freight business temporarily, for which we might be required to obtain the Road Transportation Operation Permit and Value-added Telecommunications Business License that certain entities did not have. As of the date of this annual report, we are not aware of any action, claim, or investigation being conducted or threatened by the relevant authority. While we have ceased conducting such business activities, we cannot rule out the possibility that our past practice could be interpreted as “operating without a license” and subject us to enforcement actions such as confiscation of any illegal gains, or imposition of fines.
Considerable uncertainty exists regarding the interpretation and implementation of existing and future laws and regulations governing our business activities. Historically, some of our PRC subsidiaries have been fined due to late tax filings, although the amount of the fine was not significant. If we fail to complete, obtain, maintain or renew any of the required licenses or approvals or make the necessary filings, we may be subject to various penalties, such as confiscation of the illegal gains, imposition of fines and discontinuation or restriction of our operations. Any such penalties may disrupt our business operations and materially and adversely affect our business, financial condition and results of operations.
Our historical loan facilitation services may subject us to regulatory risks, which may have a material adverse effect on our business, results of operations and financial condition.
Prior to the divestiture of our loan facilitation related business to Golden Pacer, or the Loan Facilitation Divestiture, we historically provided loan facilitation services in partnership with financial institutions who finance our customers’ car purchases. As a result of the divestiture, we have ceased to provide loan facilitation services since November 2019.
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According to the Financing Guarantee Circular 37 which was issued and became effective on October 9, 2019, entities shall be prohibited from providing financing guarantee services unless obtaining the approval from the relevant regulatory authorities and establishing financing guarantee companies. Those who have been engaged in financing guarantee services shall properly settle its existing business. The authorities shall intensify the crackdowns on the financing guarantee companies with illegal operation or those who committed serious infringement of consumer’s (and guaranteed person’s) rights and shall timely report such cases to the banks so as to work together to protect the legitimate rights and interests of the consumers. The Financing Guarantee Circular 37 also stipulates that, without prior approval, any institution which provides customer promotion, credit evaluation and other services for any lending institution shall be prohibited from providing financing guarantee services or doing so in a disguised form. Any entity operating the financing guarantee business without a financing guarantee business license shall be banned by the regulatory authorities. See “Item 4. Information on the Company—B. Business Overview—Regulation—Regulations on Financing Guarantee.” While we (i) no longer provide any additional loan facilitation related guarantee services since November 2019 and have divested the guarantee liabilities in relation to our historically-facilitated loans for XW Bank, which accounted for more than half of the total loans we historically facilitated, to Golden Pacer as a result of the Loan Facilitation Divestiture and (ii) have entered into a supplemental agreement with one of our major financing partners with regards to our historically-facilitated loans in July 2020, where we agreed to entirely settle all of our remaining guarantee liabilities associated with the historically-facilitated loans for this financing partner under the condition that we would pay the settlement amount in instalments from 2020 to 2025 based on an agreed schedule, we remain subject to minor guarantee liabilities for the rest of the consumer auto loans we historically facilitated through our 2C business. As of the date of this annual report, we have not obtained relevant approvals from regulatory authorities. It is required by the Financing Guarantee Circular 37 for us to properly settle our existing business and we plan to settle and gradually relieve our guarantee obligations from these historically facilitated loans along with the maturity of those remaining outstanding loans. However, we cannot assure you that our guarantee services in connection with such historical auto loans will be regarded as our “proper settlement” of our existing auto loan guarantee business by the relevant authority, or that our past practices in connection with our loan facilitation services would not be regarded as historical noncompliance. The imposition of any enforcement action would adversely affect our reputation and business, financial condition and results of operations.
Furthermore, PRC laws and regulations concerning financial services, including internet financial services, are evolving and the PRC government authorities may promulgate further laws and regulations in the future. We cannot assure you that our past or current practices would not be regarded as non-compliance, and imposition of any enforcement action would adversely affect our reputation and business, financial condition and results of operations. For example, under current regulations, the risk assets of a PRC entity that conducts finance leasing business must not exceed 10 times its total net assets. In addition, PRC regulations stipulate that the amount of auto loans should be capped at 80% of the purchase price for a self-use conventionally-powered new car, 85% for a self-use new energy vehicle, and 70% for a used car. Our financing partners were responsible for designing the financing products that we offered through our historical loan facilitation services and are responsible for the financing products we currently refer to consumers on our platform. The financing products provided by our financing partners on our platform may be deemed to exceed the stipulated cap on the loan amount relative to the car purchase price, in which case we may be required to make adjustments to our cooperation arrangements or cease to cooperate with these financing partners.
We may be deemed to have operated financing guarantee business by the PRC regulatory authorities.
In August 2017 the State Council promulgated the Regulations on the Administration of Financing Guarantee Companies, or the Financing Guarantee Rules which became effective on October 1, 2017. Pursuant to the Financing Guarantee Rules, “financing guarantee” refers to the activities in which guarantors provide guarantee to the guaranteed parties as to loans, bonds or other types of debt financing, and “financing guarantee companies” refer to companies legally established and operating financing guarantee business. According to the Financing Guarantee Rules, the establishment of financing guarantee companies are subject to the approval by the relevant governmental authority, and unless otherwise stipulated, no entity may operate financing guarantee business without such approval. If any entity violates these regulations and operates financing guarantee business without approval, the entity may be subject to penalties including ban or suspension of business, fines of RMB500,000 to RMB1,000,000, confiscation of illegal gains if any, and criminal liability if the violation constitutes a criminal offense.
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Prior to divesting our loan facilitation business to Golden Pacer as first announced in July 2019, we provided guarantees to our financing partners in connection with the historical consumer auto loans. We have ceased to provide loan facilitation related guarantee services since November 2019 as a result of the divestiture and have divested the guarantee liabilities in relation to our historically-facilitated loans for XW Bank. In addition, we settled our remaining guarantee liabilities associated with the historically-facilitated loans for WeBank in July 2020. We remain subject to guarantee obligations in relation to a minority part of our historically-facilitated loans. We do not believe that the Financing Guarantee Rules apply to such guarantee obligations as the guarantees were not provided independently from our principal business. However, due to the lack of further interpretations, the exact definition and scope of “operating financing guarantee business” under the Financing Guarantee Rules is unclear. It is uncertain whether we would be deemed to operate financing guarantee business in violation of relevant PRC laws or regulations because of historical arrangements with certain financial institutions. If the relevant regulatory authorities determine that we were and/or are operating financing guarantee business, we may be required to obtain approval or license for financing guarantee business. In such cases, our business, results of operations and financial conditions could be adversely affected.
We may be held liable for information or content displayed on or linked to our platform, which may materially and adversely affect our business and operating results.
We may be held liable for inaccurate or incomplete information, including car listings, that is available through or linked to our platform. The data we collect and use for the car listings may be inaccurate or incomplete due to errors or on the part of our employees or third-party information providers, or frauds. We received a penalty decision and a fine issued by the relevant governmental authority in March 2018 for providing inconsistent car information on our platform. Our failure to ensure the accuracy and integrity of our data, regardless of its source, could undermine customer trust, result in further administrative penalties and adversely affect our business, financial position and results of operations.
We depend on our proprietary technology for critical functions of our business. Failure to properly maintain or promptly upgrade our technology may result in disruptions to or lower quality of our services, and our business, results of operations and financial condition may be materially and adversely affected.
We rely on our proprietary technology, including websites and mobile apps, car inspection system and AI algorithms for critical functions of our businesses. See “Item 4. Information on the Company—B. Business Overview—Technology.” Maintaining and upgrading our technology carry certain risks, including the risk of disruptions caused by significant design or deployment errors, delays or deficiencies, which has made and may continue to make our platform and services unavailable. We may also implement additional or enhanced technology in the future to accommodate our growth and to provide additional capabilities and functionalities. The implementation of new or enhanced technologies may be disruptive to our business and can be time-consuming and expensive, and may increase management responsibilities and divert management attention. Additionally, our proprietary AI algorithms are based on data-driven analytics. If we do not have a large amount of data or the quality of data available to us for analysis is unsatisfactory, or if our algorithms have deficiencies, our proprietary AI algorithms may fail to perform effectively. If we fail to properly maintain or promptly upgrade our technology, our services may be disrupted or become of lower quality or unprofitable, and our results of operations and financial condition may be materially and adversely affected.
Our business is subject to risks related to China’s online used car transaction industry, including industry-wide and macroeconomic risks.
We operate as a national online used car dealer in China’s used car market. We cannot assure you that this market will continue to grow rapidly in the future. Furthermore, the growth of China’s used car industry could be affected by many factors, including:
| ● | general economic conditions in China and around the world; |
| ● | ongoing COVID-19 pandemic or any other serious contagious diseases; |
| ● | the growth of disposable household income and the availability and cost of credit available to finance used car purchases; |
| ● | the growth of China’s automobile industry; |
| ● | the growth of China’s auto financing industry; |
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| ● | consumer acceptance of used cars and willingness to purchase used cars online; |
| ● | consumer acceptance of financing car purchases; |
| ● | taxes and other incentives or disincentives related to used car purchases and ownership; |
| ● | environmental concerns and measures taken to address these concerns; |
| ● | the cost of energy, including gasoline prices, and the cost of car license plates in various cities with license plate lottery or auction systems; |
| ● | the improvement of highway system and availability of parking facilities; |
| ● | other government policies relating to used cars and auto financing in China; |
| ● | fluctuations in the sales and price of new and used cars; |
| ● | ride sharing, transportation networks, and other fundamental changes in transportation pattern; and |
| ● | other industry-wide issues, including supply and demand for used cars, age distribution of cars, and supply chain challenges. |
Any adverse change to these factors could reduce demand for used cars and hence demand for our services, and our results of operations and financial condition could be materially and adversely affected.
We collect, process, store, and use personal information and other data, and any actual or perceived failure to protect such information and data could damage our reputation and brand and harm our business and results of operations.
We collect, process, store, and use personal information and other data provided by consumers and our business partners. Although we have spent significant resources to protect our user and transaction data against security breaches, our internal control mechanism may not be sufficient and our security measures may be compromised. Any failure or perceived failure to maintain the security of personal and other data that are provided to or collected by us could harm our reputation and brand and may expose us to legal proceedings and potential liabilities, any of which could adversely affect our business and results of operations.
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There are numerous laws and regulations regarding privacy and the collection, processing, storing, sharing, disclosing, using and protecting of personal information and other data. Specifically, personally identifiable and other confidential information is increasingly subject to legislation and regulations in numerous domestic and international jurisdictions. The regulatory framework for privacy protection in China and worldwide is currently evolving and is likely to remain uncertain for the foreseeable future. We could be adversely affected if legislation or regulations in China are expanded to require changes in business practices or privacy policies, or if the PRC governmental authorities interpret or implement their legislation or regulations in ways that negatively affect our business, financial condition and results of operations. In November 2016, the Standing Committee of the NPC released the Cyber Security Law, which took effect in June 2017. The Cyber Security Law requires network operators to perform certain functions related to internet security protection and the strengthening of network information management. For instance, under the Cyber Security Law, network operators of key information infrastructure generally shall, during their operations in the PRC, store the personal information and important data collected and produced within the territory of the PRC and their purchase of network products and services that may affect national securities shall be subject to national cybersecurity review. See “Item 4.B. Information on the Company—Business Overview—Regulation—Regulations on Information Security and Privacy Protection.” We strive to comply with applicable laws, regulations, policies, and legal obligations relating to privacy and data protection, to the extent possible. However, it is possible that these obligations may be interpreted and applied in new or inconsistent ways and may conflict with other rules or our practices, or that new regulations may be enacted. Any failure or perceived failure by us to comply with our privacy policies, privacy-related obligations to consumers or other third parties or other privacy-related legal obligations, or any compromise of security that results in the unauthorized release or transfer of sensitive information, such as personally identifiable information or other customer data, may result in governmental enforcement actions, litigation or public statements against us by consumer advocacy groups or others and could cause consumers and our business partners to lose trust in us, which could have an adverse effect on our business. Additionally, if third parties that we work with violate applicable laws or our policies, such violations may also put our customers’ information at risk and could in turn harm our reputation, business and results of operations. In addition, the State Administration for Market Regulation and the Standardization Administration jointly issued the new Standard of Information Security Technology—Personal Information Security Specification (GB/T 35273-2020) in March 2020, which replaced the previous standard GB/T 35273-2017 and took effect from October 2020. Pursuant to this standard, personal data controllers refer to entities or persons who are authorized to determine the purposes and methods for using and processing personal information. Such personal data controller should collect information in accordance with the principles of legality, minimization and voluntariness and should also obtain a consent from the information provider. We expect that these areas will receive greater and continued attention and scrutiny from regulators and the public going forward, which could increase our compliance costs and subject us to heightened risks and challenges associated with data security and protection. For the further purposes of regulating data processing activities, safeguarding data security, promoting data development and utilization, protecting the lawful rights and interests of individuals and organizations, and maintaining national sovereignty, security, and development interests, on June 10, 2021, Standing Committee of the PRC National People’s Congress published the Data Security Law of the People’s Republic of China, which will take effect on September 1, 2021. The Data Security Law requires data processing, which includes the collection, storage, use, processing, transmission, provision, publication of data, to be conducted in a legitimate and proper manner. The Data Security Law also introduces a data classification and hierarchical protection system based on the importance of data in economic and social development, and the degree of harm it may cause to national security, public interests, or legitimate rights and interests of individuals or organizations if such data are tampered with, destroyed, leaked, illegally acquired or illegally used. The appropriate level of protection measures is required to be taken for each respective category of data. Moreover, the Data Security Law provides a national security review procedure for those data activities which may affect national security and imposes export restrictions on certain data and information.
On July 10, 2021, Cyberspace Administration of China, or the CAC, released the Cybersecurity Review Measures soliciting public comments, or the Revised Draft, pursuant to which, data processors with information of over one million users shall be subject to cybersecurity review before their overseas listings. The cybersecurity review will evaluate, among others, the risk of critical information infrastructure, core data, important data, or a large amount of personal information being influenced, controlled or maliciously used by foreign governments after going public overseas. The procurement of network products and services, data processing activities and overseas listing should also be subject to cybersecurity review if they potentially pose risks to national security. See “Item 4.B. Information on the Company—Business Overview—Regulation—Regulations on Information Security and Privacy Protection.”
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There remain uncertainties regarding the further interpretation and implementation of those laws and regulations. For example, the scope of “core data” and “important data,” two important concepts in the Data Security Law, are yet to be determined. It is uncertain whether and when the Revised Draft will be adopted, and if the adopted version will contain the same provisions as the Revised Draft. If the adopted version of the Revised Draft mandate clearance of cybersecurity review and other specific actions to be completed by critical information infrastructure operators, data processors or other companies as proposed in the Revised Daft, we face uncertainties as to whether we should obtain such clearance as a listed company in the United States and whether such clearance can be timely obtained, or at all. In early July 2021, regulatory authorities in China launched cybersecurity investigations with regard to several China-based companies that are listed in the United States. The relevant regulatory authorities in China continue to monitor the websites and apps in relation to the protection of personal data, privacy and information security, and may impose additional requirements from time to time. The relevant regulatory authorities also publicize, from time to time, their monitoring results and require relevant enterprises listed in such notices to rectify non-compliance. If any of our mobile apps is found not in compliance with these regulations, we could be subject to penalties, including revocation of our business licenses and permits.
Despite our efforts to comply with applicable laws, regulations and other obligations relating to privacy, data protection and information security, we cannot assure you that we will be compliant with such new regulations in all respects. For instance, we had been ordered by the relevant regulatory authority to rectify our collection and use of data. Although we rectified our practices accordingly and satisfied the relevant regulatory authority’s rectification requirements, we may be subject to other similar orders in the future. If we cannot comply with such orders timely or entirely, we may be required to suspend our relevant businesses, shut down our website, take down our operating applications, or face other penalties, which may materially and adversely affect our business, financial condition, and results of operations.
In addition to laws, regulations and other applicable rules regarding privacy and privacy advocacy, industry associations or other private parties may propose new and different privacy standards. Because the interpretation and application of privacy and data protection laws and privacy standards are still uncertain, it is possible that these laws or privacy standards may be interpreted and applied in a manner that is inconsistent with our practices. Any inability to adequately address privacy concerns, even if unfounded, or to comply with applicable privacy or data protection laws, regulations and privacy standards, could result in additional cost and liability to us, damage our reputation, inhibit the use of our platform and harm our business.
Any breaches to our security measures, including unauthorized access, computer viruses and “hacking” may adversely affect our database and reduce use of our services and damage our reputation and brand names.
The massive data that we have processed and stored makes us or third-party service providers who host our servers an easy target and potentially vulnerable to cyber-attacks, computer viruses, physical or electronic break-ins, or similar disruptions. Breaches to our security measures, including computer viruses and hacking, may result in significant damage to our hardware and software systems and database, disruptions to our business activities, inadvertent disclosure of confidential or sensitive information, interruptions in access to our platform, and other material adverse effects on our operations, during transfer of data or at any time, and result in persons obtaining unauthorized access to our systems and data. Our systems may be subject to infiltration as a result of any third-party action, employee error, malfeasance or otherwise. While we have taken reasonable steps to protect the confidential information that we have access to, techniques used to sabotage or obtain unauthorized access to systems change 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 measures. Any accidental or willful security breaches or other unauthorized access to our platform could cause confidential customer and investor information to be stolen and used for criminal purposes. Security breaches or unauthorized access to confidential information could also expose us to liability related to the loss of the information, time-consuming and expensive litigation and negative publicity. If security measures are breached because of any third-party action, employee error, malfeasance or otherwise, or if design flaws in our technology infrastructure are exposed and exploited, our relationships with customers and investors could be severely damaged, we could incur significant liability and our business and operations could be adversely affected.
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We depend heavily on our management team and other key personnel to manage our business. If we fail to retain their employment or services or fail to attract talents, our ability to run and grow our business could be severely impaired.
Our future success is highly dependent on the ongoing efforts of our senior management and key personnel. We rely on our management team for their extensive knowledge of and experience in China’s automobile and internet industries as well as their deep understanding of the automobile market, business environment and regulatory regime in China. The loss of the services of one or more of our senior executives or key personnel may have a material adverse effect on our business, financial condition and results of operations. Competition for senior management and key personnel is intense and the pool of suitable candidates is very limited. Hence, we may not be able to retain the employment or services of our senior executives or key personnel, or attract and retain senior executives or key personnel in the future. If we fail to retain our senior management, our business and results of operations could be materially and adversely affected. In addition, if any members of our senior management or any of our key personnel join a competitor or form a competing company, we may not be able to replace them easily and we may lose customers, business partners and key staff members.
Our business is susceptible to employee misconduct, improper business practices and other fraudulent conduct by or between our employees and third parties.
We rely on our employees to carry out our operating objectives. We are exposed to many types of operational risks, including the risk of misconduct and errors by our employees. Our business depends on our employees to interact with potential customers, conduct car inspection, process large numbers of transactions and provide support for other key aspects of our business, all of which involve the use and disclosure of personal information and are susceptible to human errors on the part of our employees.
We could be materially and adversely affected if transactions were redirected, misappropriated or otherwise improperly executed, if personal information was disclosed to unintended recipients or if an operational breakdown or failure occurred when processing transactions, whether as a result of human error, purposeful sabotage or fraudulent manipulation of our operations or systems.
Although we provide periodic and solid trainings to all our employees, it is not always possible to identify, deter or prevent misconduct or errors by employees, and the precautions we take to detect and prevent potential misconducts and human errors may not be completely effective in controlling risks or losses. If any of our employees takes, converts or misuses funds, documents or data or fails to follow protocols when interacting with customers or among themselves, we could be liable for damages and subject to regulatory actions and penalties. We could also be perceived to have facilitated or participated in the illegal misappropriation of funds, documents or data, or failed to follow applicable protocols, and therefore be subject to civil or criminal liability. Our employees may also engage in improper business practices and other fraudulent conduct with third parties. As a result of these potentially damaging activities, we could incur significant losses, which could have a material adverse effect on our results of operations and financial condition.
Failure to adequately protect our intellectual property and proprietary information could materially harm our business and operating results.
We believe our patents, trademarks, software copyrights, trade secrets, our brand and other intellectual property rights and proprietary information are critical to our success. Any unauthorized use of intellectual property rights and proprietary information could harm our business, reputation and competitive advantages. We rely on a combination of patent, trademark, trade secret and copyright law, our internal control mechanism, and contractual arrangements to protect our intellectual property.
Legal protection may not always be effective. Infringement of intellectual property rights continues to pose a serious risk in doing business in China. Monitoring and preventing unauthorized use is difficult. Furthermore, the application of laws governing intellectual property rights in China is uncertain and evolving, and could involve substantial risks to us. The practice of intellectual property rights enforcement action by Chinese regulatory authorities is in its early stage of development. In the event that we have to resort to litigation and other legal proceedings to enforce our intellectual property rights, such action, litigation or other legal proceedings could result in substantial costs and diversion of our management’s attention and resources and could disrupt our business. There is no assurance that we will be able to enforce our intellectual property rights effectively or otherwise prevent others from the unauthorized use of our intellectual property.
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We try, to the extent possible, to protect our intellectual property, technology, and confidential information by requiring our employees, third-party service providers, and consultants to enter into confidentiality and assignment of inventions agreements. Due to potential willful or unintentional conduct of personnel who have access to our confidential and proprietary information, these agreements and control measures may not effectively prevent unauthorized disclosure or use of our confidential information, unauthorized use of our intellectual property or technology and may not provide an adequate remedy in the event of such unauthorized disclosure or use. The enforceability of confidentiality agreements may vary from jurisdiction to jurisdiction. Failure to obtain or maintain trade secrets and/or confidential know-how protection could adversely affect our competitive position.
Competitors may adopt service names or trademarks similar to ours, thereby harming our ability to build brand identity and possibly leading to user confusion. Our competitors may independently develop substantially equivalent proprietary information and may even apply for patent protection. If successful in obtaining such patent protection, our competitors could limit our use of our trade secrets and confidential know-how, and our financial position and operating results would be adversely affected.
We have been and may continue to be subject to intellectual property infringement claims or other allegations by third parties, which may materially and adversely affect our business, results of operations and prospects.
We depend to a large extent on our ability to develop and maintain the intellectual property rights relating to our technology and online businesses. We have devoted considerable resources to the development and improvement of our car inspection technology, big data and AI capabilities, mobile applications, mobile sites and websites and information technology systems. We cannot be certain that third parties will not claim that our business infringes upon or otherwise violates patents, trademarks, copyrights or other intellectual property rights that they hold. Companies operating online businesses and provide technology-based services are frequently involved in litigation related to allegations of infringement of intellectual property rights. The validity, enforceability and scope of protection of intellectual property rights, particularly in China, are still evolving. We were subject to several trademark claims in the past and may in the future be subject to intellectual property infringement claims from time to time. As we face increasing competition and as litigation becomes a more common method for resolving commercial disputes in China, we face a higher risk of being the subject of intellectual property infringement claims.
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Defending against intellectual property claims is costly and can impose a significant burden on our management attention and resources, and favorable final outcomes may not be obtained in all cases. Such claims, even if they do not result in liability, may harm our reputation. Any resulting liability or expenses, or changes required to our services to reduce the risk of future liability, may have a material adverse effect on our business, results of operations and prospects.
We were named as a defendant in two putative shareholder class action lawsuits in the past that could have a material adverse impact on our business, financial condition, results of operation, cash flows and reputation.
We were named as a defendant in the two putative shareholder class action lawsuits described in “Item 8, Financial Information—A. Consolidated Statements and Other Financial Information—Legal Proceedings.” In May 2021, we have settled the two putative shareholder class action lawsuits for a total of US$9.5 million approved by court, out of which US$6.5 million were covered by our insurance policy and we made a contribution of US$3.0 million. Although the lawsuits were settled, the process last for over a year and utilized a significant portion of our resources and diverted management’s attention from the day-to-day operations of our company, all of which could harm our business. We cannot assure you that similar class action claims will not occur in the future. We also may be subject to claims for indemnification related to these matters, and we cannot predict the impact that indemnification claims may have on our business or financial results.
We may be subject to legal proceedings in the ordinary course of our business. If the outcomes of these proceedings are adverse to us, our business, results of operations and financial condition could be materially and adversely affected.
We may be subject to legal proceedings from time to time in the ordinary course of our business, which could have a material adverse effect on our business, results of operations and financial condition. Claims arising out of actual or alleged violations of law could be asserted against us by consumers and businesses that utilize our services, by competitors, or by governmental entities in civil or criminal investigations and proceedings or by other entities. These claims could be asserted under a variety of laws, including but not limited to consumer finance laws, product liability laws, consumer protection laws, intellectual property laws, unfair competition laws, privacy laws, labor and employment laws, securities laws, real estate laws, tort laws, contract laws, property laws and employee benefit laws. We may also be subject to lawsuits due to actions by our third-party financing partners, or third-party providers of various services, including logistics and delivery service, title transfer service, car repair, car inspection equipment, loan servicing, car collateral repossession, and certain data services.
For example, we are subject to ongoing unfair competition, trademark, contractual disputes and other proceedings in the PRC. These cases are still ongoing, but we believe the claims are without merit and we will defend ourselves accordingly. We are unable, however, to predict the outcome of these cases, or reasonably estimate a range of possible loss, if any, given the current status of the proceedings. We have not recorded any accrual for expected loss payments with respect to these cases as of March 31, 2021 and do not believe that any of the intellectual property infringement claims is material to our overall business operations. There is no guarantee that we will be successful in defending ourselves in legal and administrative actions or in asserting our rights under various laws. Even if we are successful in our attempt to defend ourselves in legal and administrative actions or to assert our rights under various laws, enforcing our rights against the various parties involved may be expensive, time-consuming and ultimately futile. These actions could expose us to negative publicity and to substantial monetary damages and legal defense costs, injunctive relief and criminal and civil fines and penalties, including but not limited to suspension or revocation of licenses to conduct business. See “Item 8. Financial Information—A. Consolidated Statements and Other Financial Information—Legal Proceedings.”
Acquisitions, strategic alliances and investments could be costly, difficult to integrate, disrupt our business and adversely affect our results of operations and the value of your investment.
As we continue to expand our operations, we have and may in the future enter into strategic alliances or to acquire substantial asset or equities from a pool of candidates that fit our criteria. We are not certain that we will be able to consummate any such transactions in the future or identify those candidates that would result in the most successful combinations, or that future acquisitions will be able to be consummated at reasonable prices and terms. In addition, increased competition for acquisition candidates could result in fewer acquisition opportunities for us and higher acquisition prices. Strategic investments or acquisitions will involve risks commonly encountered in business relationships, including:
| ● | lack of suitable acquisition candidates; |
| ● | intense competition with other auction groups or new industry consolidators for suitable acquisitions; |
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| ● | deterioration of our financial capabilities; |
| ● | difficulties in assimilating and integrating the operations, personnel, systems, data, technologies, products and services of the acquired business; |
| ● | inability of the acquired technologies, products or businesses to achieve expected levels of revenue, profitability, productivity or other benefits; |
| ● | difficulties in retaining, training, motivating and integrating key personnel; |
| ● | diversion of management’s time and resources from our normal daily operations; |
| ● | difficulties in successfully incorporating licensed or acquired technology and rights into our platform and service offerings; |
| ● | difficulties in maintaining uniform standards, controls, procedures and policies within the combined organizations; |
| ● | difficulties in retaining relationships with customers, employees and third-party service providers of the acquired business; |
| ● | risks of entering markets in which we have limited or no prior experience; |
| ● | regulatory risks, including remaining in good standing with existing regulatory bodies or receiving any necessary pre-closing or post-closing approvals, as well as being subject to new regulators with oversight over an acquired business; |
| ● | assumption of contractual obligations that contain terms that are not beneficial to us, require us to license or waive intellectual property rights or increase our risk for liability; |
| ● | failure to successfully further develop the acquired technology or maintain acquired facilities; |
| ● | liability for activities of the acquired business before the acquisition, including intellectual property infringement claims, violations of laws, commercial disputes, tax liabilities and other known and unknown liabilities; |
| ● | potential disruptions to our ongoing businesses; and |
| ● | unexpected costs and unknown risks and liabilities associated with strategic investments or acquisitions. |
We may not make any investments or acquisitions, or any future investments or acquisitions may not be successful, may not benefit our business strategy, may not generate sufficient revenues to offset the associated acquisition costs or may not otherwise result in the intended benefits. In addition, we cannot assure you that any future investment in or acquisition of new businesses or technology will lead to the successful development of new or enhanced service offerings and that any new or enhanced technology or services, if developed or offered, will achieve market acceptance or prove to be profitable.
We may need additional capital to achieve our business targets and respond to market opportunities. If we could not obtain sufficient capital through either debt or equity financing, our business, operating results and financial condition could be materially harmed.
Since we launched our business, we have raised substantial financing to support the growth of our business. We may require additional capital to pursue our business objectives and respond to business opportunities, challenges or unforeseen circumstances, including to improve our brand awareness, build and maintain our offline network, develop new products or services or further improve existing products and services, and acquire complementary businesses and technologies. In addition, we issued convertible notes in the total principal amount of US$280 million in 2019, of which US$50 million and US$69 million in principal amount were converted into Class A ordinary shares on July 23, 2020 and July 12, 2021, respectively. In October 2020, we completed private placements with GIC and Wells Fargo for subscription of our Class A ordinary shares for an aggregate amount of US$25 million. We also entered into a term sheet and definitive agreements with NIO Capital and Joy Capital in March 2021 and June 2021, respectively, for the subscription of senior convertible preferred shares, to raise an aggregate amount of up to US$315 million. The first tranche of US$100 million was closed on July 12, 2021. However, we cannot guarantee that the remaining portion of the transaction will close or additional funds will be available when we need them on reasonable terms, or at all.
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If we raise additional funds through further issuances of equity or convertible debt securities, our existing shareholders could suffer significant dilution, and any new equity securities we issue could have rights, preferences and privileges superior to those of holders of our ordinary shares. Our ability to retain our existing financial resources and obtain additional financing on acceptable terms is subject to a variety of uncertainties, including but not limited to:
| ● | economic, political and other conditions in China; |
| ● | PRC governmental policies relating to bank loans and other credit facilities; |
| ● | PRC governmental regulations of foreign investment and the automobile industry in China; |
| ● | conditions of capital markets in which we may seek to raise funds; and |
| ● | our future results of operations, financial condition and cash flows. |
If we are unable to obtain adequate financing or financing on satisfactory terms, our ability to continue to pursue our business objectives and to respond to business opportunities, challenges or unforeseen circumstances could be significantly limited, and our business, results of operations, financial condition and prospects could be adversely affected.
If we fail to develop and maintain an effective system of internal control over financial reporting, we may be unable to accurately report our financial results or prevent fraud.
Prior to our initial public offering in June 2018, we were a private company with limited accounting personnel and other resources with which to address our internal control over financial reporting. In connection with the audits of our consolidated financial statements as of and for the years ended December 31, 2018 and 2019, we and our independent registered public accounting firm identified two material weaknesses in our internal control over financial reporting. As defined in the standards established by the U.S. Public Company Accounting Oversight Board, a “material weakness” is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis.
The material weaknesses identified related to (i) our lack of adequate number of accounting staff and management resources with appropriate knowledge of U.S. GAAP and SEC reporting and compliance requirements and (ii) insufficient documented financial closing policies and procedures, specifically those related to period end expenses cut-off and accruals. We are in the process of implementing a number of measures to remedy these control deficiencies. See “Item 15. Controls and Procedures—Internal Control Over Financial Reporting.” However, the implementation of these measures may not fully address these deficiencies in our internal control over financial reporting, and we cannot conclude that they have been fully remedied. Our failure to correct these control deficiencies or our failure to discover and address any other control deficiencies could result in inaccuracies in our financial statements and impair our ability to comply with applicable financial reporting requirements and related regulatory filings on a timely basis. Moreover, ineffective internal control over financial reporting could significantly hinder our ability to prevent fraud.
We are a public company in the United States subject to the Sarbanes-Oxley Act of 2002. Section 404 of the Sarbanes-Oxley Act of 2002, or Section 404, requires that we include a report of management on our internal control over financial reporting in our annual report on Form 20-F. In addition, once we cease to be an “emerging growth company” as such term is defined in the JOBS Act, our independent registered public accounting firm must attest to and report on the effectiveness of our internal control over financial reporting. Our management has concluded that our internal control over financial reporting was not effective for the fiscal year ended March 31, 2021. Moreover, even if our management concludes that our internal control over financial reporting is effective in the future, our independent registered public accounting firm, after conducting its own independent testing, may issue a report that is qualified if it is not satisfied with our internal controls or the level at which our controls are documented, designed, operated or reviewed, or if it interprets the relevant requirements differently from us. In addition, as we are a public company, our reporting obligations may place a significant strain on our management, operational and financial resources and systems for the foreseeable future. We may be unable to timely complete our evaluation testing and any required remediation.
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During the course of documenting and testing our internal control procedures, in order to satisfy the requirements of Section 404, we may identify other weaknesses and deficiencies in our internal control over financial reporting. In addition, if we fail to maintain the adequacy of our internal control over financial reporting, as these standards are modified, supplemented or amended from time to time, we may not be able to conclude on an ongoing basis that we have effective internal control over financial reporting in accordance with Section 404. If we fail to achieve and maintain an effective internal control environment, we could suffer material misstatements in our financial statements and fail to meet our reporting obligations, which would likely cause investors to lose confidence in our reported financial information. This could in turn limit our access to capital markets, harm our results of operations, and lead to a decline in the trading price of the ADSs. Additionally, ineffective internal control over financial reporting could expose us to increased risk of fraud or misuse of corporate assets and subject us to potential delisting from the stock exchange on which we list, regulatory investigations and civil or criminal sanctions. We may also be required to restate our financial statements for prior periods.
A severe or prolonged downturn in the Chinese or global economy could materially and adversely affect our business and financial condition.
COVID-19 has had a severe and negative impact on the Chinese and the global economy since early 2020. Whether this will lead to a prolonged downturn in the economy is still unknown, especially considering the multiple recent outbreaks in various countries and regions as well as the uncertainties brought by the newly launched vaccination programs. Even before the COVID-19 pandemic, the global macroeconomic environment was facing numerous challenges. The growth rate of the Chinese economy had already been slowing since 2010. There is considerable uncertainty over the long-term effects of the expansionary monetary and fiscal policies which had been adopted by the central banks and financial authorities of some of the world’s leading economies, including the United States and China, even before 2020. Unrest, terrorist threats and the potential for war in the Middle East and elsewhere may increase market volatility across the globe. There have also been concerns about the relationship between China and other countries, including the surrounding Asian countries, which may potentially have economic effects. In particular, there is significant uncertainty about the future relationship between the United States and China with respect to trade policies, treaties, government regulations and tariffs. Economic conditions in China are sensitive to global economic conditions, as well as changes in domestic economic and political policies and the expected or perceived overall economic growth rate in China. Any severe or prolonged slowdown in the global or Chinese economy may materially and adversely affect our business, results of operations and financial condition. See “—We may need additional capital to achieve our business targets and respond to market opportunities. If we could not obtain sufficient capital through either debt or equity, our business, operating results and financial condition could be materially harmed.”
The trade war between the U.S. and China may dampen economic growth in China and adversely affect our business, financial condition and results of operations.
In 2018 and 2019, the U.S. government imposed additional tariffs on specified products imported from China. In response, China has also imposed additional tariffs on specified products imported from the U.S. The U.S. and the Chinese governments are continuing to conduct negotiations on trade matters. We cannot assure you that the negotiations will result in an agreement between the two countries, or that the proposed tariffs will not be imposed even if an agreement will be reached.
Although we are not currently subject to any of these tariff measures, the proposed tariffs may adversely affect the economic growth in China and the financial condition of our customers. With the potential decrease in the spending powers of our target customers, we cannot guarantee that there will be no negative impact on our operations. In addition, the current and future actions or escalations by either the U.S. or China that affect trade relations may result in global economic turmoil, which may adversely affect our business, financial condition and results of operations.
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Allegations or lawsuits against us or our management and related negative publicity may harm our reputation and have a material and adverse impact on our business operations and the trading price of our ADSs.
We have been, and may become, subject to allegations or lawsuits brought by our competitors, customers, business partners, short sellers, investment research firms or other individuals or entities. For example, a report was published on April 16, 2019 making various allegations about us, and we responded publicly stating the allegations are unfounded. Any such allegation or lawsuit, with or without merit, or any perceived unfair, unethical, fraudulent or inappropriate business practice by us or perceived malfeasance by our management, or failure or perceived failure to comply with legal and regulatory requirements, alleged accounting or financial reporting irregularities, could harm our reputation and distract our management from our daily operations. Allegations or lawsuits against us or our management may also generate negative publicity that significantly harms our reputation, which may materially and adversely affect our ability to attract customers, third-party service providers and business partners and hence our business operations, and cause the trading price of our ADSs to decline and fluctuate significantly.
We may continue to be the target of adverse publicity and detrimental conduct against us, including complaints, anonymous or otherwise, to regulatory agencies regarding our operations, accounting, and regulatory compliance. We may be subject to government or regulatory investigation or inquiries, or shareholder lawsuits, as a result of such third-party conduct and may be required to incur significant time and substantial costs to defend ourselves, and there is no assurance that we will be able to conclusively refute each of the allegations within a reasonable period of time or at all. Our reputation may also be negatively affected as a result of the public dissemination of allegations or malicious statements about us, which in turn may materially and adversely affect the trading price of our ADSs.
Any failure by us or our third-party service providers to comply with applicable anti-money laundering laws and regulations could damage our reputation.
Our financing partners and payment companies are subject to anti-money laundering obligations under applicable anti-money laundering laws and regulations and are regulated in that respect by the People’s Bank of China, or PBOC. If any of our third-party service provides fail 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. Any negative perception of the industry, such as that arises from any failure of other loan facilitation service providers, consumer finance marketplaces or online used car dealers to detect or prevent money laundering activities, even if factually incorrect or based on isolated incidents, could compromise our image or undermine the trust and credibility we have established.
We are subject to changing laws and regulations regarding regulatory matters, corporate governance and public disclosure that have increased both our costs and the risk of non-compliance.
We are subject to rules and regulations by various governing bodies, including, for example, the Securities and Exchange Commission, which is charged with the protection of investors and the oversight of companies whose securities are publicly traded, and the various regulatory authorities in China and the Cayman Islands, and to new and evolving regulatory measures under applicable law. Our efforts to comply with new and changing laws and regulations have resulted in and are likely to continue to result in, increased general and administrative expenses and a diversion of management time and attention from revenue-generating activities to compliance activities.
Moreover, because these laws, regulations and standards are subject to varying interpretations, their application in practice may evolve over time as new guidance becomes available. This evolution may result in continuing uncertainty regarding compliance matters and additional costs necessitated by ongoing revisions to our disclosure and governance practices. If we fail to address and comply with these regulations and any subsequent changes, we may be subject to penalty and our business may be harmed.
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